Seminar on EU-Korea FTA: Non-Financial Services June 20, 2011 By Yeojin Yi
Contents Trade in Services between Korea and the EU Overview of EU s Service Market Bilateral Trade in Services Korea s Service Market and Issues Impact of Korea-EU FTA on Service Key Areas of Service Liberalization Transportation Service Distribution Telecommunication Postal and Courier Service Environmental Service
Trade in Services between Korea and the EU
Overview of EU s Service Industry EU is the world s largest service exporter and its market share continues to rise each year In 2008, EU (26%, excluding intra-eu service trade), US (17.3%), Japan(5.8%), China (5.6%), Korea (3.1) Biggest service trade partners are US, Switzerland, China, Japan and Russia In 2008, Korea was EU s 14th largest trading partner in services with export of 7. 9 bn and import of 4.4 bn Within EU, UK and Germany are the top two players in the service market, constituting 36% of total EU trade in services in 2008 UK also records the largest surplus with non-eu countries (in 2009, 49.2 bn) Services sector accounts for 71% of EU GDP and 67% of EU employment Highest trade surplus in: other business services ( 29.9 bn), financial services ( 26.2 bn), and transportation ( 21.5 bn) Biggest deficits in: travel ( -18.3 bn), royalties/license fees ( - 13.9 bn) 4 l
Bilateral Trade in Services EU has enjoyed surplus in services trade with Korea since 2004, with annual growth rate of about 30% (an aggregate 66% increase in 2005-2008) Source: Eurostat 2009 Goods export Goods import Services export Services import 5 l
EU27 Trade in Services with Korea (Million Euro) Eurostat 2009 Credit Debit Net 2005 2006 2007 2005 2006 2007 2005 2006 2007 TOTAL 5,912 6,759 7,212 3,484 3,973 3,961 2,428 2,786 3,251 Of which: Transportation 2,230 2,622 3,007 1,925 2,165 2,163 305 457 844 Travel 430 590 583 236 310 170 194 280 413 Other services 3,251 3,550 3,619 1,319 1,497 1,626 1,932 2,053 1,993 of which: Communication 47 61 59 25 44 43 22 17 16 Construction 244 210 153 198 298 327 46-88 -175 Insurance 83 104 95 37 61 56 46 43 39 Financial 364 409 535 143 152 203 221 258 332 Computer and IT 102 118 132 19 38 35 83 80 97 Royalties/license fees 444 595 712 122 109 134 322 487 578 Other business services* 1,906 1,978 1,851 718 747 787 1,188 1,231 1,065 Cultural, recreational 38 53 62 34 20 11 4 33 51 Government 23 21 21 23 29 31-0 -8-10 TOTAL extra-eu 27 403,396 447,080 498,523 349,282 378,555 414,399 43,114 68,525 84,124 Korea/total extra-eu27 1.5% 1.5% 1.4% 1.0% 1.0% 1.0% * Other business services comprise merchanting and other trade-related services, operational leasing services and miscellaneous business, professional and technical services 6 l
Overview of Korea s Service Industry Traditionally, Korea s development strategy was focused on manufacturing sector, while service sector was sheltered from international competition As Korea s economy further develops, value added by the service industry and employment derived from service industry are also growing However, compared to other advanced economies, value added by the service industry is still small low efficiency and productivity 52.4% of GDP (2010), whereas US, EU, Japan range among 70-80% Most service-related employment occurs in such low value-added industry as wholesale/retail, food & beverage, hotel & lodging Value added from such industries account for 9.7% but they employ 32.7% of workforce Such high value-added industries as finance, real estate, business services created merely 21.6% of value added (cf. Luxemburg: 47.3%) Recently, education, healthcare, contents/software industries are showing potentials for faster growth 7 l
Korea s Trade in Services (2001-2010) Rank Imported Services Percentage (%) 1 Transportation 33.2 2 Business services 28.3 3 Travel 23.0 4 Royalties, license fees 7.8 5 Construction 2.0 6 Communication 1.4 7 Government 1.1 8 Insurance 1.0 9 Personal, cultural, recreational 0.9 10 Financial services 0.6 11 Computer/IT 0.5 8 l
Korea-EU FTA and Korea s Service Industry Korea-EU FTA achieved KORUS PLUS liberalization in trade in services Almost 50% of the total trade volume newly created by the Korea-EU FTA will come from services (Copenhagen Economics 2007) Output of Korea s services industry will expand by 0.8-3.5% (KIEP 2009) At the same time, Korea s deficit from trade in services will rise, especially from such high value-added areas as financial services, professional services, royalties and license fees Before KORUS FTA enters into force, EU service providers will enjoy first-mover s benefit European Services Forum was one of the most active supporters of Korea-EU FTA 9 l
OECD: Problems of Korea s Service Industry Industry Structure Low profitability Mom & Pop stores (less than 4 employees) take up 86.3% of entire service industry Productivity in wholesale/retail or hotel/lodging services is at 20% level of advanced countries Limited variety Insufficient capital for re-investment Potential for Growth? Regulatory Background High entry barriers Entry barriers exists in 1/3 of entire 543 service industries More than 50% of communication, finance/insurance, education services has some kind of entry barrier Competition-restrictive regulations (public service, medical service, zoning) and protection against establishment (Mode 3) External Environment Little attraction for FDI From 2000, FDI in financial, business services is slowly on the rise Still, Korea s FDI/total investment in service is low (1.8%, compared to 10.4% of US and 9.5% of France) 10 l
