1. 1 European Union – Korea Free Trade Agreement Sustainability Impact Assessment Presentation to Public Meeting March 14, 2008

2. 2 Outline Overview of Phase I Economic Context Social Context Environmental Context Baseline and Impact Assessment Selection of Sectors Horizontal Negotiating Issues Liberalisation Scenarios

3. 3 Phase II Analysis of Sectors: automobiles, agri-food products, financial services, and environmental goods and services Analysis of Horizontal Issues Rules of origin Technical Regulations and Standards Intellectual Property Rights Investment

4. 4 Phase III Sustainability Impact Assessment Economic Social Environmental

5. 5 Phase III Conclusions and Recommendations FTA related Measures Phasing Rules of origin TBT SPS IPR Investment Sustainable Development Enhancing measures Economic Social Environmental

6. 6 Economic Context: European Union Largest Global trader especially services In recent years had overall balance of trade with large surplus with NAFTA and large deficit with East Asia Challenges of adjustment of global imbalances Korea is the fourth largest trading partner outside Europe but accounts for less than 3 percent of EU 25 external trade Dynamic expansion of trade within the EU 27 with Enlargement

7. 7 Economic Context: Korea Good economic growth since the financial crisis a decade ago Exports and imports have grown strongly Currency Exchange rate has appreciated significantly Overall trade surplus has remained stable

8. 8 Economic Context: Bilateral Dimensions and Asymmetries EU is a more important trading partner for Korea than Korea is for the EU Bilateral Trade surplus has increased in Korea’s favour Growth in Korean exports to, and investment in, NMS has been significant Trade between the EU and Korea has a significant intra-industry component EU is the largest foreign investor in Korea

9. 9 Economic Context: Global and Regional Dimensions The role of global imbalances and longer term adjustment Emergence of regional trade and production networks in East and South East Asia Third country and multilateral effects are very important

10. 10 Social Context : Europe EU has considerable variation in income per capita among member states In a number of EU member states agriculture is still an important source of employment and income EU population is ageing and total labour force will start to shrink -- key role of Lisbon agenda in raising labour force participation

11. 11 Social Context: Korea Korea has shifted from a rural agrarian society to an urban industrial society Korean society is rapidly ageing and faces challenges of demographic transition Korea has high levels of educational participation and attainment By Human Development Index Korea ranks closer to EU median than by per capita income

12. 12 Social Context: Gender and Income Distribution Korea has low female participation in the labour force and lower educational attainment for women Korea has a relatively low level of income equality Korea is close to the median of EU member states in income equality

13. 13 Environmental Context Korea has made significant progress in environmental protection and pollution control especially in the last decade since joining the OECD As a densely populated urbanised society Korea has further needs for environmental protection Korea depends heavily on imported energy and renewable energy could play a more active role Korea participates actively in multilateral environmental agreements

14. 14 Common Environmental Challenges Common interest in Multilateral Environmental Conventions Challenges of the post Kyoto phase on climate change Reducing use of carbon sources of energy and improved environmental technologies

15. 15 Baseline and Methodology Baseline is built upon the CGE GTAP modelling framework Strengths and Weaknesses Complementary industry studies and market segmentation Dynamic Modelling and Endogenous Technology – role of investment Sector Selection

16. 16 Sector Selection Automobiles Agriculture Financial Services Environmental Goods and Services

17. 17 Horizontal Issues Rules of origin Intellectual Property Rights TBT/SPS Investment

18. 18 Liberalisation Scenarios Scenario 1 Comprehensive FTA remove all tariffs on industrial products, few agricultural exceptions, and liberalisation of services Scenario 2 Deep FTA includes Comprehensive Agreement and addresses behind the border issues

19. 19 Consultations Meetings in Brussels 30 November, 21 February and 14 March Workshop in Korea December 14 Consultations in Europe and Korea with stakeholders Briefs from stakeholders Sector Studies

20. 20 Overview of Phase Two Analysis of Sectors Analysis of specific segments, partial equilibrium analysis Economy wide modelling of specific sectoral impacts Incorporation of “behind the border”, FDI and technology effects Sustainability impact assessment Analysis of horizontal issues Identification of sectoral aspects Sustainability assessment Overall impacts

21. 21 Automotive Sector Growing role of FDI in the base case, e.g. Renault Samsung and Hyundai/Kia investments in Central Europe Global context for automobile production and trade is important: Spreading technology development costs over volume Emergence of China, India, SE Asia, Russia in production Economic Impact: Model based estimates show large increases in trade volume but our estimates are much lower than Copenhagen economics study. Market segment analysis with competitive responses by EU producers, technology changes, third country effects, and FDI shows less impact on trade volumes but offers potential economic gains Implications of preferences under KORUS and potentially with Korean FTA with Japan

22. 22 Automobile Sector Dealing with behind the border issues especially technical regulations and standards are important to the sector Social Impact: relative shift to skilled labour from unskilled labour in EU although overall impact is modest Difficult to separate the incremental impact of the EU Korea FTA on employment in the sector from other factors Overall social impacts and adjustment are limited with tariff phasing and dealing with technical regulations Environmental Impacts: The EU and Korean industry face similar challenges in reducing CO2 emissions and achieving higher levels of fuel efficiency.

