Research Reports
An Impact Analysis of an FTA with the U.S. and Policy Measures for the Korean Agriculture
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AuthorChoi, Seikyun
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Publication Date2007.05.01
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Original
The objective of this study is to analyze the impacts of an FTA between Korea and the United States on the Korean agricultural industry. The study mainly focuses on an impact analysis and possible structural reform of the industry considering the dynamic nature of the Korean agricultural industry.
Before initiating the FTA talks in June 2006, the Korean representatives established a proposal for the FTA negotiation and started discussing on the table based on the proposal. Before reaching the final agreement, both parties had eight official negotiation meetings until April 2007.
Based on the finalized agreement, KREI (the Korean Rural Economic Institute) used the KREI-ASMO 2006, a dynamic econometric simulation model, to analyze the implications of the FTA for the entire Korean agriculture. The model represents the entire Korean agriculture including rice and grains, fruits and vegetables, livestock products, and other commodities for the analysis. In particular, import demand functions were reformulated for the imports from the U.S. and other countries separately so that the trade conversion and creation effects from an FTA with the U.S. can be analyzed directly. Basically, the analysis focuses only on the tariff reduction and TRQs resulted in the FTA. However, the analysis includes indirect impacts of linkages with supply and demand functions such as price, area planted, yield, imports, per capita consumption, other consumption, ending stocks, and other necessary functions. In addition, the model analyzes a baseline that represents the current Korean agricultural situation without the FTA and then analyzes an FTA scenario with the final tariff reduction agreed in the FTA negotiation by both countries. The comparison between the baseline and the scenario would be the practical impacts of the FTA.
Since most of the tariff will be zero percent in 2023, the analysis projects until 2023 from 2009, 15 years of time period. Moreover, the final tariff schedule is exogenized such as TRQs, safe guards on specific commodities, and tariff rates.
Based upon an assumption that the FTA starts effective in 2009, the analysis shows that the Korean agricultural production value would decrease dramatically by 447 billion Korean won in five years, 896 billion won in ten years, and 1,036 billion won in fifteen years in 2023. A fifteen years production value reduction, on average, would be approximately 670 billion won. However, the results of the analysis are lower than what KREI had projected before the final agreement was reached, which was 870 billion won in the case of a ten-year tariff reduction schedule.
What Korean agriculture needs to do to minimize the negative impacts from the FTA would include strong structural reform, improvement of competitiveness, and a safety net for the agricultural income.
In a structural reform, considering the efficiency of any part of the industry, inefficient operations should be reduced, while efficient operations should be maintained. Similar to what was adopted for the FTA between Chile and Korea, the "exiting-farms" as well as the "commodity-replacing-farms" should be subsidized considering efficiency and competitiveness of the imports from the United States.
Because Korea's price competitiveness of agricultural products has been much lower than that of the U.S., the Korean agricultural industry should focus on dramatic improvement of competitiveness in quality aiming at the domestic consumers to increase the market share competing with the imported products from the United States and other countries. Moreover, the strategies for future agriculture should be based on the domestic consumers' trust and needs so that the agricultural industry would be able to put a lot of efforts to meet the needs providing fresh and safe products made by the Korean farmers. In that case, the consumer markets for domestic products and imported products would be separated so that the competitiveness in prices would be no longer taken into account in the market.
Policies for the income safety net should be carried out to minimize the negative impacts from the FTA since the domestic agricultural prices would decrease and, as a result, the entire agricultural income would reduce dramatically as well. Therefore, the policies for the income safety net should be based on a few objective analyses to provide reasonable compensation for a certain time period until the farmers would be able to adjust their production structure and plans into the new agricultural situation caused by the FTA between Korea and the United States.
Researchers: Sei-Kyun Choi, Dae-Seob Lee
Research period: 2007. 02. - 2007. 05.
E-mail address: skchoi@krei.re.kr
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