The US/Korean Free Trade Agreement (KORUS) took effect March 15, kicking off a 15-year phase out of duties on U.S. beef that will decrease the current 40% bite by 2.67 %/year, arriving eventually at zero in 2027. While U.S. beef producers and exporters are celebrating the measure, Australian producers and exporters are lamenting the competitive disadvantage it presents them.
Australian exporters and farmers have no such deal in place, and Australian negotiators are pessimistic that a similar agreement can be forged with South Korea this year, as South Korean trade officials have deferred further discussion until after the April 11th general elections. At best, negotiations between both countries are still six months away from completion, and another six months’ minimum approval process will be needed in both the Korean and Australian parliaments.
Of course, the U.S. has an advantage in that its military ensures security in the region, particularly in the face of the ongoing brinksmanship between North and South Korea. In fact, the unpopularity of KORUS in South Korea has been counterbalanced by the military presence of the U.S., a luxury Australia doesn’t have. In addition, the South Korean public’s distrust of the free-trade agreement means their trade negotiators have shelved talks with Australia until the dust settles on KORUS. Either way it looks highly unlikely that Australia will have a deal with South Korea in place in 2012, which means it will be perpetually playing catch up.
Both Australia and the U.S. have had a surge in exports in 2011 mainly due to South Korea's foot-and-mouth outbreak last year and the culling of its beef herd. Forecasts by Meat and Livestock Australia estimate Australia’s 2012 exports at 125,000 mt, almost a 15% decline on last year. Already the Australian industry is factoring in a market share loss due to KORUS.
In a mid-March television interview, Australia’s Trade Minister Craig Emerson was asked about the likely time frame for an Australian FTA with South Korea. His answer was both surprising and worrying for Australian farmers.
“The industry at one point was offered a longer phase-out period for Australian tariffs of 18 years compared with the U.S.'s 15 years. And some in the industry would not accept that. Now I'm not saying that because they didn't accept it the deal has stalled, but it certainly hasn't helped. And I think what we need is a real dose of realism. Does it matter fundamentally whether our tariffs are phased out over 18 years rather than 15 years? I think that would be a more preferable outcome than no trade deal at all,” he said.
His answer has Australian exporters and farmers concerned on several fronts. First, the talk of an 18-year, phase-out period was its first public expression; most believed the 15-year, phase-out period for U.S. beef tariffs would be the precedent for Australia’s negotiations.
The second concerning comment was the “all or nothing” potential outcome, which implies that no trade deal is a real possibility. The concern is both pronouncements weaken Australia’s hand in trade negotiations.
In examining the potential U.S. trade advantage over Australia, let's assume Australia agrees to an 18-year, phase-out introduced in 2013. This would mean a 2.22% tariff reduction next year for Australia but an accumulative U.S. reduction of 5.34%. Within five years, the U.S. trade advantage would be a 5% greater reduction in duties than Australia. If no Australia-Korea FTA was in place, the U.S. would have a 16% greater reduction in duty – a huge market advantage.
Emerson’s suggestion to take the 18-year, phase-out proposal and be happy with it is what he calls a "real dose of realism." But he fails to realize that any differentiation in duty, whether it be 5% or 16%, will see cattle prices in Australia fall in value compared to U.S. cattle prices.
The main reason is that bone-in products sold to South Korea have few alternative markets. Australian processors will be forced to sell bone-in product such as short ribs and chuck ribs at lower prices and pay the higher duties.
Should no trade deal occur for Australia, then industry experts equate the full 40% duty to be about an $80-100 USD/head price advantage for U.S. cattle producers.
Another important item with few alternative markets are bones, for which U.S. and Australian processors see South Korea as a critical market. Should the value on bones fall too much due to higher duties or no demand, then converting them into bone meal is one of the last options. Either way, for Australian exporters, a reduction in the value of bones is inevitable due to KORUS.
There is no doubt that Australian processors and farmers will be worse off financially with KORUS now in place and at best an Australian agreement next year. The key for Australian negotiators is to try to minimize the damage to the Australian cattle and beef industry and minimize the U.S. comparative advantage.