Financial Services in the EU-Korea FTA and the EU-Japan EPA. A Comparative Analysis from an EU Perspective

Tesis de Máster , 2019 , 89 Páginas , Calificación: 1,0

Economía - Teoría y política del comercio internacional

This research aims to find out whether there exist any differences between financial services provisions and commitments in the EU-Korea FTA and EU-Japan EPA.

Through a qualitative analysis in form of a comparison between the agreement texts, it was found that there exists a number of differences which can be grouped in three categories: (1) architecture, scope and coverage, (2) modes of supply, and (3) regulatory framework. The most significant differences can be found in the third category. In general, JEFTA was found out to be more liberal in many respects, because it has a broader coverage, clarifications which do not exist in KOREU and contains provisions on regulatory cooperation, among others.

This research identifies the different EU interest in Korea’s and Japan’s financial services sector as the most probable reason for the differences in the agreements. It is concluded that Japan’s financial services sector was more attractive for the EU at the time when negotiations were initiated. This is due to the fact that first, Japan’s banking sector is more developed and second, Japan is more involved in international trade and investment in financial services. Based on the findings, the EU and Korea should work to amend the agreement to improve the efficiency in financial services trade. Furthermore, the EU has to make sure to establish a balance of liberalization and financial stability.

Table of Contents

1. Introduction

2. Literature Review

3. Financial Services in RTAs
3.1. Financial Services in International Trade
3.2. Financial Services in EU Trade Agreements

4. Overview of KOREU and JEFTA
4.1. The EU-Korea Free Trade Agreement (KOREU)
4.2. The EU-Japan Economic Partnership Agreement (JEFTA).

5. Financial Services in KOREU and JEFTA
5.1. Comparative Analysis of Financial Services in KOREU and JEFTA
5.1.1. Architecture, Scope and Coverage
5.1.2. The Modes of Supply
5.1.3. Regulatory Framework
5.2. Reasons for the Differences
5.2.1. Development of the Financial Sector
5.2.2. Involvement in Trade in Financial Services

6. Policy Recommendations

7. Conclusion

Bibliography

Acknowledgement

First and foremost, I want to thank my parents, because without their continuous support I would have never been able to embark on this academic path and successfully finish this master’s degree. Thank you for always respecting my decisions and believing in me. Thanks to you, I was able to make one of the best experiences of my life. Danke für alles.

I especially thank my thesis advisor, Professor Kang Moonsung for his guidance and feedback, which helped me to get on the right track and finish this thesis while staying motivated.

I would also like to thank my committee members, Professor Park Innwon and Professor Park Sung-Hoon for their helpful comments, which enabled me to bring this thesis to another level and change it into a more valuable academic contribution.

Next, I want to thank all the friends from KU GSIS, who were always open minded and who made these two years a more joyful experience. I am glad I was part of one of the most diverse student bodies you can find in Korea.

Lastly, I want to thank myself for always giving my best even though it was very hard sometimes. I will always look back on this time with mostly good memories.

Abstract

This research aims to find out whether there exist any differences between financial services provisions and commitments in the EU-Korea FTA and EU-Japan EPA. Through a qualitative analysis in from of a comparison between the agreement texts, it was found that there exists a number of differences which can be grouped in three categories: (1) architecture, scope and coverage, (2) modes of supply, and (3) regulatory framework. The most significant differences can be found in the third category. In general, JEFTA was found out to be more liberal in many respects, because it has a broader coverage, clarifications which do not exists in KOREU and contains provisions on regulatory cooperation, among others. This research identifies the different EU interest in Korea’s and Japan’s financial services sector as the most probable reason for the differences in the agreements. It is concluded that Japan’s financial services sector was more attractive for the EU at the time when negotiations were initiated. This is due to the fact that first, Japan’s banking sector is more developed and second, Japan is more involved in international trade and investment in financial services. Based on the findings, the EU and Korea should work to amend the agreement to improve the efficiency in financial services trade. Furthermore, the EU has to make sure to establish a balance of liberalization and financial stability.

