Hopes are high in the Department for International Trade that Britain can quickly negotiate its own free trade agreements (FTAs) with countries like South Korea. The EU already has a very comprehensive FTA with the East Asian state, so is the UK in a position to negotiate a better one? Simon Hix and Hae-Won Jun examine the factors at play. They conclude that it will not be in South Korea’s interests to negotiate a deal more favourable to the UK – not least because it probably cannot give Britain more access to the market in services without offering the same deal to the EU

Hae-Won, Jun

Hix, Simon

LSE Research Online

07/02/2017Can ‘Global Britain’ forge a better trade deal with SouthKorea? This is why it’s unlikelyblogs.lse.ac.uk /brexit/2017/02/07/can-global-britain-forge-a-better-trade-deal-with-south-korea-this-is-why-its-unlikely/Hopes are high in the Department for International Trade that Britain can quickly negotiate its own freetrade agreements (FTAs) with countries like South Korea. The EU already has a verycomprehensive FTA with the East Asian state, so is the UK in a position to negotiate a betterone? Simon Hix and Hae-Won Jun examine the factors at play. They conclude that it will notbe in South Korea’s interests to negotiate a deal more favourable to the UK – not leastbecause it probably cannot give Britain more access to the market in services without offeringthe same deal to the EU.On 17 January the British Prime Minister set out her vision for the UK outside the EU.  Acentral theme of her speech was that the UK would become a “Global Britain”, “always actingas the strongest and most passionate advocate for free trade right across the globe”.  Thenext day, the Foreign Secretary, Boris Johnson declared that “countries are queuing up fortrade deals with the UK”.  Then, writing in The Daily Telegraph, the International TradeSecretary, Dr Liam Fox, declared that: “All along we have made it clear that we want Brexit tohave no disruption to global trading. Important trading partners, from Korea to Mexico, will beguaranteed the same market access to the UK that they have today”.  In short, some keyassumptions of the government’s Brexit plan are that the UK will be able to agree new freetrade deals with countries outside Europe, that these deals could be agreed quickly – particularly with countries thatalready have trade deals with the UK via the EU – and that these deals would reap new economic benefits for theUK.Shopping in Myeong-Dong, Seoul. Photo: Uwe Schwarzbach via a CC-BY-NC-SA 2.0 licenceTo assess how realistic these assumptions are we consider some global trade data as well as the trade relationshipbetween the UK and South Korea, which has an existing free trade agreement (FTA) with the EU, which covers theUK as an EU member state.Table 1 shows some of the main measures of global trade in 2015, the most recent year for which comprehensivedata are available.  The EU either with or without the UK is the world’s second largest economy, and together theUSA, EU27 (minus the UK), and China command 48% of the global economy, 42% of global trade in goods (notcounting internal EU trade), and 43% of global trade in services.  The UK outside the EU would be the fifth largest1/6economy, but would only command 2.4% of global GDP, 2.1% of global trade in goods, and 4.3% of global trade inservices.  In short, the UK would not be in the “premier league” as a global trading power.  This is not to say that theUK could not be a successful economy outside the EU, but does suggest that the UK is unlikely to be in a strongbargaining situation when negotiating free trade agreements, particularly with the world’s dominate trading powers:the US, the EU, and China.To shed more light on the freetrade prospects for the UK outsidethe EU, let us look at the situationfrom the point of view of SouthKorea, which will be a similarly-sized trading power to an‘independent’ UK.  South Korea isthe world’s 9th largest economy(counting the EU as a single bloc),and in terms of global trade (notcounting internal EU trade), SouthKorea’s combined trade volume(exports plus imports) in goodsand services was larger than theUK’s in 2015, at €1,059bncompared to the UK’s €777bn.South Korea already has an FTAwith the EU, which hence currentlycovers the UK.  So, South Koreais likely to be near the “front of the queue” for a new free trade agreement with the UK, as Liam Fox has suggested. Could this agreement be concluded quickly?  What would the terms of such an agreement be?  And would theseterms be more or less beneficial for the UK than the current EU-South Korea FTA?To answer these questions, let us look in more detail at the EU-South Korea FTA, which entered into force on 1 July2011.  Because the EU and South Korea had been working on a series of mutual assistance and trade agreementsfor some time, the EU-South Korea FTA was concluded relatively quickly.  Negotiations started in May 2007 andwere concluded in October 2009.  It then took a further 2 years for the deal to be adopted and implemented.  TheEuropean Parliament did not ratify the EU-South Korea FTA until February 2011, and only after South Korea hadmade several further concessions, including a new “safeguard” clause to protect European industry and a guaranteethat new Korean car emissions limits would not be detrimental to European car manufacturers.Two issues make the EU-South Korea agreement particularly interesting from a trade point of view.  First, theagreement is the most ambitious of the 30 or so trade agreements that the EU has signed so far, in that it covers alarger volume of bilateral trade than any other agreement between the EU and a third country.  