One year has passed since the much-lauded Korea-EU Free Trade Agreement went into effect on July 1 last year.

However, high expectations that the tariff-cutting pact would give Korea’s exporters a boost into the European market have been lowered over the year as the sovereign debt crisis in the eurozone continues to weaken the region’s overall demand, said an economist.

While 13.8 percent of Korea’s exports were sent to the EU in 2008, that share actually slid to 9.4 percent this year amid the eurozone’s debt woes and fierce competition from rivals in China, Japan and the U.S.

“It’s a very big headache for Korean officials,” said Kim Deuk-kab, a senior fellow at the Samsung Economic Research Institute, a leading private-sector think tank.

“(They are wondering) how to explain this to the people, because when we celebrated the Korea-EU FTA, (we thought) maybe the FTA would give a big opportunity to Korean exporters,” he said in an interview with The Korea Herald.

Contrary to those high hopes held just one year ago, total exports to the EU decreased by 12.5 percent on-year from July 2011 to April 2012. Of Korea’s top 10 exporting industries, shipbuilding and IT products recorded the biggest losses in year-on-year sales. Reduced demand from Greek importers dealt a blow to Korean shipbuilders, who saw sales to the EU drop in the country’s leading export industry by 47.8 percent to $6.8 billion on-year in the same period.

Similarly, exports of LCD products, mobile phones and semiconductors also shriveled during that period by 23.5 percent, 44.6 percent and 36.3 percent, respectively.

“Europe’s economy is expected to have minus-growth this year, so Koreans are disappointed at the results of exports,” Kim said.

However, these numbers paint an inaccurate picture of the FTA’s effects on Korean business, he says. Because those four industries had already been enjoying tariff-free business due to previous agreements before the FTA took effect, they were not even directly affected by the agreement.

On the other hand, the rest of Korea’s 10 leading industries, which did receive tax and tariff cuts from the pact, benefited greatly in the same period ― with all posting a double- or even triple-digit percent rise in export sales to the EU, according to data compiled by SERI.

Korean automakers’ aggressive push in the European market propelled a 62.7 percent boost in sales on-year, with the No. 2 industry collectively raking in $4.78 billion. Kim said Hyundai Motor Group’s high-quality, well-designed, price-competitive Hyundai and Kia models were increasingly demanded by Europe’s cash-strained consumers over more expensive, locally made cars. Auto parts and tire sales also jumped 16.7 percent and 18.3 percent, respectively, and refined oil export sales increased more than fivefold to $961 million.

“Hyundai and Kia, their exports to the European market are increasing so quickly. It’s incredible,” Kim said.

So incredible, in fact, that European car companies, who face excess production capacity and declining revenue, showed concern about slipping control in their region’s market and began lobbying in May to revise the free-trade agreement, the Wall Street Journal reported.

“Information shows that the European automobile industry is suffering from diminishing demand, but the Korean car industry is (nonetheless) taking a more aggressive strategy into the open market,” Kim said.

The private sectors of both regions will likely meet together to address their problems before facing a court in order to prevent an anti-dumping duty, perhaps to increase the Korean cars’ export prices to match those of European autos, Kim said.

“I think it will be the main argument between the European Union and Korea when they assess the interim results of the FTA,” he said. “Hyundai and Kia have a very aggressive strategy, but they have to understand the difficulties faced by their European counterpart. They must compromise their strategy with the European situation.”

Despite the competition on their home turf, European car makers such as Audi, BMW and Fiat are enjoying the lowered tariffs and rising demand in Korea for luxury vehicles, commanding a 60 to 70 percent share of Korea’s imported car market over American and Japanese makers, Kim said. EU car sales rose 48 percent on-year in the second half of 2011 and Korea imported nearly $2.27 billion in automobiles from the EU from July 2011 to April this year, a 9.6 percent increase from the year before.

