Korea is an important export destination for many products and typically ranks among the top six export destinations for California agriculture overall. With lower import barriers that would accompany the KORUS FTA, there is significant potential for expanding California agricultural exports to Korea. Agriculture was at the center of the negotiations and delayed completion of the deal until the very last hour. It also will be at the center of attempts to ratify the agreement in the legislatures of the two countries. In the end, Korea resisted rapid and complete opening of agricultural markets and the United States was not successful in achieving comprehensive free trade in agriculture as soon as possible. These negotiating positions followed from typical pressures on governments to protect weak industries from imports and to support strong exporters. Overall, the agreement provides for gradual elimination of Korea’s high tariffs for most export commodities of interest to California agriculture. Importantly, exceptions include rice, for which a previously negotiated quota is in place and no new market opening was achieved, and fresh citrus fruit, for which high seasonal tariffs that limit shipments of oranges and mandarins will remain. Because its costs are high and U.S. barriers are already quite low, Korean agriculture has no potential to expand its tiny agricultural exports to the United States. We find that U.S. and California agriculture will expand exports to Korea substantially if free trade is allowed. Some of that increase in exports from California would be derived from trade diversion from other exporters, such as Chile, Australia, New Zealand, and China. This diversion follows from the KORUS FTA lowering the net price in Korea of U.S. goods relative to those of suppliers from other countries. In some cases these goods from other countries have tariff advantages now that would be redressed by the KORUS FTA.

Additional exports contribute positively to the California economy,greenhouse benches whether by diversion of other global sources or replacement of local Korean supplies. From a global perspective, trade diversion may reduce global welfare if products from the United States that currently have lower tariffs replace lower cost products from other exporters that would have higher relative tariffs after the KORUS FTA. To better understand the potential for implementation and the likely impacts of the negotiated agreement, this report outlines major characteristics and concerns within Korean agriculture and shows where Korean agriculture is most vulnerable to expanded imports that affect Korean producers negatively. We also point out significant gains to Korean food buyers. By analyzing impacts among Korean farmers and consumers, we can improve understanding of the Korean situation and opposition to the agreement in the legislature. This study provides detailed information on the potential effects of the KORUS FTA for California agriculture on a commodity-by-commodity basis. This helps California agriculture better appreciate and communicate what is at stake for California commodities. The report catalogs agricultural exports from California to Korea commodity by commodity. It also reviews existing trade barriers that limit exports to Korea, considers explicitly the export positions of major competitors, and examines the size of the Korean market for each commodity. This information helps us to assess the degree to which agricultural exports to Korea have been constrained by trade barriers and the potential additional exports that the Korean market can absorb. We provide a detailed market analysis for many important California products. We find that better access to the Korean market would create significant opportunities for dozens of major commodities.

California has the potential to more than double its current exports of about $280 million within a few years and to continue to expand exports as barriers fall gradually on products that are politically sensitive in Korea. For example, lower tariffs and fewer other barriers would allow important export expansions for citrus products, tree nuts, dairy products, beef, grapes and grape products, stone fruits, strawberries, fresh and processed vegetables, flowers and ornamental horticulture, processed tomato products, olives, hides and skins, cotton, and hay. Expanded agricultural output to serve greater demand for California products in Korea will also cause additions to farm employment and expansion of the agricultural economy past the farm gate. The state of the U.S. and global economy in 2009 provides further impetus for encouraging more open international borders for trade. Countries belonging to the Organization for Economic Cooperation and Development have pledged to resist new trade restrictions and reduce trade barriers to avoid letting the collapse in trade become even more of a drag on economic recovery. The agricultural industries in the U.S. and California are looking for sources of new growth given the decline in domestic demand. Better access to the Korean market could be one source of additional market opportunity for major California commodities.The Republic of Korea1 and the United States signed a free trade agreement on April 1, 2007. Although the bilateral negotiations have been finalized, the agreement must be approved by each country’s legislature in order for implementation of the agreement to take place, but it faces considerable opposition in each country. In the United States, the Bush administration slated passage of the Korean FTA as a major goal for 2008. The Korea-United States Free Trade Agreement has the potential to be a significant demand driver for California agriculture. The Korean economy, comprised of almost 50 million consumers, has been growing rapidly for decades and has per capita income that exceeds those of many European countries and approaches that of Spain.

