OLMIS

by Gail Krumenauer, Michael Meyers
Published May-22-2012

Existing Trade Relationship Anticipated Impacts From Increased South Korean Imports Here's the Deal

The recently approved free trade agreement (FTA) between the United States and South Korea became effective as of March 2012. According to the Office of the U.S. Trade Representative, nearly 80 percent of U.S. exports to South Korea will become duty free when the agreement takes effect, with tariffs removed from almost 95 percent of bilateral trade in consumer and industrial products within five years.

The nation's newest free trade partner is also Oregon's fifth largest export market (Graph 1). Oregon exported a total of $18.3 billion worth of goods to almost 200 different countries in 2011. The state exported $1.1 billion to South Korea alone.

Since most exports sent from Oregon to South Korea prior to March 2012 had tariffs placed on them, the state's products were more expensive to Korean consumers. By the tenth year of the trade agreement, 99 percent of U.S. exports to Korea will have those tariffs removed. Instituting duty-free trade makes the products Oregon exports to Korea less costly for consumers there. The good old supply and demand curve tells us that, in theory, when a binding tariff is removed, prices decrease, and the quantity exported should increase due to a rise in demand.

Which industries in Oregon could benefit from increased demand in Korea for their goods? In 2011, exports of agricultural products made up $454 million, or 43 percent of total Oregon exports to South Korea (Graph 2). The next-largest exporting industries were manufacturers of chemicals and computer and electronic products, followed by waste and scrap (mostly metals), and food products.

Oregon exported a diverse array of commodities to South Korea in 2011 (Graph 3). The largest agricultural export commodity was wheat and meslin ($331 million). Electronic integrated circuits (microprocessors), hay, and scrap metals were also top export commodities in 2011.

The Office of the U.S. Trade Representative noted that almost two-thirds of U.S. agricultural products exported to Korea became duty free when the trade agreement took effect in March. Oregon's largest export commodity to South Korea, wheat, is one of these products. Potatoes, including frozen french fries, are now duty free. In 2011, South Korea was Oregon's top foreign export market for french fries with $16 million in exports. The elimination of the 18 percent tariff on fries should help boost exports.

The FTA also provides opportunities for new exports to South Korea from Oregon businesses. Fresh cherries, for example, have never been exported from Oregon to South Korea - until now. Helped by the elimination of a 24 percent tariff, Oregon exported its first fresh cherries to South Korea in 2012.

Generally, Oregon manufacturers benefit from the FTA in the near term, while food and agriculture effects occur gradually. Oregon manufacturers of machinery, electronics, and transportation equipment who currently export to South Korea benefit immediately from tariff eliminations. Electrical equipment such as battery parts, of which Oregon exported $1.4 million to South Korea in 2011, and tools and fabricated metal products like chainsaw blades ($1 million) are now duty free. Reductions in food and agriculture duties will occur a little further down the line. The elimination of the 18 percent duty on Dungeness crab is scheduled for the third year of the trade agreement, and Oregon dairy products will see the 36 percent duty reduced to zero by year fifteen of the trade agreement. Other, non-exporting industries in Oregon should also benefit indirectly from the FTA. The transportation and warehousing industry should benefit from increased freight volume due to increased exports from Oregon and other states that move goods through Oregon ports. In 2011, nearly $1 billion in passenger vehicles were imported into Oregon ports from South Korea.

Economists from the U.S. International Trade Commission do not expect increased imports from South Korea to result in a net displacement of American workers, as employment and output gains from increased U.S. exports are expected to be larger than losses in employment and output caused by increased South Korean imports. The main reason for this is that most of the increased imports are expected to come at the expense of decreased imports of similar products from other countries. For example, textiles and apparel imports from Korea are expected to increase between 85 and 90 percent under the FTA. The U.S. imports most of its textiles and apparel already, so any resulting increase in imports from South Korea will mainly serve to displace imports from other countries and not reduce what little U.S. domestic production remains of textiles and apparel.

Passenger vehicle imports from South Korea are also expected to increase significantly under the FTA. Unlike textiles and apparel, passenger vehicle manufacturing is a large industry of employment in the U.S., and an important contributor to U.S. gross domestic product. As with textiles and apparel, increased imports are expected to come at the expense of decreased imports from other countries. The U.S. already imports a large volume of South Korean passenger vehicles, and the increase in imports is expected to come from a small percentage change of this high-volume, high-value commodity due to the elimination of the relatively small tariff (2.5 percent). In addition, U.S. exports of motor vehicles to South Korea are expected to increase under the FTA due in part to elimination of the relatively high South Korean tariff (8 percent).

While the issue of tariffs is at the heart of most free trade agreements, nontariff measures are also dealt with in some instances. In the case of the South Korea FTA, that includes provisions to reduce taxation in South Korea related to motor vehicles with larger engines and more transparency in safety and environmental standards that U.S. manufacturers deem opaque. U.S. passenger vehicles represent less than 1 percent of vehicle registrations in South Korea. The improvement of other nontariff measures in addition to the elimination of the tariff should provide a significant opportunity for U.S. exports.

The U.S. free trade agreement with South Korea provides an opportunity to bolster Oregon exports. South Korea is already among the state's largest export recipients; the reduction and elimination of tariffs should help increase export volume. Manufacturing-related industries see more immediate benefits in the removal of tariffs, while food and agriculture trade benefits take effect more gradually. In addition to the direct benefits of tariff reductions, Oregon can also benefit from the FTA indirectly, as the state's ports serve as a point of export for goods made elsewhere in the U.S. The FTA also means increased imports from South Korea to the U.S., but they are expected to have limited impact on Oregon industries because those imports are already manufactured outside of the U.S.

For more information, contact Business Oregon, the State's economic development agency. Business Oregon assists businesses in exporting to countries throughout the world, including South Korea. Global trade specialists help Oregon businesses access global markets through their network of government and international business partners, and provide counseling and financial assistance through trade promotion programs.