Brussels will seek to upgrade its biggest free trade accord next year. But it could come with a catch.
The EU will push to revise its biggest trade deal next year, after Europe’s aerospace industry realized that the original accord with South Korea had made a potentially expensive blunder on aircraft engines.
Brussels continually cites its accord with South Korea as an example of the success of EU trade policy. Exports to South Korea have increased 55 percent since the pact came into force in 2011.
But more than 100 EU aerospace companies have raised concerns about tariffs on plane engines once they return to Korea after repairs.
The issue is highly significant because many European aerospace companies make their profits on the maintenance and service contracts for engines rather than their original sale. South Korea is a major market for military aviation and home to large airlines, including Korean Air and Asiana.
When a European-made engine is sold to Korea, it enjoys near-zero entry tariffs. But when that same engine, or part of it, is sent back to Korea after international servicing, it will have to pay an eight percent duty from 2017.
“This will put us at a significant disadvantage compared to non-European competitors and take away profit margins for EU manufacturing and repair companies operating in Korea” — Vincent De Vroey, civil aviation director ASD
“The possibility to continue to re-import repaired goods is one of the changes the EU would like to introduce,” a Commission source said, confirming that Brussels would seek to “upgrade” the deal in 2017. “This issue concerns mainly airplane engines but also other aviation components, in particular electrical and electronic components and cabin interior parts.”
It could be tough to negotiate changes. South Korea is investing heavy efforts in building up domestic champions in the aircraft maintenance business. Politicians and conservative media in Seoul have also accused their trade negotiators of conceding too much to Europeans in the original talks, saying that an influx of European cars made the deal unbalanced in the EU’s favor.
In a country that prides itself on export surpluses, the data from the EU trade deal have been politically embarrassing. In the year before the deal, Korea posted a comfortable €7.6 billion surplus over the EU, but five years later that had switched to a €7.3 billion deficit.
Europe’s biggest aerospace servicing players are Rolls Royce, Airbus, and France’s Safran Aerospace. Their interests are represented in Brussels by the Aerospace and Defence Industries Association of Europe (ASD), which has raised the issue of potential harm to their members from next year.
“This will put us at a significant disadvantage compared to non-European competitors and take away profit margins for EU manufacturing and repair companies operating in Korea,” said Vincent De Vroey, civil aviation director at ASD. “We raised it with the Commission about two months ago. Maintenance and repair are about 50 percent of the profits for some aerospace industry players,” he added.
A Korean trade representative said that talks on the issue had already begun, but labeled the problem as an error from the EU side.
“European negotiators made a mistake on repair products [goods going out of the country to be repaired],” he said, speaking on condition of anonymity. “The U.S.-South Korea trade agreement does not have this problem. U.S. negotiators addressed this before the agreement was signed. The Europeans made a mistake.”
Still, he hinted at the prospect of a trade-off: “If the EU wants to solve the issue, they will have to take some Korean demands into consideration.”
“The repair services are highly customized, and entail technical skills which are neither easily replaceable nor transferable” — Commission source
Seoul has already given indications of what it would accept in return. MEPs said they raised this issue on a fact-finding mission to Seoul in May, but realized that there would have to be a quid pro quo. When asked about the aircraft maintenance issue, the lawmakers’ South Korean counterparts responded that a new chapter on investment terms should be added to the EU deal.
“I hope this repair issue can be solved as soon as possible so that EU manufacturers and their workers can gain the full benefits from this deal,” said David Martin, a senior British lawmaker who went on the fact-finding trip to Seoul.
The Commission accepted that Korea was trying to build up greater domestic aerospace capacity but still thought Seoul would ultimately compromise next year.
A Commission source said: “Without obtaining core technologies for aircraft and parts, it is quite difficult to achieve a high level of repair capability. The repair services are highly customized, and entail technical skills which are neither easily replaceable nor transferable. For this reason, we don’t think the Korean airline companies will shift away from EU service providers to others in the immediate term.”
By Alberto Mucci
POLITICO: article available here.