Global Commentary
The article is about South Korea’s choice to engage in a Free Trade Agreement (FTA) with
the Philippines, focusing specifically on the removal of tariffs on Filipino bananas within 5
years. It is expected that through trade liberalization, which refers to these countries moving
towards freer movement of goods and services across borders, this step would result in
improved international competitiveness and economic efficiency due to division of labour.
Currently, South Korea imposes tariffs on imports, including a 30% tariff on Filipino bananas
and a 36% tariff on processed Filipino pineapples as taxes levied for protecting local
industries from foreign competition. These levies could be considered regressive tax
measures since they could be burdensome to low-income earners in South Korea resulting
into reduced domestic consumer surplus along with unequal income distribution.
For the Philippines, the existence of tariffs may lead to a “tariff disadvantage,” resulting in
lower export revenues as Filipino fruits become more expensive compared to other South
Korean imports. This may also decrease real incomes through decreasing fruit demand
causing structural unemployment within Philippines. Furthermore, while South Korea looks
set to eliminate tariffs on Vietnamese bananas, it might only serve to worsen the competitive
disadvantage that hinders the Philippines by possibly lowering demand for Filipino bananas
and shifting fruit production into Vietnam. Such an action could thus cause inefficiencies in
resource allocation leading towards welfare loss.
FTAs are agreements between countries where barriers against one another are eliminated
with an aim of promoting trade liberalization. As such, South Korea’s FTA with the
Philippines looks forward towards phasing out duties on Filipino bananas over five years
thereby enhancing bilateral trade between them. This is illustrated in the diagram below:
Figure 1: The banana market in South Korea after 5 years.
It is not stated in the article if South Korea has local bananas. The diagram therefore
addresses the importation of bananas from the Philippines to South Korea. In South Korea,
the imports of bananas range from Q2-Q3 prior to FTA. Nevertheless, after removing 30%
tariff, world price falls from P(w+t) to Pw which makes Filipino bananas affordable for
consumers. As a result, imports rise from Q2-Q3 to Q1-Q4. This leads to an increase in
consumer surplus thereby reducing their willingness pay.
However, c+g producer surplus decreases to g thus indicating inefficiency of resource
allocation and loss of welfare as countries exporting to South Korea will earn less than before
hence other producing countries incur losses although aggregate area remains constant. It
signifies that despite enhancing economic efficiency it comprises different actors.
Nevertheless this FTA promotes trade creation due to substitution of high cost bananas from
other countries by low costs Filipino banana. This may enhance access into foreign markets
for Philippines businesses that allow them enjoy economies scale and increased profitability.
Additionally, Economic cooperation between South Korea and Philippines can improve
political stability which boost confidence on economic front. Consequently through FTA
smart sustainable investments might find place in a robust market.
On top of eliminating fruit tariffs, the FTA will remove preferential market access for
targeted food products by eliminating 1531 tariff lines. This means that Philippines’ current
account position is expected to be improved because it will reduce trade deficit and decrease
national debt. Moreover there could be less reliance on few trade partners that would help
enhance economic efficacy as well as make it more resilient towards business cycle
fluctuations. Also serving as export hub may lead into generation of jobs in Filipino food
industry hence raising total output in tertiary section which will promote economic growth
and improve standards of living.
In addition, South Korea wants 9,909 lines for tariffs abolished on its industrial goods
imported from the Philippines. This would enable the country to maximize its capacity
utilization in the secondary sector by reallocating resources to low-cost industrial products.
So indirectly, this will generate a multiplier effect whereby industries in anyway, create
demands for other sectors thereby resulting more works in the Philippines and hence more
total output.
In addition, South Korea plans to undertake a process of getting rid of the 36% the tariff on
pineapples over a duration of 7 years. This may thus lead to lowered prices for Filipino
imports that could in turn improve demand for the Philippine peso and cause currency
appreciation. It could signal higher interest rates, which may attract foreign investment
thereby enhancing the country’s prospects for economic growth. Furthermore, specialization
can be promoted by both countries as they exploit their comparative advantages and
maximize productivity through exporting what they are best at producing. This highlights
how the mechanism of comparative advantage supports efficient allocation of resources and
maximizes social welfare.
However, eliminating tariffs on Vietnamese bananas completely within the next year by
South Korea could create customer loyalty for Vietnamese exports thus limiting market
access for Filipino banana exports. While this might increase consumer welfare in South
Korea, it is likely to pose problems to exporters from Philippines However, stronger bilateral
relations could give Filipino exporters an opportunity to penetrate new markets in South
Korea thus overcoming reduced market access effects. Nonetheless, both nations would
become more vulnerable to supply chain disruptions due to heightened interdependence.
Weaknesses in one trading partner will result into delays in imports from another hence
lowering overall efficiency.
To conclude, a free trade agreement between these two countries has the potential of boosting
economic efficiency through better diplomatic relations and increased specialization. The
deal allows the mechanism of comparative advantage to work effectively resulting in efficient
resource allocation and hence economic growth coupled with welfare maximization.