Seoul - South Korea's automotive sector remains a sticky issue that might make implementation of a new free trade deal with the European Union a bumpy ride.

The EU paved the way for a potentially massive rise in exports Thursday when it reached its biggest-ever free trade agreement with an individual country - worth up to 19 billion euros (28.3 billion dollars), according to some estimates.

The deal would quickly eliminate 1.6 billion euros in South Korean import duties and 1.1 billion euros in EU import duties, which should benefit both businesses and consumers because it should make products cheaper.

However, carmakers have little reason to applaud the deal, which still awaits approval from the European Union's 27 member states.

European carmakers oppose the deal because they believe the pact favours South Korean carmakers with its duty drawbacks and rules of origin. They argued it gives the Koreans unfair access to the EU's market of more than 500 million people.

The biggest obstacle in the drawn-out negotiations have been duty drawbacks, taxes paid on imported parts used to manufacture final products, such as cars, that are then reimbursed when those products are exported.

Rules of origin determine where a product was made, including those goods produced from parts made in numerous countries. These rules determine quotas and other applicable trade regulations.

Under the trade pact, South Korean manufacturers would continue to benefit from tax refunds on foreign components unless there is a significant increase in the use of imported parts. The cap on foreign content of Korean-made products was set at 45 per cent.

To allay European fears of being swamped by cheaper Asian cars, the trade deal contains a so-called safeguards clause, allowing duties to be reintroduced in case of a sudden surge in imports, which was, however, slammed as "difficult to implement" by the European carmakers association.

EU and Korean carmakers currently hold a similar 3-per-cent share in each others' markets, but owing to the larger size of the EU market, there are 10 times more Korean cars in Europe than European cars in South Korea.

Meanwhile, South Korean carmakers also do not appear to be enthusiastic about the trade agreement as they stand to lose control of their home market if the deal becomes effective.

If Seoul removes an 8-per-cent duty on European vehicles within the next three years, the competitiveness of EU carmakers is set to increase.

In recent years, foreigners have proven that the South Korean market is no longer the sole domain of local carmakers like Hyundai Motor Co or Kia Motors Corp.

The share of imported vehicles increased from 5.13 per cent, or 53,390 units, in 2007 to 6.04 per cent, or 61,648 vehicles, in 2008 while the South Korean car market itself shrank below 1 million units after 2004.

South Korean carmakers would benefit from duty-free entry into Europe, but the benefit was forecast to be limited as South Korean carmakers have already increased capacities at their production plants in Europe.

The Korea Automobile Manufacturers' Association said Korean-made cars represent 56.4 per cent of South Korean carmakers' total sales in Europe in 2008.

That rate was expected to fall below 40 per cent by 2013 with Europe-based production capacities increasing.

Hyundai started mass production at its Czech plant in November. The facility is to have an annual production capacity of 300,000 vehicles in 2011, Hyundai said, up from a current 200,000.

"Our European sales are forecast to be 7 to 10 per cent lower than last year," said Chung Euo Sun, vice president of Hyundai Motor. (dpa)