Answer given by Mr De Gucht on behalf of the Commission
17.11.2010
The EU‑Korea Free Trade Agreement (FTA) is a very comprehensive and ambitious Agreement which opens up numerous opportunities in Korea for EU business.
In particular, the FTA will secure tangible improvements in the automotive sector. These benefits include: recognition of most of the UN/ECE (United Nations/Economic Commission for Europe) standards as equivalent to Korean standards. Korea also accepted to recognise European standards in other areas, such as the on board diagnostics, and additional provisions will exempt EU car makers from the full application of other Korean regulations that constitute important barriers to the presence of EU car makers in Korea. This will allow European car makers to maintain and possibly expand their presence in the Korean market, something that could not be taken for granted in the absence of the FTA.
Nevertheless, the Commission is aware of certain concerns expressed by the EU car industry about the duty drawback provisions in the FTA. Duty drawback is currently allowed and used by both Korean as well as EU exporters. Thus, continuing to allow it in the FTA will not change the existing situation. Moreover, the Commission has shared data with the Member States and the Parliament, which show that the current economic impact of duty drawback is small- i.e. about 1/8 of the value for EU exporters' savings due to Korean duty reduction. In the case of cars, available studies show that, on average, the foreign content of Korean cars is between 10 % and 15 % and this covers also the non‑car specific components. Moreover, it would not create tangible distortions of competition in the EU since, with few exceptions, EU duties on parts are low (generally not higher than 4 %). Any impact on the competitive situation of EU companies from duty drawback, including the car sector, would thus be limited.
This conclusion is also backed up by a recent study[1] realised by a consortium between London School of Economics, Centre for European Policy Studies and Maastricht University for the European Parliament. In the extensive Annex dedicated to the evaluation of the duty drawback argument, this study compares the different scenarios and concludes that the competitive advantage for Korean producers would range between less than 1 % and a maximum of around 2 % of the value of a car. (The 2 % figure would be the result of an increase of foreign sourcing up to the maximum allowed of 45 % together with the introduction of the 5 % cap provided under the special clause on duty drawback).
Furthermore, Korea is actively liberalising its import regime under the various FTAs it is currently negotiating with third countries. This trend could progressively reduce the level of duties that Korea can refund under duty drawback. The impact of duty drawback would also be reduced as a result of the reduction of EU duties on parts once the ongoing World Trade Organisation (WTO) negotiations are implemented. The economic relevance of duty drawback would therefore diminish over time.
Nevertheless, in order to respond to concerns expressed by the automotive sector, in cases of a significant increase in foreign sourcing, the FTA also foresees a particular protection via a special clause on duty drawback. The special clause on duty drawback applies to all imports of parts and will be applicable five years after the entry into force of the FTA.
Once applied, either with the agreement of the other party or after arbitration, a cap of 5 % on duty drawback (i.e. the duties on parts imported from third countries which can be refunded when the final product is exported) would be introduced, which would thus increase the costs of sourcing in third countries.
Therefore, the Commission considers that the special duty drawback clause addresses the concerns expressed by the EU automotive industry regarding the use of components from third countries in Korean car exports.
- [1] LSE Enterprise: An Assessment of the EU-Korea FTA for the European Parliament — 26 May 2010.
OJ C 170 E, 10/06/2011