The announcement that the governments of the United States and the Republic of Korea (South Korea) are starting negotiations on a free trade agreement gives new life to the movement for bilateral agreements at a time when the multi-lateral WTO talks continue to falter. This is the most important trade negotiations for the U.S. outside the WTO since NAFTA.
The economy of Korea with 48 million people and per capita income of $20,000 per year is the tenth largest in the world, the third largest economy in Asia, the sixth largest agricultural market for the U.S. and the seventh largest U.S. merchandise trade partner. Non-agricultural most-favored nation (MFN) tariff barriers average 7.0 percent in Korea versus 3.7 percent for the U.S. For agricultural products Korea’s MFN tariffs average 52 percent compared to 12 percent for the U.S.
Korea has its own reasons for pursuing an agreement. Duty free access to U.S. markets for major manufactured products is obviously an important reason. It would also enhance relationships in research and development needed for continued economic development. With the rising economic power of China and its interest in being the center of Asian commerce, Korea is looking to the U.S. as a counter balance. It already has a free trade agreement with Chile and is interested in other South American countries.
The government of Korea is pursuing an agreement with the U.S. despite expected conflicts over agricultural trade issues. In the WTO negotiations Korea has been part of the G10 group of major agricultural importers that has resisted broad market opening efforts. Korea is a relatively mountainous country with only limited arable land. The population is already over 80 percent urban and is expected to be almost 90 percent urban by 2020. As Korean farm groups made clear in Hong Kong, they are adamant in their opposition to any further trade opening in agricultural products. The slow restoration of U.S. beef movement to Korea and debate over bone-in beef are indications of the challenges ahead. In 2003 beef and beef offal imports from the U.S. were $790 million and the number one U.S. agricultural export item to Korea in dollar value despite a 40 percent tariff.
The Korean government has already expressed interest in exempting certain agricultural items from the talks. The U.S. set a terrible precedent in the U.S.-Australian free trade agreement by keeping sugar off the table. The Bush Administration will have to come up with a creative explanation why the Koreans should not be allowed to do the same. This will be a critical test to determine if these free trade agreements are really about free trade or have morphed into managed trade.
A free trade agreement should be about moving toward free trade in all products and services. The only serious issues are the length of transition periods and the shape of the curve of movement toward free trade. Transitions in non-sensitive items can be rapid – immediately or one or two years. More sensitive issues need time. The U.S. Mexican Free Trade Agreement as part of NAFTA had some immediate market openings and other changes occurred over five, ten and fifteen years. The recently completed CAFTA agreements have some transitions of 20 years. While there is no economic reason for a transition of more than five years, political considerations often mandate a slower approach. As we are seeing with NAFTA, even 15 years is not enough transition time for some political issues.
Korea is already a growing market for a host of U.S. agricultural products. Of the $10.6 billion in Korean agricultural imports in 2004, U.S. products were $2.5 billion. Bulk commodities lead the list with corn at $547 million, soybean at $284 million, wheat at $231 million and cotton at $157 million. U.S. corn shipments had been declining as Korea purchased more supplies from China. That turned around in 2004, but shipments for 2005 have been less than half the 2004 level. Korean buyers are well aware of their opportunities to source commodity products from throughout the world.
With per capita income at $20,000, Korean consumers are increasingly diversifying their diets. In 2004 U.S. exports of processed foods totaled $216 million, fresh citrus $98 million, nuts $40 million and fruit juices $25 million. Tariffs for these products generally range from 10-50 percent.
U.S. agriculture has to keep an eye on other trade agreements that Korea has negotiated. For example, pork accounts for 44 percent of the meat protein consumed in Korea and U.S. exports have increased 500 percent since market opening measures of the Uruguay Round agreement began in 1995. Current applied tariff range from 18-30 percent. The Korean-Chilean agreement provides duty free access for pork in 2014. The U.S. pork industry will need similar access or risk falling behind in that market.
Science must play a role in the agricultural provisions of the agreement. As has been demonstrated throughout the world, regulation based on various versions of science can keep products out of markets. Internationally recognized standards that treat U.S. products the same as other importers and as domestic production must be part of the agreement.
The Korean economy is top tier and internationally competitive. The final agreement will be between economic equals. With the many reasons for completing a free trade agreement with Korea, U.S. negotiators should not ignore the importance of achieving an agreement that can serve as a template for future agreements with other high-income developing countries. A mistake in this agreement will cause problems in negotiating future agreements with other countries.