Assessing Changes in Dairy Product Import Demand:

The Case of South Korea with Implementation

of the KORUS FTA
Kiethly G. Jones
U.S. Department of Agriculture, Economic Research Service, 355 E ST, SW Washington, DC
20024. E-mail: kjones@ers.usda.gov
Don Blayney
New Mexico State University, Gerald Thomas Hall, Knox and College Street, Las Cruces, NM
88003. E-mail: dblayney@nmsu.edu
ABSTRACT
The impacts of implementing the Korea-U.S. Free Trade Agreement (KORUS FTA) on South Koreas
dairy trade are assessed in this study based on empirical estimates of short-run and long-run source-
based import demand parameters for three major imported dairy products. These estimates were derived
using the Central Bureau of Statistics (CBS) demand system model. The impacts of the tariff reductions
associated with the KORUS FTA were calculated. The results suggest that the KORUS FTA will open
South Korean dairy product markets primarily by reducing import prices of international suppliers
products. The altered import relationships among those suppliers raises overall dairy product imports
into South Korea. [EconLit Classications: F14, Q17].
C
2014 Wiley Periodicals, Inc.
1. INTRODUCTION
The conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade
(GATT/WTO) in 1994 has changed agricultural products trade among countries in signi-
cant ways. Since that time, other regional, multilateral, and bilateral trade agreements have
become common components of the international trade system (Wainio, Gehlhar, and Dyck,
2011). South Korea has not pursued multi-and bilateral trade agreements as actively as have
many other countries, but two recent bilateral agreements will likely have important implica-
tions for international trade of dairy products. The rst is a South Korea-European Union
(EU) agreement signed in October 2010 that went into effect on July 1, 2011. The second is the
South Korea-U.S. Free Trade Agreement (KORUS FTA). Both houses of the U.S. Congress
passed implementing legislation for the KORUS FTA on October 12, 2011 that was signed into
law later that same year (October, 21) by President Obama. However, the agreement did not go
into effect until March 15, 2012.
The KORUS FTA is designed to strengthen economic ties between South Korea and the
United States in part by eliminating or reducing tariffs and other trade barriers currently in
place on imported products and services. Of particular interest is howthe KORUS FTAdirectly
affects South Koreas dairy imports and, indirectly, what are potential benets for the U.S. dairy
industry. The U.S. dairy industry has taken a more aggressive approach to international trade
since the release in 2009 of the Bain Report, (Innovation Center for U. S. Dairy, 2009) that
highlighted the opportunities for greater U.S. participation in global dairy product trade.
It is believed that dairy trade gains, possibly a doubling of U.S. dairy product exports to
South Korea, could result from the implementation of the KORUS FTA. Whether such gains
are achieved and then maintained depends on two key factors. First, whether demand for
imported dairy products by South Korea will continue and possibly grow in the future; and
second, whether competing suppliers from around the world are interested in supplying the
The views expressed here are those of the authors and may not be attributed to the Economic Research Service, the
US Department of Agriculture, or New Mexico State University.
Agribusiness, Vol. 30 (1) 7484 (2014)
C
2014 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com/journal/agr). DOI: 10.1002/agr.21370
74
ASSESSING CHANGES IN DAIRY PRODUCT IMPORT DEMAND 75
desired products now and in the future. Dairy-product imports by South Korea are expected
to grow but the magnitude of that growth is an unknown. Similarly, there is a well-dened set
of countries currently supplying dairy products to the South Korean market that will likely
continue to do so, including the United States.
Underlying our analysis is an econometric model that generates empirical estimates of South
Korean short- and long-run import demand parameters for source-based dairy products. The
identication of the sources of particular dairy product imports included in the model is an
important feature that will help motivate the discussion of suppliers to the market. Including
both short and long run model components mirrors a common element of many negotiated
trade agreementsthe inclusion of a long-run time frame for reaching nal goals.
2. SOUTH KOREAS DAIRY INDUSTRY
Governmental actions to develop livestock industries in South Korea are a relatively recent phe-
