South Korea: Policy

Overview Basic Information Trade Policy Issues and Analysis Recommended Readings Recommended Data Related Links

Rice Self-Sufficiency
Uruguay Round Commitments
Market Access and Domestic Policies for Rice
Market Access for Products Other Than Rice
Aggregate Measure of Support

South Korea, a major food-importing country, has tried for more than three decades to strengthen its own agricultural production and avoid imports. The Government's trade policies imposed strong barriers to imports, and government policies strongly supported farm prices and production of certain commodities within closed borders. Korea's import barriers to agricultural products began to be reduced, first through negotiations required under the General Agreement on Tariffs and Trade (GATT) in the late 1980s, and then under the terms of the Uruguay Round Agreement on Agriculture (URAA), signed in 1995.

The two major goals of South Korean agricultural policy are self-sufficiency and parity between farm and urban household incomes. The Government uses strong producer price incentives and import barriers to achieve these dual goals. Domestic production of rice, barley, corn, soybeans, and tobacco is subsidized to varying degrees. High import barriers protect rice, barley, vegetable, fruit, and livestock farming. Imported inputs such as wheat, feed grains, oilseeds, hides, and cotton, however, are allowed easy access.

As in Japan and Taiwan, rice is central to South Korea's agricultural policy. The Government affected prices and producer income by purchasing a substantial amount—an average of 26 percent between 1990-97—of total rice production, at a high cost to the budget and taxpayers. Since 1995, however, Korea's Aggregate Measure of Support commitment to the World Trade Organization (WTO) has limited these subsidies, and government purchases dropped to 14 percent of year 2004 production. Since 2005, the Government has purchased rice for stocks under the Public Storage System for Emergencies. Purchases under this system ranged between 9 and 15 percent of production in 2005-07. The Government controls imports and segregates them from the domestic rice market. The combined policies of production support and import restrictions lead to retail prices for rice well above international levels.

The Organisation for Economic Co-operation and Development (OECD) calculates producer support estimates (PSEs) that measure the proportion of farm output value attributable to government support. For South Korea, the aggregate PSE for major farm commodities is always over 50 percent. The consumer support estimate (CSE) is always negative, representing an implicit tax on consumers caused by government programs that support producers. As a percentage, it represents the size of this implicit tax relative to consumer expenditures on foods. The aggregate CSE for South Korea is highly negative, suggesting that the implicit tax is equivalent to more than 50 percent of consumers' expenditures on major foods.

Bilateral and multilateral negotiations have gradually reduced South Korea's trade barriers. In particular, in negotiations under the auspices of the GATT ending in 1989, South Korea agreed not to invoke Article XVIII:B of GATT for all tariff-line restrictions after July 1, 1997. Until 1989, a long list of commodities required approval from various government or quasi-government agencies before issuance of an import license. South Korea justified this under the Article that allowed developing countries with balance of payments (BOP) deficits to control imports. After the BOP agreement in 1989, South Korea announced a series of liberalization moves for many tariff lines. The end of import licensing for all remaining tariff lines that were restricted was spelled out in the 1995 agreement of the multilateral trade negotiations in the URAA.

South Korea's high protection levels left its agricultural sector ill-prepared for the market access required under the URAA. As a result, concurrent with the URAA, the Government implemented a comprehensive 5-year agricultural restructuring program in excess of $50 billion in 1994. In contrast to the former policy of concentrating heavily on rice production, the new policy was more forward-looking, with resources gradually shifted from rice to other areas including production of cash crops, marketing facilities, and rural infrastructure. In 1996, as the country's rice stocks fell to low levels, these forward-looking policies were modified in favor of renewed emphasis on rice production to minimize rice imports.

In addition to the 5-year development plan, South Korea's National Assembly passed a special tax to raise $2 billion annually over 10 years, beginning July 1994, to help the rural sector cope with the impact of the URAA. The combination of the two programs—the 5-year development plan and the 10-year special tax—meant the Government budgeted $60 billion for the rural sector over 5 years. Despite the 1997-98 financial crisis and a change of political administrations, South Korea continued to spend large amounts on the rural sector.

A comprehensive 10-year plan for agriculture and rural areas was begun in 2004, which committed spending of about $104 billion on various programs in the period 2004-13. Funding is from a special tax, primarily on nonfood consumer items. An additional $1 billion was committed for the period 2004-10, primarily to assist horticultural producers after the implementation of the Korea-Chile Free Trade Agreement (FTA) in 2004. After the negotiations for the proposed U.S.-Korea FTA concluded in 2007, the Korean government added spending of another $21.8 billion to help farmers adjust over the period 2008-17.

