Table 6: South Korean Agricultural production, by sector 1999  

Source: South Korean Agricultural information and Statistics Bureau

Farming in South Korea is dominated by small landholders and independent cooperatives. Only 20% of South Korea is farmable, and shortly after World War II, the government implemented strict limits on the amount of land that any one farm household might own. Small landholdings and significant trade protection are important features of South Korean agriculture.  

Fruit is the most dynamic product in South Korea ’s agricultural sector. Fruit production has increased rapidly, from 833,000MT in 1980 to 1,766,000MT in 1990 and 2,452,000MT in 1997 (Table 7). The main fruit growers in South Korea are small individual farmers, 70 percent of whom own less than 2 hectares of land. The area planted with fruit has been increasing. The area, 99,000 ha in 1980, increased to 176,000 ha in 1997. Horticultural crops have replaced grain crops in recent years because of the higher profitability of fruits and the downturn in other agricultural sectors. The government has encouraged grain farmers to switch to horticulture as an alternative crop to rice production. Fruit production still depends heavily on weather conditions and farming technologies.  

Although the rate of fruit consumption per person has increased by 1.9% annually, production has increased by only 0.5%, resulting in increased demand for imported fruit. Self-sufficiency levels for fruit will drop to 88.2% by 2004 from 93.1% in 1995. Demand for imported fruit such as oranges and grapes will grow. The fruit industry in South Korea is dominated largely by apples, grapes and pears and to lesser extent, mandarin oranges (see Table 7). South Korea ’s main fruit imports are bananas, pineapples, kiwi, grapes, grapefruit, lemons and oranges. Bananas used to account for over half of total fruit imports in the early 1990s, but oranges and grapes now make up a significant sector of the market.

Table 7: Fruit Production and Cultivated Area Production (1000MT), Area (1000ha)

Source: Ministry of Agriculture and Fishery (MAF), 1998, South Korea  

Under the terms of the Uruguay Round Agreement on Agriculture (URAA) signed in 1995, South Korea liberalized imports of all agricultural products except beef and rice. Still, most agricultural products remain highly protected by both tariff and non-tariff barriers. Tariff rates on most imported fruit and vegetables are between 30 and 50 percent. South Korea ’s main agricultural import partners are the United States (31.5%), China (13.2%) and Australia (8%).   

Ø        Agri-food trade with Chile  

South Korea is a net importer of agri-food products from Chile . In 1999, agricultural imports from Chile reached US $14 million against agri-food exports of only US $0.9 million. Agricultural imports from Chile totaled 26 million dollars in 1997, 6 million dollars in 1998 and 14 million dollars in 1999, accounting for just a slight percentage of South Korea ’s total agricultural imports (See Table 8).  

South Korea ’s main agricultural imports from Chile are fresh grapes, kiwi and tomato paste. Most other fruits, including Chilean apples and pears, are forbidden at present due to quarantine regulations. Chilean grapes, which in 1997 accounted for 98% of South Korea’s total grape imports, currently account for more than 90 percent.

Table 8: Chilean Fresh Fruit Exports to South Korea (US$ millions)

   Source : Prochile based on Central Bank of Chile data, KOTIS, South Korea Custom Service  

Climatic and geological conditions, market oriented agricultural policies, and the plantation structure of processing, marketing and logistics make Chilean fruit exports competitive. By comparison, the South Korean fruit industry is characterized by limited arable land, a less temperate climate for growing fruits, an underdeveloped marketing structure, small family subsistence farming and the government support. (Refer to Appendix 2 for a comparison of South Korea-Chile agriculture sector and bilateral trade, 1999)  

1. WTO Agricultural Negotiation

WTO members agreed to initiate negotiations for agricultural trade reform a year before the end of the implementation period, i.e., by the end of 1999. These talks began in early 2000 under the original mandate of Article 20 of the Agriculture Agreement. At the November 2001 Doha Ministerial Conference, the agriculture negotiations became part of a single undertaking in which virtually all linked negotiations are set to end by January 1, 2005.

