Free Trade Agreements Offer Opportunities

The October passage of implementing legislation for the Colombia, Panama and South Korea free trade agreements (FTAs) and President Obama’s subsequent signing of the deals are cause to celebrate.

The long-awaited actions accomplished two very important dairy export goals: 1) They provided significant new market access to U.S. dairy suppliers, and 2) they helped to counter a rising tide of FTAs forged by Australia, New Zealand and the European Union (EU) that has been slowly slanting the international playing field in favor of U.S. competitors.

While the provisions of each agreement vary, together they provide tariff rate quotas (i.e., zero-duty market access) in Year 1 for 10,000 metric tons of cheese, 13,000 metric tons of milk powder, 866 metric tons of milkfat and nearly 2,700 metric tons of infant formula, ice cream, yogurt and other products. TRQs gradually increase and for most products are completely eliminated over a set number of years, ultimately giving U.S. suppliers unlimited, permanent duty-free access.

In addition, a number of products gain immediate duty-free access upon implementation of the agreements, including dairy spreads and whey for animal feed in the South Korea, and all whey and lactose in Colombia and Panama.

Still other products receive no TRQs but see their tariffs phased to zero over a relatively short period of time, such as milk albumin in Korea, which falls to zero in Year 5.

Non-quota products, phase-outs, above-quota tariffs and numerous other details must be examined on a deal-by-deal basis to determine the specific benefits of each. But many benefits there are.

Take for example the product of most concern for Cheese Market News readers. Cheese provisions of the deals break down as follows:

• Korea. Most cheeses, including cream cheese, mozzarella and cheddar, begin Year 1 with a duty-free 7,000 metric ton TRQ that rises gradually every year. Above-quota tariffs fall from the base rate of 36 percent in 15 equal, annual stages beginning on the implementation date, so that imports enter duty- and quota-free in year 15. Cheddar is an exception—it goes duty-free for unlimited volume in Year 10.

Blue-veined cheeses and curd do not receive TRQs, but their tariffs phase out from 32.4 percent in Year 1 to zero in Year 10.

• Colombia. The FTA provides a TRQ of 2,310 metric tons of cheese, rising to nearly 8,000 metric tons by Year 14. The above quota tariffs fall from base rates of 20-33 percent (depending on cheese variety) in 15 equal, annual stages beginning on the date the deal enters into force, so that imports enter duty- and quota-free in year 15. The Colombia FTA also provides certainty in above-quota tariff rates: Currently, imports of processed and other ripened cheeses are subject to the nation’s variable price band system, which establishes tariff rates every two weeks.

• Panama. The Panama deal contains two separate TRQs—a 364 metric ton allocation for cheddar and another 364 metric tons for all other cheeses. Both TRQs rise slowly before cheddar goes unlimited in Year 16 and other cheeses in Year 17. Above-quota tariffs begin at 15-30 percent, depending on the variety, and phase to zero over the same time period.

U.S. cheese suppliers needed these deals, particularly the FTA with Korea, which has become our No. 2 cheese export market and wherein the EU implemented its own FTA this past July. The EU in fact signed trade agreements with all three nations while the U.S. FTAs languished in Congress for years.

Its agreements with Colombia and Panama have yet to be implemented, but the EU does have a head start in Korea. When U.S. suppliers begin benefitting from Year 1 provisions in South Korea, the EU will be at least halfway to Year 2. But that’s not as bad as it sounds.

U.S. FTA provisions in many cases exceed Europe’s. In Korea, for example, the U.S. TRQ for concentrated milk products (including milk powder) reaches 5,628 metric tons in Year 5 and then rises 3 percent per year, compounded annually, ad infinitum. The EU deal caps TRQ volume after Year 15—and then only at 1,512 metric tons.

For cheese to Korea, Europe’s Year 2 TRQ is 4,696 metric tons, which is still less than the United States’ Year 1 TRQ of 7,000 metric tons.

Europe does enjoy out-of-quota tariff benefits due to its head start, but those range from 2-4 percentage points for most products.

All parties are now engaged in laying the groundwork for implementation of the U.S. deals with Colombia, Panama and Korea. Experts close to the situation expect the agreements to go into effect within the next year, starting with South Korea possibly in early 2012.

The three FTAs give the United States a golden opportunity. Now it is up to U.S. cheese suppliers to focus on that opportunity, visit the markets to get acquainted with their needs, start building relationships and sell U.S. dairy products.

(This article first appeared in Cheese Market News in November 2011.)

The U.S. Dairy Export Council represents dairy farmers, proprietary processors, cooperatives, ingredient suppliers and export traders. Its mission is to enhance U.S. competitiveness and increase global sales of U.S. dairy ingredients and products.