Like most Free Trade Agreements (FTAs), the U.S.-Korea FTA is a combination of major policy breakthroughs and work-in-progress. The agreement was reached because President Bush and President Roh said “get it done”; they believe the economic benefits out weigh the political costs of getting the agreement through their respective Congress and National Assembly. The deal will not be completely done until all details are released.
After working out FTAs with lower-income developing countries like CAFTA-DR and mid-majors countries like Australia, Singapore and Chile, the U.S. had to show it could reach agreement with an industrialized country that is a developing country in name only. Korea may have needed the agreement even more than the U.S. It is truly one of the incredible economic success stories of the past 50 years. At the end of the Korean War they were simply a poor country cut off from its more prosperous half. Per capita income in the south today is 14 times that of the north. Through a combination of aid, trade and industrial development Korea has become the tenth largest economy in the world. Korea’s challenge now is to consolidate its economic gains. President Roh was quoted in the Wall Street Journal, “If we reject change to protect just one group`s interests or we are complacent with the success we are enjoying now and try to protect what we have, there is no telling as to when other countries will pass us by and advance ahead of us.”
Korea’s economic policy challenges in the U.S.-Korea FTA are reflections of its past. In the 1950s and 1960s many developing countries erected high tariff walls to protect agriculture and selected domestic industries and tried to become competitive in low wage export industries like textiles and low end electronics. As the Korean economy has grown and moved on to higher valued exports like steel, ship building, automobiles, telecommunications equipment, semiconductors and computers, removing the old tariffs has been difficult. Korea only has FTAs with Chile, Singapore, the European Free Trade Area and the Association of Southeast Asian Nations.
Just a few days before the announcement of the agreement, the USTR’s office released its National Trade Estimate Report that analyzes by country the trade challenges for the U.S. The report said “Korea imposes tariff rates of 30 percent or higher on most fruits and nuts, many fresh vegetables, starches, peanuts, peanut butter, various vegetable oils, juices, jams, beer and some dairy products. Many products of interest to U.S. suppliers, including apples, beef, certain cheeses, grape juice and grape juice concentrate, herbal teas, pears, table grapes, and a variety of citrus fruits are subject to tariff rates of 35 percent or higher.” Korea also applies prohibitively high tariffs even when there is no domestic production. Korea has some tariff-rate quotas (TRQs) to provide minimum access as required under the Uruguay Round WTO agreement. Over-quota tariff rates for some agricultural products are prohibitive. Honey is subject to an over-quota tariff rate of 243 percent; skim and whole milk powder, 176 percent; barley, 324 percent; malting barley, 513 percent; potatoes and potato preparations, more than 304 percent; and popcorn, 630 percent.
Half of current U.S. agricultural exports to Korea will immediately become duty free. Others will have two year and five year phase outs. Some products will have expanded TRQs. A few items like beef will have a 15 year tariff phase out. Streamlined customs procedures should also allow for integrated supply chains from the U.S. to Korea.
Reducing tariffs on agricultural products which average 52 percent is a political problem with farmers, but an economic benefit for consumers. Agriculture accounts for only 3 percent of Korea’s GDP and 6.4 percent of the labor force. These are more similar to developed counties than developing ones. Reductions in import tariffs on food will result in an improvement in the standard of living of consumers due to lower food costs. By one estimate, excluding rice from the FTA will reduce by almost half the net benefits of the FTA. Korean rice prices are among the highest in the world and four times rice prices in China. Korea holds the price high to protect producers as consumption declines as consumers diversify diets.
The exclusion of rice from the FTA is not a fatal flaw. Under the Uruguay Round Agreement, Korea is exempted from setting a tariff rate quota for rice in return for establishing minimum market access that increased from 51,307 tons in 1995 to 225,228 tons in 2004, 4 percent of domestic consumption. Korea had an option to extend the agreement for another 10 years. The new agreement requires addition market access to grow to 408,700 tons by 2014.
Beef trade will be a true test of the “new” Korea. Korea has the highest retail beef prices in the world. U.S. imports were stopped in December of 2003 due to BSE. The U.S. government has pried open the market a little, but Korea is using a zero tolerance for small bone chips to reject U.S. beef. The FTA has language on strengthening protection against technical barriers to trade, including reliance on international standards that are consensus-based. This will be tested in late May when the World Organization for Animal Health is expected to designate the United States a “controlled-risk” region for BSE making it eligible for normal trade. A positive outcome would indicate that the Korean government will use import regulations to create opportunities for consumer rather than protecting producers.
The agreement could be side-tracked by hundreds of issues on either side. The U.S. Congress and the Korean National Assembly need to focus on the historic opportunities for both countries to open up markets for consumers rather allow their protectionist pasts to stymie progress.