Rhein on Energy and Climate

The EU is in the process of finalising a free trade agreement with Korea. Like all free trade agreements, it would exacerbate climate change, as more products would be shipped across the planet without paying for the external costs of shipping.

Proponents of the agreement might – rightly- object that the issue of free trade and climate change should be addressed in a wider context and not bilaterally between the EU and Korea.

But the agreement would also violate EU commercial interests. Indeed, if it were to allow for “duty draw-back”, the EU would indirectly open its market to Chinese, Japanese, ASEAN etc. manufacturers of components.

Under WTO rules any country is entitled to reimburse its exporters for import duties paid on components imported from third countries. That is perfectly normal. In the absence of a draw-back the manufacturer would be handicapped, if imported components are re-exported.

Superficially, nothing would oppose the inclusion of a draw-back clause in free trade agreements. All parties, with whom the EU has negotiated free trade agreements in the past, have therefore asked to benefit from drawback. But EU negotiators have persistently refused to accept such demands.

The reason why the EU should under no circumstances accept a draw-back clause in a free trade agreement with Korea or any other country on earth is very simple: When Chinese manufacturers export engines or other vehicle parts to the EU they pay 5-10 percent duty on these. When exporting these same parts via Korea, incorporated in automobiles, they would be exempt from the duty, because the Korean manufacturer would benefit from the draw-back facility

In conclusion,

· the EU Commission would not serve EU economic interests if it were to initial a free trade agreement with Korea providing for

duty draw-back. There is no urgency to push this agreement through. It might provoke an avalanche of similar agreements. Canada and the GCC are already waiting for also getting free access to the world’s biggest market.

· The EU needs a critical review of its trade policy. That should be one of the priorities for the incoming Commission.

Brussels, 30.03.09 Eberhard Rhein

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