Sep 25 2008
What’s Korea’s “beef” with the US on free trade?
Published by Jason Welker at 3:46 pm under
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Wikipedia“This post was originally published in April, 2008. It has been re-published today for the benefit of my year 2 IB Econ students, who are currently studying barriers to free trade.
Bloomberg.com: Economy - Korea Beef Deal Won’t Yield Trade Vote
Free trade: everyone either loves it or loves to hate it. South Korea and the US have been in negotiations for a landmark free trade agreement for years. Korea, however, has had a “beef” with US beef imports since 2003, when a case of Mad Cow Disease gave Korean officials the jitters and all imports were halted.
Even though Mad Cow has disappeared from American beef, the ban has remained, making it difficult for negotiators to come to any major agreements on the reduction of tariffs and other barriers to trade in other markets in which the US and Korea trade. Just last week, South Korea removed the beef ban, giving some analysts hope that a free trade deal may soon be agreed upon.
President Bush signed the agreement last year but has hesitated to pass it on to Congress; where certain Democratic politicians have refused to approve the agreement until S Korea removed the beef ban. Now that the ban has been lifted, however, it appears that the issues keeping an agreement from being reached may run deeper than the simple beef ban:
In addition, Ford Motor Co., unions and Democrats, including both Hillary Clinton and Barack Obama, all say the accord must be reworked to address what they call South Korea’s barriers to U.S. manufactured goods.
“I understand there are foreign policy considerations, but this is too important for us,” Stephen Biegun, vice president for government affairs at Ford said in an interview earlier this month. “We don’t see any sign that they are ready to change.”
Levin, who represents autoworkers in suburban Detroit, said the accord will need to be changed to address what he calls South Korea’s non-tariff barriers to U.S. manufactured goods, especially autos.
Clinton, in a response to questions from the Pennsylvania Fair Trade Coalition, said the agreement with South Korea “will cost America jobs.”
The S Korea / US Free Trade Agreement should bring a boost in trade between the two countries:
The U.S. is South Korea’s second-largest export market behind China, with shipments totaling $45.8 billion in 2007. Imports from the U.S. last year reached $37.2 billion. The trade agreement would eliminate or reduce tariffs on a wide range of goods including automobiles, vegetables and electronics.
Through free trade there are winners and losers. This is a theme we’ve explored in some depth already during our International Economics unit. The winners, in the case of the S Korea/US FTA will likely be manufacturers in S Korea and service industries in the US. Judging by Ford Motor Company’s response to the FTA, we can assume that American manufacturers will be losers from the accord.
Does this make it bad, however? According to macroeconomic theory, no. The removal of tariffs on imports from S Korea will force American manufacturers to become more competitive and achieve greater efficiency, both which will result in a more efficient allocation of resources in both S Korea and the US. If Ford, for example, sells fewer cars because of in influx of high quality, affordable Korean automobiles, then Ford may be forced to shut down some of its plants in the US. This will lead to the loss of American jobs, just as Hillary Clinton claims it will.
But in the long-run, America as a whole should be better off for it. Manufacturers in the US will focus more on capital intensive goods such as industrial equipment, the manufacture of which requires highly skilled labor, which America has in abundance. In addition to industrial equipment and other high skilled manufactured goods, the US service sector should benefit from freer trade with S Korea.
With beef being resolved, the U.S. banks, insurance companies and other services companies that stand to gain the most from this accord are gearing up their lobbying efforts.
Beef “has been our biggest obstacle in having a meaningful dialogue on the benefits of this agreement,” said Matt Niemeyer, vice president for the business insurer ACE Ltd. and a former U.S. trade official. “It’s now time to work with Congress to find a way to move this important agreement this year.”
As any student of economics knows by now, politics and economics don’t always mix well. The opposition to the S Korea/US FTA among Congressional Democrats is more political than it is economic. Jobs will be lost, that’s true, but overall trade between two technologically advanced, developed countries like the US and S Korea should do more for improvements in efficiency and in resource allocation than it will in harm for a handful of American workers who may find themselves out of work due to greater demand for imported automobiles.
*A tariff on Korean automobiles results in the following outcomes:
- The quantity demanded of automobiles is less than it would be without a tariff (Q4 rather than Q3)
- The quantity supplied by American auto manufacturers is greater than it would be without the tariff (Q2 rather than Q1)
- The difference between Q2 and Q1 represents an overallocation of resources in America towards automobile manufacturing.
