South Korean farmers wary; machinery, auto industries stay hopeful

By Kang Ye-won

As South Korea and the United States’ long-delayed free trade deal is set to take effect as early as January, a consensus has established among political and industry leaders that a deal will create jobs and boost economic sectors. But opponents of trade deals, like Korean farmers and textile makers, argue that in reality, the benefits are not as significant as the government claims.

Foes struggle to raise resistance

Economists generally say that free trade provides lower prices for goods and services for consumers, and more choices and investment opportunities for manufacturers and entrepreneurs.

However, Korean farmers claim they would lose a great deal once the tariffs on two-thirds of current U.S. agricultural exports are lifted immediately. Korea predicted a loss of 12 trillion won ($10.8 billion) over the next 15 years due to a production decline, said Choi Sei-kyun, a senior research fellow at Korea Rural Economic Institute.

“A 3-percent fall in production may sound small but it means a big loss for domestic agriculture, livestock and dairy sectors,” Choi said.

In compensation, Korean government said it will provide up to 22 trillion won in aid. But experts say it does not help in the long run.

“(Korean) farmers should take this as an opportunity to improve their competiveness in a global market as more FTAs such as with China are on the way,” he said.

On the other hand, the U.S. agricultural and food processing sectors would noticeably benefit from the accord. According to the U.S. International Trade Commission’s report, the U.S. expects the open market in Korea would almost double its sales in agricultural commodities including fruit and grain, and processed items. Tariffs and tariff-rate quotas on most imported goods would phase out within 10 years.

South Korea is the fifth largest importing country of U.S. agriculture, which totaled $5.3 billion in 2010, according to the report.

But it is difficult to predict whether the U.S. commodities would be competitive in Korean market since they have to compete with the European Union products, said Kim Hyung-joo, a research fellow with LG Economic Research Institute.

Regardless, the free trade with the U.S. is good news for domestic consumers since they will have more options in the grocery store at lower prices, Kim said.

Almost half of the U.S. agriculture imports is expected to come from beef as the U.S. hopes its export to reach 70 percent of its market shares in Korea. That’s a level before Korea imposed strict restrictions on American beef in 2003 in fear of “mad cow disease” and worse yet, its market shares tumbled nearly 80 percent in 2008, during a months-long protest in central Seoul after President Lee Myung-bak agreed to lift the ban on U.S. beef.

Once U.S. imports flow into the market, it will likely compete with Australian products rather than Korean beef, which targets different customers with its premium quality and high price, Kim said. And because Korea and Australia have no free trade yet, the U.S. beef is expected to have price advantage over the Australian counterpart once the tariffs are eliminated, Kim said.

Textiles do not benefit

Korea levies tariffs from 13 percent to 35 percent on U.S. goods now. Korea will cut 85 percent of duties on U.S. textiles within a five-year period and the U.S. will immediately remove about 60 percent of tariffs on Korean goods and the rest over 10 years, according to a report by Korea Federation of Textile Industries.

U.S. textile makers have criticized that a deal will favor Korean exports in the market without creating such opportunities for the American manufacturers. Contrary to its counterpart’s claim, Korean manufacturers do not seize it as an opportunity.

“On the surface, it looks like a better deal for us, but in reality it would not benefit our exports significantly,” said a manager at the Federation of Textile Industries, who requested anonymity.

Because Korea’s apparel lost its competitiveness to cheaper Chinese goods, the deal won’t help boost its exports since the provision mostly applies on apparel items such as T-shirts and sheets, the source said. Over 70 percent of Korea’s exports is fiber used in making winter coats, comforters and car seats.

To gain back its advantage, Korea should focus on exporting high technology textiles and expand its businesses from dye to sewing and converters, Kwak said.

Auto and machinery stay optimistic

Tariffs on American automobiles, now 8 percent, will get slashed by half once the trade goes into effect in January and ultimately peter out in the next five years. That’s also when the U.S. removes its own tariffs on vehicle imports from Korea, now at 2.5 percent.

The agreement will help expand Korean exports to America while intensifying competition in the domestic market, said Kwak Soo-jong, a fellow at Samsung Economic Research Institute, in a research note. Korean firms should take advantage of increased revenues from the exports and invest in developing top quality pickup trucks and high priced cars, Kwak added.

In the meantime, consumer would soon see American cars sold in domestic markets at a lower price, according to Kim Soo-dong, a research fellow at Korea Institute for Industrial Economics and Trade. For instance, Ford’s Taurus, a mid-size sedan now costs 40 million won or $36,000, which includes 12 different kinds of taxes. Once the duties are lifted, the price would cut down to about 35 million won, and consequently, it could have an impact on domestic car makers to water down their prices, Kim said.

In machinery, both Korea and the U.S. manufacturers expect to gain from free trades.

Most tariffs on U.S. machinery would be eliminated immediately and taxes on equipment would phase out over 10 years. Current tariffs range from 3 percent to 13 percent, according to a report by the U.S. Congressional Research Center.

The U.S. claims that electrical equipment will benefit substantially once the provision takes effect, according to the U.S. International Trade Commission. For example, the U.S. advances in making electrical-power generating equipment such as turbines, generators and nuclear reactors and currently, the duties range up to 8 percent.

However, Kwak said that Korean companies will have some time to boost competitiveness as Korean market will open up more slowly than their counterparts. The U.S. will scrap tariffs on 82 percent of its industrial machinery immediately, compared to Korea’s 38 percent, Kwak said, in a research memo.

“The KORUS FTA will not only benefit big companies but small- and medium-size businesses as well, and can create 340,000 new jobs in the next 10 years,” the Federation of Korean Industries (FKI) Chairman Huh Chang-soo said, in a press conference on Tuesday.

Korea and the U.S. have a complementary relationship in the machinery trades in which Korean companies specialize in general-purpose machinery and parts whereas the counterpart is more advanced in dedicated machinery, Kwak said. For example, aircraft is one of the U.S.’s strong suits.

Kwak advises that Korea should focus on affirming its position as the component supplier, especially in environment technology and alternative energy sectors.