EU Trade in Services with Korea: Net Surplus Estimation of FTA Impact Current Trend 5 bn net surplus in 5 years (190% in 5 years) 3.8 4.2 4.8 4.6 5.5 5.1 6.4 5.6 7.3 6.2 8.4 6.8 9.6 7.4 Net gain after 5 years of FTA: 2.2 bn 2009 2010 2011 2012 2013 2014 2015 2016 Source: Eurostat/ESF 11 l
Key Areas of Service Liberalization Under the Korea-EU FTA
Transportation Services Shipping: Full market access and non discriminatory treatment in the use of port services and infrastructure, related fees and charges, customs facilities and assignment of berths and facilities for loading/unloading in Korea Air transport services: Improved market access for EU services into Korea (aircraft registered in EU may be leased to Korean air carrier in specific circumstances) However, national maritime cabotage, some aircraft services (repair and maintenance, selling and marketing of air transport services, CRS services, handling services, rental services) may be restricted with regard to Mode 1 (market access) Passenger road transport (scheduled buses, taxi) is not liberalized, due to its direct impact on citizens Freight transport: given saturation of domestic market, this area remains closed except for maintenance and repair of road equipment, subject to ENT 13 l
Distribution Services: Wholesale Not committed to liberalize pharmaceutical, medical goods, functional goods, and items subject to limitations under Mode 3 ENT required for wholesale trade of used cars, gaseous fuels and related products Main criteria for ENT: formation of reasonable prices, number of and impact on existing suppliers for balance of demand and supply, healthy development of industry, establishment of orderly trade. Population density, traffic, environmental pollution, local conditions and other local characteristics as well as public interest. Alcoholic beverages wholesale distribution services: authorization required from the head of relevant tax office, subject to ENT Minister for Health and Welfare controls the supply and demand of the wholesale distribution of certain imported Asian medicinal herbs 14 l
Distribution Services: Retailing Not committed to liberalize pharmaceutical, medical goods, functional goods, and items subject to limitations under Mode 3 Excludes retail trade of tobacco, rice, red ginseng and gas station business from liberalization Retailing for used cars and gaseous fuels are subject to ENT Sale of alcoholic beverages by telephone or in electronic commerce is prohibited Only a natural person that is a licensed an gyung-sa (optician or optometrist) that has established an office in Korea may engage in optician or optometry service Only a licensed an gyung-sa may establish an office; only one office is permitted per an gyung-sa A person supplying pharmaceutical product retail distribution services (including Asian medicinal herbs) may not establish more than one pharmacy nor establish in the form of a corporation Issues of SSM laws: Distribution Industry Development Act, Act on the Promotion of Collaborative Cooperation between Large Enterprises and Small- Medium Enterprises 15 l
Telecommunications Services Satellite broadcasting: In two years after the FTA enters into force, Korea will permit cross-border supply of television and radio signals transmission services through satellite facilities without commercial arrangements (however, domestic to domestic transmission by satellite is excluded) Currently, a foreign operator must enter into a commercial contract with a domestic provider for transmission services (Article 87 of Electronic Communication Business Act) Foreign ownership requirements in Korea will be relaxed Restriction on foreign ownership of public telecommunications services will remain at 49% (subject to public interest test) However, in case of indirect investment through a Korean subsidiary, up to 100% of ownership will be permitted in two years (except for KT and SK) A foreign investor may not be the largest shareholder of KT Corporation, except it if holds less than 5% of the total voting shares of KT Korea has also committed to simplify conformity assessment of broadcasting and telecommunications equipment/materials in three years 16 l
Postal and Courier Services In three years, Korea commits to amend the Postal Service Act to expand exceptions to the letter-posts monopoly of the Korean Postal Authority by including international document express delivery service Proposed amendment of Article 3 of the Enforcement Decree of the Postal Service Act (applies to all foreign courier service providers) reflects this commitment A trucking business license for domestic courier supply is subject to an economic needs test. DHL plans to provide such services at convenient stores; domestic service providers also created dedicated teams or premium service products in anticipation The market for express delivery services in Korea is estimated at KRW 1 trillion (18 million delivery per year) 17 l
Environmental Services In outsourcing collection and treatment services of non-industrial waste water to a private provider through competition procedures, Korea commits to grant non-discriminative treatment to EU service suppliers in five years after the FTA takes force However, provision of such services at central or local level may be subjected to public monopoly or exclusive rights granted through concession contracts Notwithstanding, public authorities retain the possibility to Apply exclusive rights Choose freely management arrangement for the services Choose the mode of attribution of the exclusive rights (open competition or not), and Change from one mode of management to another (e.g. to return to a public monopoly at the end of a concession contract) 18 l
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