nomenon. In a 1995 study, Kim suggested that the post-World War II performance of South
Koreas agricultural sector can be described by four stages: initial, developing, transition, and
adjustment. During the initial stage (1948 to 1960) the importance of agriculture in the coun-
trys overall economy was due mainly to under-performance by other sectors. Reconstruction
efforts dominated the period and were focused primarily on industrial, not agriculture growth.
However, some important agricultural developments did occur, a major one being land reforms
that moved the sector from a feudal structure to one comprised of independent individual
landowners.
In stage two, roughly from 1961 to 1980, some of the initial steps being taken to promote
commercialization of the livestock industries, including dairy production, are seen. The actions
to commercialize agricultural production were viewed as a means for achieving agricultural
and food policy goals set by South Koreas government. Where the uncertainty lay was whether
farmers would accept such changes in the agricultural industries. The efforts to promote a
commercial dairy industry in South Korea began around 1962 when the government initiated a
program to import large numbers of dairy cows. By 1970, there were about 13,000 cows in the
country producing about 52,000 MT (metric tons; just over 114.6 million pounds) of milk on
farms. Over the course of the 1970s, the gradually developing commercial dairy industry was
accepted by farmers (Kihl and Bark, 1981) and milk production grew rapidly.
Developments in the dairy industry during the transition stage from 1980 to the early 1990s
and the adjustment stage since about 1991 have been built on the earlier actions. Although much
of the early milk production growth of the industry can be attributed to the rapid increase in
dairy cow numbers, the more recent increases are likely due to productivity gains and scale
efciencies. Production in 2002 reached just over 2.2 million MT (about 4.85 billion pounds)
before declining slightly to about 2.1 million MT (4.6 billion pounds) in 2011 from 207,000
cows. One measure of productivity growth is milk production per cow. Output per cow has
averaged 8.4 MT (18,500 pounds) for the 2000 to 2009 period, a level comparable to that found
in many areas of the United States. The size of dairy farms has increased over time as the
average herd grew from 26 dairy cows in 1996 to 65 in 2009. A preliminary half-year estimate
for 2010 shows a further increase in herd size of about 3% (to 67 cows) (NACF, 2010)
Along with promoting on-farm production growth, the South Korean government has also
initiated milk pricing policies and programs. The legal framework for agricultural policies is
the Agricultural Basic Law of 1967 (OECD, 1999) and it is within that framework that specic
laws have been enacted. For example, in 1967, the Dairy Promotion Law established a pricing
program for fresh milk. During a review of the law in the 1990s, the Dairy Promotion Council,
a group comprised of all dairy-related groups, presented a proposal for a full-scale revision
of the program. Since the end of the 1990s, pricing measures have changed somewhat with
the introduction of formal marketing quotas and adjustments to the two-tier pricing system
associated with them, but the government set price system has never been signicantly changed
(Lee, Sumner, and Ahn, 2006).
Agribusiness DOI 10.1002/agr
76 JONES AND BLAYNEY
The milk from South Koreas dairy farms enters two major product production channels
(or sectors): the drinking milk sector and the processing (manufactured products) sector. The
drinking milk sector has dominated milk usage over time, taking an average of 1,562 MT (or
about 73 percent of the average total production) for the 6-year period of 2005 to 2010. (USDA,
FAS, 2011) The milk that remains goes into the manufacture of mostly cheese, nonfat dry milk,
and mixed milk products.
The markets for most of the manufactured products were perhaps best described as incon-
sequential until the 1980s. Manufacture of dry milk powders was driven by demand for infant
formulas for a fast growing population. Butter, often seen as a by-product of dry milk powder
production, was locally supplied and was supplanted in consumer markets by margarine and
butter substitutes and cheese sales were small. However, hosting the 1988 Summer Olympics in
Seoul triggered interest and further growth in manufactured products in the country (USDA,
FAS, 1996, 2011).
From1971 to the mid-1980s, an Integrated Dairy Development Project was implemented that
