V. 15 no. 2 • Nov/Dec 2011 New Free Trade Agreements Will Improve California Farm Export Prospects by Hyunok Lee and Daniel A. Sumner

iven the size of the Korean econ- remaining tariffs will be eliminated omy and the high trade barriers within 15 years. The Korea free trade agreement, along now being erased, the agree- U.S. agricultural imports from Colom- with smaller agreements with Colombia G ment with Korea is considered the most bia were almost $2 billion in 2010. The and Panama, was negotiated several important U.S. trade agreement since the top U.S. imports include coffee ($909 years ago. However, legislation North American Free Trade Agreement million), cut flowers ($545 million), and approving of these agreements finally (NAFTA). Throughout this article, we fresh fruits. U.S. exports were $832 mil- passed the U.S. Congress and was signed by President Obama only on refer to the Republic of Korea simply as lion, with grain products leading the list. Oct. 21, 2011. By removing tariffs and Korea; isolationist and communist North Currently, agricultural products from other barriers, free trade agreements Korea is a separate country for which Colombia enter the United States under create larger market opportunities no free trade agreements could be appli- no or minimal tariffs, while U.S. produc- for U.S. farm exports. The potential cable. After a brief overview of U.S. agri- ers face 5% to 20% of tariffs. Under the benefits of the agreement with Korea cultural trade agreements with Panama agreement, 70% of current U.S. farm will be sizable for the United States and Colombia, this article focuses on the exports to Colombia will become duty and California agriculture. Korea-U.S. free trade agreement (KORUS free immediately and the remaining tar- FTA) which is by far the more important iffs will be eliminated within 15 years. agreement for California agriculture. U.S. Farm Exports to Korea U.S. Trade Promotion Agreements The Korean economy is comprised with Panama and Colombia of about 50 million consumers, with In 2010, the U.S. imported $53 mil- the average per-capita income (about lion worth of agricultural goods $25,000) already above that of many Also in this issue from Panama, with three products European countries and continuing to (cane sugar, bananas and pineapples) grow rapidly. Food prices are high, and Immigration Reform: What’s accounting for 70% of all imports. Koreans pay premiums for perceived Next for Agriculture? The United States exported more safety and quality. Agriculture was than $450 million in farm goods to central to the KORUS FTA negotiations, Philip Martin...... 5 Panama—48% of Panamanian agricul- and potential gains for the United tural imports. Top U.S. exports were States center on agricultural exports. OPEC and the Environmental corn, soybean cake and meal, wheat, The United States is already Korea’s Impact of Biofuels rice, and horticultural products. top supplier of agricultural products, Gal Hochman, Deepak Under the Caribbean Basin Initiative, worth $3.5 billion in 2007. Despite high Rajagopal, and David more than 99% of agricultural imports tariffs, the U.S. had a 26% share of the Zilberman...... 9 from Panama enter the U.S. market duty Korean agricultural imports in 2007. free, but U.S. exports face an average tar- Grain products (including soybeans) iff of 15%. Under the agreement, over represented 40% of U.S. farm exports half of current trade will receive immedi- to Korea, followed by fruits, nuts and ate duty-free treatment, and most vegetables (12%), and meat (11%). More recently, the value of grain and meat imports from Chile grew substantially currently large, Korean demand for fresh exports has increased due to higher for kiwifruit, grape juice, lemons, grapefruit, lemons, and limes is growing. prices and relaxation of beef barriers processed tomatoes, wine, and whey, Other fruits and products. A simple that followed finding cases of BSE (mad which are all major California export tariff phase-out applies for most fruits, cow disease) in the United States. The products. California’s other major but schedules to open the markets for overall U.S. market share has declined, international competitors for trade apples, Asian pears and table grapes, mainly due to the growth of competitors with Korea are France