[Fact Check] Will Prices Drop If Banana and Mango Tariffs Are Exempted?

"Allocation Tariff Effect Diminishes in More Competition-Restricted Markets"

The government is applying tariff quotas to imported fruits such as bananas and agricultural and livestock products to curb rising food prices, but opinions on the effectiveness are divided. In particular, there are concerns that the selection of items did not closely reflect the import-distribution competitive environment, so the price reduction effect felt by consumers may be limited. A tariff quota is a system that temporarily lowers tariffs on certain imported goods for a specific period.

According to the Ministry of Economy and Finance on the 28th, the government began lowering tariffs on 10 imported fruits and food raw materials starting from the 17th. Bananas (30,000 tons), mangoes (1,300 tons), and grapefruits (2,000 tons) are representative items with reduced tariffs. The existing tariff on bananas was 30%, but a 0% tariff applies to 30,000 tons of imports until the end of this year. Mangoes and grapefruits also have their existing 30% tariffs cut to 0% for 1,300 tons and 2,000 tons, respectively. This is to stabilize food prices by temporarily exempting tariffs on imports to control soaring prices.

According to the Ministry of Economy and Finance on the 28th, the government began reducing tariffs on 10 imported fruits and food ingredients starting from the 17th. [Image source=Getty Images]

However, it is uncertain whether the tariff exemption on items like imported fruits will lead to price reductions. The domestic imported fruit market is close to a competition-restricted environment where a few companies import and distribute products, and in such an environment, companies have little incentive to lower prices. Song Young-gwan, a senior research fellow at the Korea Development Institute (KDI), said, “In a competition-restricted market, even if the government lowers tariffs, companies have little incentive to reduce consumer prices,” adding, “The tariff benefits may not lower prices but instead result in taxpayers’ money going to a few distribution companies.” He added, “Therefore, it is very important to carefully select items considering the market environment.”

In particular, the banana market, which accounts for a large share of the imported fruit market, is considered a competition-restricted environment centered on large importers such as Del Monte and Dole. The mango and grapefruit markets are similar. Although not dominated by large companies, the market structure is such that a few importers decide import volumes, and competition is not active.

An official from the Korea Rural Economic Institute pointed out, “The imported fruit market should be seen as a place where major companies control import volumes considering exchange rates and domestic demand,” adding, “There are small-scale companies, but their price-setting power is weak.” Since the market moves around a few companies, reactions to factors such as crop conditions in exporting countries also act as variables. The official said, “Sometimes exporters in the exporting countries know about the domestic tariff quota reduction in advance and raise prices, so the import cost burden remains the same.”

Regarding this, the Ministry of Economy and Finance explained that it was an unavoidable measure amid rapidly rising domestic fruit prices. Last month, apple prices rose sharply by 72.4% compared to the same month last year due to abnormal weather, among other factors. A ministry official said, “In a situation where domestic fruit prices have risen sharply due to typhoons and other factors, the government expected a chain effect where domestic fruit demand would be dispersed and prices stabilized if imported fruit prices fell even slightly.” He added, “(The tariff reduction measure) may partly benefit importers, but we hope some of it will be reflected in consumer price reductions.” The measure is expected to have a price reduction effect by lowering the import burden on importers through tariff cuts.

Even if the application of tariff quotas does not lead to a drop in fruit prices, there is an opinion that it can at least curb a steeper upward trend. Kim Ju-young, a researcher at the Agricultural Monitoring Center, said, “When the crop conditions in the regions from which imports come are poor, if companies’ tariff burdens decrease, the incentive to reduce import volumes also decreases, which can help restrain price increases.” Mangoes, mainly imported from Peru in December, are reported to have poor local crop conditions. Although there is a possibility of fruit prices rising despite tariff cuts due to reduced import volumes, the view is that the application of tariff quotas can at least prevent prices from soaring sharply.