U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

exports. Estimates from the Commission’s economy-wide analysis of the long-term effects
of tariff and TRQ liberalization indicate that full implementation of the agreement would
increase U.S. dairy exports by $175–336 million (249–478 percent). 217 Based on current U.S.
exports and Korean protection levels, additional U.S. dairy exports to Korea would likely
consist primarily of cheese, whey, lactose, and infant formula (also known as prepared dry
milk). As a result of these estimated increases in exports to Korea, the economy-wide model
estimates that output and employment in the dairy sector could increase by 0.2 percent to
0.5 percent.
The Korean dairy industry is currently unable to supply total Korean demand for dairy
products. Fluid milk is supplied solely from the domestic dairy industry, but currently onehalf
of nonfluid consumption, which includes powdered milk, is supplied by imports. 218
Although the total number of dairy cows has expanded rapidly and production per cow has
increased by 2 percent per year since the early 1990s (to 83 percent of the U.S. average),
milk consumption has outstripped supply. 219 To meet this excess demand, the United States
supplied 17 percent of Korean dairy imports in 2005 and 18 percent in 2006. 220 In 2006, the
U.S. dairy industry accounted for 56 percent of Korean whey imports, 17 percent of cheese
imports, and 5 percent of infant formula imports.
Under the Uruguay Round Agreement, Korea converted import quotas for most dairy
products to TRQs, with relatively low in-quota tariff rates and very high, but in some cases
not prohibitive, over-quota rates. During the 10-year implementation period for Uruguay
Round reductions, Korea lowered over-quota rates but did not reduce in-quota rates. 221
Current tariffs for certain dairy exports to Korea are relatively high. For example, dairy
spreads and ice cream are subject to an import duty rate of 8 percent ad valorem; lactose
syrup, 20 percent duty rate; cheeses and infant formula, 36 percent import duty rate; and
whey products (including whey powder and modified whey), 49.5 percent duty rate.
The U.S.-Korea FTA establishes a variety of tariff elimination periods on Korean dairy
imports from the United States. The phase-in periods are generally lengthy, particularly for
those goods that are likely to be competitive in the Korean market, thereby limiting the initial
economic benefit of the agreement. Korea would phase out its current 36 percent duty on
milk and cream and yogurt products over 10 years, its 49.5 percent duty on lactose
(nonsyrup) over 5 years, and its 8 percent duty on ice cream over 7 years; its 20 percent duty
on casein and caseinates over 7 years; and its 8 percent duty on milk albumin over 5 years.
Only modified whey used for animal feed receives immediate duty-free treatment under the
agreement.
The FTA contains five dairy TRQs, all of which provide immediate duty-free treatment for
in-quota quantities and 3 percent annual growth rates of those quantities (table 3.10). 222 The
217 Impact relative to an estimated 2008 base. See chap. 2 of this report for additional information
regarding the economy-wide analysis.
218 Lee, Sumner, and Ahn, “Consequences of Further Opening of the Korean Dairy Market,” 2006, 239.
219 Ibid.
220 California Farm Bureau Federation, “United States-South Korea Free Trade Agreement: What it
Would Mean for California Agriculture,” 14.
221 Lee, Sumner, and Ahn, “Consequences of Further Opening of the Korean Dairy Market,” 2006, 240.
222 The dairy TRQs cover milk powder and evaporated milk, food whey, butter and other fats derived from
milk, cheeses, and prepared dry milk. These TRQs are specific to the United States, although most of these
products are currently subject to first-come, first-serve TRQs when exporting to Korea. All of the TRQs
except the TRQ for milk powder and evaporated milk are eventually eliminated under the agreement, and at
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