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Friday, December 13, 2013

FTA with Korea – We couldn’t afford to miss the boat

By Augusto Semmelroth  |  Source: Korean International Trade Association, MLA

Key points

  • South Korea is our fourth largest export market, and the signing of the FTA will guarantee our competitiveness in their market.
  • Australia still holds 67% of the Korean market share despite US tariff benefit.
  • Export prices to rise in 2014 as a result of lower US and Australian export capability (reduced domestic production).


2031-12-12 FTA With Korea FIG 1

2031-12-12 FTA With Korea FIG 3

2031-12-12 FTA With Korea FIG 3

On 4 December, Australia and South Korea signed the much awaited free trade agreement (FTA). This was not only a major advance in global trade negotiations, but also a crucial achievement for the Aussie beef industry. How are we positioned to take advantage of the agreement, and how well represented are we in the Korean beef market?

South Korea has been the long-standing third largest beef export market for Australia. While losing this position to China earlier this year, Korea remains a critical market in both volume and value terms. In addition, the country continues to be the second largest market for chilled beef exports.

This scenario was not always the case. Back in the early 2000s, Australian beef exports to Korea averaged only 70,000 tonnes swt a year and accounted for roughly 25% of the Korean import market. The largest supplier of imported beef was the US, with exports reaching a record 224,036 tonnes swt in 2003, equivalent to 69% of the Korean market share.

After the BSE outbreak in December 2003, and subsequent bans for US beef, imports from the US declined sharply in 2004. Figure 2 shows the rapid change in the dynamics of Korean beef imports during 2004-07. The main beneficiaries of the US misfortune were notably Australia and New Zealand. Aussie market share in Korea jumped from 21% in 2003 to a record 76% in 2006.

In 2007, Korea eased import restrictions for US beef to see exports from our main competitor gradually increasing in succeeding years. By 2011, US market share was back up to 31%, denting Aussie’s share to 58% (Figure 2).

In early 2012, the US signed an FTA with South Korea whereby the 40% tariff for US beef imports would be phased out over 15 years. Right now, US exporters are benefiting from a 5.3% advantage (34.7% tariff) to Aussie beef, which is still carrying the 40% tariff. Interestingly, despite the improved access and tariff reduction, the US still managed to lose market share to Australia since the FTA was signed (Figure 3). 

Last week, the Prime Minister announced the conclusion of the much-anticipated FTA between Australia and South Korea. As a result, Australia will also benefit from a gradual decrease in the import tariff, similarly to the US. That said, the 5.3 percent differential will remain unchanged for years to come as it took us almost two years to sign a comparable agreement.

What does this mean?

The ratification of the FTA last week should be much welcomed by our beef industry. Failing to ratify the agreement before January 2014, the tariff gap to the US would continue widen at rate of 2.66% per year.

As mentioned before, the US has not been able to benefit from their tariff advantage as they have prioritised expanding their exports to Japan and other south East Asian countries. As such, this is a great opportunity for us to continue to increase our participation in the Korean market.

Going forward, US beef production is expected to decline 7.5% in 2014 which will diminish their export capability by a similar 7.5%. As a result, competition in both Korean and the Japanese market is likely to ease in the next 12 months. That will also certainly support higher beef prices in international markets.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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