Key words: international trade, financial services, KOREU, JEFTA, trade in services, free trade agreement, FTA

List of Tables

Table 1: Trade in Services: GATS vs. NAFTA Approach

Table 2: Characteristics of the EU Approach to Financial Services in Trade Agreements

Table 3: Key Facts about KOREU

Table 4: Key Facts about JEFTA

Table 5: Architectural Differences in KOREU and JEFTA

Table 6: Data Processing in KOREU and JEFTA

Table 7: Modes of Supply in KOREU and JEFTA - Overview

Table 8: Mode 1 - Scope and Definitions

Table 9: Mode 1 - Market Access, National Treatment, MFN Principle for Financial Services in KOREU and JEFTA

Table 10: Scope of Investment Liberalization in KOREU and JEFTA

Table 11: Market Access, National Treatment and MFN Treatment

Table 12: Key Aspects of Mode 3 - KOREU vs. JEFTA

Table 13: Temporary Presence of Natural Persons, KOREU vs. JEFTA

Table 14: Principles of Regulatory Cooperation in JEFTA

Table 15: Size of the Banking Sector, Korea vs. Japan

Table 16: Access in the Banking Sector, Korea vs. Japan

Table 17: Efficiency of the Banking Sector, Korea vs. Japan

Table 18: Stability of the Banking Sector, Korea vs. Japan

Table 19: Foreign Participation in the Financial Services Sector - Korea vs. Japan

List of Figures

Figure 1: Insurance and Financial Services (% of service trade BoP, World)

Figure 2: Insurance and Financial Services (% of services exports, BoP, world)

Figure 3: Insurance and Financial Services (% of service imports, BoP, world)

Figure 4: Insurance and Financial Services (% of service imports, BoP), World & EU

Figure 5: Insurance and Financial Services (% of service exports, BoP), World & EU 19 Figure 6: EU Trade in Goods with South Korea (exports & imports in mio. €)

Figure 7: South Korea’s Share of Exports and Imports in EU Trade

Figure 8: EU Trade in Goods with Japan (in mio. €)

Figure 9: Japan’s Share in EU Exports and Imports

Figure 10: Insurance and Financial Services (% of services exports, BOP)

Figure 11: Insurance and Financial Services (% of services imports, BOP)

Figure 12: Inward FDI Financial Intermediation, in Mio. USD, Japan vs. Korea

1. Introduction

Financial services and the financial sector are “the brain of the economy” (WTO 2019), because they are essential for the functioning of the economy of a state and despite the consequences of the global financial crisis, financial services remain an important pillar of international trade, especially for countries with a large services sector.

Figure 1: Insurance and Financial Services (% of service trade BoP, World)

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Source: World Bank

As Fig. 1 shows, financial services constitute a significant share in international trade in services. In around thirty years, the share of financial services imports in international trade in services has more than doubled while exports have almost increased threefold during the same time. Even though the volume and share of trade in financial services has stagnated in the wake of the global financial crisis, the level of trade is still considerably high and the rate of decrease has slowed down which might indicate a new rise in the next years (World Bank 2019a).

The last fifteen years have seen a proliferation of RTAs and most of them include services provisions¹ (WTO 2018). One of the main actors in trade in services and especially in financial services is the European Union (EU)², who is also one of the major exporters of financial services and thus currently runs a large trade surplus in the sector (World Bank 2019a). It is therefore not surprising that one of the EU’s trade policy goals has been the liberalization of trading partner’s financial services sector to facilitate trade and investment (Lang and Conyers 2014, 37). This is why all of the major RTAs the EU is currently negotiating contain provisions on financial services, among them the EU-Vietnam, EU-Singapore and EU-Canada FTAs (European Commission 2019b).

Two of the EU’s agreements in force and containing financial services provisions are the EU-Korea Free Trade Agreement (following: KOREU) and the EU- Japan Economic Partnership Agreement (following: JEFTA). Both of these agreements are of high importance for the EU because KOREU is the first agreements of a new generation of FTAs that started in 2011, and JEFTA is the first agreement that can be classified as a so called ‘Mega FTA’.

The reason for comparing the EU’s FTAs with Korea and Japan are the many similarities between the two partners. First of all, both partners are East-Asian countries. Korea is the first Asian country the EU concluded an FTA with, while Japan is the second and most recent one. By comparing their financial services provisions, it can be analyzed how the approach towards Asian countries developed over the last years and which implications exist for future agreements with other partners in the region. Furthermore, Korea and Japan share many commonalities which make them interesting subjects for a comparative analysis. Both countries have a similar economic structure: they rely on imported resources, share a similar development history, have strong automotive and machinery sectors with export-orientation and strict government regulations in some sectors among others (Felbermayr et al. 2018, p.15).

