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Price Gouging Undermines South Korean Trade Pacts, Minister Says

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Aug. 8 (Bloomberg) -- South Korean consumers aren’t getting the full benefit of deals lowering trade barriers because distributors and wholesalers aren’t passing along the savings in import costs, the nation’s trade minister said.

The margins being charged by “the different layers of distribution” exceed savings from tariff cuts stipulated in free trade agreements, Bark Tae Ho said yesterday in an interview with Bloomberg News. President Lee Myung Bak has pushed to expand trade markets, calling it necessary to widen the resource-scare country’s “economic territory.”

“If you add up these margins, the 15 percent tariff, 8 percent tariff cuts don’t really matter,” Bark said. “Maybe we are healthy for exports but we’re not really healthy for imports.”

High import prices are adding pressure on consumers to curb spending as South Korea struggles to revive domestic demand. Faltering overseas shipments and a decline in consumer spending is hurting the momentum of the economy that could fail to reach its 2012 growth target of 3 percent, the Bank of Korea said last month.

Lee’s popularity has plunged amid resentment over the rising cost of living and a widening income gap, ahead of presidential elections in December. Opposition lawmakers criticized the U.S.-South Korea free trade deal that took effect in March, and public discontent could hinder future agreements that fail to sufficiently lower import prices.

“While the tariff cuts give suppliers wiggle room to bring down prices, importers don’t really feel the need to do so because most of them have monopoly on products included in the accords with U.S. and Europe,” said Kim Hyung Joo, an economist at the LG Economic Research Institute in Seoul. “Consumers will need to wait up to five or 10 years to see enough competition build up to pressure importers.”

Luxury Goods

Some products like clothing and luxury goods where select importers have monopoly rights are yet to reflect the tariff cuts to consumer prices, Bark said. He called on consumers to take the matter into their own hands by filing complaints to relevant ministries.

There is “good momentum to correct this so that the benefit can reach consumers,” he said.

Prices of electric tooth brushes, whiskey and beer have risen since the FTA with the European Union went into effect in July 2011. Rising raw material and oil costs increased import prices, according to a June 21 statement from the Fair Trade Commission. For example, the price of electric tooth brushes rose to 159,000 won ($140) in November 2011 from 148,000 won ($131) in June 2011, according to FTC data.

U.S. walnuts rose 21.1 percent since the first quarter of last year, due to this year’s bad weather and poor crop showing, the FTC said.

Overseas Shipments

South Korea has signed ten free trade agreements since its first with Chile in 2004 as part of a strategy to boost exports, which account for half of gross domestic product. While some sectors have fared relatively well, overseas shipments made the worst showing in nearly three years and the manufacturing activity shrank in the sharpest pace this year amid the euro region crisis and slowing demand in China.

The U.S. and EU trade accords brought down prices for most imported fruits and wines by ‘liberalizing’’ the distribution structure and giving consumers direct access to importers or wholesalers and skip retailers’ premiums, Bark said.

To contact the reporter on this story: Sangwon Yoon in Seoul at syoon32@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net