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

In addition to the data on bilateral trade in each of the sectors in the model, data are
incorporated on the domestic production and use of each sector (including use in the
production of other commodities and services); the supply and use of land, labor, and capital;
population; and GDP. The database also contains information on tariffs, some nontariff
barriers, and other taxes. An additional component of the data is a set of parameters which,
in the context of the model’s equations, determine economic behavior. These are principally
a set of elasticity values that determine, among other things, the extent to which imports and
domestically produced goods are substitutes for one another.
The standard GTAP data are based on the year 2001—i.e., trade flows and barriers and other
data refer to the world in that year. For the purpose of the present study, the standard data
were projected to reflect 2008; the benchmark update incorporates actual increases in U.S.
and Korean trade flows, as well as U.S. trade flows with the world at large, through 2005. 2
The model is then projected to 2008 using estimates of regional and global GDP growth
through 2008. 3 Data are drawn from the U.S. Department of Commerce (U.S. imports and
exports, as well as U.S.-Korea bilateral trade) and the World Bank (GDP projections).
Observed GDP growth rates for all the regions of the model are targeted using the data
above, as are population growth rates. Labor supply is assumed to grow in line with
population growth rates, and no shift in the relative composition of skilled and unskilled
labor is assumed. Capital stocks are assumed to grow at the same rate as real GDP over the
period 2001–05.
Trade flows within the model are adjusted to reflect key observable trade in the real world.
The strategy employed is to match all broad measures of international trade and then
selectively match more disaggregated trade flows that are critical to the results of the policy
simulation. At the broadest level, total imports for each of the ten regions are benchmarked
to observed 2005 trade flows. Select bilateral total trade flows are also adjusted, including
bilateral total trade between the United States and Korea, Japan, China, and Chile. Korea’s
total imports from Chile are also adjusted to align with 2005 trade. Bilateral trade in
merchandise sectors between the United States and Korea is benchmarked to 2005 flows.
Lastly, total sectoral imports and exports for the United States are targeted to observed 2005
trade data.
The trade protection data were also adjusted to reflect policy measures implemented under
the Uruguay Round and the Agreement on Textiles and Clothing (ATC), full implementation
of NAFTA, and the 2005 level of applied tariffs between the United States and Korea. Other
recent bilateral FTAs between the United States and partner countries are reflected in the
updated U.S. import and export flows. Trade with these countries is aggregated into larger
groups (the rest of the Americas and the rest of the world), in which their contribution to
average tariff rates is small. Since the simulations conducted here do not involve changing
these other tariff rates, any influence on the results is quite small.
To take into account the evolving oil and gas market, regional production levels of oil and
gas were adjusted to reflect the state of the world in 2005. Changes in production were
benchmarked to international production data maintained by the Energy Information
2 Compiled from official statistics of the U.S. Department of Commerce. The years over which the model
was updated span a period of tremendous growth in certain commodity prices, particularly oil and gas.
Special attention was paid to updating the oil and gas sector within the model; see below for a more detailed
discussion. Note that a relatively small amount of oil is traded between Korea and the United States,
mitigating the influence of any misspecification on simulation results in this report.
3 USDA, ERS, “Real Projected Gross Domestic Product,” August 1, 2007.
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