The purpose of this research is thus to find out which differences exist in KOREU and JEFTA’s provisions on financial services and which might be underlying reasons for the existence of these differences. In the end, policy implications for the EU should be drawn from the findings. Therefore, the main research questions for this study are: (1) What are the differences in financial services provisions and commitments between KOREU and JEFTA? (2) What are the reasons for the existence of these differences? (3) What policy recommendations can be drawn from the findings?

Based on these research questions, this thesis establishes two hypotheses: (1) There exist three major groups of differences in the financial services provisions and commitments of KOREU and JEFTA. These are differences in (a) architecture, scope and coverage (b), the modes of supply, and (c) regulatory cooperation. (2) The reasons for these differences are diverging EU interest due to (a) the different size and development of the financial services sector in Korea and Japan, and (b) Korea’s and Japan’s different degrees of involvement in trade and investment in financial services. (3) The main policy recommendations that can be drawn from the findings are (a) the need to amend financial services provisions in Koreu to improve trade in financial services between the EU and Korea, and (b) the necessity to establish a balance between regulation and financial stability to protect the EU financial services sector.

This thesis utilizes a qualitative research approach, which is commonly used to analyze RTAs under the aspects of contents, expectations or implications for international trade affairs (for example: Sauve and Molinuevo 2010; Lang and Amarasekara 2016; Mathis and Laurenza 2012). Another commonly used approach of analyzing an RTA agreement is the quantitative approach, which often focusses on numerical outcomes or numerical predictions for future outcomes (for example: Felbermayr et al. 2018; Forizs and Nilsson 2016). The qualitative approach was chosen because the focus will be on the agreement text and contents rather than on the actual numerical outcomes.

In order to find out whether there exist differences regarding financial services in KOREU and JEFTA and what these differences are, the main body of this thesis applies the discourse analysis, which is an established approach for comparing RTAs or other agreements. For example, Mathis and Laurenza (2012) use this approach to compare KOREU and the Korea-US FTA (Korus) under the aspect of regulatory cooperation in trade in services. Another example, where this approach has been used similarly is Roy et al. (2007) who compare new generation RTAs to the GATS.

Therefore, this thesis uses an established approach and applies it to KOREU and JEFTA which have not been compared yet in order to contribute to the existing research. Using this method, the chapters on financial services and modes of supply provisions of each agreement, as well as existing reservations, annexes on financial services commitments were examined.

The second method used is the application of quantitative data in order to assume the reasons for the above differences between the agreements. Qualitative data was related to the qualitative discourse comparative analysis to deduct the assumptions. First of all, the section compared the size and development of the financial services sector in Korea and Japan in order to find out whether this might be one of the reasons for the more differing EU interest. This is done by using the World Bank’s Banking Sector Development Framework (World Bank n.d.) which provides a list of indicators to measure the size, accessibility, efficiency and stability of the banking sector in both countries. For the insurance sector, such a framework does not exist, however, since the banking sector makes up the major proportion of the financial services sector of both countries, this does not impede the findings significantly. The framework is filled with data provided by several sources, most importantly the IMF Database, the FRED Database and the World Bank Development Indicator Database. The main focus lies on the year when negotiations were initiated, because this study assumes that the state of the financial sector from that year influenced the negotiation process the most. A similar approach is also used for analyzing the involvement in trade in financial services.

Lastly, two qualitative semi-structural interviews were conducted in order to confirm the hypotheses or find out about possible weaknesses of the study as well as to get further insights. One interview was conducted in person with two EU officials from the European Delegation in Korea. The second interview was conducted via written response with an EU official from the European Delegation in Japan.

Using the above methods, this thesis is structured as follows: Chapter 3 introduces the international standards of integrating provisions on financial services into RTAs, while also explaining the typical EU approach. Chapter 4 then introduces the main characteristics and background of KOREU and JEFTA, respectively. Chapter 5 constitutes the main body of this research. The first section identifies the differences in financial services provisions in KOREU and JEFTA one by one. The second section analyzes the diverging EU interest in Korea’s and Japan’s financial services sector by discussing the size and development of the financial services sector, and involvement in international trade in financial services. Based on the findings, Chapter 6 then presents policy implications for the EU. The last Chapter concludes the findings and presents a future outlook.

