U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

The Petersen Institute for International Economics has produced a series of reports on a U.S.-
Korea FTA. The first report was Choi and Schott, discussed above. Schott, Bradford, and
Moll updated these results in 2006. 8 Schott, Bradford, and Moll incorporated GTAP version
6 data into a model originally created by Harrison, Rutherford, and Tarr. 9
Relative to the GTAP model, their model produced much higher estimates of sectoral
reallocation resulting from liberalization, although both models estimated similar welfare
gains for the United States. U.S. welfare would increase by 0.10 percent in the long run in
their liberalization scenario that excluded service sectors and rice. The inclusion of Korean
rice in the liberalization scenario slightly reduced the estimated U.S. welfare gain, despite
increased U.S. rice production, because of increased payments under U.S. agricultural
support programs.
There are two studies that have estimated ad valorem equivalents of U.S. and Korean service
barriers and included reductions in these barriers as part of the FTA analysis. Lee and Lee
used GTAP to analyze an 80-percent reduction in agricultural tariffs and complete
elimination of all manufacturing tariffs. 10 They estimated service barriers based on Uruguay
Round Schedules submitted to the WTO, and assumed the FTA would reduce these barriers
by 50 percent. They did not report U.S. gains, but they estimated that liberalization of all
sectors would increase Korean welfare more than liberalization of only agriculture and
manufacturing.
Kiyota and Stern used the Michigan model to separately analyze the economy-wide effects
of four liberalization experiments: agricultural, manufacturing, services, and full
liberalization. 11 The Michigan model, unlike the GTAP model, incorporates increasing
returns to scale and monopolistic competition in all nonagricultural sectors. 12 The use of
increasing returns did not significantly alter the results relative to the GTAP model except
in the agricultural liberalization scenario, which they estimated would lead to a very small
U.S. welfare decline of 0.01 percent. 13 Manufacturing liberalization would increase U.S.
welfare by 0.04 percent, in line with other studies. Kiyota and Stern included estimated
service barriers based on financial data on price-cost margins constructed by Hoekman. 14
Services liberalization produced an 0.11-percent welfare gain for the United States, the
largest U.S. gain in their model.
In all of the models discussed in this review, U.S. trade with Korea is expected to increase,
and U.S. exports consistently rise more than U.S. imports, in both value and percentage
8 Schott, Bradford, and Moll, “Negotiating the Korea-United States Free Trade Agreement,” June 2006,
26–27. In this series, Choi and Schott updated the policy discussion without providing new model results in
Choi and Schott, “Korea-U.S. Free Trade Revisited.” In Free Trade Agreements: U.S. Strategies and
Priorities, 2004.
9 Harrison, Rutherford, and Tarr, “Quantifying the Uruguay Round,” 1997,1406–1409.
10 Lee and Lee, “Feasability and Economic Effects of a Korea-U.S. FTA,” December 30, 2005, 78–104.
11 Kiyota and Stern, “Economic Effects of a Korea-U.S. Free Trade Agreement,” 2007, 39. Kiyota and
Stern used a liberalization scenario with a time frame considerably different from the other studies. They
estimated changes from a U.S.-Korea FTA relative to an extrapolation to 2020 that incorporated potential
Doha tariff liberalization.
12 The GTAP model assumes constant returns to scale and perfect competition, whereas the Michigan
model assumes increasing returns to scale and monopolistic competition.
13 They reported that this welfare decline may reflect the movement of workers and capital away from
increasing-returns manufacturing sectors to constant-returns agricultural sectors. The U.S. welfare decline
was not because of increased payments under U.S. agricultural programs as in Schott, Bradford, and Moll.
14 Hoekman, “The Next Round of Services Negotiations: Identifying Priorities and Options,” 2000, 38.
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