23. 23 Agri-food Sector: Economic Impacts Earlier FTAs such as Korea-Chile have had significant effects in certain sectors such as wine. An EU-Korea FTA is not expected to have as much of an effect on the agriculture and fishery industries of Korea as the KORUS FTA. The EU is expected to concentrate on expanding exports of processed foodstuffs such as alcoholic beverages and processed dairy products such as butter and cheese. Any increase in the export of Korean food products to the EU is expected to be small, and concentrated in non-sensitive areas such as ramyon (instant noodle) and kimchi.

24. 24 Agri-food Sector: Social and Environmental Impacts The expansion of specific exports from the EU such dairy products, pork, wine or spirits could have regional impacts on employment in the exporting regions in the EU Some restructuring of the Korean food processing sector may be necessary, but such adjustment would be already occurring with KORUS. Limited impact on primary agriculture in Korea. The adverse social impact in Korea could be on older workers in segments of the agri-food sector Environmental Impacts: G iven the relatively small scale of the potential export expansion and the associated production response, it is doubtful that there would be significant environmental impacts. EU exports to Korea currently account for about 1.5% of the EU total, and about 0.1% of total industry turnover.

25. 25 Financial Services In our view the main effect of liberalisation of financial services will be increased FDI. Economic Impact: The Copenhagen study foresees contraction in Korean financial services sector and expansion of EU exports In our analysis output will increase in both EU and Korea in financial services

26. 26 Financial Services Social Impact: I f FDI is taken into account then the effects of Korean financial services liberalisation are likely to be an increase in efficiency and in output and economic activity. This will lead to increased demand for skilled labour in the financial services sector in Korea. Environmental Impact: effect of financial liberalisation on environment is ambiguous since the liberalisation has environment impacts through many channels. Direct environmental impact is extremely difficult to assess as financial services are typically low-energy consumption and low- CO2 emitters industries. Thus, expansion of the share of financial services in the economy can be said to have a positive environmental impact. When financial liberalisation leads to higher economic growth and employment, it may have negative impacts on environment

27. 27 Environmental Goods and Services Korea has made significant progress in environmental protection and pollution control especially in the last decade since joining the OECD, As a densely populated urbanised society Korea has further needs for environmental protection Korea depends heavily on imported energy and renewable energy could play a more active role Environmental Goods are included in machinery sectors where Korea had a trade surplus and shows strong output gains under the Copenhagen study – SIA CGE modelling shows limited impact on EU Environmental goods are products where the tariffs are lower and the EC has a positive trade surplus in a number of products and in environmental services Economic impacts: Strong pattern of overlapping intra-industry trade, which suggests mutual benefits from trade expansion Environmental impacts: Liberalisation of environmental goods and services offers benefits in exchange and development of clean technologies

28. 28 Rules of Origin It is appropriate to have high content requirements for Pan EuroMed rules with Cumulation for countries contiguous with EU or for regional blocs eg EPAs High content requirements are a challenge for Korea due to the structure of the economy and distance from the EU High content requirements are more warranted in sectors with high and dispersed third country tariffs

29. 29 Technical Regulations and Standards Technical regulations and standards are important in specific sectors Automobiles Cosmetics Electronics Technical regulations and standards should make greater use of international norms Development of Mutual Recognition of Conformity Assessment

30. 30 Intellectual Property Rights Legal framework in Korea needs to be strengthened in a few areas such as Regulatory Data Protection and patent linkage Better enforcement of IPRs including for counterfeit goods is a priority

31. 31 Investment Increased Foreign Direct Investment will contribute to economic benefits from the FTA Increased FDI is likely to be the most significant mode for trade in services Increased FDI can also contribute to aggregate investment and improved economic growth

32. 32 Conclusions : Economic Impacts The overall economic effects of the EU-Korea FTA are likely to be modest because both partners already have very open economies and highly integrated into the world economy. Second, the emergence of Korea as a developed economy and the degree of overlap that has developed in the industry structure for goods and for services between the EU and Korea suggests that there are increased opportunities for intra-industry specialisation, scale effects, pro-competitive effects and induced investment and innovation effects.

33. 33 Social Impacts There are unlikely to be large inter-industry shifts in output and employment that could lead to disruption of labour markets at either a national or regional level. In the medium to longer term both the EU and Korea face common challenges to increase productivity and labour force participation and employment rates in order to sustain economic growth with a stable and aging population.

34. 34 Environmental Impacts The convergence in economic development levels is leading to greater commonality in concerns about protection of the environment between the EU and Korea. The potential economic benefits of increased productivity and enhanced technology could translate into the development of, and the increased use and diffusion of clean technologies.

35. 35 Phase III Sustainability Impact Assessment Trade models show significant trade effects and modest welfare gains with greater proportional gains to the smaller economy Increased FDI is an important channel Role of specialisation and induced technological innovation

36. 36 Social Impacts Limited employment impacts Modest positive effects on gender in Korea e.g. financial services Very modest price effects and overall positive

37. 37 Environmental Limited mitigation challenges incremental energy use the only significant one identified Common multilateral challenges Focus on energy efficiency and climate change

38. 38 Phase III Conclusions and Recommendations FTA related Measures Phasing Rules of origin TBT SPS IPR Investment Sustainable Development Enhancing measures Economic Social Environmental