This research can deliver a significant contribution to the existing literature, because it analyzes a recent and not yet widely discussed topic. There exists an evident research gap not only about JEFTA in general, but also in regards to comparing these two RTAs under the aspect of financial services, which will be further elaborated in the following literature review.

2. Literature Review

The relevant literature for this study can be roughly categorized into four groups. The first group is literature on financial services in RTAs in general. Studies falling into this category are generally conducted using a qualitative discourse methodology and analyze agreement text formulations and content. Most of this literature approaches the topic by comparing selected RTAs or all existing RTAs (at the time) to the GATS or with each other. One of the most important studies was published by Stephanou and Goncalves (2010) who provide an extensive background study on the architecture and scope of incorporating provisions on financial services in RTAs before they analyze several case studies of Latin American countries’ financial services provisions in RTAs. They furthermore introduce possible motivations for including financial services in RTAs as well as negotiation patterns. The authors conclude that the increasing proliferation of RTAs led to greater liberalization in financial services in the Latin American region.

A similar study was conducted by Stephanou, who chose the same approach of relating international experience to a case study about China. He examined the general patterns of including financial services in RTAs, as well as current international trends like increasing liberalization for example. He concluded that even though the importance of financial services in RTAs is increasing, China should wait more until it joins this global trend (Stephanou 2009). Lastly, Tietje et al. (2010) related existing RTA provisions on financial services to the GATS and drew implications for developing countries. They analyzed agreement texts and common elements of the provisions. The authors concluded that including financial services in RTAs can be a more effective method for financial liberalization that also works for developing countries. Yet, they argue, institutional challenges for these countries remain.

The second group of literature are studies on financial services in EU RTAs. These studies follow a similar approach to the first group; however, they concentrate their focus on the EU RTAs, relating them to the GATS and/or to each other. One exemplary study was conducted by Lang and Conyers (2014), who analyzed several financial services provisions of newer EU RTAs, among them KOREU. They argue that the EU has established a distinctive pattern of integrating financial services into their RTAs, whose main feature is the strong focus on market access. In general, their study remains neutral in evaluating the quality of commitments in financial services in the EU RTAs.

One critical study was conducted by Dupre (2018) who analyzed provisions on financial services in EU RTAs under negotiating in 2018 by identifying general patterns in architecture and scope and relating them to EU regulations in the financial services sector that have been enforced after the global financial crisis in 2007. He criticizes that the new EU RTAs are contradicting the objectives of financial regulations and endanger financial stability and soundness on a global level. He, therefore, is of the opinion that the EU RTAs’ commitments on financial services are too liberal.

The third group of literature constitute economic impact studies on KOREU on the one hand and JEFTA on the other hand. The majority of these studies analyzes the effects of the agreements on all sectors of the economy in both parties. Thus, most of these studies also contain assumptions or evaluations on the (expected) effects on the trade in financial services between the parties. In the case of KOREU, studies assessing the potential impact, as well as studies evaluating the actual impact supported by statistical evidence have been published. In 2007, the year when negotiations for the agreement were initiated Francois et al. (2007) published their research about the expected outcomes of KOREU. Following a quantitative approach, they established two scenarios, a conservative and a fully liberalized one and concluded, that in both scenarios, both parties would gain. Furthermore, they argued that Korea would gain more than the EU and that a fully liberalized agreement would be more beneficial for both economies. Regarding financial services, they concluded that both economies would see an increase in their trade in financial services, however, compared to other services sectors, the impact would remain rather small since non-tariff barriers remain in the Korean market.

In case of JEFTA, due to its recent nature, there exist only studies about the potential impact of the agreement on both economies. The first study was published in 2012 and recommended the European Commission to start agreement negotiations with Japan after analyzing expected impacts quantitatively. Regarding financial services, the study found, that market penetration remains way below potential and that non­tariff trade barriers exist, that could be overcome through the agreement (European Commission 2012a). A more recent study was conducted by Felbermayr et al. (2017) who used available data on the outcomes of KOREU to calculate expected outcomes for JEFTA. They modelled one conservative and one fully liberalized scenario and argue that even in a conservative scenario the EU as well as Japan would gain considerably. Furthermore, they approve of the signal that the agreement would send against the proliferation of protectionism in current trade relations. Additionally, they show that JEFTA would lead to a significant reduction in non-tariff trade barriers for financial services.

