South Korea's US Beef Ban: Health Concern or Protectionism?

South Korea's Economy and Beef Market Overview

South Korea is the world's 14th largest economy, with a GDP (purchasing power parity) of $1.335 trillion. With $433.5 billion in exports, South Korea is the world's 12th largest exporter. The export industries are focused on technology (semiconductors, telecommunications) and industry (steel, automobiles, computers, and petrochemicals) (CIA World Factbook, 2009). South Korea's four-decade rise as an economic power in the wake of the Korean War was based on rapid industrialization, infrastructure and education investment, and the development of trade. The United States, which fought in the war against the Communists, was eager to trade with the South as part of its broader effort to counter Communism around the world. Today, the US is South Korea's third-largest trading partner, its second-largest export market, its third-largest source of imports, and its second-largest source of foreign direct investment (Cooper & Manyin, 2007).

As a consequence of this rapid industrialization, South Korea's agricultural capacity has approached the relatively low levels seen in the Western world. At just 3% of GDP, agriculture has been somewhat marginalized in Korea. As a result, the nation is dependent on food imports, in particular for high-intensity commodities like beef. Prior to the ban on US beef, the United States was the third-largest supplier of beef to the Korean market. Korea banned Canadian beef at the same time, as one of the US cows found to have bovine spongiform encephalopathy (BSE) had originated in Canada. Korea subsequently increased its emphasis on Australian and New Zealand beef in order to make up the difference.

Attempts to partially re-open the Korean market to US beef have been made, but massive protests in South Korea against the move caused the government to backtrack. These protests have been cited as one of the major reasons why South Korea stood apart from the rest of the world in maintaining its beef ban. For example, Canadian beef received approval from international health authorities in 2007 and re-entered fifty-five markets from which it had been banned. South Korea remained the lone outlier, maintaining its ban on both Canadian and American beef.

Beef is a land-intensive agricultural product that requires a massive amount of resources to produce. South Korea's domestic beef production is focused on Hanwoo beef. Hanwoo is viewed by the Korean consumer as being superior to all other forms of beef. As a result, it occupies a premium position in the market and does not compete directly with imported beef at its highest grades (Kim et al., 2009). Hanwoo production twenty years ago was sufficient to meet all of Korea's beef needs, but the market dynamics changed rapidly over the subsequent years.

With Korea's rising living standards came an increase in the amount of animal protein consumed. Beef suppliers were the main beneficiaries of this increased protein consumption, given beef's widespread popularity in Korea. The nation's signature dish — aside from kimchi — is a beef dish: bulgogi. With rising economic prosperity, Korea's beef consumption increased from just over 100 kilotons in the mid-1980s to nearly 400 kilotons today. Today's level is, however, lower than beef consumption was prior to the 2003 BSE discovery (Kim et al., 2009).

Contributing to the rapid increase in beef consumption was a series of trade policies that liberalized the beef market. Early steps were tentative, resulting in partial liberalization of beef imports. The introduction of a tariff quota in 1995 set the stage for a rapid increase in beef consumption. In 2001, further liberalization and the introduction of a tariff-only system further increased consumption, which hit 403 kilotons in 2002. Current consumption rates equate to 36 kilograms per person in 2007, up from 2.9 kilograms in 1985 (Kim et al., 2009).

Introduction: The US-Korea Beef Trade and Protectionism

The US and Australia were among the largest beneficiaries of this increase. With the US beef ban in effect, Australia improved its market share in the South Korean beef market to 73% by 2007. In 1985, when consumption was at 2.9 kilograms per person, Korea was at nearly 100% self-sufficiency with respect to beef production. With trade increasing the availability of beef in Korea, consumption skyrocketed. One consequence of this rapid increase in consumption was a heavy dependence on foreign beef sources. Korea's self-sufficiency in beef production has been below 50% since 2000 (Kim et al., 2009).

