Many of you recently have been subjected to me flogging what is perhaps a dead horse. As you can read here, here, and here. Some in their comments seem to be asking me why I am passionate about it, wonder about my motives, and hint at exasperation on why I bring it up. I usually bring up an argument from the standpoint of social equality (if not social justice). I want to take a little time right now to make another argument.
One of the things that irritates me, likely because it’s only me that sees it this way, are the posters and reminders around Seoul on saving energy. To many, these posters get people wrapped-up in a “save the earth” or “save Korea” feeling as warm and fuzzy as the coats they must put on to conserve. Yet I put to you that Korea really does not give a fig about the sentiment in the poster given its trade policies.
One of the most identifiable side-effects of all the tariffs, are the inefficiencies they create. For example, take example rice production. I think we can all agree that a US farmer can produce rice at a cheaper cost that a Korean farmer, thus the rice compromises outside the WTO treaties signed by Korea and other rice growing countries, including the US. It is also the reasons for the extremely high tariff and non-tariff barriers in Korea for rice and rice products (a note, I chose the US not for chauvinistic reasons, rather to mitigate the argument against labor prices).
To make some numbers to illustrate my point, let’s say the US farmer takes a liter of fuel to make a kilo of rice. The Korean farmer, being less efficient, would take a liter and a tenth. Now 100cc may not seem like much, but it adds up. So if Korea consumes, say, 1 million kilos of rice a year from domestic sources, it means that 100,000 liters of fuel are wasted. And you can extend that out, that’s 100,000 kilos a US farmer could have used to feed somebody. Second, because the US farmer is producing anyway, the 10% of his harvest that would likely go to Korea does not go and rots in the silos because of the tariffs, thus wasting even more fuel and food.
Then you have to realize that this waste does not stop at rice. No, Korea does not have simply one vice to indulge. As I have shown here the Korean tariff system encourages waste in all sorts of fields and industries. Waste that is not only expensive, but waste of resources, such as oil, that are limited for everyone on the planet, not just Korea.
So what do you think I thought of when I read this in the Joongang Daily this morning:
Korea’s original energy unit based on value-added was 2.2 times higher than that of Japan’s, meaning Korea was less energy efficient in 2006.
Hmm what could make Korea not as energy efficient that Japan? Well here is some food for thought in the annual survey of global economic freedom by the Heritage foundation:
Japan Trade Freedom — 80%
Japan’s weighted average tariff rate was 2.5 percent in 2005. Import and export bans and restrictions, [etc.]… add to the cost of trade. An additional 15 percentage points is deducted from Japan’s trade freedom score to account for non-tariff barriers.
Korea Trade Freedom — 66.4%
South Korea’s weighted average tariff rate was 9.3 percent in 2004. Import restrictions, quantitative restrictions, [etc.]… add to the cost of trade. An additional 15 percentage points is deducted from South Korea’s trade freedom score to account for non-tariff barriers.
Hmmm Japan has comparatively lower trade barriers, and is more efficient in the use of energy. Curious!
Going back to the article, let’s look at some of the industries cited for inefficient energy use, and again for compare them to the baseline tariffs set out in the KORUS FTA:
Within the petrochemical industry, the gap in energy efficiency between the two countries was 7 percent in 2006. Although energy efficiency had significantly improved in the 1990s on the back of up-to-date systems, it remained stagnant in Korea in the 2000s due to decreased facilities investment and the slack development of new processes and technologies.
Most petrochemicals introduced into Korea are taxed at 6.5%, and I suspect the non-tariff barriers for “safety” are legion.
As for the steel industry, Korea’s energy efficiency in electric steel is the world’s best, but that of electric furnace steel is quite poor, with energy efficiency about 14 percent lower than that of Japan in 2006. The recycling rate of waste for this industry has substantially declined (half of Japan’s rate) with the comparative gap amounting to 20 percent.
Guess what! Korea has very low tariffs for raw steel (2%) at most. And most of that applies to…wait for it… waste in the industry that can be recycled!
It was found that the energy efficiency of Korea’s paper-making industry ranks first in the world, outperforming that of Japan by 21 percent.
And surprisingly, paper tariffs are very low to none in Korea! Coincidence?
Energy efficiency of the nonferrous metal industry has also improved steadily due to increased investments in modern facilities and the adoption of new process methods.