The first phase of agricultural negotiations consisted of countries submitting proposals for their starting positions. The second phase of negotiations ended with discussions on specific topics and technical details. The next tasks are formulas and other “modalities” for countries’ commitments by March 2003, and for countries to submit comprehensive draft commitments by the Fifth Ministerial Conference in Mexico in 2003. Significant tariff reductions, domestic support and export subsidies can be expected to be the main focus of agricultural negotiations.

In the ongoing WTO agricultural negotiations, South Korea is trying to secure developing-country status. South Korean agriculture still needs some degree of protection, and developing-country status would facilitate gradual liberalization and minimize shocks to local farmers from the market opening. On the other hand, as a member of Cairns group of agricultural exporting countries, Chile supports a substantial opening in agricultural markets and the elimination of export subsidies.
 

Analysis

1. Analysis of the Economic Effects of a South Korea-Chile FTA

Potential benefits
A South Korea-Chile FTA is expected to benefit both countries. While Chile exports raw materials, South Korea exports manufactured goods. According to a study by the South Korea Institute for International Economic Policy (KIEP), an FTA with Chile would boost South Korean exports by $660 million and imports by $220 million, thereby improving South Korea ’s trade balance by about $440 million. The FTA will also improve South Korea ’s welfare by $960 million dollars (See Table 9). South Korean producers of automobiles (occupying 18% in Chilean import market), refrigerators (31%), microwave ovens (69%), washing machines (65%), tires and automobile batteries, textiles, elevators and PVC would be the greatest beneficiaries of a free trade agreement.  

Tariff elimination with Chile will have secondary benefits for South Korea . The FTA’s that Chile has already signed with other countries act to block South Korean exports. For example, preferential tariffs imposed by Chile on Canadian and Mexican exports through FTA agreements block South Korea ’s export of automobiles and tires. A South Korea-Chile FTA will provide South Korean products price competitiveness, enabling them to compete with other countries in Chilean market.  
Mexico, with an industrial structure similar to South Korea ’s, benefited significantly from its own FTA with Chile. Mexican exports to Chile jumped from $180 million in 1992 to $930 million in 1996. South Korea is expected to enjoy a similar export expansion with a Chilean FTA. Furthermore, the FTA has potential for securing an effective gateway to the Latin American market. The Latin American population is a huge potential market for South Korean automobiles and other South Korean manufactured products.  

Potential costs / Sensitive sector
Of the manufacturing sectors, the copper processing industry in South Korea will be most affected by a South Korea-Chile FTA. This is because Chilean copper is leading the world in exploitable reserves, production, and export volume. The mining sector is the most important and competitive sector in the Chilean economy, accounting for more than half of global exports.
 
The most affected industry from a South Korea-Chile FTA, however, is likely to be South Korea ’s agricultural sector. According to the Revealed Competitive Advantage (RCA) indices, relative competitiveness for grapes, plum, kiwi, pears and apples were higher than any other Chilean agricultural products. Therefore, it is likely that the export of such Chilean fruits as grapes, apples and pears to South Korea would increase as the South Korea-Chile free trade agreement entered into force.  
Agricultural imports from Chile totaled  $26 million in 1997, $6 million in 1998 and $15 million in 1999, accounting for a tiny fraction of South Korea ’s total agricultural imports. Moreover, due to their respective geographical locations, the fruit harvesting seasons differ and thus most Chilean fruit imports do not compete directly with local fruits. Though the increase of Chilean fruit imports is likely to inflict some damage on competing domestic fruit producers, the impact on South Korea’s entire agricultural sector would be small. The study by South Korea Agriculture Economic Institute (KREI) predicts that with the complete tariff elimination on the agricultural sector, domestic fruit and vegetable production would decrease by about 0.007 percent while imports would increase by about 96%.  

