Pete Verbrugge has been exporting the apples, pears and cherries grown on his 2,000 acres of family-owned Washington orchards for decades. But when complex fumigation requirements spoiled the Korean cherry market a few years ago, the third-generation fruit grower from Yakima decided to uproot from that market entirely.
Then came the Republic of Korea-United States Free Trade Agreement (KORUS FTA), which triggered the elimination in March 2012 of a 24 percent tariff on U.S. cherries. Verbrugge knew he couldn’t afford to miss this ripe opportunity, especially when it coincided with a bumper crop of the dark red varieties favored by Korean consumers. Overnight, American cherries became a lot more affordable for shoppers at leading Korean retailers like Lotte Mart and E-mart. Huge mounds of cherries disappeared from the fruit section of Seattle-based Costco, a popular stop for American goods in Seoul, the nation’s capital and home to more than half its 50 million consumers.
Even South Korea’s three giant home shopping networks—think QVCs of Asia—cranked up the volume, promoting a 1.5-kilo cherry gift box like carnival barkers at a televised farmers market. Internet savvy Koreans ordered their pre-packaged cherries for next-day delivery on the latest mobile devices.
U.S. cherry exports to South Korea exploded. By the end of 2012, Washington and California cherry growers had exported 650,000 20-pound cartons to the Asian nation—nearly double the previous year’s total. Stemilt Growers, a leading U.S. supplier of fresh fruit, was forced to charter a Boeing 747 on two occasions to haul its cherries to Seoul, because limited cargo space on commercial flights meant no quarter for the perishable fruit.
“It’s been pretty phenomenal this past year,” says Dave Martin, Stemilt’s director of marketing.
As for Verbrugge, he reentered the market just in time to catch the tidal wave of business that pushed South Korea ahead of Japan in cherry purchases for the first time, for his own business and the U.S. market as a whole.
“Right now the Korean market is stronger financially,” says the 44-year-old grower, who schedules a visit to Asia at least every other year to stay current on consumer trends. “Where Japan has had this stagnant economy and its consumers can’t afford to buy the best cherries and are a lot more price conscious, the Koreans are willing to pay more for a better quality piece of fruit.”
The U.S. International Trade Commission predicted the newly minted KORUS FTA would boost U.S. merchandise exports by $10 billion annually once fully implemented. The first FTA negotiated with a country in North Asia, it was billed as an economic game-changer because of its potential for expanding U.S. exports to South Korea’s $1.6 trillion economy. Under the agreement, almost 80 percent of U.S. consumer and industrial products sold to South Korea became duty free on March 15, 2012, and that total is scheduled to increase to 95 percent within five years.
The spike in Washington cherry exports to South Korea is one of the great success stories. “Cherry growers certainly saw huge value in the Korea FTA,” says B.J. Thurlby, president of Northwest Cherry Growers, a Yakima-based trade group that represents growers in Washington, Oregon, Utah, Idaho and Montana. “We’d like to see more of those agreements.”
South Koreans have a per capita income of $22,500, which means money to spend on higher-end imported goods—and they’re increasingly savvy and selective. With the country’s removal of its 8 percent tariff on raw almonds, exports of that crop, you could say, have gone nuts. U.S. almonds bound for Korea jumped by 22 percent in year one—and the Golden State is cashing in.
California’s 6,000 growers produce more than 80 percent of the world’s almonds, three-quarters of which are exported. The U.S. generally ships 40-50 million pounds of almonds to Korea per year.
But filling orders is not so easy when Mother Nature is manufacturer. Korean consumers love to eat raw almonds as snacks, but they want the longer, flatter variety, free of spots, chips or other blemishes. Contrast that with U.S. consumers, who embrace natural appearances, organic foods and farmers markets.
“Almonds are relatively stable in pricing, but this year we’ve had a shortage in the crop and we’ve seen some pretty significant price increases,” explains Jeff Sleeper, the international sales manager for Blue Diamond Growers, a Sacramento-based growers’ cooperative and the world’s largest producer of almonds. “That’s something we haven’t seen in five or six years.”
Napa winemakers have also seen the doors open wider to Korea thanks to KORUS. South Korea’s wine market is dominated by French and Chilean vintners, the latter having negotiated a trade pact several years ago that carved out a stronghold in lower-cost wines. But America’s vintners are fighting their way back with a fresh FTA in their corner, and their timing couldn’t be better. The European Union recently forged its own trade pact with Korea, which would have given French, Italian and Spanish winemakers a strong price advantage if the U.S. hadn’t gotten its 15 percent tariff removed.
