Friday, March 30, 2012

Price Fixing in Korea: Will FTA's Lower Consumer Prices in Korea?

As booze and babies illustrate in today’s newspapers, the consumer price impacts by the EU & US FTAs may have been blown way out of proportions by both proponents and opponents of these trade treaties.

The big price inflators are, normally, not duties but distribution costs and sometimes excise taxes. In time, some of the new import price savings resulting from tariff reductions may be passed on to consumers as more importers and distributors provide Korean consumers with foreign goods. But that will happen only so long as the marketplace is competitive, free of price fixing. In the main part, however, probably the greatest consumption boosts may be found to be more psychologically than financially based.

That is, consumers come to expect foreign goods to now be cheaper and more affordable — and consequently begin shopping, often for the very first time. Those consumers already familiar with foreign products are likely to be disappointed in the lack of any significant price drops. But in time, experienced shopper, too, will be rewarded.

As the Korean consumer herd begins to start buying more foreign goods, a greater variety is more likely to be commonly found. As foreign goods move away from being considered essentially luxury items to more common commodities, more import/distribution channels will being created. That in turn creates retail competition, which will drive down upstream pricing as middlemen compete more on the high volume, low margin model rather than the low volume, high margin one.

We first saw this happen with the overall wine consumption market exploding, thanks largely to the Korea-Chile FTA in which cheap – but not necessarily cheaper – wines stimulated consumer interest and thereby created increased demand for wine.

In other words, the trigger is for naive consumers to believe they can now afford once-considered exotic or luxury goods and their increased mass purchasing eventually brings down prices – actually more than tariff reductions. On the other hand, without highly publicized free trade agreement support and opposition, the common consumer would not likely pay as much consideration to start purchasing imported goods.
Below are two articles that illustrate shortly after major free trade agreement implementations how imported goods can maintain or even increase prices regardless of the expected FTA benefits.

The baby buggy example may shows price fixing maintaining artificially high prices. But without the FTA implementations, I doubt this practice would have been highlighted by journalists. This is likely to also be the case with whiskey and other imports’ pricing in today’s and future media reports. And in turn this kind of exposure may eventually lead to lower prices. (Sean Note:  The Korean Fair Trade Commission has also been aggressive in finding tools to lower consumer prices - lawsuits and fines)
by Tom Coyner.  Senior Commercial Advisor for IPG.  
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SeanHayes@ipglegal.com