for wine, Spain which are consumed widely in Korea, including China, Australia, and Chile. for grape juice, New Zealand for kiwi- are more restrictive. The initial safeguard fruit, beef and dairy, Australia for beef quantity for apples is 9,000 metric tons, California Farm Exports and dairy, Iran for pistachios, and less than 2.5% of domestic production. and Korean Markets China for strawberries, lettuce, and Fuji apples, a variety favored by Koreans, Korea ranks among the top six export processed tomatoes (Table 2). Most have the safeguard duty lasting 23 years. destinations for California agricultural processed fruit products are imported Along with the immediate table grape exports. In 2007, the total value of and little vegetables enter the country. tariff reduction from 45% to 24%, the all California agricultural exports to The potential for increasing Cali- tariff for off-season imports (Oct. 16 to Korea was almost $400 million (4% of fornia exports to Korea also crucially Apr. 30) phases out in four years, and total California agricultural exports) depends on the competitiveness of the tariff for in-season imports phases (Table 1). Among all commodities Korean producers and the size of the out over 17 years. Tariffs for grape shipped to Korea, fresh oranges top market. Table 2 shows that imports juice (45%), raisins (21%), and wine the list, followed by rice, beef and beef to Korea represent a small share of (30%) will be eliminated immediately. products, almonds, and walnuts. the domestic consumption of many The immediate elimination of the With their FTA in 2004, Korea’s major food products. Tariffs for 24% tariff for cherries will expand most fresh fruits and vegetables are the fresh cherry market even further. Table 1. Value of California Agricultural high—above 30% in most cases. Among other fruits, strawberries and Exports to Korea by Commodity, 2007 kiwifruit are promising. Currently no To To Korea Opening the Korean Market Commodity Korea World Share fresh strawberries enter the country, ----$millions---- % The KORUS FTA defines three mecha- and over 70% of strawberry imports Total 386.4 10,912 4 nisms for improving access for farm are frozen and mainly from China. Oranges 55.0 260 21 products: (1) the immediate unrestricted Kiwifruit is relatively new to Korean Rice 43.3 313 14 opening, (2) the phase-out of tariffs over consumers, but imports have grown Beef & products 40.5 199 20 a period, and (3) the expansion of tariff- rapidly (mainly from New Zealand). Almonds 35.6 1,879 2 rate quotas (TRQs), with the phase-out Tree nuts. California tree nuts have Walnuts 35.2 444 8 of over-quota tariffs. Under a TRQ, a a strong presence in the Korean market. Dairy products 28.9 963 3 lower tariff is applied to imports within Almond and walnut exports are already Hay 18.1 134 14 the quota volume, and a higher, often substantial. Korea has no domestic Wine 15.8 816 2 prohibitive (over-quota), tariff is applied tree nut industry and the United States Cotton 13.5 505 3 to imports in excess of the quota (exclusively California) is the only or Tomatoes, proc. 11.3 300 4 volume. To assure slower import access dominant supplier for tree nuts. The Table grapes 10.0 553 2 for politically sensitive products, the current 8% almond tariff will be elimi- Cherries 8.5 97 9 agreement allows the imposition of safe- nated, and in-shell and shelled walnut Lemons 8.4 169 5 guard measures (Tables 3 and 4). tariffs, as high as 45%, will be phased Grape juice 6.7 32 21 Citrus. Korea is a major market for out over 6 to 15 years. The immedi- Raisins 5.9 213 3 fresh oranges and other citrus from Cali- ate elimination of the 30% tariff on Grapefruit 5.8 79 7 fornia, despite a current duty of 50%. pistachios will expand the market. Kiwifruit 2.5 14 18 While the agreement lowers trade barri- Vegetables. Korean tariffs on Plums, dried 2.3 175 1 ers considerably during the off-season, vegetables will be eliminated either Pistachios 2.2 364 1 in-season imports (Sep. 1 to Feb. 29) immediately or phased out over Lettuce 1.8 274 1 will still be subject to tight TRQs. The time, except for a few sensitive prod- Source: Matthews and Sumner, 2008. http://aic.ucdavis.edu/ initial duty-free TRQ of 2,500 tons is ucts for which safeguard restrictions No formal trade data available at state level; equivalent to only 0.4% of Korean citrus apply. Vegetable exports to Korea estimates by UC Agricultural Issues Center. produced in Korea in 2007. While not are dominated by China, except for

