Page 1 Hearing on the FTA between EU and South Korea Ivan Hodac Secretary General of ACEA European Parliament, INTA Committee Wednesday, 23 June 2010.

page 1

Hearing on the FTA between EU and South Korea

Ivan Hodac

Secretary General of ACEA

European Parliament, INTA Committee

Wednesday, 23 June 2010

2

Why is automotive important for the EU and the FTA?

15.2 million vehicles

produced in 2009

Over € 26 billion in R&D

spending, largest private

investor

€ 42.8 billion of net trade

contribution

€ 377 billion of tax revenues

The European automotive industry is key to the strength and competitiveness of Europe.

It provides direct employment to more than 2.3 million people and indirectly supports another 10 million jobs.

36.6% of EU manufacturing employment. Annually, ACEA members invest over €26 billion in R&D,

or 5% of turnover.

ACEAMEMBERS

3

Major Trends for the Auto Industry

● Increasing global competition China, India, Brazil, ASEAN countries

Unequal competition in terms of social model (labor cost, conditions, etc.)

Need to keep manufacturing/supplier base in EU

● Global economic difficulties Value of manufacturing

● Growing demand for (individual) mobility Further urbanisation

● The challenge to ensure that mobility is sustainable

4

Today’s Environment - Europe

● Economic instability; euro crisis● Unemployment● EU leadership ambition on climate change● Barroso II – Balancing ‘green’ and ‘growth’

A revival of the value of manufacturing? “Strategy 2020” where trade is a cornerstone

Smart, sustainable & inclusive growth

But a trade policy that is out of sync Safeguarding the European social model is

incompatible with simple opening of markets; agreements need to achieve real balance FTAs need to preserve EU employment! This includes offering export opportunities for

all segments of EU automobile production

5

The EU/South Korea FTA and the automobile industry

• The automobile sector was a key sector in the negotiations.

• EU tariffs applied today (10%) on Korean car imports.

• Korean tariffs (8%) and numerous non-trade barriers on EU car exports to South Korea (SK).

• Tariffs and NTBs dismantling is welcome, but the agreement, as currently drafted, is clearly in favour of the Korean automobile industry and offers it an unfair competitive advantage.

In short: the automotive industry is a bargaining chip in the negotiations

6

Different market sizes and opportunities

* Average of last 4 years

Consumer market

Car market

Car production

Total car exports

Bilateral car exports

49 million500 million

1.34 million14.2 million

3.7 million13.9 million

32,500* to SK 541,500* to EU

3.4 million 2.0 million

Bilateral car exports as % of total car exports 1% to SK 25% to EU

7

Imbalances

• EU trade deficit in goods with South Korea amounts to about €14 billion (Eurostat)*.

• EU trade deficit in automobiles with South Korea amounts to about €3.5 billion (Eurostat)*.

EU trade deficit in automobiles amounts to about 25% of the total trade deficit*!

And it will grow with an FTA!

* Average of last 3 years

8

Unfair competition - the Duty Drawback (DDB)

• DDB enables manufacturers to reclaim duties for parts imported from 3rd countries and used for cars produced for exports.

• Our industry asks that the DDB should be excluded after 5 years once the import tariffs are dismantled.

• DDB has never been granted to any OECD country before in an FTA negotiation. Granting it now permanently creates a harmful

precedent for future FTAs.

9

Unfair competition - the Duty Drawback (DDB)

• Korean manufacturers could save an additional 300-500€ (independent study Credit Suisse) on cars exported to the EU (average car value of 10,000 €). European manufacturers would benefit only

marginally from better export opportunities to South Korea: the large market is in Europe

• Trade Commissioner de Gucht has publicly declared that the FTA was not about opening the South Korean market for cheap small cars.

10

Bilateral Safeguard Clause

• Bilateral safeguard clauses are normally tools to give a sector time to adjust to new circumstances (such as import surge).

• They are limited in time (10 years) and represent only a short respite in the lifetime of an FTA.

Bilateral safeguard clauses, such as the one proposed by the Commission, do not address, let alone redress, the imbalance created on a long-term basis by the Duty Drawback!

11

Bilateral Safeguard Clause

• The bilateral safeguard clause should be simple to apply and efficient.

• To that end, our industry calls on the MEPs to support amendments: Clarifying definitions Reducing investigation lead-times Giving the right to the Industry to request the initiation of

an investigation Prolonging the duration and review of safeguard measures,

of up to 4 years for the initial period Proposing a regional (or national) dimension, and a

“narrow” interpretation of “Union Industry” or, Introducing the concept of “Regional Industry”

12

The Special DDB Clause

• The Special DDB Clause will also be an essential element to lessen somewhat the negative impact of conceding DDB.

• We welcome the EP and Commission willingness to include it in the EP and Council Regulation implementing the Bilateral Safeguard Clause.

• But, to be fully efficient, it must:

Apply as soon as feasible after the entry into force of the FTA, and not after 5 years as provided today.

Cover several additional tariff lines besides the purely automobile ones in order to reflect the reality and costs of car production.

When investigating on DDB, the Commission shall be ready to evaluate production capacities, currency practices, and labour conditions of third countries that sell products covered by the DDB.

13

Commission Impact Assessment (IA)

The IA acknowledges that:

•The EU automobile industry will not gain from the FTA.

•The already negative EU trade balance for this industry will deteriorate by at least 5 billion euro and probably more.

•Korean manufacturers gain a competitive advantage and will increase their market share in small and medium-sized vehicles segments.

•Production and employment levels in the EU automotive industry will decrease as a consequence of the FTA.

•The overall positive effects of the FTA are more important for South Korea.

14

Commission Impact Assessment (IA)

However:

•The IA plays down negative effects on the automobile industry. •It overrates potential positive effects, refers to a very unlikely high figure of 400% increase of EU car exports to South Korea thanks to the FTA.•It assumes that South Korea will eliminate all NTBs and not introduce new ones, including technical regulations. •It plays down the decline in automotive jobs due to the FTA. •A decline by 1.4% represents a loss of direct employment of at least 30,000 jobs (or more than 10 production plants), with a loss of another 150,000 indirect jobs related to the industry.•It does not assess the impact of the changes in the Rules of Origin threshold and the permanent concession of the DDB to South Korea.

15

Risks of future regulatory NTBs - ACEA requests for improvements of the FTA text

• Automotive Annex 2-C in the FTA:

Articles 4 and 7 are drafted in such a way that they enable the parties to introduce in the future new safety and environmental legislation.

As an example, currently, the Korean MOE seriously envisages implementing a more stringent CO2 legislation favouring domestic production.

Such new legislation could considerably hamper EU car exports to South Korea, without giving to the EU proper means to oppose such legislation (sovereignty of South Korea).

Our industry requests a modification of the drafting of these two Articles by deleting the last § of Point 1 of Article 4, and the last sentence of Article 7.

Contrary to what the Commission believes, the dispute settlement mechanism in Article 10 will be very difficult to apply for this category of new legislation.

16

Rebalancing the deal

We call on the European Parliament to rebalance the deal and safeguard the legitimate competitive interests of the

European automotive industry