Only one that does not fit the pattern yet, tariffs of around 5-8% in non-ferrous metals in Korea. Hey I am fair!
The Joongang piece goes on to make recommendation since the source was the Samsung Economics Research Institute. It speaks of the usual patter. Need for government funded investment for technology and more company work. The closest it comes is scolding Korea for its government pricing controls on energy. However I would like to make a different suggestion. You know what that is.
When you figure it out, give this guy the memo.
{ 14 comments… read them below or add one }
Dude, you had me at “hello.”
Zounds! On just how many different threads are we supposed to be able to carry on a trade-related discussion in a single day?
Sidenote:
I think the accepted theory in economic egghead circles is that the country which intervenes in its domestic markets to provide price supports, transfer payments, production subsidies, etc., is the one which finds its producers producing surpluses that rot in silos (or rust on lots, as the case may be).
Huge water subsidies in the Central Valley and paying Ted Turner not to farm are also serious market distortions that do no favors for the world. The U.S. sadly has a long way to go before it could be considered a free trade haven.
Massive Detroit bailouts? Sure, why not support a Jurassic union system that’s almost killed the state of Michigan.
When did you move to France? Part of the ‘Obama exodus’ of conservatives heading for more right-wing pastures?
Free Trade in rice sounds all good. But it will never happen in Korea, at least for decades. Because of two reasons:
1) General Korean sentiment on rice as a strategically important product in terms of national security, that is too dangerous to depend on foreign countries for (like they depend on oil).
2) Traditional opposition from farmers and their opposition parties that will make the entire beef fiasco look like a coming out party, if the government ever try to liberalize the rice market. The farmers, although dying out slowly, make up a potent political force – just like the auto workers of America and their politicians who make up a potent political force in America. If they ever try to liberalize the rice market, there could be a civil disobedience and even a revolution in the country.
There’s no way any Korean government will even try to provoke the socialists and farmers, and risk impeachment of the president. A sizable chunk of Koreans sympathize with the farmers because the old farmers are their fathers, mothers, and grandparents. There are still strong ties to the agricultural communities even as the non-competitive agricultural industry keeps going down hill. Maybe things will change in the future when Koreans no longer have the ties to the agrarian past, but not now.
I have always wanted to read War and Peace. Thanks!
…said the blogger who writes 5 pages per post.
To make some numbers to illustrate my point, let’s say the US farmer takes a liter of fuel to make a kilo of rice. The Korean farmer, being less efficient, would take a liter and a tenth.
You fail to take into account the amount of fuel it takes to ship all that energy-efficiently produced rice from the US to Korea.
Wow, a guy picks an example that most can latch on to, and yet thats all they latch on to.
I can agree that Korea will never get rid of their rice restrictions, and in ways I am sympathetic to some arguments in this specific case. I am also aware that the US side does it own monkeying around so as to either create or increase their cost advantages. These specifics were used only to illustrate my point easily.
As for the “shipping” costs, well that would be reflected in the price wouldn’t? The price for my hypothetical US kilo of rice is still cheaper once in Korea than the hypothetical Korean kilo, even with the shipping costs. Thus even with the seemingly complex system, it can still be more efficient.
International economics and boobies all in one day. This is the best blog ever.
Historically, all countries the US included have only advocated free trade when their own industries have a considerable advantage, and as soon as it looks like another country’s industry can beat their own have abandoned free trade for protectionism.
It may be cheaper to import US rice, but a country may be forgiven for not wanting to be completely dependent on another nation for its staple food. Does the US even produce japonica rice – i.e. the type Koreans like to eat – in sufficient quantities for the Korean market?
Sigh…once again let me state more emphatically, the choice of the US and rice, as well as the numbers, were arbirary so as to illustrate a real point.
@10
Again the choice of the US was arbitrary. In this post my intent was not to promote or defend US trade policy. However, I think more than a handful of workers in the US would disagree with the point.
As to your second point, it really reinforces what Economics is and what it is not (despite the attempts of some). However to backtrack a bit and bring up specifics, yes the US does produce japonica rice, its commonly known as variety Calrose as I recall.
It does not matter what amounts the US produces per se. There is no magical US rice quota an American farmer has to fill so as to then sell overseas. Nor does the farmer say, usually, “I will feed Americans first, and when they get full I will send it abroad”. Rather than make these complex developmental decisions, we have an easy way, the price.