Another study by Felbermayr et al. (2018) found that JEFTA is very similar in structure to KOREU. Furthermore, they calculated that trade in financial services between the EU and Japan will probably increase significantly. Similar results have been reported in the most recent economic impact study about JEFTA, which, in regards to financial services, discusses the commitments for regulatory cooperation between the parties (European Commission 2018b).

The fourth and last group of literature discussed are studies which focus on services in KOREU in specific. First of all, there is no literature available that only focusses on financial services provisions of one of the agreements. Available literature analyzes the whole services spectrum and even in that regard, only few studies exist. There are no such studies published for JEFTA, which is most likely due to its recentness. In the case of KOREU, the relatively low importance of Korea’s trade in services might be the reason for the sparse research. One significant study in the field was published by Mathis and Laurenza (2012). They compared the agreement text of KOREU to the GATS and identified similarities and differences between the two. They concluded that KOREU is the most ambitious EU RTA to that date in terms of services and investment provisions and commitments.

The literature review shows the evident research gap that exists in the field of financial services in KOREU and JEFTA. The fact that there does not exist a single study comparing the two agreements’ financials services provisions makes it an interesting topic for research. Therefore, this thesis aims to contribute to the closing of this research gap.

3. Financial Services in RTAs

This section gives a brief background on the status quo of including financial services in RTAs. First, global patterns and trends will be explained, before the EU approach and its characteristics are introduced.

The basic framework for financial services trade is set out in the General Agreement of Trade in Services (GATS) by the WTO, which entered into force in 1995. According to GATS, financial services are: “[...] any service of a financial nature offered by a financial service supplier of a Member. Financial services include all insurance and insurance-related services, and all banking and other financial services (excluding insurance)” (“Annex 1B - General Agreement on Trade in Services (GATS)” 1995, 309). This definition is also used in KOREU and JEFTA. Therefore, whenever the term ‘financial services’ is used in this thesis, it is referring to this definition.

3.1. Financial Services in International Trade

Fig. 1 and Fig. 2 show that international trade in financial services has increased significantly starting from the late nineties and reached its peak before and around the global financial crisis. Since then, the relative percentage of trade in financial services has declined slightly, but has stayed at a similar level for the past several years.

Figure 2: Insurance and Financial Services (% of services exports, BoP, world)

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Figure 3: Insurance and Financial Services (% of service imports, BoP, world)

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Source: World Bank (2019)

According to Roy, Marchetti and Lim (2007, 31), “financial services are a special and controversial sector, because of its strategic importance for economic development and its political sensitivity. Yet, finance is one of the sectors where WTO members have made more commitments than in any other sector expect tourism”. Along with the recent figures, it can be stated, that also today, financial services are still a very important factor of international trade.

A country or a customs union might want to include financial services in its trade agreements for several possible reasons. The most important one is that one party has a negotiation interest in liberalizing the financial services sector of the other party. This interest is often pursued by the party with a higher bargaining power. Another related reason is that one or both parties want to preserve the current level of liberalization or possess interest in additional liberalization in order to reform the financial services sector. Lastly, in some cases, the reasoning behind including financial services in a trade agreement can be strategic interest, for example initiatives to form a trading bloc in the future (Haddad and Stephanou 2010, 4f.).

In general, the provisions on financial services and their architecture are closely related to the architectural approach chosen for the whole trade agreement. It is especially closely related to approach that underlies the service and/or investment chapters, since these chapters establish general rules for trade in services between the parties (Stephanou 2009, 12). The two main approaches which are being used for services in RTAs and thus also for financial services provisions are the GATS-type and NAFTA-type approaches.

Table 1: Trade in Services: GATS vs. NAFTA Approach

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Source: compiled from Stephanou and Goncalves (2010, 24f.)

As Table 1 shows, GATS-type agreements usually include one chapter that covers the entirety of services subject to the agreement, while NAFTA-type agreements include not only separate chapters for services and investment, but also for specific services, for example financial services. These specific chapters cover all provisions related to the service in question (Haddad and Stephanou 2010, 24f). Some countries favor separate chapters for financial services, because it enables them to be more flexible when negotiating financial services and the party can retain control about the degree of liberalization (Stephanou and Goncalves 2010, 29).

