SQ INTERVIEW

SERI Quarterly's LEE Keon-Hyok spoke with Brian McDonald about the Korea- EU FTA, Korean regulations, the Lisbon Treaty, the Copenhagen Conference, and more.

HE Brian McDonald is the Ambassador and Head of Delegation of the European Union to the Republic of Korea. His career of over thirty years has included positions with the Irish Foreign Ministry, the General Agreement on Tariffs and Trade, the Organization for Economic Cooperation and Development, the European Economic and Trade Office, the European Commission, and Yale University. He is the author of The World Trading System: the Uruguay Round and Beyond and holds law degrees from Harvard Law School and University College Dublin. Contact: delegation-rep-of-korea@ec.europa.eu.

SQ EU- Korea relations are heading for a very important and meaningful year with the FTA likely to go into effect in 201 0. What would be the benefits for Korea and EU over the shortand the longer-term?

MCDONALD First of all, this is a trade agreement, so there will be benefits from increased trade. We expect trade to go up by 30-40 percent but, of course, this is the static figure. You know there is an x-efficiency factor, which will account for a more dynamic evolution of our trade relations over time. Our trade has gone up quite substantially every year in the last ten to fifteen years, so I am expecting quite a big jump, at least in the beginning.

I think it also has important implications for Korea in terms of investment because you will have done an agreement with us, with the United States, ASEAN, India, and others And that means that you will have privileged access to these markets, and you are actually the only country in Asia to have done this So I expect a lot of FDI to come into Korea as a result. I think it will work both ways in the sense that we will also invest here because it will also give us access to ASEAN, India, and possibly China if a similar agreement is made. I think this is a very far-reaching policy that's been undertaken by the Korean government. I think it fits in well with ROK plans to become a global player and become a hub for financial players in the region.

SQ Historically, Koreans have had closer relations with the United States and Japan with regard to FDI, trade, and business. But since 2006, China and the European Union have become Korea's two largest trade partners and the EU is actually already Korea's biggest foreign investor. What do you think are the main factors behind this?

MCDONALD I think investors generally find the Korean market a good place to be because the workers are determined and well-educated, and somebody told me the other day that the profits that you can make here are actually better than what you can make in China. There are, obviously, difficulties in the area of labor relations, but I think that is less of a problem for European companies because we have a long tradition of trade unionism in Europe.

But there are still problems such as regulatory issues that I think are important. I hope the FTA will help us to overcome these things by developing a closer partnership. And, in particular, I think it's important that we manage better relations between the ministries that deal with the individual industrial sectors I am sure that it happens in regard to domestic industry but I think there is room for improvement at least dealing with non-Korean companies. And we think that is an important feature if we want that the FTA to really succeed; I think that is the important path that we're going to have to pursue. And I hope to devote my time to that because I think the implementation of this FTA is going to be very important for us as well as Korea, so we want to make it a big success

SQ The EU Gateway Program in Korea aims to help European and Korean companies develop business cooperation. What are some of the key hurdles that Korea must tackle to improve its attractiveness to the EU private sector?

MCDONALD I think the Gateway Program is working extremely well. We've had a lot of good reports about that, and everybody seems to be very happy with it. The big companies can look after themselves. The Gateway is aimed at small- and medium-sized enterprises, so this is something relatively new for us in trying to penetrate the Korean market.

SQ When the FTA negotiations were under way, the EU saw the FTA as a stepping stone into Asia. You have already mentioned that it would help you get in to ASEAN and India Could you draw a picture of how Europe intends to engage Asia in the foreseeable future?

MCDONALD We engage Asia across the board. You'll find that the European presence - the political presence - in Asia is not perhaps as strong as it might be, but the economic presence is very strong. We've got an enormous amount of investments in China and in Southeast Asia, and this is not a particularly well-known fact, but we have a very strong economic presence in Asia in general.

SQ Would you view the FTA with Korea as a bridgehead into Asia?

MCDONALD I think it would be a partial bridgehead and operate that way to some extent. Due to this network of FTAs that Korea is establishing, I think it's bound to attract people who want to invest in Asia. This is a market where your Investment Policy Reviews are good, which is not always the case elsewhere. And, as somebody pointed out the other day, the profits you can make here can be better than elsewhere.

