Productivity Gaps between Korea and Japan

Regarding agriculture in Korea and Japan, it is often said that price and cost gaps are the smallest, compared to other Asian countries.

Table 7.2 Retail Food Prices in Fukuoka and Seoul (Fukuoka: Dec. 2001, Seoul: March, 2002)

(Common 29 Items)

Fukuoka CPI Seoul Prices in Yen Ratio (Fukuoka=100)

Item Unit (Yen) Weight Department Supermarket CVM Average Department Supermarket CVM Average White Bread 1kg 391 45 625 375 375 458 160 96 96 117

Spaghetti 300g 137 3 90 － － 90 66 － － 66 Salmon 100g 201 14 230 2.00 － 215 114 100 － 107 Codfish 100g 196 0 250 － － 250 128 － － 128 Prawns 100g 273 20 364 － － 364 133 － － 133 Canned Tuna 80g 159 0 75 64 91 77 47 40 57 48 Beef Rib-Loin 100g 651 24 750 468 － 609 115 72 － 94 Pork Shoulder 100g 154 18 120 129 － 125 78 84 － 81 Chicken 100g 111 24 85 69 － 77 77 62 － 69 Ham 100g 224 18 180 168 － 174 80 75 － 78 Whole Milk 1000ml 196 46 78 90 135 101 40 46 69 52

Hen Egg 1kg 332 19 450 150 367 322 136 45 111 97 Cabbage 1kg 99 7 192 133 － 163 194 134 － 165

Spinach 1kg 494 13 500 556 － 528 101 113 － 107 Lettuce 1kg 211 7 967 660 － 814 458 313 － 386 White Potato 1kg 215 8 250 218 － 234 116 101 － 109 Carrot 1kg 239 9 188 180 － 184 79 75 － 77

Onion 1kg 198 8 175 130 － 153 88 66 － 77

Tomato 1kg 480 9 550 250 － 400 115 52 － 83

Apple 1kg 501 23 339 － 446 393 68 － 89 78 Banana 1kg 200 7 230 250 － 240 115 125 － 120 Canned

Pineapple 340g 134 2 102 － 160 131 76 － 119 98 Sugar 1kg 189 4 90 108 127 108 48 57 67 57

Mayonnaise 500g 291 8 233 270 230 244 80 93 79 84

Butter-Cookie 100g 139 13 － 88 76 82 － 63 55 59 Chocolate 100g 128 12 141 141 143 142 110 110 112 111 Potato chips 100g 133 10 － 90 125 108 － 68 94 81

Black Tea 25 bag 297 4 － 280 280 280 － 94 94 94 Instant coffee 100g 816 9 394 397 450 414 48 49 55 51

Average of 29 items 95

(Japanese Type 13 Items)

Fukuoka CPI Seoul Prices in Yen Ratio (Fukuoka=100) Item Unit (Yen) Weight DepartmentSupermarketCVMAverage DepartmentSupermarketCVM Average Rice 10kg 4189 89 2925 3090 3850 3288 70 74 92 78 Rice Cake 1kg 732 8 － 255 － 255 － 35 － 35 Tuna Fish 100g 319 45 500 450 － 475 157 141 － 149

Cod Roe 100g 621 15 － － － － － － － － Chinese Cabbage lkg 103 10 100 55 － 78 97 53 － 76

Dried Shiitake 100g 1043 2 1667 － － 1667 160 － － 160 Dried Laver 1 piece 282 13 220 200 － 210 78 71 － 74 Tofu 100g 18 37 49 42 － 46 272 233 － 256 Fermented

Soybeans 100g 75 10 － － 167 167 － － 223 223 Pickled Ume 100g 185 6 － 450 230 340 － 243 124 184

Soy Sauce 1000ml 265 5 600 395 660 552 226 149 249 208 Miso lkg 432 11 500 472 500 491 116 109 116 114 Green Tea 100g 529 23 760 716 574 683 144 135 109 129

Average of 12 items 131

Average of 41 items 109

Note: Fermented soybeans, pickled ume (plums), soy sauce, and green tea are imported from Japan. Average ratio of 37 items excluding these four items are 104. 1 yen = 10 won.