Top of page

Rice Self-Sufficiency

Except for some lean years, since the late 1970s, South Korea has achieved its stated policy of self-sufficiency in rice through heavy government intervention. Rice production rose throughout the 1960s and 1970s and then gradually declined after the late 1980s. Rice consumption per person grew until the 1980s, when it began to fall, and it has declined almost every year since 1987.

In the 1970s, the South Korean Government embarked on a concerted drive to attain rice self-sufficiency. It used two main methods: increasing production and limiting consumption. Production of rice in South Korea rose sharply in the 1970s, after the introduction of tongil rice, crossbred from indica and japonica rices. Tongil yields were higher than japonica yields, and farmers shifted most of their paddies into the new variety. Domestic prices were allowed to rise to give farmers a higher income. A cold snap in June 1980, however, devastated the tongil rice, badly shaking farmers' confidence in the new variety and creating a large deficit in rice supplies. The Government was forced to make emergency rice imports of more than 1 million tons. Thereafter, farmers increasingly switched from tongil to japonica varieties, which, although lower yielding, were less susceptible to cold weather damage.

The Government interfered with rice consumption in several ways. Retail rice prices rose because the Government refused to import any rice (the authority to import and export rice is reserved exclusively to the Government), except after the 1980 harvest. The Government mandated that barley and wheat be mixed with rice, to conserve rice use. Most processing uses of rice were forbidden. Consumers did not like the taste and cooking characteristics of tongil rice, and the Government was forced to pay high prices to farmers to induce them to plant tongil, especially after 1980, while offering it to consumers at lower prices to get them to buy it. The Government's budgetary deficit from its rice transactions ballooned, requiring tax-paid subsidies.

During the 1980s, restrictions on the use of rice were gradually lifted. By 1991, the Government had ended its purchases of tongil rice. With no other market for the unwanted rice, planting of tongil ceased. Although rice consumption per person has steadily declined, the yield drop that occurred after tongil was abandoned meant that production dropped below consumption in several years, and South Korea's rice stocks fell to perilously low levels in 1994-96. Rising labor costs in rural Korea made rice farming less and less attractive on the small farms that are still common. As a result, area planted to rice decreased each year during 1987-96. While yields of the japonica rice varieties have risen, production generally decreased because area planted to rice dropped. Government interventions raised the rice planted area in 1996-2001, but area again fell each year after 2001.

In the Uruguay Round of the WTO, South Korea agreed to a minimum access import regime beginning in 1995 (see Market Access and Domestic Policies for Rice). With the aid of imports, South Korea has been able to rebuild stocks in the years since 1997. The Government's present policy of using imported rice for processing uses keeps the main table rice market in South Korea isolated from the high-quality japonica market outside Korea. South Korea has one of the most quality-conscious rice markets in the world, and consumers now pay more for domestic rice than they would for high-quality foreign rice. Thus, this market is very tempting to exporting areas like California, Australia, and northern China.

Uruguay Round Commitments

Like other signatories of the WTO, South Korea committed to policy reforms under the 1995 URAA. In general, the agreement has resulted in improved market access (in the form of tariff reductions, quota growth, and elimination of import bans), restrictions on export subsidies and trade-distorting domestic support, and provision of some recourse against the use of safety and health standards as disguised barriers. South Korea notified the WTO that it does not provide export subsidies for agriculture. As for sanitary and phytosanitary (SPS) measures, South Korea has agreed that all health-related measures restricting imports be based on science. South Korea has also made concrete commitments in the areas of market access and the Aggregate Measure of Support.

