EU-Korea Free Trade Agreement Will Aid Tyre Sales

On 15 October EU Trade Commissioner Catherine Ashton and Korean Trade Minister Kim Jong-hoon initialled a free trade agreement (FTA), which the EU calls “the most important ever negotiated between the European Union and a third country.” Estimated to be worth a total of 19 billion euros in new trade for EU exporters, the agreement is designed to remove virtually all tariffs between the two economies.

However, it is a bilateral deal. And European carmakers, apparently fearful of being swamped by imports of more economically priced Korean cars in an already depressed market, were the first to call for a rethink through industry body ACEA. However this appears to have been too little too late and according to the commission, the initialling signals the end of negotiations. The current “stable legal text” will be formally presented to EU Member States in early 2010. So what does this mean for the European tyre (and associated product) markets?

First of all, South Korea will completely remove its 8 per cent tariffs in this product segment. This will take effect as soon as the agreement enters into, resulting in an estimated 3 million euros in savings for EU exporters almost immediately. In response the EU will phase out its tariffs (averaging 4 per cent) over a three year period.

So, three years after the free trade agreement takes effect, Korean-made tyres sold in the UK and European markets won’t have to pay the 4 per cent levy they currently work with. Or to put it bluntly, they will have an additional 4 per cent of pricing leeway. When you consider that the proposed FTA arguably has its greatest affect in the automotive market (which, in the UK at least, is already a major growth area for Korean manufacturers) and that these cars invariably carry Hankook, Kumho or Nexen tyres, there is also likely to be a secondary OE pull-through benefit for the Korean tyre makers. (See October’s magazine, page 47 for more on this)

In addition the stable text for the proposed EU-Korea FTA contains what it calls “a sectoral annex” on motor vehicles and parts which addresses non-tariff barriers (NTBs) in the sector. The list of provisions specifically for the auto-part business basically provides for a wide-ranging recognition of international standards by Korea. UNECE standards, for example, will be considered as equivalent to Korean domestic standards from the start of the agreement. According to sources at the European Commission, this covers all those standards signalled by the industry as being “significant trade barriers.” In practice this means EU tyres complying with the standards covered by UNECE Regulation 30, 54, 75, 106, 108, 109, 117 will be considered as complying with the Korean Quality Management Safety and Control of Industrial Products Act (QMSCIPA) (Articles. 19, 20, 21); Enforcement Rules of QMSCIPA Article 2, paragraph 2, Article 19. In return, over a five-year period, Korea will align its regulations to a further 29 UNECE.

As you can see, the EU-Korea free trade agreement has benefits for those exporting automotive parts (including tyres) into South Korea. But not much product goes in that direction. So, as far as the tyre business is concerned, the main beneficiaries of this agreement are the companies producing tyres in South Korea for export into Europe.

All the elements of EU-Korea free trade agreement together with a “reading guide” are can be accessed online here.