April 02, the United States and the South Korea reached a free trade agreement which lifts tariffs on wide range of products except rice. The agreement is waiting to be approved by both countries’ legislature. This is the United States’ biggest trade deal since the North American Free Trade Agreement in 1993 and is the first trade deal with major Asian economy.

What products are included in the Agreement?

About 90 percent of both countries’ tariffs on industrial goods will be eliminated immediately and will be expanded to the remainder in three to 15 years. Two of the most notable goods in the agreement would be auto and beef.

In 2005, the United States trade deficit with the South Korea was about 16 billion dollars. Auto trade accounts more than 80 percent of it. Some 4,000 U.S. made vehicles were sold in the South Korean compare to 800,000 Korean made vehicle sold in the United States. In the agreement, Seoul promised to change its tax system on autos which will make U.S. cars less expensive to sell in Korea.

The South Korean used to be a major importer of Beef from United States. Before 2003, the South Korean spent 850 millions dollars on U.S. beef a year. However, the South Korean government put a ban on the import of U.S. beef due to the fear of mad cow disease outbreak. Although, Seoul agreed to import boneless beef from United States last year, they were still hesitated to buy U.S. beef. Three shipments were rejected after finding tiny bone fragments in the shipments.

What is not included in the agreement and who are opposing?

As many analysts expected, rice is not included in the free trade agreement. The South Korean government has a hard time to come to a deal with United Stats on Rice because of the opposing from its 940,000 rice farmers in fear of losing their jobs.

Why not importing U.S. rice which is cheaper?

In the South Korea, rice is planted by small individual farmers with average annual income of about $30,000. However, planting in small scale, which is more labor incentive, drove the rice’s price up while U.S. rice is cheaper because of mass production and heavily in using machines. Rice farmers in the South Korea do not want to see the flood in of U.S. rice because it will drive the price of local growth rice as well because of the available of cheap alternative.

On the other hand, some people suggest that the South Korea should import cheap rice from the United States and use the land to plant more profitable corps. The following is quoted from an article from The Wall Street Journal:

…if rice is excluded from the deal, South Korea’s economic benefit is estimated to be substantially reduced. Rice prices will remain high and land that could be more profitably used for other crops will remain tied to rice.

However, it is more ideal than realistic. Rice is the main diet in the South Korea and many other Asian areas. About 5.5 million tons of rice is consumed in South Korea and only 246,000 tons is imported. There is no other crop which has as sizeable market as Rice. If one farmer switches to certain crops, other farmers will follow and quickly saturate the market and eventually drive down the price. In the worst case, those rice farmers may simply lose their job and asking for government’s financial support.

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