aimed to promote expanded milk production by providing nancial support to dairy farmers
and to establish more dairy processing facilities to handle the added production. In addition to
the production supports, the government also put signicant trade barriers in place. As of 2009,
21 dairy product processing rms, ve of themcooperatives, were operating 45 facilities in South
Korea according to the Korea Dairy Committee (KDC). The products produced were fresh and
fermented milks, cheese, and dry milk powders. The dairy processing/manufacturing sector in
Korea is geared overwhelmingly toward providing products for the fresh (uid beverage) and
fermented (yogurts) milk product markets.
Agricultural product trade barriers were a major focus initiated in the 1988 Uruguay Round
of the General Agreement on Tariffs and Trade and continued to be so under the continuation
of multilateral trade negotiations by the World Trade Organization. Because South Koreas
milk producers were largely supplying the domestic fresh (uid) markets, the countrys dairy
trade policies were predominately applied to manufactured dairy products. By committing to
the Uruguay Round Agricultural Agreement, South Korea essentially adopted single applied
tariffs and tariff rate quotas (TRQs) as the primary instruments of dairy product trade policy.
Single tariffs were applied on cheese, ice cream, and mixed milk products. Butter, nonfat and
whole-fat dry milk powders, and whey powder were subject to TRQs that, as a rule, consisted
of relatively low in-quota quantities and tariff rates and a very high over-quota tariff. The
exception to that rule was whey powder where the in-quota quantity is high, the in-quota
tariff rate is low and, the over-quota tariff is high but not as high as for the other products.
A common feature of many post-URAA trade negotiations, including the KORUS FTA, is
negotiated changes in existing applied tariffs and TRQs.
The three major dairy products imported into South Korea over time have been whey, butter,
and cheese. Table 1 shows summary statistics for these three products over the 1990 to 2011
period. Considering only the most recent year, 2011, the Global Trade Atlas reported imports
of whey and modied whey from 26 countries valued at $43.9 million. More than two-thirds
of the imported whey powder is used for animal feed and the rest is used in bakery and confec-
tionary products. The 2011 total imports of butter from 24 countries, 8.579 thousand metric
tons (valued at $41.65 million), represented a 71% increase over 2010 imports. Last, about
76.2 thousand metric tons of cheese, valued at nearly $360 million, entered South Korea from
30 countries. Ninety-ve percent of all whey, butter, and cheese imports come from ve coun-
tries. The summary statistics for South Koreas imports of whey, butter, and cheese are identied
for six (6) source country regions: South Korea and ve others. The quantities imported, their
unit values, and the shares of import expenditures are highlighted.
On average, besides its own domestic supply, New Zealand is the largest supplier of whey
to South Korea, followed by the EU and the United States. Whey from New Zealand has the
lowest per unit value. Most of South Koreas imported butter comes from Oceania (Australia
and New Zealand), which supplied, on average, more than 36% annually since 1990. Australia
and NewZealand, each supplied an average of nearly 400 metric tons annually. However, butter
fromthe United States had the highest unit value, followed by the EU. The three major suppliers
Agribusiness DOI 10.1002/agr
ASSESSING CHANGES IN DAIRY PRODUCT IMPORT DEMAND 77
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Agribusiness DOI 10.1002/agr
78 JONES AND BLAYNEY
of all types of cheese to South Korea are Australia, New Zealand, and the United States, each
supplying on average, about a quarter of the imported cheese. The United States is the main
supplier of cheddar cheese to South Korea.
3. METHODOLOGY AND DATA
The demand systems model derived by Keller and Van Driel (1985), called the Central Bureau
of Statistics (CBS) demand system, is used to estimate South Korean dairy product import
demand parameters where the source of the imports is identied. The CBS model combines the
non-linear expenditure effects of the Almost Ideal Demand System(AIDS) model (Deaton and
Muellbauer, 1980) and the price effects of the Rotterdam model (Theil, 1966). The Rotterdam
model meets negativity conditions on the Slutsky matrix required for a downward sloping
demand curve if its price coefcients are negative, semi-denite. The general CBS model is
expressed as:
w
i

