Research Reports
Evaluation of Compensation Measures and Impacts of Implemented FTAs on Agricultural Sector
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AuthorChoi, Seikyun
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Publication Date2009.10.01
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Original
This study evaluates compensation measures and impacts of the FTAs currently implemented in the agricultural sector. As the number of FTAs in force increases, the research demand to evaluate the fulfillment of FTAs also increases. Therefore, this study is a preemptive research.
Target commodities to be analyzed are selected by examining the concession document of each FTA and by analyzing agricultural trade. The impact evaluation of FTAs is focused on those selected commodities. As for compensation policies, only the compensation measures with respect to Korea-Chile FTA are evaluated for their achievements and effects.
According to the analyzed results of agricultural trade and import duty concessions of implemented FTAs, only a few commodities out of Korea's 50 major crops in terms of production value are adversely affected by the increase in imports. According to a cointergration analysis of 68 domestic and foreign products, 31 models out of total 68 have impact relationships. Some import products affect domestic prices, and vice verse. The result of an impulse response analysis indicates that banana imports from ASEAN have a big shock of 10 months and converges afterward.
The results of an impact analysis by commodity show that domestic pork production is reduced 0.3% and its price is dropped 1.0~1.1% every year due to tariff reduction of Chilean pork by Korea-Chile FTA. The production value of pork industry is estimated to decrease by 34.3~35.2 billion won every year. The imports of Chilean grapes reduced domestic grape production by 0.2~0.4% and decreased its domestic price by 0.3~0.7%, so the production value of domestic grape is reduced 3.5~7.3 billion won every year. Imported Chilean grapes affect domestic strawberry and tangerine industries as well. The production value of strawberry dropped 3.1~6.4 billion won, and tangerine production value decreased 2.0~4.0 billion won every year due to grape import after Korea-Chile FTA. It is analyzed that domestic kiwi production is reduced 0.27~0.28 billion won every year due to kiwi imports from Chile. After Korea-Chile FTA, wine imports from Chile increased and affected the domestic liquor industry, especially soju. The increase of wine imports from Chile reduced domestic soju production by 0.3~0.4% and dropped its price by 0.6~0.7% a year.
With respect to Korea-ASEAN FTA, which went into effect in June 2007, its impacts are small since the level of concessions in major agricultural commodities is low. However, the share of ASEAN in the domestic import market is getting bigger. For instance, the import share of canned peaches from ASEAN increased from 2.3% in 2005 to 17.2% in 2008.
The impacts of implemented FTAs on the economy estimated using input-output analysis were -55.30~-68.30 billion won/year in direct effects, -89.76~-97.66 billion won/year in indirect effects, and -41.38~-46.48 billion won/year in induced effects.
The area of closed orchards with compensations from the government was 5,812ha. By commodity, the area of greenhouse grape is 482ha, kiwi 51ha, and peach 1,796ha.
The average indemnities by commodity are 3.4 million won for greenhouse grape, 1.3 million won for kiwi, and 1.2 million won for peach. The number of farms that took indemnity for closing the orchard totaled 16,860 in which peach farms were 14,903 (83.6%). After the closing of orchards, 30% of those farmers produced another fruit.
The compensation policy for closing the orchards had the effect of supporting prices and increasing productivity. The effect of supporting price is estimated at 3~4% in greenhouse grape and 1.5% in peach. Moreover, it may contribute to improving productivity because the targets of closing orchards are focused on old trees and old farmers.
According to the results of an econometric analysis on impacts of FTAs, direct effects are greater than indirect effects because of substitution in demand. The input-output analysis showed that the impacts on the economy are 1.5 times greater than the impacts on the agricultural sector. Therefore, ex-ante and ex-post impact analysis of FTAs for the future should consider substitute commodities and industrial linkages.
It is analyzed that the domestic compensation policy on FTAs has some issues to be revised. After Korea-Chile FTA became effective, the compensation measure supporting 80% of the price gap between market price and base price never worked out. Thus, this measure needs to be revised. In the compensation policy of Korea-Chile FTA, the indemnity for closing the orchard was too much and supported too many farmers. So, the compensation measures should be reexamined based on reasonable production cost data and in view of the negative 'balloon effect' of farmers flocking to certain crop items and the waste of resources that could occur in the process of reopening the orchard for the cultivation of same commodity only after a certain period. Finally, a way to minimize administration costs of compensation measures should be found and direct income compensation payments at the farm unit level should be introduced.
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