Source: N. Suzuki made this table by revising the Tokyo-Seoul comparison table in Korean Food Market Survey Report in 2002 by Y. Yoshida, K. Adachi, and Y.

Takeda.

Indeed, our research shows that the Seoul and Fukuoka retail food price levels on average are almost the same (Table 7.2). On average, the Seoul level is 5% lower regarding the basic 29 items, and 9% higher regarding all 41 items including Japanese-type food. Of course, we should check item-by-item prices instead of just the total average level. For example, the Seoul drinking milk price is only 52% of the Fukuoka price and The Seoul green tea price is 29% higher than the Fukuoka price.

However, how about food production costs? (Tables 7.3 and 7.4) The Korean vegetable production costs are less than 50% of Japan’s costs.

Usually, fertilizer, seed, pesticide, and machine costs are less than 30% of

the Japan’s level. The Korean milk and pig production costs are about 60%

of the Japan’s level. Feed and (unpaid) family labor costs are the major sources of the difference. It is strange that retail prices are almost the same on average and there are huge differences in production costs between Korea and Japan. This can be partly explained by much larger marketing margins in Korea.

Table 7.3 Vegetable Production Costs and Working Hours Comparison

Working Hours Yield (kg/10a) Costs (yen/kg)

(hour/10a) Commodity

Korea Japan Korea Japan Korea Japan Cucumber 11,702 15,965 60.3 157.3 835 1,414

Cucumber* 53 120

Tomato 7,418 11,520 70.7 145.7 744 1,069

Tomato* 40.1 168.8

Strawberry 2,685 2,407 155.6 779 775 1,121 Sources: http://www.gifu-u.ac.jp/~fukui/03-010622-7.htm

Cucumer* : http://www.geocities.jp/dr_otopy/tpcbk_je.htm Tomato* : http://www.geocities.jp/dr_otopy/tpcbk_jh.htm

Table 7.4 Milk Production Costs in Korea and Japan in 2002 (yen/kg) Category Korea All

Japan Hokkaido Korea - Japan

Korea - Hokkaido

Feed 25.38 31.37 27.21 -5.99 -1.83 Others 14.26 24.43 16.00 -10.16 -1.74 Purchased 11.12 6.94 11.21 4.17 -0.10 Livestock Depreciation 4.56 9.55 9.31 -4.99 -4.75

Building 1.09 1.57 1.65 -0.48 -0.56 Machinery 1.93 2.65 2.37 -0.72 -0.44

Labor 8.15 21.11 17.74 -12.96 -9.59 Sub Total 45.63 74.71 66.11 -29.08 -20.49

By-product 5.46 6.74 8.55 -1.28 -3.09 Sub Total minus

By-product 40.16 67.97 57.57 -27.80 -17.40 Entire Cost 44.50 72.87 63.99 -28.37 -19.49 Milk Yield (kg) 7,070.80 8,834 8,836

Source: Korean data is from from www.naqs.go.kr and Japanese data from Ministry of Agriculture.

Comparison of food prices and production costs is very useful in knowing the difference of competitive power among countries and analyzing the effects of tariff elimination. Especially, for countries with high production costs like Japan, detailed comparison by disaggregated cost categories provides the reason why the costs are so high. We can find a way to improve the high cost structure.

