Purchasing a bottle of Kentucky bourbon whiskey in Seoul, South Korea, has for years meant paying a stiff 20 percent tariff.
Until now.
With the March implementation of the Korea-U.S. Free Trade Agreement (KORUS FTA), the Korean tariff on Kentucky’s signature libation was completely eliminated, along with duties on Kentucky-manufactured motor vehicle brakes and parts, while tariffs of varying percentages on products ranging from plastics to Thoroughbreds are being phased out within the next five years.
Strategically located between Japan and China, Korea has opened its market wide, ending decades of shielding domestic producers from global competition and dispatching its ambassador to the United States to meet with business and government leaders across the country and spell out details of the agreement.
“We were convinced that this agreement will benefit businesses in both countries,” said Ambassador Choi Young-jin in an exclusive interview with Business Lexington while in Lexington on Monday for Kentucky’s annual World Trade Day Conference. “We are aiming at a strategic objective. We are living in a very important transitional period because of the rise of China, which is the most important preoccupation for all of the countries in the region: How to manage the rise of China. We think the best way to manage it is through trade, creating interdependence.”
Tami Overby, U.S. Chamber of Commerce vice president for Asia, said the new treaty levels the playing field for U.S.-Korean trade.
“The U.S. already is a pretty open market. The U.S. average tariff on Korean exports was only 3.5 percent. Where we’re going to see the biggest improvement is the average applied tariff that our products faced in Korea was over 12 percent. Within five years, 95 percent of those are going to be completely eliminated. And within 10 years, almost all tariffs are eliminated. What that means is that American products are going to suddenly be more cost-competitive in Korea, particularly compared to our competitors.”
Driving U.S. interest in achieving such a vast improvement in relations with a Pacific trading partner was competition from across the Atlantic.
“It was critical that the U.S. ratify this as quickly as possible, because the Koreans signed a similar agreement with the Europeans, and it went into force last summer. So they have a little bit of a head start. But as far as competing against Japanese companies or Chinese companies, we will have a tariff advantage,” Overby said, noting that neither Japan nor China has a trade deal with the Koreans.
Beyond eliminating the 20 percent tariff on Kentucky bourbon, an 8 percent tariff on Kentucky-manufactured automotive parts was immediately eliminated. A 6.5 percent tariff on silicones will disappear within three years, along with an 8 percent levy on acrylic polymers.
“Also, chemicals,” noted Overby. “Last year, Kentucky exported almost $200 million worth of chemicals to Korea. There really is a lot of trade now, and this is going to make it more competitive.”
Kentucky also exports beef and bison to Korea — $3 million worth in 2011. And in the same year, $160 million worth of Kentucky uranium was shipped to Korea for power generation. Other exports, according to data provided by the Korean Embassy, include resins and synthetic fibers ($74.3 million), pharmaceuticals ($49.4 million), fabricated metal products ($24 million), industrial machinery ($21.8 millon) and general purpose machinery ($13.5 million.)
Korean manufacturers last year did a brisk business with Kentucky in semiconductors and components ($345.1 million), general purpose machinery ($48.5 million), motor vehicle parts ($38.7 million), aerospace products and parts ($31.9 million), resins and synthetic fibers ($15 million), chemicals ($12.7 million) and metalworking machinery ($11.5 million.)
Korean investment in the United States in 2011 far overshadowed the reverse, totalling $14 billion — 10 times that of American investments in Korea. With the elimination of import tariffs, the trade deal seems weighted in favor of U.S. interests.
“In the short term, that’s absolutely true. Our market’s already widely open. The Korean market has had higher tariffs,” said Overby. “But I think what the Korean leaders rightly focused on is, by opening their market to America — and America is the most competitive market in the world — it’s going to help reform and liberalize even further the Korean market, and that’s going to help them remain competitive in the medium and long term.”
One Kentucky export to Korea that has seen eye-popping growth since 2005 is Thoroughbred broodmares. From 2005 to 2011, sales have increased 14-fold, from $483,200 to $6.9 million. Horse racing is enjoying growing popularity in Korea, which has two major tracks with a third planned. With the treaty, Korea’s 8 percent tariff on purebred breeding horses is being phased out over five years.
Ambassador Choi said the Korean-U.S. Free Trade Agreement serves as an important benchmark as his country looks to strengthening trade with its immediate neighbors.
“We need it, because we are facing very stiff competition from both Japan and China,” he said. “They do not have FTAs with the United States. Only Korea has it. So we think it will make our economy more healthy and competitive. We would like to challenge the Chinese economy to open its market, especially government procurement, intellectual property and services. We have one-and-a-half years to go with negotiations of a Korea-China FTA, and this FTA will serve as a reference for us.”