Lnq
i

j
w
j
Lnq
j

= a
i
+

c
i j
Lnp
j
+b
j

Lnx
i

j
w
j
Lnp
j

(1)
where:
w
i
=
p
i
q
i
x
and q
i
is the quantity of dairy product imported from country i, p is the price of dairy product
in country j, x is the total expenditure on dairy products from all countries, Lnq
i
, .Lnp
j
, and
Lnx
i
are the partial derivatives of the logarithms of the quantity, price, and expenditures, and
c
i j
and b
j
are coefcients. The w
i
represents the expenditure share of dairy product imports
from the i
th
country.
The CBS is a set of partial differential equations. Differential demand systems are commonly
estimated under the assumption that differences are reasonable approximations of the differen-
tial demand. The following restrictions are satised for consistency with utility maximization:

i
c
i j
=

j
c
i j
=

i
b
i j
=

i
a
i
= 0, implies that homogeneity of degree zero and the adding-
up conditions hold for the budget constraint, andc
i j
= c
ji
, i j, implies symmetry.
The analysis does not directly address the range of supply issues that may impact on the
ability of any source country to export dairy products. Instead, the assumption was made
that the supply from each identied country or region was perfectly elastic and South Korean
importers (wholesalers) determine the quantities to be imported from individual countries
based on international product market prices and the preferences of South Korean consumers.
Wholesale level import data was used for the analysis and unit values were used for imported
dairy product price.
The South Korean dairy product import demand model rests on the assumption of a two-
stage budgeting process outlined by Kesvan, et al., (1993) where the aggregate quantity of
dairy product consumed by the South Korean is determined in the rst stage, and the second
stage focuses on the demands for dairy products by country of origin. Similar products from
different sources may be physically different, which may be the case for the three (3) dairy
products being studied. However, perceived differences associated with a countrys reputation
for quality products, trade history, reliability, and consistency, among other trade-related issues
may arise that may cause price differences that are not explained by product attributes alone
(Muhammad and Kilmer, 2008; Lopez, Pagoulatos, and Gonzalez, 2006). In the second stage,
the South Korean demand for imported dairy product is specied as a function of prices and
the mixed quantity Divisia index. Separability is assumed in the demand for each dairy product
from other dairy products.
Agribusiness DOI 10.1002/agr
ASSESSING CHANGES IN DAIRY PRODUCT IMPORT DEMAND 79
A dynamic specication of the general CBS model was used to capture both the short-run
and long-run relationships in South Korean dairy product import demand:
w
it

Lnq
i

j
w
j
Lnq
j

= a
i
+

c
i j
Lnp
jt
+

d
i j
Lnp
jt1
+b
i1
dBQ
t
+ b
i2
dBQ
t1
+e
it
(2)
where w
it
is the expenditure share of dairy product consumed from the i
th
source country, p
j
is the differential price based on the unit value of imports and the domestic wholesale price, a,
c
ij
, d
ij
, b
1
, and b
2
are parameters to be estimated, and e
ij
is the disturbance term. The source
countries included in the model are: South Korea, Australia, New Zealand, the United States,
the EU and the rest of the world (ROW). The three dairy productswhey, butter, and cheese
are assumed to be mutually exclusive in terms of end use so they are evaluated independently.
In other words, three models were estimated and in each model the ROW equation was omitted
to avoid singularity.
Own-price, cross-price, and expenditure elasticities, are calculated for each country-specic
import demand.

i j
=
(c
i j
d
i j
+w
i
w
j
) dLnp
j
w
i
(3)
Own-price and cross-price elasticities

iy
= 1 +

i
w
i
(4)
Expenditure elasticity
A key feature of the KORUS FTA is the negotiated reduction in tariffs. Tariff reductions help
reduce the wedge between the product prices in exporting and importing countries and stimulate
trade. It is in many ways similar to an export subsidy to the exporting country. The importing
country simply pays a lower price for the product from the country from which the tariff is
reduced or eliminated. We noted earlier that South Korea had established dairy product tariffs
and TRQs as part of the GATT/WTO Uruguay Round. For whey, a global TRQ allowed for
imports of 54,223 tons at a maximum bound tariff rate of 20%. The total quantity imported
was parsed in two categories: feed whey was allowed to enter under a 35,000-ton TRQ with a
tariff rate of 4%. And whey for food was allowed to enter under a 19,233-ton TRQ with a tariff
rate of 20%. The out-of-quota tariff rate was 49.5%. The global TRQ on butter and butter fat
was 420 tons, with an in-quota tariff rate of 40% and an out-of-quota rate of 89%. A single
applied tariff rate for cheese at the WTO-bound rate of 36% was maintained.
Based on the KORUS FTA tariff reductions, Korean importers will pay a lower price for
imported U.S. dairy products. The lower prices essentially improve the competitiveness of the
U.S. dairy products relative to imports from other countries where the original tariff and TRQ
regimes still apply. Also, the lower prices of imported products from the U.S. result in a real
expenditure expansion on Korean dairy products. Since all competing countries will also be
relatively disadvantaged by the same tariff reduction, both own-price and cross-price effects
must be considered. The presumption of cross-country competitiveness typically requires the
assumption that similar products are differentiated by country of origin. Given the cross price
substitution effects between all import products and, given the elasticity of demand for that
group of products in total, then the elasticity of demand for aggregate imports is derived based
Agribusiness DOI 10.1002/agr
80 JONES AND BLAYNEY
on the share of the imported products in the market. The impacts of KORUS FTA tariff
reductions (equation 7 below) for each of the three imported dairy products are derived in the
following manner. The matrix of calculated own and cross elasticities (equation 5) is multiplied
by the vector of specied tariff reductions T (equation 6)