- The domestic quantity demanded exceeds the domestic quantity supplied. The difference (Q4 - Q2) is made up for by imports from S Korea.
- The government earns revenue equal to the area of the yellow rectangle (amount of tariff x number of cars imported)
- Society experiences a loss of efficiency (deadweight loss) equal to the combined areas of the green triangles Y and X. This is consumer surplus lost, accounted for by the higher price paid by American consumers imposed by the tariff.
In the model above, the removal of a tariff on Korean automobiles will result in a decrease in output by American firms from Q2 to Q1, an increase in imports from Q4 - Q2 to Q3 - Q1, and an increase in consumer surplus, efficiency, and better overall allocation of resources in America.
Discussion questions:
- How does the graph illustrate the concept of “winners and losers from free trade”?
- Who gains and who loses from free trade with the US within Korea?
- Is it possible that a free trade agreement with Korea would actually create jobs in America? Explain…
- Why do politicians oppose free trade deals that would result in such improvements in efficiency, allocation of resources, and even in the employment opportunities for American workers?
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
Submit your Econ questions here. Replies will be posted to the blog
I have seen the extent of how much the Korean population objects to the beef trade. During my visit to seoul this summer, the news was constantly showing images of tens of thousands of people crowding into the city centers with lit candles as a sign of protest to the government. Despite some obvious potential advantages of a free trade, the Korea seems to oppose it. However I think it is rather naive to consider the Koreans ridiculous because of economic reasons.
I believe a great aspect which affects Korea’s opinion is the internal political condition. S Korea has recently reelected a president (President Lee Myoung Bak), who is known to be a pro-upper, rich class. This has affected his domestic policies (real estate for instance comes to mind). Many of his policies have disappointed the labor or lower classes, which make up a great percentage of the population. I believe the problem with mad cow desease has actually acted as a spark which releases all the harsh feelings toward the government. As a result, these people who have “beeef” with the government have been protesting for months. The government, which has to maintain a democracy and a “for the people” attitude is presumably having difficulties establishing a free trade when so many people are showing opposition.
I used to live in Korea and I remember the huge news coverage this got. If I remember correctly, after the mad cow scare, Korea turned to Australia to import beef. It cost a ridiculous amount too, I remember my mum constantly complaining about it. The people who gain from the free trade in Korea are manufactures. This trade agreement should strengthen US-Korean ties even more. The Korean government has been urging the US to slowly withdraw troops from the country but even though peace efforts are strengthening (then they get set back again, latest was when NK fired at a South Korean woman who apparently overstepped the boundary lines) the US continues to want their presence within the country. This results in a tense relationship and hopefully the trade agreement will make it more secure.
The graph illustrates the economic effects of the tariff placed on the import of Korean cars into the United States. It thereby helps to demonstrate who the winners and losers from free trade will be. Consumers will benefit from free trade because they will have to pay a lower price for the cars. This is because, with the tariff in place, competition will be decreased for domestic producers and they can ask a higher price. It is for a similar reason that foreign producers can also be considered “winners”. With free trade, competition will increase and shift price down to Pworld and people will buy the cars from the most efficient producers (Koreans). The diagram clearly shows that the losers from the free trade of cars between the United States and Korea will be the American producers. The tariff makes it more expensive for Americans to buy Korean cars, so they will choose to buy the American cars, which now appear cheaper. However, society as a whole will benefit because there will no longer be domestic over allocation of goods or foreign under allocation of goods, which will then remove the dead weight loss that the tariff caused.
Even though, if tree trade between the United States and Korea were to happen, society as a whole would be better off, there would also be certain “losers”. As stated, society would benefit because of the removal of the DWL, as would Korean car producers. To that, Korean consumers would also profit from the increase in competition. The losers, however, would be the Korean cattle farmers. This is because the with American beef producers now also competing in the market, there will be more competition and the prices will fall. Therefore, their total revenue would decrease.
In the long run, it is possible for the free trade between America and Korean to create jobs in America. This is because, even though some jobs will be lost to more efficient Korean producers, American producers will be forced to allocate their goods to their best use.
Politicians often oppose such deals because, in order to get elected, they only think about the effects that will be visible in the short run and tell the voters what they want to hear.