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

Key Assumptions
Agency. 4 The price changes generated in the model in response to these production levels
are in broad agreement with observed price changes. The nominal price of oil increased by
120 percent over the period in question, while the price in the simulation rose from 2001–05
by 118 percent.
Gross output for select sectors is also targeted for the textiles and wearing apparel sectors
in the United States. This adjustment is necessary because the two sectors experienced
substantial contraction over the period, while in the absence of targeting the model
anticipates only stagnation of growth.
Once the database is updated to align with key observable 2005 data, the 2005 database is
then projected forward to 2008. This is accomplished by incorporating real GDP and
population growth projections from the sources listed above. Anticipated continued
contraction in the textiles and wearing apparel sectors are also incorporated into the
projection, as is removal of the remaining TRQs on wearing apparel imports from China,
which are scheduled to expire in 2008. Certain key trade flows are also benchmarked to
expected growth rates, including exports of vegetables, fruits, and nuts; and dairy products.
The Commission’s simulation liberalizes trade completely in all goods subject to
liberalization under the U.S.-Korea FTA, except for the vegetables, fruits, and nuts sector,
which is subject to partial liberalization as a result of permanent, though increasing, TRQs.
An additional policy change that is modeled is the reduction in the excise tax on the sale in
Korea of all passenger vehicles with an engine displacement in excess of 2 liters. In order
to reflect the effects of tariff elimination on U.S. beef exports, the 2008 U.S. export
benchmark value assumes full resumption of U.S. beef exports to Korea, based on 2003 (pre-
BSE) values, which are then projected forward to establish the 2008 baseline. To reflect the
unchanging treatment for rice and rice products under the FTA and the limited trade
expansion potential for products in the raw milk and sugar sectors, bilateral traded quantities
are held level for products in the following model sectors: paddy and processed rice, raw
milk, sugarcane and sugar beet, and manufactured sugar. In order to take into account the
differential treatment of food-grade soybeans under the agreement, several changes to the
standard liberalization scenario have been made. First, Korean consumer demand is held
constant in quantity terms to reflect the limits placed on U.S. exports of food-grade
soybeans. Second, demand for oilseeds by food manufacturers in Korea (specifically, the
sugar manufacturing, food products n.e.c., beverages and tobacco, and wholesale trade) are
also held constant. There is no implicit or explicit time elapsing in the model, and no
adjustment costs are considered. This assumption means, first, that all provisions of the FTA
are assumed to be fully phased in immediately on January 1, 2008, rather than staged in over
many years per the FTA. The assumption also means that the modeled results are long-run
effects of a fully implemented FTA in an economy otherwise identical to the benchmark
2008 economy—i.e., an economy with the same resources, population, and other
characteristics as the 2008 economy.
A full list of the initial measured trade barriers in the model is shown in table F.2. These
barriers essentially constitute price gaps, or wedges, between world prices and domestic
prices in the importing country. The differences are accounted for principally by tariffs and
4 USDOE, EIA, “World Crude Oil Production,” May 25, 2007.
F-6