1. John Dyck Hui Jiang Anita Regmi Ralph Seeley Mark Thompson
A Tariff-Line Approach to Capturing Trade Gains from an FTA: the Case of the Proposed KORUS FTA
November 16, 2007
Our presentation illustrates a method of analyzing a trade agreement, but also teaches about the nature of the proposed KORUS FTA, which is an ambitious, very detailed agreement. In essence, the problem we address is “how do you assess a mountain of details?”
On the program, only 3 authors are listed. Since we turned in the prospectus for our presentation last summer, we have added 2 authors: Hui Jiang and Mark Thompson, both of USDA-FAS.
John Dyck
Hui Jiang
Anita Regmi
Ralph Seeley
Mark Thompson

2. Exporter Shares of Korea's Ag Imports
Korea is an important market for U.S. agriculture—often the 4th, 5th, or 6th largest country markets for our exports. However, the U.S. share of Korea’s agricultural imports, once dominant, has declined over time. First China, and, more recently, the EU, ASEAN, and Australia have taken some share from the U.S.

3. Ten Percent of Ag Lines Have Tariffs > 50%
But they account for 93% of lines with TRQs
and 34% of US exports to Korea in
It’s important to recognize that, in agriculture, the proposed KORUS FTA is very detailed. It was negotiated for each tariff line, at the 10-digit level. Thus, the starting point of analysis is to examine Korea’s existing tariffs.
Korea’s agricultural trade is open in important sectors, making it a very large agricultural importer. However, strong protection remains for some products. The 10% of tariff lines in agriculture with bound tariffs over 50% are often in tariff-rate-quotas. About one-third of U.S. agricultural exports to Korea is in these sensitive categories.

4. Proposed KORUS Agreement
23 staging categories (tariff reduction schedules) for ag imports to Korea
16 new US-specific TRQs established, with scheduled increases
30 products with special safeguards
In most cases, tariffs reduced slowly over the implementation period,
No tariff reductions for rice, or for over-quota rates on certain dairy products
The KORUS Agreement is not yet ratified by the legislatures of the two countries. However, if the proposal is ratified, this is one way to characterize its effects. Again, the agreement has a distinct settlement for each tariff line in agriculture, and this characterization is about as general as we can be.

5. Proposed TRQs for Korean imports of U.S. products
This slide is hard to see. It shows the TRQs proposed for imports from the U.S. Let me point out some interesting aspects. In most cases, the TRQs are established with an initial quantity which is increased each year until, at the end of the agreed period, the TRQ disappears, and all imports from the U.S. in that category are given duty-free entry into Korea. The implementation period before full liberalization of U.S. imports varies from 9 to 17 years. However, in 5 cases, the TRQ lasts forever. In these cases, it also continues to increase forever, at a rate of 3% per year. Some of the indefinite TRQS are particularly important: milk powders, fresh potatoes, and oranges.
Note: Only certain 10-digit lines are included in the TRQs.
The 4-digit HS groups represented here also include non-TRQ 10-digit lines.

6. A Tariff-Line Approach in Trade Analysis
Avoids biases from aggregating tariff lines.
Allows better representation of tariff details.
Allows consideration of TRQs and other product-specific details.
Allows handing multiple tariff lines per TRQ, and multiple TRQs per tariff line
BUT
Uses a static, partial-equilibrium model, where the only factor influencing trade for an HS-10 line is the import price, assumed to be directly affected by a tariff reduction.
No cross-product effects are incorporated.
The negotiators on both sides agreed on what the Korean and U.S. tariff lines were, and what the initial tariffs were. Using shared spreadsheets that laid out the full set of tariff lines, they went back and forth until agreements were reached.
We inherited the final, agreed spreadsheet for the Korean tariff commitments. In a sense, it was natural to use an approach that interpreted or modeled the agreement on a line-by-line basis. Here are some of the trade-offs we faced when we used the Cline model, which has very specific, but minimal input requirements.
Here are some of the strengths and weaknesses of the approach:
Note that this approach does not take into account growth of the economy over the implementation period. Each year is treated in comparison to the base year. Economic growth would be expected to change the demand level over time.