The GATS established the four modes of supply for services, which are cross­border supply, consumption abroad, commercial presence, and presence of natural persons. These modes are applicable to all covered services (WTO 2019). For NAFTA- type agreements there are three modes of supply defined under services which are cross-border trade, consumption abroad, and commercial presence. The fourth mode of supply is regulated by an extra-chapter. Worldwide, mode 1 and 3, cross-border service and commercial presence, make up about three thirds of trade in services. Compared to mode 3, mode 1 is more difficult to liberalize since cross-border trade is regulated heavier and more vulnerable to consumer protection measures (Lang and Conyers 2014, 26).

Lastly, the two approaches differ in their scheduling of commitments. The GATS-approach uses a positive listing approach and the NAFTA-approach a negative listing. Roy et al. (2007, 34) argue that “agreements of GATS-type approach have tended to produce more limited results, while PTAs following a negative list or hybrid approach have tended to produce more significant results”.

There exists a range of important provisions, that are included in almost all service agreements and/or financial services chapters (depending on the type of listing), most importantly the national treatment and most-favored nation principles. Another important feature are market access provisions, which under the NAFTA-type agreements are very general while they are specified by each mode of supply in GATS­type agreements. A more recent phenomenon are provisions concerning new financial services. This means that agreements including such provisions allow the supply of new financial services as long as they are permitted by domestic law of the party they are supplied to. This fosters the introduction and trade of innovative financial services as soon as they are being developed (Stephanou and Goncalves 2010, 32-4).

One very recent trend in negotiating financial services provisions in RTAs is the incorporation of financial services in so-called ‘mega-trade-agreements’. Agreements falling under this category are for example the Trans-Pacific Partnership Agreement (TPP), which is still under negotiation, and JEFTA, because it will affect a very large portion of world trade and population. One point of critic, however, is that provisions in these agreements do contradict many of the financial regulations that were established after the global financial crisis. Dupre argues that the increasing liberalization does endanger the financial and economic stability of the partners and can even become a factor in causing another financial crisis (Dupre 2018, 23).

The conclusion of this paragraph is that there is no one universal or ‘right’ approach to incorporating provisions on financial services into trade agreements, but that is depends on a country’s individual situation (Haddad and Stephanou 2010, 5).

3.2. Financial Services in EU Trade Agreements

This paragraph explains the specifics of the EU approach to financial services in trade agreements and current developments in EU trade policy regarding financial services, which is important background information for understanding financial services in KOREU and JEFTA.

Figure 4: Insurance and Financial Services (% of service imports, BoP), World & EU

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Source: World Bank (2019)

Figure 5: Insurance and Financial Services (% of service exports, BoP), World & EU

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Source: World Bank (2019)

As Fig. 3 and Fig. 4 show, financial services constitute a very important factor in EU trade. While the rates of import are about world average, export-rates of financial services have been constantly above the world level and continue to be high, even after the reduction in trade caused by the global financial crisis. Due to this importance of the financial services trade, the EU pursues some key priorities in its financial services trade strategy. These are the upkeeping of the existing market liberalizations, achieving better opportunities of establishment in the partner’s market, the provisions that new financial services are liberalized by default and more harmonized financial regulation (Lang and Conyers 2014, 9).

In terms of negotiating financial services in trade agreements, the standard EU approach is closely related to the GATS-type approach, yet, there exist some important differences.

Table 2: Characteristics of the EU Approach to Financial Services in Trade Agreements

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Source: compiled from Lang and Conyers (2014, 15f.)

As Table 2 shows, the EU approach to trade in (financial) services is differing in some aspects from the above explained general approaches. Most recent EU trade agreements include a chapter called ‘trade in services, establishment and electronic commerce’ which covers all services included in the agreement in one chapter. This chapter usually includes the modes of supply, which thus also apply to investment, as well as regulatory frameworks. Financial services are included as a sub-section of this chapter and therefore applicable to the general services provisions (Lang and Conyers 2014, 15).