For example, in2015 EU-South Korea trade was €90bn, whereas EU-Canada trade was only €64bn.  The EU trades more with theUnited States and China, but the EU does not yet have free trade agreements with either of these countries.Second, the EU-South Korea agreement is interesting because it is the most comprehensive agreement the EU hasimplemented to date, and is one of the most comprehensive trade agreements signed between any two partnersanywhere in the world.  Import duties (tariffs) are eliminated on almost all products.  The agreement also goes farbeyond the liberalisation of services market that both parties have already implemented under their GATS (GeneralAgreement on Trade in Services) commitments.  For example, the treaty includes stronger intellectual propertyrights (including geographical indications), regulatory co-operation, sustainable development provisions, aims toopen up public procurement, as well as specific commitments to reduce non-tariff barriers in many sectors, including2/6cars, pharmaceuticals, and electronics.  As a result, the EU-South Korea agreement is often seen as a model“second generation” trade agreement.From the UK’s point of view, a comprehensive FTA with South Korea would also be attractive.  As Table 2 shows,South Korea is the UK’s 11th largest trading partner (treating the EU27 as a single trade entity).  In fact, SouthKorea is the third largest trading partner of the UK outside the EU with which the UK currently has a trade status asa member of the EU.  Norway is in the single market via the European Economic Area (EEA), and Turkey is part ofthe EU’s Customs Union, so these two states would be covered by any FTA with the EU/EEA.  The US, China, HongKong, Japan and India will be high on the UK’s priority list, but any negotiations with these states would need to startfrom scratch, whereas potential agreements with Switzerland, Canada and South Korea could start from the termsof the current EU (and hence UK) agreements with these three countries.  Also, as the final column shows, the UKcurrently has a positive trade balance with South Korea.Nevertheless, as Table 2 shows,the volume of UK exports andimports between the UK and anyof these states is tiny compared tothe current volume of tradebetween the UK and the EU. Hence, the overwhelming toppriority for the UK must be acomprehensive trade agreementwith the EU.  Theresa May hastried to claim that “no deal is betterthan a bad deal”.  But, given thedependence of UK industry andUK consumers on trade with theEU, this claim must be treated withsome scepticism.  For example,even if the UK could sign quickagreements with the 10 other countries in Table 2 – and this is a big “if” – this would only cover 37% of the UK’scurrent exports and 33% of the UK’s current imports, compared to the current 44% of exports to and 53% of importsfrom the EU27.Assuming the UK could do a deal with South Korea, what would it cover?  Table 3 shows the main products tradedbetween the UK and South Korea in 2015.  As the data show, the removal of tariffs has led to a significant year-on-year increase in trade in several sectors.  Producers in these sectors, and consumers of these products will beeager not to reintroduce tariffs once the UK leaves the EU, and hence the current EU-South Korea FTA.3/6At face value, a quick cut-and-paste of the terms of the EU-SouthKorea FTA into a new UK-SouthKorea FTA seems like thesimplest, least disruptive, andquickest solution.  However, this isnot as simple as it sounds.  Theprecise terms of the EU-SouthKorea FTA were the result of adelicate compromise between avery large and powerful economy,the EU, and an economy andtrading power less than one-tenthof the size of the EU.  As a result,the EU had a much strongernegotiation position than Korea,and, as discussed, Korea had tomake even more concessions tosecure an agreement in theEuropean Parliament.  In contrast,the South Korean economy isabout half the size of the UKeconomy.  Because of this, Seoulwill be reluctant to simply replicatethe terms of the EU-South KoreaFTA in a new UK-South KoreaFTA, as South Korea will expect amore equal ‘partnership’ with anindependent UK.In addition, in many specific areasthe EU-South Korea agreementgoes well beyond Korea’s GATScommitments. For example, infinancial services, it allows EU firms the right to offer new financial services as they will develop. It also openstelecommunications markets by reducing local ownership requirements, as well as the legal services andaccountant services markets. Markets for medical, education and audio-visual services were excluded on therequest of the EU.  The level of market liberalisation in this area was similar to that of the US-South Korea FTA.In terms of services trade, it will not be easy for the UK to get better terms in a future UK-South Korea FTA than thecurrent level of liberalisation.  For example, in chapter 7 of the EU-South Korea FTA, on Trade in Services,Establishment and Electronic Commerce, each party is required to extend to the other any market liberalisation thatit may grant in any future FTA that it signs with another third country.  This implies that South Korea cannot agreeany further services market access to the UK, in a future UK-South Korea agreement, without also extending it to theEU.  In addition, if South Korea extends market access to the UK, the US may demand a similar level of accessunder its agreement with Korea.  