The European Commission (the "Commission") issued its first ever annual report, dated 25 February 2013 (the "Report"), on the implementation of the bilateral ‘Free Trade Agreement’ executed on 6 October 2010 between the European Union and South Korea ("Free Trade Agreement" or "FTA").1
This short memorandum will highlight the increasingly important business relationships between South Korea and the European Union (and its 27 member States)2, with business players leveraging market conditions and legal tools. In fact, we detected business flows that are twofold:
- the increased outbound M&A activities from South Korean’s companies towards European targets, often financially distressed; and
- the material increase of European companies’ exports to South Korea.
The Report has an added value because, in order to prepare it, the Commission gathered and analyzed the trading data between South Korea and the EU in the period July 2011 – July 2012, and compared them to the average data of the four previous years. Whilst all previous publications provided estimates and political intentions, the Report finally provides actually reliable business data. However, there are ongoing discussions on the impact of the FTA, in particular in South Korea, and the debate among international scholars has also risen3.
Whilst it is not appropriate at this stage to assess the actual long-term impact of the Free Trade Agreement, there are clear signs that indicate that entrepreneurs in both jurisdictions are leveraging the new legal framework and market conditions to create more business opportunities.
The Free Trade Agreement
The FTA, as a bilateral free trade agreement, has been provisionally in effect since 1 July 2011. From a formal standpoint, it is an international treaty made of 15 chapters, with a number of annexes, appendices, protocols, and understandings. In terms of the relevant market size, the FTA is the largest free trade agreement that South Korea has entered into.4 Therefore, the FTA is a complex legal text that impacts, directly or indirectly, all players active in the EU or in South Korea.
The FTA follows a steady path of increased cooperation, which dates back to 1997, with the first EU - South Korea agreement on co-operation and mutual administrative assistance in customs matters. In the words of the European Commissioner for Trade, Mr. de Gucht:
"The EU-Korea FTA is the most ambitious trade agreement ever negotiated by the EU; it is also the EU’s first trade deal with an Asian country. The Agreement is expected not only to boost bilateral trade and economic growth in both the EU and Korea, but also to have a wider impact in Asia and elsewhere by signaling the EU’s openness to doing business with third world countries and its commitment to free trade.
The Agreement is unprecedented both in its scope and in the speed at which trade barriers are to be removed. By the end of the transitional periods, virtually all import duties between the two economies will have been removed. Exporters and importers of all industrial products and almost all agricultural products will be able to trade without having to pay duties. Additionally, the FTA breaks new ground in tackling significant non-tariff barriers to trade, with a specific focus on the automotive, pharmaceuticals, medical devices and electronics sectors.
The Agreement will also create new opportunities for market access in services and investments, and lead to major advances in areas such as intellectual property, government procurement and competition policy".5
Moreover, the FTA is the first free trade agreement executed by the EU with a partner in Asia, and it has been described as "the most comprehensive free trade agreement ever negotiated by the EU […] import duties are to be eliminated on nearly all products (98.7 % of duties in terms of trade value will be eliminated within five years) and there is far reaching liberalization of trade in services (including in telecommunications, environmental services, shipping, financial and legal services) covering all modes of supply. The FTA is expected to create substantial new trade opportunities in goods and services […] as well as in investment […] Moreover, specific commitments to eliminate and to prevent the emergence of non-tariff barriers to trade have been agreed in sectors such as automobiles, pharmaceuticals and electronics" (emphasis supplied).6
In fact, the Korea-EU FTA is very comprehensive. It reduces and eliminates tariffs and other trade barriers in manufactured goods, agricultural products, and services and would also cover such trade-related activities as government procurement, intellectual property rights, labor rights, and environmental issues.
As the European Union’s diplomatic corps stated; "since 2010, the EU and South Korea have upgraded their relationship to a Strategic Partnership, ensuring a high level of commitment from both sides. Relations are governed by two key agreements, as well as more specific agreements in several fields." 7 Thus, the EU – South Korea relationship8 was already strong on multiple levels9 and, through the Free Trade Agreement, it can also benefit from a clearer and more reliable legal bound, thus increasing the legal certainty entrepreneurs seek the most when dealing with cross-border transactions.
As an example of the impact of the FTA, it should be noted that the tariff elimination/reduction will not apply indiscriminately to any product: only products originating in South Korea or in the EU are entitled to benefit from the preferences granted under the FTA. Therefore, rules of origin are an important aspect and the relevant provisions of the FTA, set forth in the Protocol on Rules of Origin, according to which products are subject to the FTA are: (i) wholly obtained10 in the EU or in South Korea; or (ii) have been sufficiently processed11 in the EU or in South Korea.
Snapshot of South Korean’s Investments in Europe
South Korean companies have been increasingly more active towards overseas M&A in Europe for the following two main reasons:
- more undervalued European assets are on sale due to the protracted debt crisis in Europe; and
- stronger Korean Won favors cash-rich Korean companies to buy European firms.
Such conditions have helped to trigger a near doubling in the value of Korean companies’ acquisitions of European businesses, to $1.34 billion in 2012 from $756 million in 2011.
Amid such wide interest in the European market, Paul Hastings LLP advised major outbound M&A deals in Europe by Korean companies, such as: (1) a Korean conglomerate in its acquisition of the wire business of a UK-listed international technology company, and (2) a Korean conglomerate in its acquisition of a major technology company based in Sweden.
Many experts predict this trend to continue into the following years as many Korean companies seek more chances in Europe when the time is right.
Snapshot of the EU’s Exports to South Korea
The dramatic effect of the FTA on the European Union can be easily summarized as follows:
- Before the Free Trade Agreement, overall EU exports to South Korea enjoyed an annual average growth rate of 7%.
- After the Free Trade Agreement, EU exports to South Korea increased by 37% overall.
Moreover, EU’s investment in South Korea between July 2011 and March 2012 jumped 60.5% from the year before to $3.57 billion. Considering that the EU’s investment in South Korea from July 2010 to March 2011 dropped 48.8% year-on-year, the Korea-EU FTA played a major role in boosting investment.
According to the European Commission, South Korea is the EU’s tenth largest trade partner and the EU is South Korea’s fourth export destination (after China, Japan, and the US). Moreover, European companies are the largest investors in South Korea. And the industries potentially affected are countless: industrial, fishery and agricultural products, power/non-electrical machinery, chemicals, transport equipment, optical and photo equipment and base metals, trade in services, and specialized services in such sectors as banking, financial, and accounting services.