SQ The Korea- US FTA was negotiated before the one with the EU, but the Korea- US agreement is still floundering in the national assembly. What have you learned from that episode that you worked into the Korea- EU FTA?

MCDONALD On the substance, there are few major differences between our agreement and that with the United States However, there are some specific differences, for example, regarding the standards and the regulations in the automobile sector that don't affect other partners It is just a recognition of equivalence and other things So it's not a problem of substance so much as the fact that there have been delays in the US Congress, there's been a change in the US administration, the health bill having priority in the US. I think if we manage to have this agreed and ratified in the next six months or so, I think then there will be some pressure on Congress naturally to follow suit.

SQ What is it that makes yours [the Korea- EU FTA] easier to swallow than the one before?

MCDONALD Well it hasn't been easy to swallow actually because we've had a lot of problems with the automobile sector and all of this has fallen in the middle of a big financial and economic recession, so it hasn't been

SQ Let me ask it in a different way. If the contents of the FTA are not that substantially different from the one with the United States, how is it that it's easier to accept on the European government's side and ratify without great difficulty?

MCDONALD We expect them [the European Council and European Parliament] to [ratify] but its not without difficulty because the automobile sector is still very sensitive. Just as it is for the Americans - the big issue is "are you going to have some additional language or whatever it is on the automobile sector?"

SQ In some cases, I think they want a re-visitation ...

MCDONALD Yes, they'll revisit, but in what form is another matter, what this will amount to. But I think it is quite clear that we are both [the US and EU] watching each other. We had the bad experience, for example, with the NAFTA agreement. That went ahead, and we lost something like 30 percent of our market share in Mexico. So we learned a lesson from that.

SQ Maybe that is the important point.

MCDONALD Yes, we are doing this because we think it is important anyway as a part of our global strategy. But the fact of the matter is that Americans and Europeans have to look at each other because we are competing head on.

SQ So, being late or delayed in ratification, you are losing out...

MCDONALD Yes, delays can have an economic impact. It took us two to three years, I think, to get an agreement with Mexico. And when that happened, we were able to get back our market share, but in the meantime we had difficulties.

SQ Are there any points that you wanted to make on the economic front? Something that you think that can be improved or observations?

MCDONALD I think the regulatory issue is the most important for us. If we find ourselves having difficulties with the regulations next year, people will say, "What was the point of this FTA?" If we can't develop a proper economic partnership in the context of this FTA, people will not be happy.

SQ Any specific areas?

MCDONALD No, no particular areas. But the regulations are occurring all the time and the question is whether they take sufficient account of the trade relations and trade partners of Korea, or whether they're domestic-focused.

We have the same problem. When we introduce regulations in Europe, we have to pay more and more attention to our trade partners because, for a long time, it was so difficult to reach agreement inside the EU on some things so that we didn't look over our shoulders at our trading partners sufficiently. But I think now we've learned that the better part of wisdom is try to keep everybody happy and on board.

SQ Let me change subjects and ask you about green growth. The theme for this Quarterly issue is green growth. Traditionally, the EU and you yourself have been among the leaders in combating climate change. I've seen your quotes and statements on the subject, and you've asked for "ambitious, global, and comprehensive" efforts. What are the main results that you would like to see from the Copenhagen Conference [held December 7-18, 2009]?

MCDONALD We would like to see people undertaking ambitious targets for reducing climate change. The sooner we do this, and the more ambitious we are, the better it is because the costs of delay are likely to go up and up. You've probably read the Stern [Review on the Economics of Climate Change] Report. The costs [of delaying] keep going up. One of the reasons for the Four Rivers Project is the environment. You can already see the costs, and this is true everywhere: you can read [news] articles about bush fires in Australia; prolonged drought in some of the most important agricultural areas in Australia; in the south of Europe, major fires in Greece going on all summer, and even in the Po Valley in northern Italy, which is fed by the Alps, there is not enough water, or not as much as there used to be. We are all facing these issues, and the sooner we tackle them the better.