“We would have liked to have it first, but at least the playing field is level,” says Linsey Gallagher, vice president of international marketing for the San Francisco-based Wine Institute, the industry’s main marketing arm. U.S. winemakers have pounced on the opportunity, exporting $16 million of wine to Korea in 2012, up 26 percent over the previous year. Ninety percent of that wine came from California, which now counts Korea as its eighth largest market, up from 10th in 2011.
“You’ve got to be in Korea at least once or twice a year, conducting winemaker dinners, hosting events for the media and dedicating money to advertising,” says Michael Parr, vice president of international sales for Wente Vineyards, the oldest family-owned vineyard in America. The Livermore, California-based winery enjoyed 20 percent growth in sales to South Korea in the first half of 2012, helped by savvy marketing.
Shortly after the trade agreement went into effect, Parr dispatched Wente’s in-house chef for a two-week guest stint at the Ritz Carlton Hotel in Seoul, where he whipped up menus featuring U.S. foods and wines. “We were sending our chef to share a little taste of the United States and a little taste of California, and at the same time he was waving the Wente flag,” says Parr.
All in all, exports of high-value U.S. agricultural goods reached a record $2.8 billion in 2012. Still, farmers aren’t alone in taking advantage of the latest FTA.
KORUS was a life-saver for high-end boat manufacturers, who saw their sales sink by 70 percent when the U.S. economy took a dive in 2008. That’s when Bill Yeargin, president and chief executive officer of Correct Craft Inc., manufacturer of the Nautique wake boats, started scouting abroad for markets where people had money to spend and a love of water sports.
Seoul was one stop on Yeargin’s tour, with a visit to the Korean Waterski and Wakeboard Federation at the top of his itinerary. Several months later, he received a surprise call from Korean Ambassador Han Duck-soo, who asked to visit Correct Craft’s manufacturing plant in Orlando, Florida.
“When we travel anywhere, we’re very, very respectful of the country, the people, their traditions, their practices,” says Yeargin, who has visited all 65 countries that have Correct Craft dealerships. “We don’t want to come in like we know everything. We just want to establish relationships and demonstrate the benefits of our product.”
Last August, Correct Craft sponsored a Waterski & Wakeboard championship in Chuncheon, South Korea, and held a reception for the owners of the most popular ski clubs. Those clubs generally have a couple hundred members and own half a dozen boats that are rented by the hour.
“There are lots and lots of these ski clubs throughout Seoul, but most of them use very old boats,” says Yeargin. Since the trade agreement was signed, his company has sold seven of its high-performance Nautique boats ranging in price from $60,000 to $150,000. Within three years, the 8 percent tariff on those boats will completely disappear. “There is a huge opportunity to sell more product there.”
But KORUS hasn’t been a home run for all segments of the U.S. economy, still struggling to pull out of the worst downturn since the Great Depression. Beef and pork producers saw their exports to South Korea drop more than 20 percent in 2012, which industry experts attribute to unusual market conditions the past two years.
And while U.S. automakers enjoyed a sales increase—Honda began shipping Tennessee-made Accords to Seoul in 2012—Hyundai, Daewoo and other Korean automakers saw an even bigger expansion of their U.S. sales. As a result, America’s goods-related trade deficit with Korea climbed from $13.2 billion in 2011 to $16.6 billion in 2012.
Rob Scott, Economic Policy Institute economist and critic of U.S. trade policies, says the Obama Administration gave away too much, opening the U.S. economy to more cheap imports at the expense of U.S. jobs. “If this continues, it’s going to be a very disconcerting trend,” he says.
Gary Hufbauer, on the other hand, is a strong proponent of trade liberalization. He warns against reading too much into one year’s worth of statistics. Global trade was slow last year. As the U.S. economy continued to recover, China and India’s red-hot economies hit some bumps and the European Union jolted from one crisis to the next. Exports of key commodities such as corn were hurt by the stronger U.S. dollar and extreme weather, which pushed up prices.
Hufbauer, a senior fellow at the Peterson Institute for International Economics, remains confident that trade with South Korea will increase significantly in the long run, creating new jobs in areas such as legal services and international cargo transportation, where U.S. firms have a strong competitive advantage. But he says it will take time to realize these benefits, particularly in areas like meat and automobiles, where Korean producers successfully lobbied for protective tariffs to remain in place for more than a decade.
