Next time you’re dining out in Seoul, have a good steak and wash it down with a shot of Jack Daniel’s, compliments of U.S. exporters.
The U.S.-South Korea Free Trade Agreement took effect on March 12, and shippers of meat and distilled spirits are bullish about their prospects. Neither group is a newcomer to South Korea, but they say elimination or reduction of tariffs will help them compete more effectively.
The FTA is a big deal for the Obama administration as well. Officials see the agreement as a major step toward meeting the president’s objective of doubling exports in five years. In 2007, just after the two nations began negotiating, the U.S. International Trade Commission estimated an FTA would increase U.S. exports by as much as $10.9 billion, adding $11.9 billion to the U.S. GDP.
South Korea’s thirst for spirits ranked 10th in the world in 2010, and fourth in Asia, with Koreans spending some $10.1 billion, according to the Distilled Spirits Council of the United States. The country ranked as the No. 4 buyer of U.S. beef exports in 2010, and ranked fifth in purchases of U.S. pork, the U.S. Meat Export Federation said.
The FTA will lower South Korea’s tariff on U.S. beef muscle cuts from 40 percent to 37.3 percent. Beef variety meats had a lower tariff. Both will be decreased in increments over the next five years.
“It’s a start in the process,” said Jim Herlihy, the USMEF’s vice president for corporate communications. “As these tariffs are reduced over time, it will give us a price advantage. The U.S. industry already feels confident in the quality of the grain-fed products we’re selling there. Being able to lower the price will make us even more competitive.”
South Korea bought $686 million worth of U.S. beef in 2011, down from $815 million in 2003, before markets collapsed because of the threat of mad cow disease. Today, South Korea gets 48 percent of its beef from Australia, but the U.S. is closing the gap with a 40 percent market share.
“We’re getting back to the level we were at our peak in 2003,” Herlihy said. “I think we see potential even beyond that.”
When the Obama administration reopened the South Korea agreement for new negotiations in 2010, “cows and cars” was the Washington shorthand for the better deal that negotiators were seeking. The result was a better deal for automobile manufacturers, as well as cattle producers. Although beef will benefit from lower tariffs, pork exporters also should increase sales because of the reduction in the tariff, said Joe Schuele, the USMEF’s communications director.
“Last year was such a boom year that people may look at the numbers and say the FTA won’t make that much difference, but last year showed us what we can really accomplish when we have duty-free access. It was kind of a free preview on the FTA,” Schuele said.
A 2010 outbreak of hoof and mouth disease hit domestic South Korean pork producers hard. Some 3.3 million hogs, about a third of the herd, had to be killed. The government set a tariff-free quota for pork imports to meet the domestic demand.
“The duty-free access we’ve had the past two years has been very beneficial. It was very forward thinking by the Korean government, to implement a duty-free quota,” Schuele said. “A duty-free quota during an emergency is great, but we needed a lasting agreement, and now we have that in place.”
Koreans’ drinking habits narrow down to two dominant categories: soju, a domestic whiskey, or imported whiskeys. When the FTA took effect, a 20 percent tariff on U.S. bourbon and Tennessee whiskey dropped to zero. That’s good news for Jack Daniel’s, the best-selling whiskey in the world — it even outsells Scotch whiskey in the U.K., according to Phil Lynch, chief spokesman for Brown-Forman, Jack Daniel’s parent company since 1956.
“We’ve been in Korea for quite a time, and we’ve been fairly successful on a limited basis. The 20 percent tariff gave us a competitive disadvantage against other whiskeys, like Scotch whiskeys,” Lynch said. “We’ve found that if we can get the Scotch drinkers and other whiskey drinkers to try Jack Daniel’s, we can win over a good number of them to our brand. We were at a competitive disadvantage on price, so we’ll be able to compete better on price with a more level playing ground.”
Brown-Forman sells more than 30 brands, but the company will focus on bourbons and whiskeys in South Korea. Jack Daniel’s may pave the way for another brand, Woodruff Reserve, a super-premium Kentucky bourbon, Lynch said. The strategy is to attract customers in on-premises settings, such as bars or restaurants. Consumers may be familiar with the brand name, but they haven’t tried it.
“Someone is more likely to try something new in ‘exotic’ American whiskey if it’s one drink at a time, not the whole bottle,” Lynch said. “Once they’ve tried it, we’ve been successful.”