Korean wants rice more than the US, and they are willing to work more for it (meanwhile the US is more willing to work more for, say, potatoes than Koreans). The farmer responds to this demand and sends his rice to Korea, and the US will get something else (again, say, potatoes). Now if either the supply of rice in the US falls enough, or the demand increases, prices would rise in the US and more rice would be sold in the US.
@11
Supply and demand? Leave it to the market? Tell it to the banks on bailout.
Some demands are artificially created. Some demands come and go with trends. And some, like the demand for rice in Korea, are needs, needs which we cannot afford to leave at the mercy of economic trends in other countries or currency fluctuations. Suppose it becomes more profitable for American rice producers to grow beans at some point? Or suppose the Won crashes against the dollar. It’s all very well to say it will all balance out in the end, but in the meantime what are we supposed to eat?
I understand that you would rather discuss Economics in the ethereal realm of ideology, rather than the mundane world of concrete examples. Sorry but economics is a bit complicated for me. I do, however, understand when people want to know what’s for dinner.
Oh, and on Calrose rice, this is from Wikipedia:-
“The odor and taste of Calrose is said to be disagreeable, and its lower moisture level can lead to drying and cracking in the grains, which prevents the cooked rice from taking on the shiny, rounded look valued in other varieties.”
Now that may be just prejudice talking – I wouldn’t know – but it’s enough to illustrate that decisions that may affect a whole national diet are not to be taken lightly.
Well if you want to remain practical and stick to this issue specifically, I am game.
You never asked if it was a 100% substitution, just if the US grew a Japonica varietal. Further, you forget there is the price/quality trade-off in many goods and services. It’s a matter for consumers to decide if the extra cost of domestic rice is worth it. Last, there are all sorts of other uses for the rice than simply the rice steamer. Just to name a few, flour, starch additive, ddok (rice cakes), and noodles. In such applications such limitations could be meaningless.
Meanwhile some of your concerns addressed specifically:
Suppose it becomes more profitable for American rice producers to grow beans at some point?
To put it bluntly, you can’t grow beans in a rice paddy. Soil is not right and its too wet. Plants are plants though, so I guess it would be possible to grow some beans in such fields, however I doubt it would be more profitable than rice. However, I think you intended that as an example.
Such a change would happen gradually over time. As any Korean farmer can tell you when they debate the same issue, farming is a capital intensive industry. Changing crops means a change in that same capital. This problem is compounded for US farmers since they rely more on such technology than those Korean farmers, thus making such a change a bit more gradual.
Or suppose the Won crashes against the dollar.
OK first we need to explicity state an implied premise, Korean demand for US rice will be so great, despite whatever quality issues referred to previously, that such would indeed be a major worry insofar as feeding the population. If such were true, thats a large bit of demand. So much demand I would estimate that Korea would become one of the top buyers of US rice.
In having such a large influence over the demand for rice, such a currency change would likely have an equally radical immedate impact on US dollar price for rice, or heck I would go so far as wager the price of rice in general worldwide.
It’s all very well to say it will all balance out in the end, but in the meantime what are we supposed to eat?
There are all other sorts of crops, and who knows what Korea might be able to grow with all the farmland now inefficiently allocated.
Meanwhile, since we are in “disaster” mood here, lets talk about the otherside of this coin. If Korea were to experience a draught, where would people get their food from? You would have no Korean production and all these barriers erected to prevent people from getting food. Even if you were to remove the official quotas and tariff bans, what about the grain processing facilities to receive all those imports? What about storage, packaging, and delivery operations?
Sure one could look at the possibilities of relying on other people, but there are equal concerns that can be raised on the pitfalls of doing it all yourself.
I do not know if I should pile on with this, but I think its reckless for us to consider this specific issue without raising another important aspect, Korea’s real estate and land-use laws. Such metaphorically, if not literally, force farmers to grow rice at the expense of any other crop, or even at the expense of simply not planting anything.
If I was being forced to only farm some inefficent crop while competition was allowed on that crop, I would be rather pissed to.
Unfortunately, nobody raises that salient issue when it comes to free trade talks. I have theories why, and why in turn this rice issue is really a red herring, but they might bring us off track a bit.
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