Negotiating a U.S.-Korea Free Trade Agreement has proven to be as difficult as many analysts had expected. Agriculture has been a major pressure point because of the Korean government’s history of protecting agriculture from international competition. It is tempting to think about taking the low hanging fruit in an agreement and forgetting about the hard to reach items. That would lower the bar for all future bilateral free trade agreements and miss an opportunity to build on the successes of agreements under the WTO.
As Deputy U.S. Trade Representative Karan Bhatia said on September 26, 2006 in discussing a U.S.-Korean agreement, “The fundamental goal of free trade agreements is to achieve comprehensive liberalization, including in the agricultural sector….Studies suggest that potential gains of a KORUS FTA would be at least cut in half for both economies if agricultural trade were somehow to be excluded.” While industrial products like autos and pharmaceuticals receive much of the attention in the talks, negotiators recognize that agriculture is also a key component for both countries.
There are plenty of opportunities for U.S. negotiators to accept a partial agreement. According to USTR estimates, the average applied tariff by Korea for imports of goods and services is 11.2 percent compared to 3.7 percent for the U.S. Only 5.7 percent of the items on the Korean tariff schedule are tariff free compared to 30.9 percent for the U.S. The differences are even greater in agriculture with Korean tariffs averaging 52 percent and the U.S. tariffs 12 percent. A less than complete agreement in agriculture may be particularly tempting given the one-way nature of U.S. agricultural trade with Korea. U.S. agricultural exports to Korea were $2.2 billion in calendar year 2005, down from exports of $2.9 billion in 2003 before the discovery of BSE in the U.S. Imports from Korea were only $210 million in 2005, down slightly from the 2004 record of $233 million.
Given the size and topographical nature of Korea, the U.S. could reduce agricultural tariffs without fearing a surge of imports from Korea. With total Korean agricultural imports from all countries at over $10 billion per year, a 50 or 75 percent cut in Korea’s average agricultural import tariffs would likely result in major increases in agricultural exports to Korea from the U.S. because Korean applied tariffs are high across a wide range of U.S. agricultural exports. According to the USTR website, tariffs on most fresh fruits and vegetables are 45-50 percent, 30-54 percent on fruit juices and 30 percent on potatoes. Beef has tariffs of 8-40 percent, pork 18-30 percent and poultry meat 18-27 percent. Milk products have tariffs at 36 percent for cheese, 49.5 percent for whey and 176 percent for over quota skim milk. The over quota tariff for corn is 328 percent and 487 percent for soybeans.
Despite the tariff on beef, total exports of beef to Korea were valued at $749 million in 2003 before trade was suspended. USDA has had ongoing negotiations to restart beef trade. Trade is now hung up over the potential for small amounts of bone to be in beef shipments. Korea is holding to a zero tolerance standard, and U.S. companies have refused to ship meat to Korea because of uncertainties of what regulators would do if small amounts of bone were found in a shipment of meat. This is a food safety issue that needs to be resolved based on the WTO agreements.
The biggest stumbling block in the agricultural negotiations is Korean resistance to inclusion of rice in an agreement. This is not a new issue. In 1994 under the WTO rules established during the Uruguay Round, Korea designated rice as a sensitive product. Rather than establishing a tariff-rate quota for rice imports, they agreed to increase import from zero to 4 percent of consumption over 10 years. The WTO rules also provided that this “special treatment” could continue for an additional length of time if individual WTO members had the opportunity to negotiate concessions for continuing the special treatment arrangement.
In late 2004 the U.S. and Korea reached a new agreement in which Korea will almost double rice imports from all countries over the next 10 years from 225,575 metric tons in 2005 to 408,698 metric tons in 2014 and provide guaranteed minimum access for 50,076 metric tons of U.S. rice each year. That was not a large step for Korea since they had purchased more than 50,000 metric tons of U.S. rice each year for 2002 through 2004. Purchases in 2005 were only 16,000 metric tons, but imports for the first seven months of this year were almost 63,000 metric tons. The tariff rate on the imports is 5 percent. There are no provisions for imports above the quota amount. By 2014 total rice imports will likely be about 7 percent of total consumption.
The logical starting point for the new agreement would be allow the current WTO sanctioned agreement on rice to continue until its conclusion in 2014. This would allow the rice industry and the politicians another eight years to adjust to the new reality. Access could then be scaled up for another seven years so that at the end of a 15-year transition the Korean rice market would be open to U.S. rice imports based on market conditions in the two countries.
By definition, free trade agreements should result in free trade. Some transitions are easier and shorter than others depending on the economic and political situation. WTO agreements on food issues and minimum market access for sensitive products provide a framework for resolving the beef and rice issues. If the Korean government refuses to accept free trade in rice after a transition period, the U.S. should end negotiations. The U.S. government made one mistake in not including sugar in the U.S.-Australian FTA. It should not compound that mistake by making another one on the other side of the table. The U.S. should recommit to bilateral free trade agreement covering all products in all industries. Anything less is a move toward protectionism that hurts producers and consumers in both countries.