Top of page

Market Access and Domestic Policies for Rice

Rice imports, a highly controversial issue in South Korea, were essentially banned for more than a decade before the URAA. In the URAA, South Korea agreed to a progressively increased minimum market access (MMA) import regime. The URAA required that in 1995 South Korea import the equivalent of 1 percent of average consumption for the years 1988-90, increasing that amount to 4 percent by 2004. In addition, there was a 5-percent tariff on permitted imports, and rice trade remained strictly under government control during the 10-year grace period. The MMA import requirement in metric tons, milled basis for 1995-2004 was:

According to the URAA, the replacement of the MMA was to be negotiated with Korea's trading partners before December 31, 2004. Negotiations continued through much of 2004 and culminated in an agreement just before the deadline that set the rules for Korean rice imports for 2005-14. Under the agreement, the minimum-access import quota will almost double in size by 2014, but there is no provision for imports above the quota. The tariff within the quota will remain at 5 percent. The South Korean Government is committed to resell a portion of the imported rice into the Korean market with an allowed markup on the price. The minimum import quota for 2005-14 is divided into two sections. One section, consisting of the 205,228-ton quota size reached in 2004, is to be divided each year among four exporting countries:

• China, 116,159 tons
• United States, 50,076 tons
• Thailand, 29,963 tons
• Australia, 9,030 tons

All the quantities are metric tons and on a milled basis.

A second section, consisting of the increments added to the quota each year, 2005-14, is open to exporters on a most-favored-nation (MFN) basis, so that exporters in any country that has MFN standing with South Korea can try to sell rice within the quota. The initial MFN section of the quota in 2005 was 20,347 tons, and the quota increases by 20,347 tons each year thereafter, until the total quota size is 408,700 tons, with the MFN section equal to 203,472 tons in 2014.

In side agreements, South Korea agreed to purchase an average of 9,121 tons of rice annually from India and to make a one-time purchase of 20,000 tons of Egyptian rice in 2006 or after. More detail is available in the USDA Foreign Agricultural Service GAIN report, Quarterly Grain and Feed Trade Report (KS5022, May 2, 2005).

South Korea reserves the right to terminate the minimum access quota and move to a tariff-rate quota (TRQ) system at the beginning of any year, 2005-14. If a TRQ system is adopted, the size of the quota remains at the level of the minimum access quota when the switch to a TRQ system is made, with no further increases in later years. A TRQ allows for imports outside the quota, and the over-quota tariff would be calculated according to URAA guidelines. If agreement is reached in the global Doha Development Round (DDR) of negotiations, the over-quota tariff and the size of the TRQ would be changed to reflect rules of the DDR agreement. In the event of a switch to a TRQ system, country-specific quotas would end and the entire quota amount would be open to imports on an MFN basis.

The agreement made at the end of 2004 to allow more rice imports exacerbated a problem that South Korea has faced in recent years: consumption has been declining faster than production in most years. If imports are to be used in South Korea, they will replace domestic production. In response to this problem, South Korea has been revising its domestic rice policies to provide aid to farm income in ways that it believes are in accordance with WTO rules, and to encourage some farmers to reduce the area planted to rice.

The Government revised its Grain Management Act in March 2005 to end annual procurement of rice by the Government at a favorable price. Instead, the Government will buy rice for food security stocks at the prevailing market farm price, at harvest time, and sell older stocks after harvest at market prices.

The Rice Income Compensation Act was also revised in March 2005. It establishes two kinds of payment to rice farmers. The first pays 600,000 won per hectare (about $600 per hectare) each year for farmers growing rice, as compensation for benefits to the public that come from maintaining rice paddies. The second payment is related to the price of rice that farmers receive. If the price falls below a target that is fixed in advance, the Government pays farmers 85 percent of the difference between the target and market price for the quantity of rice that farmers sell.

Another measure to deal with surplus rice production is the direct payment for adjustment of rice production. Currently, the payment is 3 million won per hectare ($3,000 per hectare) for fields that are not used for any commercial production for 3 years.

For more information on South Korea's domestic policy changes in 2005, see the USDA Foreign Agricultural Service GAIN report, 2005 Annual Grain and Feed Report (KS5015, April 1, 2005), on which this explanation is based.

Top of page

Market Access for Products Other Than Rice

Under its market access commitments, South Korea began to phase out nontariff import restrictions on agricultural products in January 1995. TRQs were established for a number of former import-restricted agricultural products, including many horticultural products. The remaining phase of the BOP liberalization, somewhat modified by the URAA, was completed on schedule by January 1, 2001. Since then, South Korea technically has liberalized imports of all agricultural products except rice. In addition, the maximum levels for tariffs on all agricultural products except rice were fixed (bound). The simple average of the 1,239 bound tariff lines is 64.8 percent—high tariffs more representative of a developing country, even though South Korea is a member of OECD.

