Since most exports sent from Oregon to South Korea prior to March 2012 had tariffs placed on them, the state's products were more expensive to Korean consumers. By the tenth year of the trade agreement, 99 percent of U.S. exports to Korea will have those tariffs removed. Instituting duty-free trade makes the products Oregon exports to Korea less costly for consumers there. The good old supply and demand curve tells us that, in theory, when a binding tariff is removed, prices decrease, and the quantity exported should increase due to a rise in demand.
Which industries in Oregon could benefit from increased demand in Korea for their goods? In 2011, exports of agricultural products made up $454 million, or 43 percent of total Oregon exports to South Korea (Graph 2). The next-largest exporting industries were manufacturers of chemicals and computer and electronic products, followed by waste and scrap (mostly metals), and food products.
Oregon exported a diverse array of commodities to South Korea in 2011 (Graph 3). The largest agricultural export commodity was wheat and meslin ($331 million). Electronic integrated circuits (microprocessors), hay, and scrap metals were also top export commodities in 2011.
The Office of the U.S. Trade Representative noted that almost two-thirds of U.S. agricultural products exported to Korea became duty free when the trade agreement took effect in March. Oregon's largest export commodity to South Korea, wheat, is one of these products. Potatoes, including frozen french fries, are now duty free. In 2011, South Korea was Oregon's top foreign export market for french fries with $16 million in exports. The elimination of the 18 percent tariff on fries should help boost exports.
The FTA also provides opportunities for new exports to South Korea from Oregon businesses. Fresh cherries, for example, have never been exported from Oregon to South Korea - until now. Helped by the elimination of a 24 percent tariff, Oregon exported its first fresh cherries to South Korea in 2012.
Generally, Oregon manufacturers benefit from the FTA in the near term, while food and agriculture effects occur gradually. Oregon manufacturers of machinery, electronics, and transportation equipment who currently export to South Korea benefit immediately from tariff eliminations. Electrical equipment such as battery parts, of which Oregon exported $1.4 million to South Korea in 2011, and tools and fabricated metal products like chainsaw blades ($1 million) are now duty free. Reductions in food and agriculture duties will occur a little further down the line. The elimination of the 18 percent duty on Dungeness crab is scheduled for the third year of the trade agreement, and Oregon dairy products will see the 36 percent duty reduced to zero by year fifteen of the trade agreement. Other, non-exporting industries in Oregon should also benefit indirectly from the FTA. The transportation and warehousing industry should benefit from increased freight volume due to increased exports from Oregon and other states that move goods through Oregon ports. In 2011, nearly $1 billion in passenger vehicles were imported into Oregon ports from South Korea.
Passenger vehicle imports from South Korea are also expected to increase significantly under the FTA. Unlike textiles and apparel, passenger vehicle manufacturing is a large industry of employment in the U.S., and an important contributor to U.S. gross domestic product. As with textiles and apparel, increased imports are expected to come at the expense of decreased imports from other countries. The U.S. already imports a large volume of South Korean passenger vehicles, and the increase in imports is expected to come from a small percentage change of this high-volume, high-value commodity due to the elimination of the relatively small tariff (2.5 percent). In addition, U.S. exports of motor vehicles to South Korea are expected to increase under the FTA due in part to elimination of the relatively high South Korean tariff (8 percent).
While the issue of tariffs is at the heart of most free trade agreements, nontariff measures are also dealt with in some instances. In the case of the South Korea FTA, that includes provisions to reduce taxation in South Korea related to motor vehicles with larger engines and more transparency in safety and environmental standards that U.S. manufacturers deem opaque. U.S. passenger vehicles represent less than 1 percent of vehicle registrations in South Korea. The improvement of other nontariff measures in addition to the elimination of the tariff should provide a significant opportunity for U.S. exports.
For more information, contact Business Oregon, the State's economic development agency. Business Oregon assists businesses in exporting to countries throughout the world, including South Korea. Global trade specialists help Oregon businesses access global markets through their network of government and international business partners, and provide counseling and financial assistance through trade promotion programs.