Another feature that sets the EU approach apart are the modes of supply for services. In the EU approach, there are only three modes of supply as opposed to the four modes in the GATS approach. Mode 1, which is cross-border supply, includes also consumption abroad. Mode 2 and 3 are the same as GATS modes 3 and 4. When it comes to trade in services, EU mode 2 is by far the most important mode of supply. In 2015, 63 percent of exports and 60 percent of service imports were channeled by commercial presence/establishment. 34 percent of exports were financial services and insurance. With 27 percent of exports and 29 percent of services imports, Mode 1 is the second most important mode of supply for EU trade in services. Financial services and insurance make up 18 percent of mode 1 (Eurostat 2019b). Due to the importance of commercial presence/establishment, the EU intents to reach high levels of commitments in this mode and consequently became one of the most liberalized markets for foreign investment in the financial services sector. Furthermore, due to the hybrid nature of the scheduling of commitments, financial services can be highly liberalized while maintaining some reservations (Lang and Conyers 2014, 27).

In terms of scheduling of commitments, the EU usually follows a positive approach that applies to all three modes of supply. However, EU scheduling of commitments is divided into two columns, one for commitments and one for reservations. Lang calls this “a default full commitment for all listed sectors, subject only to the specific reservations inscribed”. This approach is called a ‘hybrid approach’ by some scholars because it contains some of the negative listing elements (Lang and Conyers 2014, 16).

The effect of the positive listing is that the EU or its partner can further liberalize their financial services sector or other services sectors unilaterally, while maintaining the right to revoke these additional liberalizations at a later point. This is because concessions made after the enforcement of a positive listing RTA do not count as a binding commitment under the RTA (Tietje et al. 2010, 19).

In summary, the EU approach to financial services in trade agreements is unique in some ways and serves the EU interest to achieve liberalization in the financial sector, so they can increase their presence in the other party’s market. As will be discussed later, this approach is used for KOREU, while the EU has altered its approach for JEFTA. This shows that it is not a static model, but rather a process that can change over time.

4. Overview of KOREU and JEFTA

This chapter provides a brief overview over KOREU and JEFTA in order to contextualize the two agreements’ financial services provisions. It will discuss the timeline of events, general characteristics of the agreements and (expected) outcomes.

4.1. The EU-Korea Free Trade Agreement (KOREU)

Figure 6: EU Trade in Goods with South Korea (exports & imports in mio. €)

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Figure 7: South Korea’s Share of Exports and Imports in EU Trade

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Source: Eurostat (2019)

Before negotiations for KOREU started, the EU had a trade deficit with Korea, importing around 50 percent more from the country than it exported. This trend changed with the negotiations of KOREU and the agreement’s consequent entry into force. In 2012, EU exports to Korea surpassed imports for the first time. Since then, total trade in goods between the EU and Korea increased by almost 15 percent while being almost balanced.

While trade between the two parties had been rising in absolute terms, the importance of Korea had been relatively stagnant for imports and even falling for exports, coming in at around two percent share in total extra-EU trade. Since the enforcement of KOREU, this negative trend has been stopped, with rates rising to 2.7 percent in 2017. These figures show that Korea may not play a major role in EU trade, but constitutes a steady partner. This partnership seems to have improved thanks to KOREU and Korea was able to become the eighths largest extra-EU trading partner (European Commission 2019c).

Table 3: Key Facts about KOREU

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Source: WTO - Committee on Regional Trade Agreements (2012, 1-7)

Negotiations for KOREU were launched in May 2007 and lasted for eight rounds until the agreement was signed in 2010. It entered into force in 2011 and has a full implementation timeframe of twenty years, so tariffs will be lowered gradually until almost all tariff barriers are being abolished. The long implementation period stems from the slow lowering of tariff barriers in the agricultural sector of both parties (WTO - Committee on Regional Trade Agreements 2012, 48). The most important traded goods are machinery and transport equipment for both sides, followed by chemicals (European Commission 2015, 4-6).

KOREU is the first trade agreement that falls under the so-called ‘ New Global Europe Strategy’ , which was meant to revive EU trade with the world. The agreements concluded after the start of this new strategy are profounder than their predecessors. KOREU is also the first trade agreement the EU ever concluded with an Asian country and at the time it was the most ambitious agreement the EU had ever entered (European Commission 2016, 2).

The reason why the EU wanted to conclude a trade agreement with Korea was the assessment that the full potential of trade relations with Korea was not yet reached (Francois et al. 2007, 6). Furthermore, the EU was interested in establishing a leading position in the market against competitors which were also actively seeking trade relations with Korea. Lastly, the agreement also holds a political component in that it allows the EU to strengthen its influence and positive image in Korea and East-Asia in general (Cherry 2011, 80).

