The U.S.-Korea Free Trade Agreement (FTA) has become an easy target for trade policy critics in general and those with specific industry concerns like automobiles and beef. Some of the issues raised are valid points of concern, but are actually reasons to support the FTA as a way to deal with the issues. The FTA permanently sweeps away barriers to trade that would be impossible to remove one at a time. U.S. agriculture has a major stake in seeing that the agreement is approved by Congress and fully implemented.
Korea’s trade policy has been part of a larger policy of trying to manage its economy from the top down. Korea has participated in expansion of trade under the WTO rules while at the same time protecting domestic industries, agricultural and non-agricultural, to the maximum extent possible. Korean political and business leaders have now concluded that it is in their economic best interest to pursue a more open trade policy with the U.S. to promote greater economic growth through price competition and innovation. This is a unique opportunity.
Supporters of agricultural trade with Korea are quick to point out that U.S. agricultural exports to Korea were $2.85 billion in calendar year 2006 making it the sixth largest market for U.S. agriculture. What is left unsaid is that the dollar value of exports in 2006 was roughly the same as the peak export year of 2003 before the discovery of BSE in the U.S. dried up beef exports to Korea. The export total is also based on a relatively few items that makes agricultural trade at risk to changes in market conditions for those products. The FTA provides an opportunity to increase total exports by expanding sales across a broad range of products.
Course grains, mostly corn, at $719 million accounted for 25 percent of U.S. agricultural exports to Korea in 2006. That was triple the value of shipments in 2005, up one-third from the previous high of $542 million in 2004 and far beyond the $42 million of course grains shipped in 2003. With China likely to be less of a player in corn exports in the next few years, this market may become more stable. Corn is among the products least impacted by the FTA. Korea imports corn tariff free, but could impose a 5 percent WTO tariff on the first 6.1 million tons of corn imported with a 328 percent tariff for imports above that level. Under the FTA the tariff would be zero for all quantities and remove any uncertainty about future market access.
The second largest category of imports from the U.S. was hides and skins at $354 million, 12 percent of U.S. exports. Cattle hides accounted for about 80 percent of shipments and about 90 percent of Korean cattle hide imports. This is a declining market as the tanning industry moves to lower cost countries. As with corn, the WTO tariff is 5 percent. The applied tariff is 1 percent and would be bound at zero under the FTA.
The current import barriers for fruits and vegetables and red meats, the third and fourth largest categories at $258 million and $234 million, respectively, are much more complex and costly. These products compete directly with Korean domestic production. Consumer-oriented products accounted for one-third of U.S. exports to Korea and are expected to grow under the FTA.
The tariff for oranges in Korea’s out-of-season period (March 1 – August 31) would be immediately reduced from 50 percent to 30 percent and eliminated over six years in equal installments. An in-season duty-free quota would be set at 2,500 tons per years with a 3 percent yearly increase. The over quota tariff would be 50 percent. The 30 percent tariff for lemons and grapefruit would be eliminated over two years and five years, respectively. The 54 percent tariff on frozen orange juice would be eliminated immediately. Other fruits and vegetables would have a mixture of immediate elimination of tariffs and phase outs of up to 18 years. Some products will have in-season quotas combined with out-of-season tariff reductions.
Frozen and fresh pork products would have tariffs of 25 percent and 22.5 percent, respectively, reduced to zero by 2014. Tariffs on fresh pork bellies would be eliminated over 10 years, with a safeguard quota that begins at 8,250 tons (about twice current imports) and increases by 6 percent per year. The 40 percent tariff on beef muscle meat would be reduced to zero over 15 years of equal adjustments, with a 270,000 metric ton safeguard that increases 2 percent per year. Poultry meat, eggs and dairy would have similar reductions in tariffs with quantity safeguard and tariff rate quotas.
As has been learned with U.S. beef shipments to Korea, the food safety regulators are adept at thwarting market opening agreements. In the FTA both countries affirm their rights and obligations under the WTO SPS agreement and establish an SPS Committee to enhance cooperation on sanitary and phytosanitary concerns. The WTO SPS agreement encourages regulatory harmonization through the use of international standards and guidelines, including those of the World Organization for Animal Health (OIE).
USDA estimates that 64 percent of U.S. agricultural exports would immediately be duty free. That percentage would be concentrated in the bulk commodities, except for rice imports which would continue under existing WTO rules. With Korea’s history of protecting its agriculture and the current experience in beef, increased imports of consumer-oriented products would likely result in many disagreements over food quality and safety issues, but that should not deter support for the agreement. Market opening by an economically successful country like Korea trying to shake off its protectionist past is a unique opportunity that should not be missed. Korea already has an FTA with Chile, and other agricultural exporters are interested in an agreement, particularly if the U.S. rejects the FTA.