i j
=

a
11
K a
1n
M O M
a
m1
L a
mn

(5)
where,
ij
is the elasticity matrix
T =

t
1
M
t
n

(6)
=

a
11
K a
1n
M O M
a
m1
L a
mn

t
1
M
t
n

(7)
The Global Trade Atlas provided the data employed for model estimation. The six source
countries for the products were dened as South Korea itself, Australia, New Zealand,
the United States, the EU, and the rest of the world (ROW). Quarterly quantities and values of
the selected dairy product imports for each of the ve international source country/region were
obtained and used to calculate per-unit values ($/lb.) for each of those sources. A proxy for
South Koreas domestic dairy product production for each category is calculated by subtracting
total consumption, using data obtained fromSouth Koreas Livestock Policy Bureau, fromtotal
imports.
Over-quota tariff reductions of 49.5%were evaluatedfor whey, 36%reductions were evaluated
for cheese, and 89% reductions for butter. Based on the KORUS FTA, unlimited quantities of
all three products would enter the Korea duty free after phased in tariff reduction over 10 to
15 years; hence over quota tariffs would be fully removed. Because a similar free trade agreement
was also brokered with the EU, the impact of tariff reductions afforded to EU countries was
included in the model.
4. RESULTS
The conditional short run and long run own-price elasticities for whey, butter, and cheese,
averaged over the quarterly values from1990 to 2011, are presented in Table 2. For the most part
the calculated cross price elasticities were positive, small in values, and statistically insignicant.
However, these cross elasticities still play an important role in the overall impact of KORUS
FTA on Koreas dairy products demand.
As expected, both the short-run and long-run own-price elasticities for whey imports were
negative and inelastic for most of the source countries. The exception was New Zealand, which
had a positive but statistically insignicant long run own price elasticity. South Korea was
highly price responsive to its own long run whey demand with an own price elasticity of -1.516,
but relatively unresponsive to whey imports from other countries in both the short run and the
long run. The short run impacts of price changes on whey demand from all countries, except
New Zealand, were found to be statistically signicant. These results suggest that a specic
price reduction associated with the KORUS FTA is likely to generate less than proportional
increases in whey imports from the United States.
In the short run South Korea was quite responsive and statistically signicant to butter
demand fromits domestic suppliers (-1.079) and the EU(-1.610), suggesting that a 10%decrease
Agribusiness DOI 10.1002/agr
ASSESSING CHANGES IN DAIRY PRODUCT IMPORT DEMAND 81
TABLE 2. Estimated Short-run and Long-run Own-Price Elasticities for South Korean Source Country Demand for Dairy Products
Whey Butter Cheese
Short-run Long-run Short-run Long-run Short-run Long-run
South Korea 0.922

1.516

1.079

0.938 0.388

1.702
(0.106) (0.254) (0.263) (0.730) (0.055) (0.828)
Australia 0.011

0.902

0.335

1.656 0.169 0.577

(0.003) (0.341) (0.101) (0.997) (0.087) (0.752)
New Zealand 0.024 0.251 0.780 0.492 0.242 0.660
(0.234) (0.243) (0.717) (0.999) (0.555) (0.770)
United States 0.678

0.324 0.750 0.473 0.428

1.810

(0.365) (0.540) (0.458) (0.808) (0.259) (0.539)

European Union 0.845

0.854

1.610

1.571

1.210

1.151

(0.259) (0.374) (0.576) (0.878) (0.218) (0.360)

ROW 0.409

0.528

0.140 0.107 2.447 2.577

(0.159) (0.228) (0.367) (0.552) (0.242) (0.277)