What I always point out is that the cost is not yet so huge. If the world invested $250 billion a year for ten years, we'd probably have solved the problem or, at least, made a big impact on it. And these are very small amounts of money considering what we've just been spending on the financial sector.

We were pleased when the [Korean] government decided to opt for the most ambitious emission reducing target, which we thought was commensurate with its status as a developed economy - although the Korean government keeps saying it is still a developing country in this context. But what we were a little bit disappointed by was that while you have legal commitments in your domestic legislation, that you weren't able to translate this into commitments at the international level. And I think that would have set of a very good example for other countries in the region.

SQ 'Translated at the international level" means what?

MCDONALD In terms of a legal obligation at international level. What we are going to get out of Copenhagen probably is a political commitment. It is an agreement and something that we are committing to, but it would have been better to have a legal commitment [from Korea]. In our experience, if you don't have a legal commitment, you lose about 30 percent of the effort in actual terms

SQ But can Korea do that unilaterally?

MCDONALD it would have to be a part of a package But the fact of the matter is that if Korea had declared itself as willing to do that, it might have helped. I think we are not going to see a legal commitment out of Copenhagen; not probably in a year's time or so. We feel that that is nonetheless important.

SQ So in Copenhagen you expect a simple political adoption?

MCDONALD We would like to see more than that, and quite honestly, I don't know what we can achieve in Copenhagen. Certainly, our objective would be to have a legal commitment. But I am not sure if this can be brought off at this juncture The United States, of course, is a key player here but it has been tied up with all these problems with the health bill and I think there has not been perhaps enough focus on the environment.

SQ On November 1 7, 2009, the Korean government approved a plan to cut greenhouse gases by 30 percent compared to otherwise what would have been or by 4 percent compared to 2005 levels.

MCDONALD Which is a good effort, and we are pleased with that.

SQ Are there areas where you think Korea could have done more?

MCDONALD Well, we always think that everybody should do more, you know. We [the EU] have even said that we will do 20 percent by 2020, but we will do 30 percent by 2020 if other people would make greater efforts. So it's all a question of how we judge the efforts of others

SQ Korea is still a country entirely dependent on energy imports. The current administration is very much focused on a green growth strategy for the twenty-first century. What would be your policy recommendations in this regard?

MCDONALD Well, I think it is an excellent strategy. The idea of putting 2 percent of your GDP into productive investment - which happens to be green - I think is an excellent idea. I don't think anybody can contemplate investments nowadays without making them green. If you decide to build a smokestack factory tomorrow, in about five years, you may be told to close it down. I think it is very hard to imagine in ten years people undertaking non-green investments And it's also very important to get out front in terms of the market and to be producing green goods and all the green technologies.

We [the EU] are a bit further down the road than you [Korea] are, I think. But you also have a very strong microelectronics industry here, which you can build a lot of the efforts in relation to green technology related to your abilities to control it electronically, the outputs, and all the rest of it. I think one element that really should be tackled here are the buildings If you reengineer the buildings here, you can make savings by up to about 40 percent of the energy consumption of these buildings, I think. That's an important area here that has not really been tackled.

SQ Aside from the green aspect of policy, are there any policy recommendations you would make for the Korean government? Over the next five years, what kind of policy do you think Korea should be pursuing and how would you go about it if you are in their shoes?

MCDONALD I'm afraid I'm very hesitant to make recommendations because I think Korea is doing very well, frankly. You [Korea] are the first OECD country to emerge from the financial crisis so I don't think there is much advice that I can give you, but I think the fact that you have taken on so whole-heartedly this green policy, green growth, the Green New Deal and all that, I think that is a very good sign. As a medium to long-term policy I think that's first-class.

SQ Let me turn that around a bit then. The EU has suffered more than many in this downturn. And [President of the European Central Bank Jean-Claude] Trichet is now talking about withdrawing some of the more extraordinary measures earlier than people have expected. And the fiscal deficits or the fiscal pressures in the EU still remain quite significant. Do you have any views on how the EU might conduct itself in terms of fiscal and monetary policies in the next year or so?

MCDONALD Generally speaking, at [the September 2009 G20 meeting in] Pittsburgh we have all said that the exit strategy is really premature. We need to wait until next year. I think the general view is that a lot of this might take place even in as late as 201 1, depending on the country. So while Mr. Trichet may be reducing some of the excess credit provided to the banks, he is not talking about the economy as such.