Before the agreement entered into force, both parties were predicted to gain from the agreement. Korea was said to gain significantly more because the increased competition would have beneficial effects on its economy (Francois et al. 2007, 3). In reality, a look at the figures shows that, while Korea gained more in relative terms at first, nowadays, the gains are quite equally distributed. The EU is satisfied with the outcomes of KOREU and considers it to be performing very well (European Commission 2016, 12). However, this positive development is likely to receive a blow from the exit of the UK from the EU, so trade between the EU and South Korea will decline, at least in absolute terms (Choi 2019).

4.2. The EU-Japan Economic Partnership Agreement

Figure 8: EU Trade in Goods with Japan (in mio. €)

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Source: Eurostat (2019)

Figure 9: Japan’s Share in EU Exports and Imports

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Source: Eurostat (2019)

In its trade relations in goods with Japan, the EU has always had an account deficit, however, due to the fact that exports to Japan increased about 39 percent and imports decreased around 13 percent since 2007, the current account deficit has decreased significantly. While the absolute volume in trade in goods between the EU and Japan has been relatively stable over the years, Japan ‘s importance for the EU has lost ground in relative terms. In 2004, Japan’s share in EU imports constituted more than 7 percent, its share in exports 4.6 percent. In 2017, these figures have dropped to 3.7 percent and 3.2 percent respectively. Consequently, Japan has fallen to rank seven of the largest EU-trading partners (European Commission 2019c), while it had been placed higher in previous years (Eurostat 2019).

Table 4: Key Facts about JEFTA

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Source: Compiled from WTO (2018a), Felbermayr et al. (2018, 2)

Negotiations for JEFTA were initiated after the release of the Impact Assessment of a Proposed Free Trade Agreement. Following the authorization of opening negotiations, the EU and Japan started negotiations in April 2013. Compared to KOREU negotiations, the process took much longer, because it took the parties eighteen rounds to agree on the final draft of the agreement (Sharma 2018, 1-2), which could be due to more issues of disagreement or JEFTA broader scope. After the agreement was signed, it entered into force on February 1st 2019 (European Commission 2019a). It is the largest trade agreement the EU ever concluded to date (European Commission 2018b). Like KOREU, its period of full implementation is twenty years, which means that until 2039 almost all tariffs in EU and Japan trade will be abolished. This long implementation period is to give sensitive sectors, especially the agricultural sector, enough time to adapt to the new trade policies (European Commission 2018a, 5).

The EU was interested in concluding an agreement with Japan, because not only were trade volumes between the parties lower than their potential would indicate, as noted above, bilateral trade had also been shrinking for the past decade, especially in relative terms. Hence the EU acknowledged the need to revitalize its trade relations with Japan (European Commission 2018c, 6).

Unlike other trade agreements the EU concluded, and thus unlike KOREU, JEFTA is not merely an agreement for trade but is also of strategic significance. This is why it is called ‘Economic Partnership Agreement’ rather than ‘Free Trade Agreement’. The EU and Japan aim to counter the increasing protectionism and hope to influence global trade rules (Sharma 2018, 2).

[...]

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¹ Provisions mean a statement in a free trade agreement, which states the rules and obligations the parties have to abide to. Obligations are understood as “measures which states are not permitted to apply in committed sector”. This is to be differentiated clearly from the term commitments, “which set out the sectors to which these obligations apply” (Lang and Conyers 2014, 22). Hence, when the term provision is used in this research, it refers to the statement of rules and obligations, while commitments are referring to the sectorial application and thus, to sectorial liberalization.

² This study will not include the implications of Brexit since the UK still is a member of the EU at the point of conducting this research.

• Universidad: Korea University, Seoul (Graduate School of International Studies)
• Calificación: 1,0
• Autor: Britta Kistenich (Autor)
• Año de publicación: 2019
• Páginas: 89
• No. de catálogo: V934609
• ISBN (Ebook): 9783346256010
• ISBN (Libro): 9783346256027
• Idioma: Inglés
• Etiqueta: international trade, financial services, KOREU, JEFTA, trade in services, FTA, EU-Korea FTA, EU-Japan FTA