It is interesting to note that Korean beef consumption is price inelastic. Basic supply-and-demand theory holds that the rapid increase in the quantity of beef available in Korea should have been followed by price declines. Empirical evidence shows that wholesale beef prices remained stable over the past twenty-five years, but that retail prices actually increased (Kim et al., 2009). That prices increased despite a greater supply of beef indicates that demand grew faster than supply. This situation illustrates that beef consumption in South Korea is relatively price inelastic, and that the limits of this elasticity have not yet been fully tested.

There are several demand drivers for beef in South Korea. The first is the nation's wealth. As national wealth has increased, so has demand for beef. Historically, beef has been viewed as a luxury product and its consumption as a status symbol. For younger generations, however, beef consumption is more a habit than a sign of status. Another key demand driver in Korea is beef quality. Korean Hanwoo beef is often perceived as the best beef available, and its highest grades dominate the top end of the market. The lower grades of Hanwoo are used in soups, and it is at this level that domestic Korean beef competes with imported beef (Kim et al., 2009).

Other key quality drivers for Korean consumers include marbling, texture, flavor, color, and tenderness. Hanwoo beef holds a competitive advantage over foreign beef on most of these metrics. Among imported beef, American beef has a competitive advantage over Australian beef: American beef has more marbling than the leaner Australian variety and is preferred by Korean consumers on the basis of its flavor. Prior to the BSE outbreak, the US held a 67.9% share of the import market, while Australia held a 21.8% share. With the ban on US and Canadian beef, Korean consumers were forced to turn to three alternate sources. Australia's share of the import market rose to 72.7%. New Zealand's share increased from 8.6% in 2003 to 18.9% in 2007. The other main beneficiary of the ban was the domestic beef industry.

The Hanwoo beef industry had fallen on hard times during the 1997 Asian financial crisis. Prices for Hanwoo cattle fell as demand dropped. The slaughter of Hanwoo cattle increased as farmers began to liquidate their now-unprofitable herds. The slaughter included a much higher than usual number of female cattle — an indicator of diminished breeding intentions. The industry was only beginning to rebuild its herds in 2003, just as consumption surpassed the 400-kiloton mark. It was at this point that the BSE discovery occurred.

In 2003, BSE was discovered in Washington State. The cattle in question had originally been sourced from Canada, so beef from both countries was banned around the world. South Korea's ban was not unusual — many beef-importing nations enacted similar bans and international health authorities became involved. Bovine spongiform encephalopathy is a disease involving the progressive wasting of the cow's brain. Consumption of beef infected with BSE has been linked to the development of Creutzfeldt-Jakob disease (CJD) in humans. CJD has similar neurological effects and is 100% fatal.

Animal feeding practices in the US and Canada have been blamed for the incidence of BSE in cattle from those countries. Cattle are sometimes fed meal made from deceased cattle, including bone, brain, and other tissue from so-called "downer" cattle. If a downer animal had suffered from BSE, the disease could then be transmitted through the meal produced from its remains to other cattle in the herd. The widespread nature of this practice, combined with international skepticism about the strength of regulatory controls on it in North America, contributed substantially to the ban.

BSE — and by extension CJD — is a major public health concern, and in South Korea, fear of the disease politicized the issue of beef imports. CJD is rare but is a degenerative condition that invariably leads to death. There are no treatments and no cure, making it one of the most feared diseases in the world. It is natural that governments would seek to protect their citizens from CJD by minimizing the risk of exposure to BSE-infected beef.

In 2007, the Korean market was reopened to US beef. The South Koreans, engaged in negotiations with the Americans, had capitulated on the eve of an important summit between the two nations. That the market was eventually going to reopen was essentially inevitable, since international regulators and most other nations had already resumed accepting US beef. However, the Korean government — which had promised domestic farmers it would maintain high tariffs to protect the local industry — rapidly moved to remove those tariffs once the Free Trade Agreement was reached (Hankyoreh, 2007).

The response was swift. With a dramatic increase in supply imminent, beef prices began to fall. Korean beef farmers began trying to unload their cattle at market but found few buyers. The price of a female calf dropped from 3.2 million won before the Free Trade Agreement to 2.3 million won after. Korean cattle farmers, who had seen their industry grow under the ban and behind protectionist tariffs, were suddenly facing a new crisis.