South Korea agreed to remove all nontariff barriers to beef imports, including state trading and price markups, by January 2001. Before then, South Korea's beef import regime followed rules negotiated under the auspices of GATT in agreements reached with the United States and other trade partners in 1989 and 1993, before the URAA. Imported beef was under a quota, which increased until 2000, the final year. Steep price markups have been eliminated. Before 2001, an increasing share of the quota was allocated to private "supergroups," representing private buyers such as supermarkets, restaurants, and hotels. Through the Simultaneous-Buy-Sell (SBS) system, supergroups were free to negotiate specific cuts and qualities with foreign exporters. The rest of the quota was administered by the Livestock Products Marketing Organization (LPMO), a state trading enterprise. The LPMO allocated some imported beef to special shops licensed to sell it. As of January 1, 2001, beef became freely importable, at a 41.2-percent tariff. Special treatment of imported beef, such as the requirement that it be retailed in shops that did not also sell domestic beef, was supposed to end. The scheduled reduction of tariffs under the URAA reached its end in 2004.

Horticultural and Processed Product markets also benefited from trade liberalization.

Top of page

Aggregate Measure of Support

South Korea provides support to its farm sector through several domestic policies, and some of these policies have significant consequences beyond its borders. The URAA instituted the Aggregate Measure of Support (AMS) to limit such support. According to South Korea's Uruguay Round schedule, its AMS in the base period was 1,718.6 billion won ($2.14 billion). Unlike every other country involved in the URAA, South Korea used 1989-91 as a base period to calculate its AMS commitment (see below). The base period AMS measured the monetary amount of selected domestic (or internal) policies that transfer funds to the agricultural sector by multiplying production by the difference between internal and world prices in the base period. The base period AMS is the starting point for upper limits on domestic support spending for each year. The limits were reduced each year, 1995-2004. Annual spending on certain kinds of domestic support policies in Korea must fall beneath that year's AMS limit. South Korea notified the WTO about internal support measures for eight commodities, but the amounts for three of them (grapes, silkworm, and milk) were "under the minimum," and exempted from reduction commitments in the URAA. The five remaining commodities were (with their 1989-91 base period amounts):

• rice, 1,268 billion won
• soybeans, 73 billion won
• barley, 52 billion won
• corn, 23 billion won
• rapeseed, 2 billion won

Rice support is overwhelming—accounting for over 90 percent of total AMS through 2004, the latest year for which South Korea has reported an AMS estimate. Thus, the basic policy measured by South Korea's AMS was the annual Government purchase of rice production. Each year, Korea's National Assembly determined a quantity and price of rice to be purchased by the Government. Since the prices were favorable, this was a subsidy to the farmers that they would not receive in private-sector markets for rice and tended to encourage greater production. The rice portion of the AMS was defined as the extra value for farmers represented by the direct government purchases of rice, with the quantity and price determined annually by the National Assembly. These purchases were made at prices above prevailing private-sector prices in South Korea. The extra value, or subsidy, was calculated as the difference between the government purchase price to farmers in the current year and the sum of the free-on-board price of Chinese rice plus 10 percent for transportation in the 1989-91 base period.

South Korea calculated its AMS based on the higher 1989-91 average instead of the lower 1986-88 base period used by other countries. South Korea pledged to reduce the AMS over 10 years (1995-2004) by 13.3 percent, to 86.7 percent of its base level. In addition, because South Korea raised its AMS considerably after its base period, the AMS for rice has been calculated based on the higher 1993 market price support instead of the 1989-91 average. The final bound commitment level in 2004, however, is the level reduced by 13.3 percent from the 1989-91 average base total AMS. South Korea's AMS commitments in billion won were as follows:

South Korea's purchase of cattle during a period of slumping prices in 1997 and 1998 pushed spending under the AMS category above the agreed limits, and this additional spending has been challenged in a WTO complaint against Korea by the United States. See Issues and Analysis.

Top of page

References

USDA's Foreign Agricultural Service (FAS) office in Seoul prepares commodity reports with policy information. The latest Attaché Reports and archives of earlier reports are available through FAS. The annual FAS report on Food and Agriculture Import Regulations and Standards explains current Korean rules affecting agricultural imports in general. Additional information and links to other sites about trade policy and regulations is available from the FAS Agricultural Trade Office in Seoul, South Korea.

The Organisation for Economic Co-operation and Development’s annual report, Agricultural Policies in OECD Countries:  Monitoring and Evaluation, provides information on the extent and trend over time of South Korea’s support to agriculture.  In 2008, the OECD published a special report on Korea, Evaluation of Agricultural Policy Reforms in Korea.