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FTAs help cushion inflation risks (Korean Herald)

While steep commodity prices and record-high oil costs fan inflationary pressures around the globe, free trade agreements can be a boon - rather than a blight - regardless of their controversies.

Countries with FTAs under negotiation or yet to be ratified may want to accelerate the process, because such trade pacts can cushion consumers from rising costs, experts say.

"Free trade agreements definitely do have a cushion effect on consumer prices and can provide stabilization," said Hong Seung-in, senior deputy director of the FTA Negotiation Coordination Division at Seoul's Trade Ministry, in a telephone interview. "Tariffs are removed in free trade, so this means consumers can buy goods without this extra burden."

Although it depends on the category, Hong said that under an FTA the prices of some goods could drop by 12 percent. Korea's average import tariff rate with the United States, for instance, is 7 percent.

In the case of the Korea-U.S. FTA, both sides agreed to remove tariffs on 94 percent of manufactured goods within three years once the accord takes effect, while duties on all goods would be removed in 10 years.

Consumer prices of imported goods from the United States are projected to drop between 6.1 percent and 6.2 percent, according to Lee Hang-koo, an economist at the Korea Institute for Industrial Economics and Trade. He expects a trade pact with the European Union to generate the same effect, although negotiations are still underway.

Comparatively, agricultural imports make up about 10 percent of imports from the United States. Due to the sensitive nature of agricultural goods, most tariffs are to be phased out throughout an average span of 10 years.

With Korea dependent on imports for most of its grain needs, Lee expects free trade to ease the shocks of global inflation as well. Rice, the nation's staple food, has also been exempt from FTAs.

According to Lee Jung-hwan, chief economist of GS&J, a private think tank, agricultural tariffs are significant, with some as high as 700 percent. The lowest is about 2 percent, while the average ranges between 20 percent and 40 percent for products like fruits and livestock.

Lee of GS&J, however, said an FTA would have little relief on grain import prices. The duty on wheat is 3 percent, and duties on corn and grains used for fertilizer are merely 1 percent.

The price of beans, on the other hand, can drop as much as 81 percent.

Free-trade partners can also help each other drive down prices while providing competitive goods, said Lee, the economist at the Korea Institute for Industrial Economics and Trade.

"If the Korea-U.S. FTA is ratified, tariff elimination could boost the competitiveness of Korean brands, for instance, against cheaper Chinese goods flooding into the world's largest consumer market," the trade expert explained. He emphasized the favorable prospects for Asia's fourth-largest economy, which has been recording a decline in U.S.-bound exports.

"For a country like ours that depends on exports to drive the economy, an FTA is very important," Lee told The Korea Herald.

Seoul is also keen on securing free-trade deals with as many strategic partners as possible, which would open up the country more to adopt international standards, take it up to par with advanced countries, and also strengthen its global competitiveness. The country is currently negotiating a deal with Canada, while preparing to begin discussions with China and resume talks with Japan.

Free-trade partners, however, need to be wary of some opposing factors.

Hong warned that the cost-saving impact also depends on the exchange rate. A weaker domestic currency means having to pay more for imports.

He also cautioned that countries more sensitive to inflation and high oil costs would have to raise the prices of their goods.

"This means that if our trading partner can't cope with inflationary pressures, the cost burden would naturally be reflected in the final marketing product," Hong said.

But Lee of KIET offered a more uplifting view.

"Producers are constantly pressured to find cost-effective ways of production with rising raw material costs, which ultimately means competitive prices for consumers," Lee said.


By Yoo Soh-jung


(sohjung@heraldm.com)

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My Thoughts,

FTA has been praised by many of econmists. However it has been suffered much in the reallity. FTA between Korea and U.S. is still not copleted. Although it seems that we as koreans have advantages from it, it is not so easy to say we should do this in the public. Since it has both good and bad sides. When I first learn Economics in the class the very first chapter claimed that the better standard of living means better economy. Even though I would agree with some part it is not just like that.
This article is one of a good example. For it says it's good to have FTA, they didn't talk about the people's impact who might loose their job or their wealth. FTA finally could better-off for the county's economy but it could be good or bad to a person who lives in this community. so my opinion would be this. We need to approch this case with political approch. Polititions need to come up with this issue and make people to understand or make consensus among the people.