Estimating economic impacts of the US-South Korea free trade agreement

ABSTRACT

We analyze the economic impacts of the United States-South Korea Free Trade Agreement by applying the Global Trade Analysis Project (GTAP) computable general equilibrium model to highly disaggregated commodity flow data. The analysis calculates the impacts in terms of welfare effects, national economic indicators (such as GDP), and business performance metrics (such as sales revenue), which can be used by a variety of decision-makers. Our results suggest several trade-offs among these measures. Positive welfare gains between the US and South Korea are about the same in absolute terms, but favor the latter in relative terms, and very heavily so for GDP gains. Moreover, the US is projected to incur a loss of gross output (sales revenue) in several major manufacturing sectors that are heavily concentrated in geographic areas that have been promised a return of jobs by the Trump Administration.

KEYWORDS:

• Free trade agreement
• United States
• South Korea
• tariff barriers
• computable general equilibrium modeling

Acknowledgements

We are grateful to the following people for commenting on the earlier drafts of the study: Bryan Roberts, Katie Foreman, Gia Harrigan, and staff of CBP. We also thank Brett Shears for his valuable research assistance. However, the views contained in the paper are solely those of the authors and not necessarily of any of the institutions with which they are affiliated nor the institutions that funded the research.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Although tariff reduction or elimination is a main focus of FTAs, FTAs also contribute to other aspects of trade liberalization. These can include a loosening of government procurement policies, reductions in non-tariff trade barriers (NTB), such as import licensing and quotas, technical regulations, sanitary and phytosanitary measures, and other regulatory complexities (Fugazza and Maur, 2008; Hayakawa and Kimura, 2014). The impacts of NTBs are not modeled here because they involve very different policy instruments, do not have a unified and straightforward approach to their measurement, and suffer from a lack of empirical data. Felbermayr et al. (2013) indicated that if such NTBs are quantified as an ad valorem equivalent, they can represent an additional 15–30% increase in trade costs. Therefore, the economic impacts of the US entering a trade agreement with a foreign trading partner presented in this study can be viewed as a conservative estimate of the benefits of the US-Korea FTA.

2. One should note that this can be a caveat of CGE modeling in general as these parameters are often inconsistent with the economic structure of the analysis, as indicated by Chen and Haynes (2017). For example, in the case of the GTAP Model, the Armington elasticities of substitution were estimated in Hertel et al. (2007) using econometric analysis, whereas the factor substitution elasticities were taken from the SALTER model (Jomini et al, 1991). The various elasticities in the SALTER model were specified based on a synthesis of estimates from the econometric literature and original econometric work for New Zealand.

3. The commodity terms of trade refers to the purchasing power of a country’s exports with respect to imports (Burfisher, 2011). The exchange rate in real terms is sometimes considered a proxy for the terms of trade, but the two are equivalent only if export and import prices are the same as consumer goods prices.

4. There are some notable exceptions to this statement, such as the case of Transportation Equipment, of Electronic Equipment, and of Machinery, where the gross output declines in both countries. However, this can be explained for the first two sectors by the fact that there is hardly any tariff reduction for these goods at all in either country (see Table 1). Therefore, resources will shift away from them and move to other sectors that benefit from high tariff reductions. In case of the Machinery sector there is a significant tariff decrease applicable to imports from Korea to the US. However, it is still modest compared to many other sectors.

5. The various indicators of the impacts of the US-Korea FTA represent alternative interpretations of its benefits. A complete policy analysis would also include consideration of costs and their distribution. We have presented this aspect in part in terms of negative impacts on various producing sectors in both countries. Additional costs would be associated with administering an FTA, including monitoring and enforcement. Some relevant estimates of these costs are contained in a related report by Wei et al. (2016) on US Customs and Border Protection staffing to administer this FTA.

Additional information

Funding

This work was supported by U.S. Department of Homeland Security (DHS) Customs and Border Protection (CBP) [grant number BOA HSHQDC-10-A-BOA19].