SQ So you're more in favor of delaying the exit strategy?

MCDONALD I think it's not just me; it's [the participants at] Pittsburgh that said that, and everybody seems to concede that that is the important point. Even here I heard the [Korean Minister of Strategy and Finance Yoon JeungHyun] saying that he didn't think that there was enough revival in private consumption and private investment to be able to justify an exit strategy this year.

SQ in the EU as well, there has to be an exit strategy for monetary and fiscal policy, and I suppose for monetary policy, they will withdraw the various exceptional measures such as the provision of financing to banks. Eventually, they'll have to raise interest rates. On the fiscal side, some European countries already have significant public debts and large fiscal deficits. Do you have a view on how to handle that?

MCDONALD This is why, I think, we [the EU] have had trouble having a huge fiscal stimulus, although I think it was still fairly big. Some critics say that it's not enough but I think some of the reasons for it not being, perhaps, extravagant is that we do have too much public debt and we do have problems We have exceeded the limits of the Stability and Growth Pact. But I think growth has already come back into the economy in Europe, so I am not as pessimistic as some people. And next year, I imagine things will be going much better.

SQ You're not worrying about a double dip?

MCDONALD Well, I'm fairly confident about there not being a double dip.

SQ Turning to the EU reform treaty, was there any reason why Ireland had voted against it last year but now has voted for? [Editor's note: HE McDonald is Irish.]

MCDONALD The reasons that the positions of the people have changed are that there were changes made specifically in the treaty. For example, there was nothing in the treaty that addressed the issue of reducing the number of commissioners So we got a commitment that that would not be the case; in other words, that we would maintain an Irish commissioner. Otherwise, we might have found ourselves outside of the decision-making table. I think that was a very important point.

And then there were also some other things politically significant but not substantially significant, like the question of our neutrality and problems about abortion, rights, and so on. Tax was also an issue. We have quite a different corporate tax regime from a lot of other countries, so there had been a lot of talk about harmonization of tax structures inside the EU, which was a big problem for us because our economic model is based on a low corporate tax model. And so we were given a guarantee that this would not be the case. They were very substantial issues So it wasn't just the people's political mood [being such and such] one day and then another the next day.

SQ Belgian Prime Minister [Herman] van Rompuy has been chosen for the newly created EU presidency and the UK's Baroness [Catherine] Ashton is the foreign policy representative, another new post. How is that going to affect the way that the EU is managed?

MCDONALD Well, at the level of the presidency, he's in charge of the Heads of State Council, and under him there will be a nominee of a six-month rotating presidency; you'll have three presidencies in a row operating together over eighteen months They will manage the committees and he will manage the Council for 2.5 years, renewable to five. Then you have Lady [Catherine] Ashton who is going to be the high representative for foreign policy. Before, foreign policy was basically divided up between the Council, represented by Mr. [Javier] Solana, and the Commission, which had all the offices abroad, the money, etc.; now, all that has come together in one person. So that makes a difference in terms of the weight, how to conduct the policy, and more coherence. We will also have member state diplomats coming to join us and to work for us in this common external service.

SQ With regard to the foreign policy, it looks ike there is a sort of a one-stop shop, two bodies instead of one, and the one representative. But, the representative cannot make decisions on behalf of the EU, right? She has to only represent on those issues where you have agreement.

MCDONALD Yes, we still don't have majority voting in the foreign policy field, but that will come someday. At the moment, we will have more cohesion because we will have a common external service dealing with these issues, with member states being represented on this common external service.

SQ I can see how the foreign policy is effectively more unified and cohesive, and therefore provide a more effective and unified front.

MCDONALD Yes, but you still don't have majority voting.

SQ Right But in the case of the presidency, previously you had a six-month rotating presidency, now you have that continuing and then you also have a 2.5 year presidency. How does that gel and work together?

MCDONALD Well, the six-month rotating presidency is now going to be disappear, and you will have the three presidencies that would normally have done the three periods of six months working together over a period of eighteen months at the lower level, and then Mr. van Rompuy works over a period of 2.5 years with possible renewal.