Conclusion
Some argue against the South Korea-Chile FTA, not because of potential damage to South Korean fruit farmers, but rather because the economic size, purchasing power and trade volume of Chile is relatively small. The spending power of Chile is only 20 percent that of South Korea . Regionalism, however, is an important trend today and a growing number of countries are affiliating themselves with regional trade arrangements in one form or another. FTAs involving South Korean trading partners but excluding South Korea can seriously damage South Korean exporters. KIEP estimates that such non-participation will cost South Korea about US $35 billion worth of lost exports.
 
As a country whose economy heavily depends on foreign trade—total foreign trade represented about 73 percent of South Korea ’s GDP in 2000— South Korea has few BATNA (Best Alternative To a Negotiated Agreement) other than to engage in regional trade agreements. If South Korea does not participate in FTAs, it will lose a golden opportunity to expand economic ties and promote further economic growth and development. A number of recent studies conclude that as countries reduce barriers to trade (both internal and border restrictions), per capita income increases significantly.  
A South Korea-Chile FTA will likely bring sizable gains to South Korea in the long run. South Korea should learn from Chile ’s experience in establishing FTAs, and South Korea should pursue its own FTAs with major trading partners like Japan and the United States. The positive side of an FTA is not limited to growing trade volume. As seen in the case of the EU, the agreement is a catalyst for competition among member nations to accelerate industrial realignment and expedite economic reformation.  
The following table is a summary of KIEP studies on the economic effects of a South Korea-Chile FTA. In assessing economic effects, three basic scenarios are presented. The first scenario is based on complete tariff elimination by both countries across all sectors. The second scenario is based on complete tariff elimination in general sectors and partial tariff reduction for agricultural products and livestock. The last scenario assumes zero tariffs in all sectors except for agriculture and livestock.

Table 9: Expected Economic Effects of a South Korea-Chile FTA (Unit: US$ millions)  

Note: 1) In value terms 
Source; Cheong In-kyo (2000). South Korea-Chile FTA: Background, Economic Effects and 
Policy Implication KIEP Policy Analysis 00-27 
 

2. Commercial Analysis of the FTA Impact on the South Korean Fruit Industry

A South Korea-Chile FTA would likely bring a surge of Chilean fruit imports, affecting the domestic fruit industry. As already stated, Chilean fruit exports, both natural and processed, are highly competitive and maintain a dominant position in the world market. South Korean farmers and agricultural organizations fear that imports of grapes, pears and apples from Chile will dramatically increase with tariff elimination, resulting in decreased sales and domestic prices and reduced income for farmers. South Korean farmers argue that a South Korea-Chile FTA would completely destroy the domestic total fruit industry.  

The domestic grape industry is the most sensitive sector in the South Korea-Chile FTA negotiation. Since 1996, when the domestic grape market was liberalized for the first time, Chilean grapes have accounted for over 90 percent of market share of total imported grapes. Even after the introduction of Chilean grape imports to the domestic market, however, domestic grape production continued to rise. In 1999, domestic grape production amounted to 0.47 million tons. Chilean imported grapes represented only 1.3 percent of the total domestic grape production, as shown by Table 10.

Table 10: Domestic grape production and imports

Note: 1) The number of grape farming households is 53800, which represents 19.3% of the entire fruit farming households in South Korea . 
2) Greenhouse production of grapes accounts for 772 ha, 2.6% of the total grape production. 
Source: KREI, <agriculture outlook> 

That domestic grape production has expanded despite increased imports is partly due to a steady increase in domestic fruit consumption. Per capita consumption of fresh fruit has increased from 41kg in 1990 to 58kg in 1997. That imported grapes have had insignificant impacts on domestic grape production, however, is mainly due to different marketing seasons for imported and local grapes. As revealed by Table 11, Chilean fruit imports are largely received during the March-June period, South Korea ’s non-marketing season. Local grapes start to enter the market by July, with an exception of the greenhouse-produced grapes, which are being released by May. Thus, for the most part, the Chilean imported grapes are unlikely to compete with local grapes.

Table 11: Comparison of marketing season between Chilean grapes and local grapes