Note: Asymptotic standard errors are in brackets

<0.01

<0.05

<0.10
TABLE 3. Estimated Short- and Lon-run Percentage Changes in South Korean Product Imports Due to KORUS Trade Agreement
Whey Butter Cheese
Short-Run Long-Run Short-Run Long-Run Short-Run Long-Run
South Korea 17.29% 29.61% 21.00% 11.42% 11.25% 0.34%
Australia 142.62% 205.20% 36.02% 31.78% 14.83% 18.97%
New Zealand 48.47% 32.45% 12.95% 121.75% 4.07% 15.07%
United States 97.97% 88.99% 97.81% 59.92% 79.78% 89.09%
European Union 118.69% 137.02% 337.81% 336.58% 86.74% 64.90%
ROW 55.52% 130.03% 109.55% 426.60% 22.85% 33.87%
in the price of butter from these two sources would increase South Korea and the EUs demand
for their butter by 10.79% and 16.10%, respectively. All other countries exhibited short run
inelastic butter demand with Australia (-0.335), being the only other country with a statistically
signicant own price elasticity. The United States had an inelastic own price elasticity of -0.750,
suggesting that a 10% decrease in the price of butter would increase South Koreas demand
for its butter by 7.50% and that price reductions through the KORUS FTA may not result in
substantial increases in demand for U.S. butter. Only the EU had statistically signicant own
price elasticities in both the short and long runs for butter.
Australia, New Zealand, and the United States are the primary suppliers of cheese to South
Korea. The short run own price elasticities for cheese shows the United States, the EU and the
ROW as highly sensitive, the ROW being the most sensitive (-2.447), followed by the United
States (-1.428) and the EU (-1.210). The estimated long run elasticity for the United States
increased to -1.810 suggesting that decreases in U.S import price associated with the KORUS
FTA may result in substantial increases in demand for U.S. cheese. These ndings support
previous work by Washington and Kilmer (2008) who found that the demand for U.S. cheese
was highly elastic in most countries.
The estimates of the percentage changes in dairy product imports into South Korea and
the estimated change in the products sourced by South Korea are shown in Table 3. These
percentage changes are calculated as per the derivation of effects of tariff reductions described
in Section 3. They suggest that in the short run, whey and butter sourcing from South Korea
both decline, by 17.3% and 21% but in the long run only whey faces a decrease of 296%. For
cheese, both the short run and long run sourcing from South Korea increase.
Agribusiness DOI 10.1002/agr
82 JONES AND BLAYNEY
TABLE 4. Estimated Short and Long Run Changes in South Korean Dairy Product Import Quantities (2010 base year)
Whey Butter Cheese
Base Short run Long run Base Short run Long run Base Short run Long run
Metric tons
1
/-
Australia 984 2,387 3,003 1,725 2,346 2,273 8,636 7,355 6,998
New Zealand 67 35 45 3,305 3,733 0 19,306 18,520 16,397
United States 20,135 39,861 38,053 139 275 222 18,518 33,292 35,016
EU 2,716 5,940 6,437 1,142 5,000 4,986 6,056 11,309 9,986
ROW 16,727 26,014 38,477 85 0 448 8,455 6,523 5,591
Total 40,629 74,237 86,016 6,396 11,354 7,929 60,971 76,999 73,988
/
1
A zero implies the estimated change was negative
Whey imports from the ve other sources all increase in the short run, except for a 48.5%
decline from New Zealand. Australia stands to gain the most with a 142.62% increase in short
run import demand, and a further increase in the long run to 205.2%. The United States and
the EU would experience expansions of whey exports to Korea in the short run of 97.97% and
118.69% but only the EU shows a further increase in the long run.
In the short run, Koreas imports of butter from the other sources, except for the ROW,
increase and, in the cases of the United States and the EU, those increases are quite large
(97.8% and 337.8%). The increased imports seen in the short run for the United States and
the EU are again seen in the long run, but surprisingly, New Zealand imports decline quite
signicantly (-121.8%) as ROW imports expand 426.60%.
Table 4 shows the calculated short run and long run effects, in terms of quantities, on
South Korean imports of butter, cheese, and whey when the implementation of both the
KORUS FTA and the Korea-EU FTA are included in the analysis. These estimates are derived
by multiplying base period (2010) dairy product import quantities into South Korea by the
calculated percentage changes generated from the country specic calculations described in
Section 3 and shown in Table 4. It is these quantity estimates that perhaps better reect
the potential trade opportunities that might arise from the overall impact of own and cross
elasticities. The United States short run and long run cheese exports increase by 79.78% and
89.09%, respectively. Again, the results are consistent with the work of Fabiosa, Hayes and