Ever since Korea negotiated the respective FTAs with the EU and the US inparallel, the US has tried to make sure that the US obtain a similar level of market access to Korea to that granted tothe EU.  As a result, it is unlikely that South Korea would be willing to offer better market access to the UK than thatcurrently granted under the EU-South Korea FTA.One aspect of the services market is legal services.  The terms of the EU-South Korea agreement in this area were4/6almost solely for UK interests, since all of the top 50 law firms in the world are either US or UK based.  Theagreement allows UK law firms to set up Foreign Legal Consultant offices in Korea. Under the agreement, lawyerslicensed in the UK can provide advisory services regarding the jurisdiction in which they are licensed and publicinternational law in Korea.  It also provides for cooperation and joint ventures between UK and Korean law firms inorder to deal with cases in which domestic and foreign legal issues are mixed.  Five EU-based law firms haveopened offices in Korea under the agreement, and all 5 of these are British.  If the UK leaves the EU without a newagreement with South Korea, the interests of UK law firms, and the millions of Pounds of contracts they have signedwill be put in jeopardy.Finally, and perhaps most significantly, even if the UK and South Korea could agree to apply the current terms of theEU-South Korea FTA, this would not be as beneficial for the UK once it leaves the EU.  This might seem counter-intuitive, but the reason for this is because of the way “rules of origin” work in international trade.  Under the EU-South Korea FTA, there are two main scenarios for a product to be considered as “originating” in the EU or SouthKorea.  The first scenario is that it has been wholly produced in the EU or South Korea.  The second is that it hasbeen sufficiently processed in the EU or South Korea.  The criteria for determining “sufficient processing” aredescribed for each product in the product-specific rules in the text of the agreement.For instance, for cars, base on value added, a car will be deemed to have “originated” in the EU if no more than 45%of the value of the inputs have been imported from outside South Korea or the EU to manufacture it.  Under thecurrent agreement, any product originating in the UK is counted as originating in the EU if the component parts aremanufactured anywhere in the EU and South Korea (the EU and Korea mutually recognise each other’s originswhen calculating rules of origin).  But, once the UK leaves the EU, these components from the EU will be consideredto be from outside the UK, which will mean that many UK products will not count as “originating” in the UK and sowill not be covered by the terms of the deal.  Currently, the percentage of UK components in British-built cars is 41%on average, which is short of meeting the required 55% of local contents under a UK-South Korea FTA thatreplicates the rules-of-origin in the current EU-South Korea FTA. This could mean, then, that cars manufactured inthe UK would suddenly be subject to an 8% tariff when exported to Korea (which is the current WTO most-favoured-nation level), even if the UK and South Korea agree to continue to apply the current EU-South Korea agreement!To summarise, viewed from Seoul, the prospects for a “Global Britain” can be summarised as follows:1) The UK outside the EU will be a ‘second tier’ player when it comes to negotiating free trade agreements,considerably weaker than the ‘big three’, of the US, the EU, and China;2) It will be easier for the UK to sign trade deals with the 53 countries with which the UK already has free tradeagreements, via its current EU membership;3) One of the countries high on this list will be South Korea, which has a very comprehensive FTA with the EU,covering services and non-tariff barriers, which has already reaped important benefits to both the UK and SouthKorea;4) But, South Korea will be reluctant to replicate the terms of the EU-South Korea FTA for the UK, because it wouldexpect a better deal with the UK than it managed to negotiate with the EU (because the EU has an economy 10times larger than South Korea, whereas the UK economy is only twice the size of South Korea);5) If the UK fails to reach an agreement with South Korea, this would lead to the re-imposition of tariffs on UK-SouthKorea trade, and would jeopardise the significant services trade that has developed between these two economies;and6) Even if South Korea and the UK could agree to replicate the terms of the EU-South Korea agreement, the “rulesof origin” in the deal could mean tariffs on many manufactured goods from the UK (such as cars) as a result of thelarge content of parts from elsewhere in the EU, which would count as made in a “third country” once the UK has left5/6the EU.In short, Global Britain does not look quite as attractive from Seoul as it might initially seem from London!This post represents the views of the authors and not those of the Brexit blog, nor the LSE.Simon Hix is Harold Laski Professor of Political Science, in the Department of Government at the London School ofEconomics and Political Science.Hae-Won Jun is Assistant Professor, in the Institute of Foreign Affairs and National Security at the Korea NationalDiplomatic Academy. The views expressed in this article are those of the authors and are not to be construed asrepresenting those of Korea National Diplomatic Academy.Copyright © 2015 London School of Economics6/6

Can ‘Global Britain’ forge a better trade deal with South Korea? This is why it’s unlikely

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