The Marmot’s Hole

As the perceived FTA guy at the Marrmot’s hole I have been prodded by many in the past 24 hours for some post on the recently concluded FTA agreement. So this post may dissatisfy many.

First, I am surprised an agreement was reached. It was literally reached in the final closing minutes. Knowing that the deadline would be 12:59pm April 2, 2007 Korea time I was constantly pressing the refresh buttons on the wire services. I was when the news surfaced on my screen. As I said before the Korean side would, theoretically, need to give a lot up without much in return from the US side. For example, the average tariff rate for Korea is 11.2% while the US maintains a 3.7%. Expecting a one-for-one exchange will still leave the US with a hefty 7.5% tariff to come into Korea.

So no doubt there were quite a few compromises. Already people, on both sides, are starting to carp. Depending who you talk to the FTA sells out Korean farmers, sells out US auto workers, is for the greedy capitalists, symbolizes the evil imperialist US, or is a farce of an agreement that is really “managed” trade not free. Out of all rhetoric, I find free trade rhetoric most distasteful since it’s simply 99% horse puckey. For most economies, free trade, even a small ”managed” taste of it, is always better in the long run.

So given the tilt of the issue, and specifically the Korean press’s methods, I will withhold my judgment. Right now most of the reporting seems to be a fever swamp of nationalism and hysteria. What I am really waiting for is the text of the agreement when it is made public. Partly it is to make up my own mind, but also because the agreement will be a lot more complicated than can be encapsulated in a 100 word Korean press account written at a 6th grade English level by a reporter with a 2nd grader’s understanding of economics and international trade and edited by hippie Canadian with a mail-order masters degree in “International Medieval Interpretive Dance Studies”.

I digress. I may likely write as more details come out, but what I am really waiting for though is the text that was agreed to yesterday about this time. Let me conclude with a sobering reason why. Here is an edited “brief” part of recent US Trade Representative’s report on Korean trade barriers:

Korea imposes tariff rates of 30 percent or higher on most fruits and nuts, many fresh vegetables…and some dairy products. Many products of interest to U.S. suppliers, including apples, beef,…and a variety of citrus fruits are subject to tariff rates of 35 percent or higher.

Other products of interest to U.S. industry on which Korea imposes high tariffs include cherries, distilled spirits…and fruit wine. In many instances, Korea applies prohibitively high tariffs despite the absence of domestic production of certain agriculture products.

Korea also has established tariff-rate quotas (TRQs) intended to provide minimum access to previously closed markets or to maintain pre-Uruguay Round access. In-quota tariff rates may be very low or zero, but the over-quota tariff rates for some products, mostly agricultural and fishery, are prohibitive. For example, natural and artificial honey are subject to an over-quota tariff rate of 243 percent…and popcorn, 630 percent. In addition, for some agricultural products such as corn grits, popcorn, and soy flakes, Korea aggregates raw and value-added products under the same quota. Domestic producer groups, which administer the quotas, invariably allocate the more favorable in-quota tariff rate to their larger members, who import raw ingredients.

That text is a bit above a second grader’s level ain’t it folks? Take that aggregate 630% TRQ on popcorn. Or better, first lets break that down. A TRQ is a tariff when you import over a specific quota. For example, and part of this I am inventing for edification, lets say that Korea will allow 100 tons of popcorn in a year at a 52% tariff (the average Ag goods tariff). After that 100 tons the TRQ kicks in and the next ton has a tariff of 630%. And this quota includes more than raw popcorn, it includes microwave popcorn and Cracker Jack (the “aggregate” part).

So in the above example there are actually FOUR distinct barriers to trade:

1. The 52% tariff
2. The 100 ton quota
3. The 630% TRQ
4. Aggregation of processed goods with raw goods.

So then if a news outlet says something like “Most Korean popcorn protections will be phased out in 5 years”, what exactly does that mean? The quota? The tariff? The TRQ? The aggregation?

If you click through the above link you will find all sorts of similar complex barriers on the Korean side. So please respect my decision to be quiet for now until I see the text and specifics.