7. Analysis of Non-TRQ Lines
Cline Model
We used the Cline model, originally developed by William Cline and others during the Tokyo Round. It requires base-year import values, an elasticity of demand for a Korean import from the U.S. with respect to the import unit value; and detail about the tariff reduction in each year.
There is an error: t1 is the new ‘U.S. rate’, not MFN
The percentage increase in import value equals the percentage change in the import price caused by the tariff reduction, multiplied by the import demand elasticity.

8. TRQ Lines: Non-Residual-Trade Formulation
[in-quota import price] = [world price] + [in-quota tariff]
[over-quota import price] = [world price] + [over-quota tariff]
[total imports] = Min ( [TRQ], [in-quota imports])
+ Max (0, [over-quota imports] – [TRQ])
In the case of TRQs, we used a formulation adapted from Morath and Sheldon (1999). Note that we assume (i.e., force) the U.S.-specific TRQs to fill the in-quota amount. That’s the Min feature in the total imports equation.
Total imports equal the imports that would be taken at the in-quota tariff, with a ceiling of the TRQ quantity, plus any imports exceeding the TRQ, that would be taken at the over-quota tariff.

9. Example 1: Chilled beef
Pre-existing tariff treatment: simple ad-valorem tariff of 40%
Competitors: Korea, Canada, Oceania
KORUS phase-out: 15 years
Final tariff for US product: 0
Trade increase for US using Cline approach, at year 15: $21 million
We will use 3 examples from our work to illustrate how the agreement operates, and how we model the change.
Note for chilled beef, there is no WTO TRQ, and no U.S.-specific TRQ is envisioned. This is a simple application of the Cline model.

10. Example 2: Corn for processing
Pre-existing tariff treatment: WTO TRQ and annual adjustment TRQs; in-quota 2%, over-quota 328%
Main use is corn sweeteners; competing supplies from South America, China, South Africa
US would get 0 over-quota tariff after 7 years
KORUS phase-out: 7 years
Effectively permits expansion of corn processing industries: unlimited inputs from US
Trade increase for US using TRQ formulation, at year 7: $41 million
For corn for processing, there is a WTO TRQ and, each year, Korea has been establishing a more liberal ‘adjustment’ TRQ. The agreement immediately drops the in-quota tariff for U.S. products to 0, compared to 2% for the competitors. After 7 years, the TRQ ceases to apply to the U.S., and tariffs on all U.S. imports will be 0, without a limit.
Korea does reserve the right to apply a safeguard mechanism to U.S. imports. This can only be done once, and the maximum length of the safeguard is 3 years. The safeguard mechanism disappears in year 8 of the implementation period.

11. Example 3: Oranges
Pre-existing tariff treatment: TRQ with 50% in-quota tariff; 50% over-quota tariff
Competitors: Korean tangerines
US gets country-specific TRQ, rising 3% per year indefinitely, from a small base
0 tariff within US TRQ; 50% over-quota
Trade increase for US assuming complete use of US TRQ, at year 15: $24 million
In this case, a small, U.S.-specific TRQ is established, which increases at 3% per year, indefinitely. Outside this quota, the tariff remains at the current level of 50%. In this case, we assume that the U.S. TRQ will be filled with imports that would not otherwise come in. Thus, new trade of $24 million.

12. Bottom line KORUS FTA has not been ratified
All analyses point to beef and pork as biggest potential US export gains
Challenges to analysis:
Long, uneven phase-in of concessions
How should economic growth be handled?
Need to capture meat/feed tradeoff
Cross-price effects
Strength of this analysis:
Captures specific treatment for each tariff line
Also, trade growth in model is small or 0 if initial level is small or 0.