The pact offers several indirect benefits for Korea as well. As Korea is the first Asian country to ink such an agreement with the EU, Kim said other countries such as neighboring Japan and China may also take advantage of Korea’s FTA as a springboard into the European market by investing in production operations here ― further boosting Korea’s domestic economy.

Some Korean businesses haven’t needed to take advantage of the deal in order to compete in the EU market. Some companies have been moving their operations abroad in order to cut costs. Ever since the formation of the European Union, German and Asian producers including Korean technology makers have flocked away from the Mediterranean toward Eastern Europe to set up cheap-labor factories in the Czech Republic, Poland, Hungary and now Slovakia.

Although this means domestic labor isn’t utilized in these situations, it also means that Korean companies are saving money by localizing their production bases closer to their target markets in Western Europe, the eurozone’s economic powerhouse.

Since Korean companies export semi-finished goods to those production centers to finish them, the value of their actual, finished products is underestimated in export measurements from FTA-related data, Kim said.

For example, local mobile phone producer Samsung Electronics ― whose increasingly popular Galaxy S smartphone line helps the company maintain a 70 to 80 percent share of the EU’s imported smartphone market ― exports to the EU both directly from Korea and through production centers abroad. Though Korea’s biggest electronics company took in 4.27 trillion won on phones alone in the first quarter of this year, the country’s overall mobile phone exports actually dropped by 44.5 percent on-year in the 10 months after the FTA began to take effect.

“It’s very curious. Over one year, Korean mobile phone industry exports are almost 45 percent down. But Samsung Electronics company’s market share in the industry increased,” Kim said. “The statistics do not explain this phenomenon.”

But with Korea’s overall trade surplus with the EU plummeting by $11.2 billion on-year over those first 10 months and the trend not expected to quickly improve, local companies must find alternative, non-exporting ways to maximize their business potential in an underperforming European economic landscape.

Kim suggests that now is the perfect time for capital-rich businesses to buy out high-potential companies with in-demand technology or design, particularly in crisis-laden countries like Greece or Italy, through mergers and acquisitions.

Korean retail conglomerate E.Land Group has already done so, acquiring high-profile fashion companies in Italy since last year in order to export brand-name goods to China and meet the country’s burgeoning demand for luxury consumer products.

Samsung Electronics similarly acquired Netherlands-based display technology company Liquavista in late 2010.

“We (Koreans) are very proud of our commercialized technology. So in order to be the real winner in the global market, we have to get original technology,” Kim said. “It’s a very good chance for Korea to get technology skills by acquiring European companies.

“The European sovereign debt crisis doesn’t make Europe attractive for the time being, but on the other hand mergers and acquisitions are very good (strategies).”

Though a higher-than-expected 65.7 percent of Korean exporters already take advantage of the FTA’s features, according to the European Commission, Kim says Korea probably won’t be able optimize the pact’s potential since Korea’s exports rely so heavily on just a few industries that aren’t even directly affected by the FTA, such as heavy and chemical products. In 2010, just 10 types of items made up 65.9 percent of Korea’s exports to the EU.

Furthermore, since those industries are controlled by a few big conglomerates, the small and medium-sized companies who make up about 20 to 30 percent of exports to Europe face an uphill battle in gaining market share.

The EU’s economy will need a few years to recover from its sovereign debt crisis, so it is too soon to accurately measure the full benefits of the free trade agreement, Kim said.

“It will take maybe two or three years to recover economic growth. We have to wait.”

And because the global impact of the eurozone recession is more gradual than the shock from the U.S. financial crisis in 2008, Korea must also prepare for a long healing process.

Korea will be buoyed by its neighbor China, who can afford to expand spending to stimulate its own economy as well as its neighbors’, he said.

“There is a long way to go to (become) an advanced economy ... Korea competes with big, strong neighbors, China and Japan, surrounding the Korean Peninsula,” Kim said. “So in order to compete with big guys, we always develop ourselves. We have to upgrade to survive. I think the Korean people have the DNA to survive against the big (countries).”

By Elaine Ramirez (eramirez@heraldcorp.com)