Dong (2007) whose results show a 75.1% increase in U.S. cheese exports. These results also
support earlier studies by Lee, Sumner and Ahn (2006) that show that lowering trade barriers
on all Korean dairy imports results in increases of dairy product imports from all sources,
including the United States. Peng and Cox (2005) and Beghin (2006) also found similar results
throughout the Asian dairy markets.
5. SUMMARY AND CONCLUSIONS
Overall, based on the results, it appears that the free trade agreements open up the South Korean
dairy product markets primarily by reducing prices, which in turn increases competition among
possible suppliers and results in an overall expansion of dairy product imports. Cutting prices
via the free trade agreements results in both a substitution effect and an expenditure effect. The
substitution effect has clearly resulted in an increase in the demand for dairy products from
those countries for which free trade agreements were institutedUnited States and the EU.
The expenditure effect has also resulted in the ability to purchase more dairy products with the
same total expenditure and have expanded overall dairy product demand by South Korea.
The price sensitivity of Korean importers suggests if many suppliers of a particular product
exist, then those with the best price into the country will garner the larger shares of the im-
ports. For the three products discussed in the analysis, Australia, New Zealand, and the United
States have manufactured product industries that are either already oriented to exporting
Agribusiness DOI 10.1002/agr
ASSESSING CHANGES IN DAIRY PRODUCT IMPORT DEMAND 83
(Australia and New Zealand) or are large enough to be in a position to redirect signicant
quantities of products into export channels (U.S.) The EU industries likely t the nal descrip-
tion at present but in general have focused attention on dairy trade toward the U.S. and closer
markets such as Russia and areas around the Mediterranean Sea.
The results regarding cheese and whey are as we would expect. The mere size of the U.S.
industry gives it the capacity to produce both cheese and whey in quantities that can satisfy
export market demands in Korea and that meet specications of importers. It is also important
to recall that cheese and whey are essentially joint productsa large, vibrant cheese industry
can support the same kind of whey industry. It is likely that the quality of most dairy products
provided by the manufacturers in the four countries do not vary signicantlyso price is
the decision variable for importers. Because the Korean dairy industry is so much focused
on supplying the fresh drinking milk market rst, any rising demands for the manufactured
products will depend on imports. The emphasis of further processing of dairy product imports
suggests that commodity type products rather than nal consumer packaged products would
be preferred, a situation that generally favors Australia, New Zealand, and the United States.
As concerns about fat intakes grow for consumers, butter industries are evolving to meet a
reduced demand. However, there are parts of the world where butter is still a desired product.
The butter industry in the U.S. is capable of supplying products but may not enjoy a favorable
position relative to other countrys industries with respect to the number of such products
available. Australia and New Zealand would likely have more butter-type products to meet
import demand specications.
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Agribusiness DOI 10.1002/agr
84 JONES AND BLAYNEY
Keithly G. Jones is a Senior Economist with the United States Department of Agriculture, Economic Research
Service, markets and Trade Division, Animal Products and Cost of Production Branch in Washington D.C.
He received a Ph. D. in agricultural economics in 1999 from Penn State University. His research interests
include livestock production, demand, and trade, livestock outlook, and commodity policy and programs.
Don Blayney is the Gerald Thomas Chair in Food Production and Natural Resources in the Department
of Agricultural Economics and Agricultural Business at New Mexico State University. Prior to taking
the position, he spent 25 years with the Economic Research Service of the USDA. He received a B.S. in
Mathematics from Westminster College, Pennsylvania, an M.A. in Economics from New Mexico State
University, and a Ph.D. in Agricultural Economics from Washington State University. His primary research
interests are commodity production and marketing, specically those related to the U.S. dairy industry.
Of special interest are the U.S. dairy policy and its ramications, supply chain issues, including farm-level
production, and consumer demand for milk and dairy products. More recently, he has explored the role of the
U.S. in international dairy trade.
Agribusiness DOI 10.1002/agr