2 Giannini Foundation of Agricultural Economics • University of California a few commodities such as pick- Table 2. Value of Korean Imports and Major Competitors for Selected Commodities, 2007 led cucumbers and fresh lettuce. Korean U.S. % of Import % With a 45% tariff for lettuce, imports Imports Korean of Korean Major Competitors’ constitute a small share of the domestic ($mil) Imports Consumption* % of Korean Imports Korean market valued at $200 million. FRUIT 852 27 n/a† Philippines(30), China(9), Chile(7), NZ(7) California lettuce competes mostly with Bananas 171 0 100 Philippines (100) off-season, high-cost greenhouse lettuce Oranges, fresh 108 93‡ 9.9 —§ and has substantial potential for export Oranges, juice 71 24 100 Brazil (60) growth under the 10-year tariff phase- Kiwifruit, fresh 70 8 100 NZ (77), Chile (14) out. Other fresh, leafy vegetables also Pineapples 68 0 100 Philippines (98) Table grapes 58 18 8.3 Chile (82) have potential for export growth. Garlic, Cherries, all 36 91 100 — onions, and red peppers are major Grape juice 25 47 100 Spain (26) crops in Korea and face gradual 18-year Lemons 11 77 100 Chile (5), Italy (10) phase-outs, with safeguard restrictions. Apples, proc. 10 0 100 China (50), Chile (2) Beef and related products. Beef prod- Strawberries, 10 26 3.7 China (57), Mexico (5) ucts are the number-one agricultural froz. & proc. import into Korea by value, exceeding Peaches, proc. 9 0 100 China (44), S. Africa (20), Greece (14) $1 billion in 2007. Korea became an Grapefruit, juice 9 74 100 Japan (12) important market for U.S. beef after Raisins 6 98 100 — its beef market was opened in 2001. Olives 3 1 1 Spain (75), Italy (18) However, a ban on U.S. beef was Prunes, dried 2 98 n/a — imposed in December 2003 (follow- Peaches, juice 1 83 100 China (8) ing the BSE incident) and Australia Pears, proc. 0.3 1 100 China (48), Spain (18), S. Africa (12) and New Zealand exports expanded Pears, fresh 0.1 83 0 — rapidly. The U.S. market share has been VEGETABLES 466 14 11 China (69), Japan (4), NZ (3) improving gradually since the U.S. Red peppers 85 0 15 China (95) resumed export to Korea in 2007. Carrots 37 0 n/a China (98) Under the KORUS FTA, with the Tomatoes, proc. 36 32 100 China (42), Chile (10), Italy (9) sizable initial safeguard quantity, Garlic 32 0 12.8 China (100) the within-quota tariff is scheduled Pumpkins 15 0 n/a NZ (88) to fall by 2.7% each year, providing Onions 13 6 3 China (94) a price advantage to U.S. produc- Broccoli 11 0 n/a China (100) ers over their competitors. Cucumbers 9 47 n/a China (41) Dairy products. Korea currently has Lettuce 4 48 n/a China (52) high trade barriers for dairy products. TREE NUTS 76 94 93 — Walnuts 38 91 100 Vietnam (9) Under the KORUS FTA, TRQs increase Almonds 35 100 100 — gradually with the phase-out of over- Pistachios 3 59 100 Iran (37) quota tariffs. Among dairy products BEEF, DAIRY 1,856 28 n/a Australia (45), NZ (15) exported to Korea, the U.S. has a strong Beef 1,037 9 59 Australia (73), NZ (16) presence in cheese, lactose, and whey. Dairy, all 438 19 n/a NZ (24), Australia (15) Under the agreement, the first year Hides, skins 381 89 n/a — duty-free TRQ for cheese is sizable OTHER (close to the total U.S. cheese exports Cotton 305 40 100 Australia (13) to Korea in 2007). For feed whey, Hay 237 82 n/a — immediate duty-free access is granted Wine 150 11 n/a France (45), Chile (15) and for non-feed whey, the over-quota Rice 137 31 5.4 China (61), Thailand (8) tariff (over 3,000 metric tons) will be Flowers 68 1 n/a China(31), Taiwan(30), Netherlands(18) reduced immediately from 49.5% to Sources: Korea Agricultural Trade Information 2009; Korean Ministry of Agr., Forestry, Fishery and Food, 2008. 20%—phased out over ten years. U.S. *Some shares are based on quantity when values are unavailable. exports of lactose to Korea are also siz- †No domestic production statistics available or commodity aggregation is not meaningful (e.g., dairy products). ‡Discrepancy between Korean and U.S. sources; U.S. figure was $85.4 million. able, worth $30 million, about half of §No major competitors.

