1st July 2019

Dr Minako Morita-Jaeger, International Trade Policy Consultant and Fellow, UK Trade Policy Observatory at the University of Sussex.

The British and South Korean governments settled on an agreement in principle on ‘trade continuity’ on 10 June. Although there is no official information on its content or duration, Dr Liam Fox, Secretary of State International Trade, tweeted that it would be a base for an ‘ambitious future free trade agreement (FTA)’ when the UK leaves the EU. If so, what would be possible options for such an FTA? And how realistic are these ambitions?

A bilateral trade deal with South Korea would become an important case for the UK, because it is one of only two of developed countries which have comprehensive FTAs with both the EU and the US, the two largest markets in the world (the other is Canada).

Both FTAs were negotiated in the late 2000s: the agreement with the EU (KorEU) was provisionally applied in July 2011, and the one with the US (KORUS) entered into force in March 2012. By comparing KorEU and KORUS, we can look for potential opportunities and pitfalls for the UK.

I spotlight services in comparing these FTAs for two reasons. First, despite the fact that in 2018 80% of the UK’s economic output was services and 45% of exports were generated by services, trade in services has been drawing much less attention than trade in goods in the public debate over Brexit.

Second, in terms of UK-South Korea trade relations, Korea is a strong potential market for UK services exports. The UK’s services exports there amounted to £1.87 billion in 2017, over four times larger than in 2000 (£0.4 billion). As for services investment, in 2014 the services sector accounted for 61.1% of South Korea’s inward foreign direct investment (FDI) and the UK is the fourth largest investor in South Korea (7.8% in total), mainly because of its strength in financial services.

Since FDI in South Korea accounts for only 12% of GDP, which is the second lowest among the OECD countries, and its labour productivity in services is less than a half of that in manufacturing, the government in Seoul wants to boost inward services FDI. Thus, it is economically rational for the UK to aim at an ambitious FTA in services with Korea.

Comparing KorEU and KORUS

Our recent study revealed that KorEU and KORUS took very different approaches to liberalisation, and one example of this was in the way they committed to service trade liberalisation. Whereas KorEU applied a positive list approach (a bottom-up approach) like the WTO/GATS (General Agreement on Trade in Services), KORUS applied a negative list approach (a top-down approach).

Under the former, participating states agree on market access rules for a given set of services or sectors; in the latter, access is granted to all sectors except those specifically listed in the agreement. Although it is generally understood that the negative list approach can provide more transparency and predictability than the positive list approach, the liberalisation approach in KORUS is more complicated than that in KorEU.

Also, KORUS entails some features inconsistent with WTO rules. For example, it does not cover movement of natural persons (‘Mode 4’ in GATS-speak), which is a significant derogation from the GATS Article V (Regional Integration).

Both achieved a higher degree of liberalisation from South Korea than its services commitments in the GATS. However, despite the fact that the EU negotiated KorEU using KORUS as the benchmark, the level of liberalisation in KorEU is less than that in KORUS. KORUS achieved relatively more than KorEU by focusing closely on the sectors of US interest, including audiovisual services; educational services; recreational, cultural and sporting services; environmental services; and air and space transport services.

Since regulatory incompatibility matters for business in practice, both KorEU and KORUS promoted regulatory cooperation in addition to market liberalisation, although in each case in a way that respected existing regulatory cultures and regimes.

Possible options and reality

If the UK wants to negotiate an ambitious FTA with South Korea, there are two potential options. One is to build on the ‘trade continuity agreement’, which means using KorEU as a model and trying to fill a liberalisation gap between KorEU and KORUS. The other option is to use KORUS as a model and try to replicate the achievements of the US.

While the latter has the advantage that the UK would not be directly bound by KorEU, the UK government has to be conscious of the legal pitfalls in KORUS previously noted. The UK should aim at a WTO-consistent and more business-friendly FTA with South Korea, and since both FTAs were negotiated 12-13 years ago, the regulatory cooperation chapters should also surely be modernised.

In reality, the UK would face two stumbling blocks in this exercise. The first is the UK’s limited negotiating power: it cannot exercise the same economic or political power as the US and the EU did.

The second stumbling block is Most Favoured Nation (MFN) clauses in KorEU and KORUS. Since MFN clauses (covering cross border services and investment) require South Korea to share any better commitments it makes to the UK with the EU and the US, it would not have much incentive to give better deals to the UK. This implies that the UK is likely to achieve better concessions in only limited areas, such as audio-visual (curved out in KorEU) and where South Korea has MFN exemptions in KorEU and KORUS.

In short, it is not going to be easy for the UK to achieve an ambitious FTA with South Korea. Whatever the scenario, the UK government’s negotiating capacities will be critical in coping with these challenges.

This blog is also published by UK in a Changing Europe.

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