The Ban: Public Health Concern or Protectionism?

The general public had other concerns. Fueled by inflammatory media reports containing gross distortions of the facts, the Korean public began to protest in the streets of Seoul against the prospect of being exposed to American beef. The protests spanned months, and the issue became a major political liability for Korea's leader. Allowing American beef into Korea represented the removal of a key obstacle to the Free Trade Agreement, which was projected to bolster trade between the US and South Korea by $20 billion per year. South Korea's leadership was perceived by the public to have sold their health for the sake of the trade deal. As the protests grew in intensity, South Korean President Lee Myung-bak was forced to make multiple public apologies related to the beef issue. Poll numbers suggested that people viewed his actions as a betrayal of public trust and a failure to understand popular sentiment (Harden, 2008).

Exacerbating the situation was a miscommunication between US and Korean officials. The US had promised in 2005 to tighten regulations on the use of downer cattle as feed but never followed through. The Koreans had misunderstood certain US communications regarding this issue, and believed that US beef had become safer — which was not the case. The public felt betrayed by this "miscommunication," which had been used as a justification for the government's capitulation on the beef ban.

It is difficult to determine with certainty the exact motivation behind the trade dispute. There is a compelling case to be made for the protectionist argument, and an equally compelling case for the public health argument. The protectionist argument stems from the condition of the Korean beef industry before, during, and after the ban. The industry had been suffering for years from the effects of the 1997 financial crisis. South Korea's beef farmers were leaving the business. Aside from a slump during the crisis itself, demand for beef in Korea had been increasing rapidly. The industry was just beginning to turn the corner toward recovery when the ban on American beef went into effect. The positive impact of this ban on the Hanwoo industry could not have been lost on the Korean government.

Koreans view such protectionism as perfectly reasonable. The nation's rapid economic growth was the result of heavy government intervention in the economy — both direct and indirect — including the fostering of the chaebol, large conglomerates given favorable status for many years. Koreans are accustomed not only to government intervention in the economy but also to government protection from outside forces. The Korean people have faced a multitude of foreign invaders and occupiers throughout their history, from the Japanese to the Americans. As a result, the Korean public expects its government to offer protection from outsiders. Trade protection is simply one component of that broader expectation.

The Korean government's protection of its domestic beef industry was, at first, inadvertent. The country was one of dozens that banned American beef after the BSE discovery. However, the ban allowed the Korean industry to rebuild. Consumption dipped in the immediate aftermath of the BSE discovery — partly due to public fear and partly because prices increased significantly. However, since demand for beef in Korea is relatively price inelastic, consumption began to recover even as prices remained high. The result was a strong increase in domestic cattle production, augmented by increased purchases from Australia and New Zealand.

With high prices and sustained demand, the Korean beef industry began to flourish. When other nations began allowing American beef back onto their markets, Korea failed to follow suit. On a strictly scientific basis, South Korea had no greater reason to fear American beef than any other country. That said, the concerns about feeding practices in the US beef industry are not without foundation — many American consumers have given up beef or switched to grain-fed alternatives because of the BSE threat. In the US, however, such choices are made by individual free will; it is not viewed as the government's role to limit market access. The market is expected to set its own limits.

Koreans, however, believe the government has a legitimate role in protecting the public from harm. The government still protects the Korean automobile industry — another point of contention in US-Korea trade talks. The actions of President Lee further illustrate the Korean view of government intervention. He was forced to apologize for failing to bow to public sentiment. Koreans believe that if the public does not want to eat American beef, the government should ban it. Many Koreans, therefore, do not accept the premise that individual free will is a sufficient answer to a public health concern, or that consumers can simply choose not to eat American beef if it is available on the market.

In the United States, the role of government in markets is viewed differently. Protectionism remains common — particularly in agriculture — but the government is also expected to open markets for American products abroad. In this case, American beef producers were frustrated that South Korea had stood alone in continuing to ban their product.