Introduction
Trade and competition: a new approach
First use of the FTA competition rules
More cases in the pipeline


Introduction

On July 1 2012 the EU-Korea Free Trade Agreement (FTA) celebrated its first anniversary. In a speech to the EU-Korea Business Roundtable in Brussels on June 27 2012,(1) Trade Commissioner De Gucht highlighted the benefits of the EU-Korea FTA after one year in force. While he noted that it may be early to make definitive statements, preliminary data on the trade in goods since the FTA's application as of July 1 2011 shows strong progress. EU exports to Korea were up 36% over the first nine months of the FTA's implementation, which represents an increase in trade of nearly €2 billion and savings of about €350 million in duties. The progressive liberalisation of trade between the European Union and Korea will result in the elimination of duties on 99.9% of EU-Korea trade by July 2031. As De Gucht noted, this EU-Korea FTA is the first of the European Union's next-generation agreements aimed at comprehensive and ambitious liberalisation, and designed to eliminate significant tariff barriers and to provide progressive disciplines in areas such as services, investment, regulation (eg, competition law) and IP rights. Negotiations on similar agreements have recently been completed or initiated with trade partners including Colombia, Peru, Vietnam and Central America.

Trade and competition: a new approach

The EU-Korea FTA deals with tariff and non-tariff barriers to trade and also includes an important competition chapter that builds on the European Union's experience in competition and state aid issues.

The European Union has long been a proponent of including a competition element in bilateral and multilateral trade negotiations. It put competition on the agenda of the World Trade Organisation (WTO) as one of the 1996 Singapore issues, which led to the establishment of a Working Group on the Interaction between Trade and Competition Policies to study the complementary role of competition and trade laws. However, there was little enthusiasm for this discussion among a large number of mainly developing WTO members, which often did not even have a functioning competition regime in place. As a result, the working group never moved beyond exploring certain issues and discussing closer cooperation between the competition authorities of WTO members. That debate itself was short lived, as competition was removed from the WTO agenda in 2004. The WTO General Council decided that the interaction between trade and competition policy would no longer form part of the work programme set out in the Doha Ministerial Declaration, and that no work towards negotiations on any of these issues would thus take place within the WTO during the Doha Round. The working group has been inactive ever since.

The EU-Korea FTA's competition chapter demonstrates that the European Union will continue to seek the inclusion of competition issues in international trade agreements.

First use of the FTA competition rules

The Korean Fair Trade Commission (KFTC) recently imposed its first fine on a European company under FTA competition rules. It imposed punitive sanctions – a €1 million fine – against Dutch company Philips Electronics for forcing Korean retailers to set minimum prices on their products.(2) The June 24 2012 decision is the first example of the KFTC fining a European company for alleged violations of the EU-Korea FTA. The KFTC's investigation found that Philips prevented online sellers from offering discounts – in breach of the July 2011 EU-FTA – that lifted an 8% tariff on small appliances from the European Union. The authority found that the local operations of Philips fixed the prices of Korean shopping websites and prohibited them from selling goods at lower than the company's recommended resale prices between March 2011 and May 2012. The KFTC found that Philips is one of the market leaders of small electrical appliances in South Korea, reportedly selling 61.5% of all electric razors, 45.2% of clothing irons and 31.3% of coffee makers in the country.

More cases in the pipeline

This decision is not the first example of the KFTC raising concerns that European companies may be engaged in price fixing. In June 2012 the Korea Times reported that the KFTC is investigating BMW, Mercedes Benz, Audi and Volkswagen of price fixing. While both the motor vehicles case and the electricals case raise the issue of the relationship between trade and competition rules, there are important differences in the underlying substantive issues. In the motor vehicles case, the allegations are based on suspicions of coordinated action between competitors (ie, horizontal agreements). In the electricals case, what was alleged was a vertical restraint whereby one party (a manufacturer) imposed restrictions on another party which was operating at a different level in the supply chain (ie, a vertical agreement). Typically, vertical agreements have attracted fewer competition law concerns, mainly due to the economic efficiencies that may be generated by vertical restraints in incentivising the parties to invest in and distribute the relevant products. An exception is vertical resale price maintenance, which was the allegation in the electricals case. The KFTC did not say that it was conducting a full investigation, but the companies remain on its watch for possible price collusion. Cars were one of the most important issues in the negotiations of the EU-Korea FTA and complicated the conclusion of the FTA. If the KFTC were to launch a full investigation under the FTA's competition chapter in respect of European car imports, the point would be made that proper competition rules are needed in a trade agreement to ensure that producers and consumers alike benefit from trade liberalisation.

For further information on this topic please contact Jasper M Wauters at King & Spalding LLP's Switzerland office by telephone (+41 22 591 0803), fax (+41 22 591 0880) or email ([email protected]). Alternatively, contact Suzanne Rab at King & Spalding LLP's England office by telephone (+44 20 7551 7581), fax (+44 20 7551 7575) or email ([email protected]).

Endnotes

(1) http://trade.ec.europa.eu/doclib/docs/2012/june/tradoc_149602.pdf.

(2) http://eng.ftc.go.kr/.