SQ Is it a vertical, hierarchical relationship?

MCDONALD Yes. They are all working towards him because he is the one at the top dealing with the heads of state. So, in principle, they have to work upwards towards him. Up to the Lisbon Treaty it was six months for everything, but now you have more permanence at the top with two and a half years renewable and then at the bottom, you have eighteen months with three presidencies working together. It's called a trio. They've got to work together, they're not going to work separately, so it will be an eighteen-month presidency at the lower level. In other words, we don't have every six months a new presidency starting all over again with a different agenda and all the rest of it.

SQ So, it gives you some continuity.

MCDONALD That's it.

SQ is that the biggest advantage of the new structure?

MCDONALD Yes, but that's not a small word, continuity, because it means much more cohesion and coherence over a longer period of time.

SQ As the ambassador of the European Union, how do you try to reflect the diverse interests of the various member states into a comprehensive and concise message?

MCDONALD It's not that difficult. We're used to working with each other for years and we try very hard to arrive at common positions, and it is rare that we can't arrive at a common position. I get along extremely well with all my colleagues here. We are able to meet once a month and talk with each other.

SQ With the many ambassadors here in Korea?

MCDONALD Yes, there are 23 EU ambassadors in Korea, out of the 27 there are 23 present.

SQ So, in those meetings, you come together and then you discuss various issues?

MCDONALD Yes, we discuss what is happening in Korea and what should we be doing about climate change, etc. So we arrive at, very easily, common positions.

SQ Clearly not everybody can be on the same page for every issue, and you must act as some sort of a mediator.

MCDONALD Yes, that's right. That's my role. The main focus of the commission is always to try to find the common interest and the general interest. We're a bit like a referee in that sense. So, it's not that the member states can't agree on their own. The Commission's main focus is on what the EU should be doing, as opposed to what France or Ireland should be doing for example, because everybody's national interests are slightly different. So, the general idea is to try and secure the general interest and the common interests.

SQ So it helps that you had a long history of working together with all these states?

MCDONALD Absolutely. This is why the EU is such an important example for others, I think. The fact that we've been able to sit down and talk to each other, thousands of civil servants every week in Brussels sit in hundreds of committees. And they talk and talk and they produce legislation, they produce common positions on this and that, and sometimes it's just the lowest common denominator, but this is better than not talking to each other at all or continuing national rivalries, which were never resolved. This is a very important feature of regional integration and that has been very successful in our case. We had terrible wars in Europe for centuries. Not just in the 20th century, we have been fighting each other for thousands of years, and the fact that that's become inconceivable [now] is a huge achievement.

SQ OK, last question. You've been in Korea for three years, which is probably long enough for you to get a fair sense of the locals, with one year to go. Can you list three things that have given you the strongest impression of Korea.

MCDONALD The most striking thing here is that this is now a first-world economy, and a very dynamic and very effective one which has a big reputation all over the world. I go to Pyongyang now and again and I can see what Korea must have looked like 50 or 60 years ago. The contrast is extraordinary.

Second, I think you need to see yourself more constructively - or with a little more confidence - in terms of your role. You're a relatively small country with one enormous neighbor and one quite large neighbor. But in Europe, you would be considered a big, medium-size power. And actually, your performance reflects that. I think that you can also see all these initiatives that you have taken to become "Global Korea," all these FTAs and things like that are an excellent development. And they have really put you on the international stage in a remarkable way.

Third, everybody said to me when I came here that the Korean people were like Irish people - and it is true in many ways - but I think you are perhaps a tad bit more passionate, determined, and romantic lot. My Irish colleagues might disagree. [Laughter] I am struck by the warmth and humanity of the people here in Korea.

Transcription: KIM Sora

Author affiliation:

LEE Keon-Hyok is SQ Editor-in-Chief and Senior Vice-President of SERI. He was previously Vice-President at Samsung Electronics, Senior Counselor to the ROK Ministry of Finance and Economy, Co-Head of Asian Economic Research at JP Morgan, and Senior Economist at the International Monetary Fund. He holds a PhD in Economes from London School of Economics and Political Science. Contact: keonhyok.lee@samsung.com.