In addition, it would be useful to estimate the effects of tariff elimination using a simultaneous equation model. An example model was built for estimating the effects of fresh milk tariffs elimination on the Kyushu dairy market in the K-J FTA. The milk price Korean farmers receive is now 60 yen/kg in Korea and they can receive 90 yen/kg if they sell their milk for fluid purposes in Fukuoka. The transportation cost between Busan and Fukuoka is about 10 yen/kg. Therefore, they have incentives to move fresh milk to Fukuoka when the current 21.3% tariff is eliminated. Our simulation results show that milk imports from Korea will be 214 thousand ton with a decrease in Kyushu milk price from 86.3 yen/kg to 72.3 yen/kg (16%

decrease) and a rise in Korean milk price from 60 yen/kg to 62.3 yen/kg (3.8% rise). The result further shows that Kyushu milk production will decrease from 877 thousand ton to 618 thousand ton (30% decrease) in a few years and Korean milk production will increase from 2.340 million ton to 2.418 million ton (3.3% increase). Effects of incorporating milk into the K-J FTA might be significant. Table 7.5 also shows that Korea as well as Japan will be an importer when China joins the FTA because the milk price is only 20 yen/kg in China.

We assumed perfect substitution between Korean and Japanese milk in this calculation. The Armington elasticity, the degree of substitution between domestic and imported goods, is a key parameter to estimate effects of trade liberalization. It is often said that the GTAP model (a standard Computable General Equilibrium model for international trade) tends to underestimate

the effects of trade liberalization because the Armington elasticities are too small in the GTAP model.

Table 7.5 Effects of K-J FTA and KJC (Korea-Japan-China) FTA on Milk Markets

Unit Current K-J

FTA KJCFTA

KJCFTA (Domestic Premium) Milk Production 10,000 ton 87.7 61.8 17.5 53.3

Fluid Price yen/kg 90.1 72.3 38.2 67.1 Fluid Supply 10,000 ton 69.0 61.8 17.5 53.3 Fluid Demand 10,000 ton 69.0 83.2 143.2 88.7 Manufacturing

Supply 10,000 ton 18.7 0.0 0.0 0.0 Manufacturing Price

with Subsidies yen/kg 72.1 - - - Weighted Average

Price yen/kg 86.3 72.3 38.2 67.1

Manufacturing Price yen/kg 61.8 - - - Total Imports 10,000 ton 0.0 21.4 125.7 35.4 Imports from Korea 10,000 ton 0.0 21.4 0.0 0.0 Kyushu

Imports from China 10,000 ton 0.0 0.0 125.7 35.4 Production 10,000 ton 234.0 241.8 158.1 154.0

Demand 10,000 ton 234.0 220.4 476.7 500.1

Price yen/kg 60.0 62.3 38.2 37.1

Exports to Kyushu 10,000 ton 0.0 21.4 0.0 0.0 Korea

Imports from China 10,000 ton 0.0 0.0 318.6 346.1 Production

10,000 ton

1,025.

5

1,025.

5 1,426.7 1,369.1 Demand

10,000 ton

1,025.

5

1,025.

5 982.4 987.7

Price yen/kg 20.3 20.3 28.2 27.1

Total Exports 10,000 ton 0.0 0.0 444.3 381.4 Exports to Kyushu 10,000 ton 0.0 0.0 125.7 35.4 China

Exports to Korea 10,000 ton 0.0 0.0 318.6 346.1 Note: Domestic premium is set at 30 yen for Korea and 40 yen for China in the

final case.

Source: Estimated by N. Suzuki.

An alternative way would be to assume that a differentiated domestic premium is a constant difference remaining unchanged even after liberalization. That is, the differentiated domestic premium = domestic price – (foreign price + tariffs + transport costs + other transaction costs).

According to an interview survey in Japan conducted by my student, Mr. N.

Zushi, Fukuoka consumers are willing to buy Korean milk if its price is 94.5 yen per liter and buy Chinese milk if its price is 72.9 yen per liter, compared to 180 yen per liter for Japanese milk at the retail level. Table 7.5 also shows the results assuming that the domestic premium is 30 yen/kg for Korea and 40 yen/kg for China at the producer price level. In this case, negative effects of trade liberalization on Kyushu dairy farmers could be significantly reduced.

The vegetable production in Japan has been surviving although production costs in Japan are over twice that of in Korea and the import tariff is only 3% in Japan. We cannot explain this fact without considering the existence of the domestic premium for Japanese vegetables. This is a clear evidence of the domestic premium.

8. The BUG and FNSY Regions Should Seek Reciprocal