U.S. meat exporters can attest to last year’s unusual market conditions. The South Korean government put pressure on its cattle ranchers to cull their herds, flooding the market with a glut of low-cost domestic beef. Though U.S. pork exports to South Korea were strong, they still lagged behind the record exports of 2011, when a disease wiped out the domestic pork population and the Korean government temporarily dropped barriers to imported pork. It will be 15 years before Korea’s tariffs on U.S. meat products are completely lifted.
Hufbauer remains confident that U.S. trade with South Korea will grow by at least 25 percent more than it would have without KORUS FTA, and he predicts it will reach that benchmark within five years of its launch. “This agreement with Korea is the touchstone. It’s the closest thing to a gold standard as we’ll ever get,” he says.
MARCH OF THE CHERRIES
Meeting demand for a perishable product can be the pits when your market is 5,200 miles away.
Korean consumers have a gold standard of their own, whether it’s almonds or fruit. In cherries, they prefer dark red varietals—Bing, Sweetheart, Stehekin, Chelan—and they like them large, firm and blemish free. That can be a challenge with a delicate fruit. Sensitive to temperature changes and prone to bruising, they must be treated with care. So how does Pete Verbrugge deliver pristine cherries to the Asian nation and capitalize on KORUS FTA? It starts on his Washington orchards.
During cherry-picking season, Verbrugge holds sales meetings three times a day. As soon as an order comes in from South Korea, his team starts placing calls to growers to find out who can supply the high-quality fruit required to survive the long journey across the Pacific. They are looking for firm red cherries with healthy green stems. The next morning, the growers are contacted again to find out how many pickers are available, and how much fruit they can deliver.
As soon as the fruit is harvested, it is loaded onto trucks and brought into Verbrugge’s warehouse, where it is run through a hydro-cooler containing chlorinated, ice-cold water. The cherries are then placed overnight in an air-tight fumigation chamber that is warmed to about 50 degrees and filled with methyl bromide.
At daybreak, the room is vented and the cherries are sent to a packing line that has been carefully cleaned to prevent contamination. The packing line—described by Verbrugge as a cherry water park—involves a trip through ice-cold water baths and sorting and packing machinery. From there, the boxed cherries go into the hyper-chill rooms, where they are bathed with ice-cold air to keep their temperature at about 32 degrees.
By 11 a.m., the cherries must be packed onto trucks for their two-and-a-half hour trip to Seattle-Tacoma International Airport. Upon arrival, the Department of Homeland Security requires that every box of cherries be pulled off and run through an X-ray machine before being placed in freight containers packed into the belly of commercial airlines or cargo carriers with direct flights to Seoul, such as Korean Air, Asiana, United Airlines, UPS, FedEx and Polar Air Cargo. The cherries are covered with insulated blankets to keep them as cool as possible for the 5,200-mile ride.
Since fresh cherries are highly perishable and the fumigation process shortens their shelf life, close to 90 percent of the cherries are shipped to Korea by air. But nabbing that cargo space is neither easy, nor cheap. The air freight costs alone can add up to as much as one dollar per pound of cherries, leaving little room for error or profit.
Verbrugge relies on Binex Line Corp., an El Segundo, California-based freight forwarder, to snag coveted air cargo space on one of the regularly scheduled flights between Los Angeles and Seattle, before heading for Seoul. But it sometimes comes down to the wire, as the airlines determine how many passengers and how much cargo they are carrying.
If Verbrugge’s day has gone well, his cherries are delivered to their buyer at Seoul’s Inchon Airport within 48 hours of being picked off a tree in eastern Washington. But that “if” keeps him awake at night.
“Any one of those things can go wrong and you’ve missed your plane,” he says. “The grower didn’t have enough packers, or they decided to hold off picking a day because the color wasn’t right, or the packing line breaks down. Or the truck breaks down. Stuff goes wrong all the time, and you have to adjust on the fly.”
U.S. cherry growers say the next big opportunity for growth will occur if South Korea follows the lead of Japan and implements a different pest monitoring system. That would mean growers could skip the fumigation process that shortens the shelf life of their cherries and kept Verbrugge out of the market for a time.
“This would allow us to have more shipments by vessel and not have to fly them,” says Verbrugge. “Then our transportation costs are substantially lower, maybe 20 percent of what air freight is. But it’s still nerve-wracking when you have that perishable a product on a ship for two weeks.”