Giannini Foundation of Agricultural Economics • University of California 3 Korean lactose imports, and the cur- Table 3. Access Improvement for Important Agricultural Products by General Market Access Category upon Implementation of KORUS FTA, 2007 rent tariff of 49.5% will be phased out in five years under the agreement. 1. Immediate Unrestricted Opening: asparagus, cabbage, celery, cucumbers, eggplants, shallots, spinach (fresh and frozen), tomato paste, cherries, olives, raisins, frozen orange concentrate, grape juice, wine, almonds, pistachios, coffee, cattle hides and skin, live livestock, feed whey Opportunities Ahead 2. Tariff Phase-Out: Although Korea already has an almost Years to Complete Product open border for many field crops—with 2 Avocados, lemons, dried plums the important exception of rice—it has 5 Chinese cabbage, carrots (fresh and frozen),cauliflower, broccoli, peas, beans*, high trade barriers for many vegetables, dried mushrooms*, tomato juice, grapefruit, strawberries (frozen), orange juice, fruits, and animal products that are various fruit juices important in California agriculture. 4 Off-season table grapes Under the KORUS FTA, California 6 Walnuts (shelled), off-season fresh oranges has substantial potential to expand its 7 Tomatoes, ice cream, apricots exports of agricultural commodities to 9 Strawberries Korea. Lower trade barriers will allow 10 Artichokes, Brussels sprouts, preserved cucumbers, lettuce, fresh mushrooms*, peaches, pears (excluding Asian pears), dates, persimmons, tangerine juice California agriculture to compete in a large, growing, and lucrative market. 12 Chicken meat, frozen onions, watermelon, various berries Commodity prices are high in Korea, 15 Korean citrus, kiwifruit, walnuts (in shell), chestnuts, pinenuts, oak mushrooms (fresh and dried), beef offal and consumers are willing to pay premi- 17 In-season table grapes ums for the high-quality products 20 Asian pears produced in California. When the KO- 3. Duty-Free Tariff Rate Quota Expansion with or without Over-Quota Tariff Phase-Out: RUS FTA is implemented, California in-season fresh oranges, many dairy products agriculture should be in an excellent po- 4. Safeguard Quantity and Duty: garlic, onions, peppers, beans, sweet potatoes, ginger, sition to compete on both price and apples, beef, pork quality. Excluded from Agreement: Rice (remained at the quota set by 1994 WTO agreement) Source: Office of United States Trade Prepresentative (USTR), 2008. *Some varieties excluded. Suggested Citation: Table 4. Base Tariffs on Exports to Korea for Selected Products Lee, H. and D.A. Sumner. 2011. "New Base Free Trade Agreements Will Improve Tariff % Product California Farm Export Prospects.” ARE Update 15(2):1-4. University of California 1 Cattle hides and skin Giannini Foundation of Agricultural 8 Almonds(shelled and in shell) Economics. Tomatoes (paste) 18–20 Plums (dried), olive, casein Hyunok Lee is a research economist and Daniel 21–24 Raisins, cherries (fresh) Sumner is the Frank H. Buck, Jr. Chair in 27–30 Artichokes, Chinese cabbage, broccoli, cauliflower, brussels sprouts, garlic (frozen & Agricultural Economics, both in the ARE pickled), peppers (frozen), onions (frozen), cucumbers (pickled), carrots (fresh, department at UC Davis. They can be reached frozen, preserved & dried), beef offal, lemons and limes, grapefruit (fresh & juice), by e-mail at [email protected] and wine, avocados, dates, pistachios, walnuts (shelled) [email protected], respectively. 36–40 Cheese Beef (muscle cuts) For additional information, 45–50 Apricots, cherries (canned), peaches, strawberries, other berries, oranges, peaches (preserved), juices (grape, apple, lemon, lime, peach, strawberry), walnuts (in the authors recommend: shell), lettuce, tomatoes, lactose, whey Lee, H. and D.A. Sumner The Prospective 54 Orange juice (frozen concentrate) Free Trade Agreement with Korea: Back- ground, Analysis, and Perspectives for 89 Butter California Agriculture. June 2009. UC 135* Onions (fresh and dried) Giannini Foundation of Agricultural 144 Korean citrus and mandarins Economics Information Series 09-2. http://giannini.ucop.edu/InfoSeries/092_ 176 Skim and whole milk power KORUS_FTA.pdf. 270 Peppers (fresh and dried) 360* Garlic (fresh and dried) For information on free-trade agreements, Source: USTR 2008. visit the USDA website: www.fas.usda. *Over-quota tariffs; base tariffs are 50%, but quotas are so tiny that higher tariffs are listed. gov/info/

4 Giannini Foundation of Agricultural Economics • University of California