The U.S. International Trade Commission (ITC), an independent agency of the federal government, is required by law to assess the economic impact of a free trade agreement (FTA) within 90 days of it being signed by the President. The U.S.-Korea FTA was signed by President Bush on June 30. To no great surprise the ITC estimates the agreement will have a positive impact on the U.S. economy overall and on many industries.
The reason for the positive results is simple. Under current rules 38 percent of U.S. tariff lines and 13 percent of Korean tariff lines are duty free. With implementation of the FTA, 82 percent of U.S. and 80 percent of Korean tariff lines would be duty free. In year ten of the agreement, 99 percent of U.S. and 98 percent of Korean tariff lines would be duty free. Korea`s average ad valorem equivalent (AVE) tariffs for U.S. manufactured products is less than 10 percent, but tariffs and tariff rate quotes (TRQs) on many U.S. agricultural and food products exceed 30 percent. The U.S. average AVE tariffs for imports from Korea are less than 5 percent with a few agricultural products higher than that. U.S. GDP would increase by $10-12 billion per year (0.1 percent); exports to Korea would increase by $10-11 billion per year; and imports from Korea would increase by $6-7 billion per year.
The report makes a key point that is overlooked in discussions about trade agreements, “Aggregate U.S. output and employment changes would likely be negligible, primarily because of the size of the U.S. economy relative to that of the Korean economy.” U.S. GDP in 2006 was $13.2 trillion compared to $888 billion for Korea. The political process in the U.S. focuses on jobs created to judge the benefits of an FTA. The correct economic measures are increased efficiencies through more trade and expanded opportunities for consumers, investors and workers. Comparative advantage and economics of scale result in expanded consumer choices, better returns for investors and higher incomes for workers who specialize in industries with a comparative advantage. Growth in U.S. jobs is more a function of sound regulatory, tax and monetary policy and flexible labor markets.
According to the ITC analysis, current U.S. exports of machinery, electronics, transportation equipment and passenger vehicles and parts are expected to benefit from relatively small tariff reductions. Changes in trade regulations may help high technology products like pharmaceuticals and medical devices. Imports to the U.S. of Korean textiles, apparel, leather products, and footwear would increase due to reductions in relatively high U.S. tariffs. U.S. imports of machinery, electronics, and transportation equipment would also increase due to small tariff reductions. The analysis estimates that 85–90 percent of the increase in textiles and apparel imports and 55–57 percent of the increase in passenger vehicles imports would replace existing import from other countries. Service sector exports would increase because Korea has agreed to major changes in levels of market access, national treatment, and regulatory transparency.
U.S. agricultural exports would gain from lower tariffs and higher TRQs. Korean markets are relatively open for corn and wheat and the elimination of tariffs would ensure that access. Oilseeds and vegetable oils and fats exports could have increases of 5-11 percent and 20-33 percent, respectively, with half the growth in food-grade soybeans and the rest in soybean oil. The immediate removal of the 5 percent tariff on distillers dried grains with solubles (DDGS) would benefit a market where the U.S. had a 63 percent share in 2006.
Fruits and vegetables will gain market access through lower tariff rates and quota removals. The 30 percent tariff on lemons will be phased out over two years and the 30 percent grapefruit tariff over five years. Seasonal TRQs for oranges would remain, but late season orange exports would benefit from a reduction of the 50 percent tariff to 30 percent the first year and five percent per year thereafter. The average Korean tariff on non-citrus fruit is 52 percent; some tariffs will be removed immediately, like cherries and dried grapes, while other are phased out, like fresh peaches, over 10 years. Tariffs on fresh and processed vegetables will mostly be phased out over two or three years. Those markets are growing, but the U.S. faces competition from China and Chile. Canned tomatoes and products are expected to have a strong market presence. Sweet corn exports are also expected to increase.
The long phase out periods of tariffs for dairy products will limit sales in the early years, but the long-term opportunities are good. The potential for meat exports is great enough that it was picked up in the ITC’s economy-wide analysis of the long-term effects of tariff reductions and TRQ expansions. U.S. beef exports could increase by $0.6–1.8 billion, 58–165 percent using 2003 as the base, and exports of other meat products, mostly pork and poultry, could increase by $456–763 million, 151–254 percent.
A newly formed Committee on Sanitary and Phytosanitary Matters is charged with dealing with issues through science and risk-based assessments. Meats and fruits and vegetables have struggled with SPS issues and success of the agreement will be determined by the ability to work though those issues. Chapter 7 deals with customs administration and trade facilitation issues. The report explains that both countries have agreed to immediately implement transparent and efficient procedures, greater accountability and predictability, improved customs efficiency, reciprocity and fairness, and expedited goods clearance to reduce paperwork and delivery times.
It is easy to get lost in phase out time periods and estimates of export increases; the ITC report at 400 pages is testament to that. The two keys to the U.S.-Korean FTA are the overall tariff reductions outlined earlier and regulatory reforms for SPS issues, customs and trade facilitation concerns.