Korea - Australia Free Trade Agreement Oct. 9, 2014
The Korea - Australia Free Trade Agreement (KAFTA) was officially signed by both parties on April 8th, approximately two years after the KORUS FTA went into effect in March 2012. As a direct competitor in lucrative products such as beef and wine, KAFTA will pose a greater challenge for US exporters to Korea. Details of the agreement are contained in the following report.
General Information: The Korea-Australia Free Trade Agreement (KAFTA) was officially signed by both parties on April 8th, 2014, approximately 5 years after negotiations began in May 2009. KAFTA is expected to formally enter into force the end of 2014 or the latest early 2015, following ratification by the respective countries’ legislative bodies.
Based on Harmonized System for Korea (HSK) product lines, 90.8% of Australia’s imports from Korea and 75.2% of Korea’s imports from Australia will become duty free upon implementation of the agreement. Australia will eliminate tariffs on 99.5% of the products from Korea within 5 years, while Korea will eliminate tariffs on 94.3% of the products from Australia within 10 years.
Among all industries, KAFTA will have a huge impact on Australia’s agricultural exports to Korea. Australia is already a big agricultural exporter to Korea. In calendar year 2013, Australia was the fifth largest agricultural exporter to Korea with a monetary value of US$2.4 billion and a market share of 7.7%, according to Korea Trade Information Service.
Top 7 Countries that Export to South Korea in CY 2013
(Unit: Million U.S. dollars)
The United States of America
People’s Republic of China
Even though the United States has a bigger market share in Korean imported agricultural market than Australia, the two countries are competitors in certain products, such as beef and wheat. Therefore it is worthwhile to look into the contents of KAFTA.
For agricultural products, 61.5% of Korea’s imports from Australia based on HSK product lines will become duty free within 10 years. Exceptional clauses, such as longer tariff removal schedule, tariff rate quota (TRQ), agricultural safeguard (ASG), and exclusion, are applied to the other 38.5% of HSK product lines. This is a more conservative FTA compared to Korea-United States Free Trade Agreement (KORUS FTA) or Korea-EU FTA in terms of agricultural trade.
KAFTA is expected to benefit Australian agriculture exports to Korea with improved market access. Almost 17% of Australia’s exports will become duty free upon entry into force of the KAFTA is expected to benefit Australian agriculture exports to Korea with improved market access. Almost 17% of Australia’s exports will become duty free upon entry into force of the agreement. When KAFTA is fully implemented, 90% of Australia’s agricultural exports to Korea will enter duty free. The Australian government predicts that under KAFTA, exports of agricultural goods to Korea will be 73% higher, compared to an increase of 25% for overall exports to Korea. This will contribute to a 5% increase in total Australian agricultural exports worldwide.
As indicated above, Korea employed exceptional clauses due to concerns over sensitivities in the agricultural market, of which 38.5% (579 products) of agricultural products are handled exceptionally. For example, 158 very sensitive agricultural products, such as rice, powdered milk, and frozen pork belly, are excluded from concession. In addition, tariffs on 421 other sensitive products will be eliminated over 10 years. Moreover, Korea sought to protect its agricultural industry by employing tariff rate quota, agricultural safeguard, seasonal tariff, and partial tariff reduction.
Major export products from Australia to Korea are beef, wheat, malt and malting barley, rice, cheese, and wine. Australia currently has the largest market share for beef in Korea. The size of Australian beef imports increased rapidly since December 2003 when US beef imports were stopped due to bovine spongiform encephalopathy (BSE) case in the United States. The report on “Changes in Supply and Challenges of Agriculture due to the Implementation of FTA” by the Korea Rural Economic Institute (KREI) revealed that in 2013, Australia had 55.1% share (in terms of volume) in the imported beef market, while the United States was the second with 33.7%.
Once KAFTA enters into force, it is expected to influence not only Australian agricultural exports to Korea, but US agricultural exports to Korea as well.
The United States has been benefitting from KORUS FTA since 2012. In the case of beef, the United States currently has an 8% tariff advantage. However, when KAFTA is implemented, Australia will also benefit from a lower tariff in the Korean market. The advantage will lessen to 5.4% if KAFTA is implemented during 2014. By 2028, beef from both countries will enter duty free. A tough competition is expected in the imported beef market, as Australia gains price competitiveness with KAFTA. The implementation of KAFTA will not only increase competition among imported products in Korea, but it is expected to help increase the market size through lower prices, which at the end of day should not only benefit the Korean consumers but also increase Korea’s total import volume