How the benefits of KAFTA are shared – Case study: Australian beef

16.04.2018 Heath Baker

The Export Council of Australia (ECA) interviewed a meat importer that specialised in Australian beef. Meat is one of Australia’s biggest exports to Korea, and Korea is one of Australia’s biggest meat export markets.

With rising incomes, Korean demand for beef is growing strongly. In Korea, Australian beef competes with American beef and the local Korean ‘Hanwoo’ beef. Koreans prefer Hanwoo beef, but it is a premium product and supply is limited. With increasing demand, prices for Hanwoo are rising to the point where most Koreans can only afford to buy it for special occasions.

Without KAFTA, Korea’s imports would be dominated by American beef due to the Korea-US FTA (KORUS) which entered into force in March 2012. After KAFTA entered into force in December 2014, Australian beef has been able to stay competitive with American beef—although American beef will retain a 5.34% tariff advantage every year until 2027. Perhaps the bigger advantage the US has is that the volume of its beef imports to Korea are well under the safeguard level every year, whereas Australian imports revert to a 40% tariff once it exceeds the safeguard levels (which it has done each year since KAFTA came into force).

In practice, this means that the US has a 5.34% tariff advantage for around nine months of the year, and 19% (and growing) for the remaining three months.

Being a globally traded good, Australian beef prices are set by the market. With Hanwoo and American beef both popular with Korean consumers, there is little room to shift pricing of Australian beef in the Korean market. The Korean importer is a price-taker for both buying beef from Australia, and selling it in Korea.

While the importer makes a sufficient margin for most of the year, it makes a substantial loss during the period when KAFTA safeguards are triggered for Australian beef. It is not an option to stop importing when the safeguards are triggered: being a consumer product, the Australian beef brand will suffer if it is not available year-round. So instead, the importer puts up the price a small amount; not enough to significantly impact Korean consumers’ perceptions of Australian beef, but enough to dampen demand and go a small way to offsetting their losses from the temporary tariff hike.

In the period each year when safeguards are not triggered for Australian beef, the benefits of KAFTA are shared between consumers, the exporter and the importer.

Consumers get greater choice and lower prices, while exporters and importers get higher volumes and therefore more revenue. However, when the safeguard tariff rates kick in, while there are disadvantages for consumers and exporters, the burden mainly falls on the importer. The beneficiaries of the safeguards are not local producers, but American exporters—as the supply of Hanwoo beef is limited, it is only American beef exporters who can enjoy the benefits of satisfying the additional demand.

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