The United States is already Korea’s top supplier of a broad variety of agricultural products at $3.5 billion in 2007. The United States is the number one supplier to Korea of such farm products as almonds, fresh cherries, hides and skins, poultry, soybeans, corn, and wheat. As a relatively large, relatively high-income country with a well developed food and fiber distribution system, Korea is a major market for agricultural goods of the type produced in California. As the country has become more developed over the past 40 years, Korean agriculture has become less competitive with imports and potential imports. Korea has relatively little arable land per capita and is now a highly urban country with agriculture accounting for only 3% of gross domestic product and about 7% of the population. Korea’s many small farms have relied on high government-protected commodity prices to maintain farm incomes comparable to rapidly improving urban incomes. Nonetheless, the average age of farmers has been rising. And because young people have avoided farming, the farm population has been declining rapidly in number. Despite high import tariffs, tight import quota quantities, and restrictive sanitary and phytosanitary regulations, South Korea has become a major agricultural importer with imported products comprising an increasing share of food consumption expenditures. Korea is an important export destination for many products and typically ranks among the top six export destinations for California agriculture overall. With lower import barriers that would accompany the KORUS FTA, there is significant potential for expanding California agricultural exports to Korea. This bilateral agreement, which lowers tariffs on Korean imports of U.S. products, is expected to help the United States compete against other countries, especially China and Australia, and, as a consequence,plant benches to expand U.S. sales in the Korean market. Agriculture was at the center of the negotiations, delaying completion of the deal until the very last hour. It also will be at the center of attempts to ratify the agreement in the legislatures of the two countries . In the end, Korea resisted rapid and complete opening of agricultural markets and the United States was not successful in achieving comprehensive free trade in agriculture. These negotiating positions followed from typical pressures on governments to protect weak industries from imports and to support strong exporters. Agricultural costs of production are high in Korea and U.S. barriers to imports from Korea are already quite low. Therefore, it is generally accepted that Korean agriculture has no potential to expand its limited agricultural exports to the United States. We fi nd that the significant agricultural effects for California are that U.S. and California agriculture will expand exports to Korea substantially if free trade is allowed. Some of that increase in exports from California would be derived from trade diversion from other exporters, such as Chile, Australia, New Zealand, and China. This diversion follows from the KORUS FTA lowering the net price in Korea of U.S. goods relative to those of suppliers from other countries. In some cases, such goods from other countries have tariff advantages now that would be redressed by the KORUS FTA. Additional exports contribute positively to the California economy, whether by diversion of other global sources or replacement of local Korean supplies.

From a global perspective, trade diversion may reduce global welfare if products from the United States that currently have lower tariffs replace lower cost products from other exporters that would have higher relative tariffs after the KORUS FTA. Because of the size of the Korean economy and the height of pre-existing trade barriers, the KORUS FTA is broadly acknowledged as the most commercially significant free trade agreement the United States has negotiated in nearly twenty years. Several factors underscore the significance for California agriculture of comprehensive and rapidly established free trade with South Korea. First, California agriculture is a major supplier of many fruit, vegetable, and tree nut products. It is also a large supplier of hay, rice, cotton, beef, and dairy products. Second, exports have recently accounted for more than 20% of California agricultural production and are important for the economic success of many commodities . Third, Korea has a large and well-developed consumer base for California agricultural products. Korea has long been an important market for California agriculture even as the leading export commodities have changed over time . Fourth, Korea has high trade barriers for many of the products supplied by California agriculture. Therefore, the potential for expanded imports from California is large. Finally, Korea has little or no potential to increase exports of agricultural products to the United States. Korean domestic prices are high and very few Korean agricultural products could compete successfully in the U.S. market. We find that better access to the Korean market would create significant opportunities for dozens of major commodities. California has the potential to more than double its current exports of about $280 million within a few years and to continue expanding exports as barriers fall gradually on products that are politically sensitive in Korea. For example, lower tariffs and fewer other barriers would allow important export expansions for citrus products, tree nuts, dairy products, beef, grapes and grape products, stone fruits, strawberries, fresh and processed vegetables, flowers and ornamental horticulture, processed tomato products, olives, hides and skins, cotton, and hay. Expanded agricultural output to serve greater demand for California products in Korea will also cause additions to farm employment and expansion of the agricultural economy past the farm gate. The rest of this report builds on these general points to consider more specifically the basis for these broad conclusions. It is important to understand some background information before delving into the details of the agreement and its implications. In Part 1, we provide a general background about the negotiation initiation and process; summarize the nature of the Korean economy, especially in agriculture; and describe the two countries’ trade positions. Understanding pre-existing overall and bilateral trade will help us appreciate the scope of interaction between the two economies, further understand the potential for trade, and see how the KORUS FTA fi ts within the context of Korea’s society, economy, and agriculture. We then turn our attention to California agriculture and its role as an export provider. Part 2 gives a snapshot of California agriculture that focuses on export commodities. Part 3 provides detailed information on how the KORUS FTA eliminates or reduces the trade barriers currently in place for products important for California agriculture. In Part 4, we discuss the impact of free trade on both Korean and California agriculture. We summarize the impacts for key commodities and commodity groups. The final section concludes the report. Much of the report consists of a series of detailed tables and charts that show trade patterns and current Korean trade barriers.