An Analysis of the Import Effects of the Korea-U.S. FTA and Its Implications

This study analyzed the impact of tariff elimination and reduction under the Korea-U.S. FTA on Korea’s imports from the United States.

Since entering into force on March 15, 2012, the Korea-U.S. FTA has been supported by efforts from both countries toward its successful implementation, with the Joint Committee and sectoral committees reviewing implementation status and pending trade issues. Nevertheless, controversy over the economic effects of the FTA has intensified recently, particularly after calls for its renegotiation emerged during the U.S. presidential election process.

As of September 2017, among the 15 FTAs concluded by Korea, the Korea-U.S. FTA has remained a subject of continuous controversy in Korean society from the negotiation stage through its entry into force and implementation, which suggests that its effects on the Korean economy are considerable. In ex ante studies on the economic effects of the Korea-U.S. FTA, the discussion mainly focused on concerns over industries adversely affected by market opening and on negative effects on domestic employment. In ex post studies, however, most research has analyzed the performance of the FTA’s implementation and the characteristics of trade changes before and after its entry into force.

Accordingly, this study conducted an empirical analysis, based on import and tariff-reduction data obtained during the implementation of the Korea-U.S. FTA, to identify changes in Korea’s import structure from the United States after the FTA and to distinguish the effects of the FTA within those changes.

To summarize the main findings, with regard to changes in Korea’s import structure from the United States after the FTA, this study reconfirms, as with other FTAs, the importance of trade in intermediate goods in Korea’s imports from the United States. In particular, imports of U.S. intermediate goods have consistently accounted for more than two-thirds of total imports, and it is worth noting that imports of intermediate goods receiving preferential tariffs under the FTA have continued to increase despite the overall decline in imports since 2014.

Because the impact of an FTA on the domestic economy, including productivity and employment, is not direct but appears through multiple channels such as intensified market competition, increased exports, expanded foreign direct investment, and greater trade in intermediate goods, this study examined the effect of the Korea-U.S. FTA’s entry into force on Korea’s imports from the United States through the activation of trade in intermediate goods, and further analyzed its effects on the domestic economy. To summarize the empirical findings, overall, the elimination and reduction of Korea’s tariffs on U.S. goods were found to have a positive effect on both the value of imports and the number of imported product categories. Therefore, the Korea-U.S. FTA can be assessed as having contributed not only to the intensive margin but also to the extensive margin of Korea’s increased imports from the United States. Based on this, the application of preferential tariffs to intermediate inputs used in specific industries after the Korea-U.S. FTA entered into force was found to have a positive effect on improving TFP (total factor productivity) in those industries. Through this study, I seek to emphasize that, among the FTAs Korea has concluded—including those with China, the EU, and ASEAN—particularly in the case of FTAs with major trading partners, an increase in imports from these countries should not be interpreted as unconditionally having a negative impact on the domestic economy, and that a reassessment of their economic effects is needed through detailed analysis of the industrial and trade structure of each FTA.

I. Introduction

1. The Negotiation Process and Progress of the Korea-U.S. FTA

2. Controversy over the Economic Effects of the Korea-U.S. FTA

II. Review of Existing Research Related to FTAs

1. Studies on the Trade Liberalization Effects of FTAs and Intermediate Goods

2. Existing Research Related to Analysis of the Economic Effects of the Korea-U.S. FTA

III. Analysis of the Import Effects of the Korea-U.S. FTA

1. Import Trends Since the Korea-U.S. FTA Entered into Force

2. Status of Trade Liberalization Following the Entry into Force of the Korea-U.S. FTA

3. Static and Dynamic Analysis of the Import Effects of the Korea-U.S. FTA

IV. Conclusion and Implications

References

Mijin Cho / Professor, Department of International Trade, Myongji University

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=24

Original title: 한미 FTA의 수입효과 분석 및 시사점

Author: Mi-jin Jo

Date: 2017-10-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=3&idx=10744