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

other barriers. 5 As tabulated, they consist of tariffs and price premiums due to TRQs,
measured in the GTAP database as AVEs. 6 The sectors listed in table F.2, and their
corresponding import tariff equivalent measures, are highly aggregated. For example, the
“other crops” category includes commodities such as coffee, tea, cut flowers, cotton, spices,
and tobacco. As a result, the listed import tariff equivalent measures are trade-weighted
averages of the measures faced by the individual commodities composing the aggregates.
The tariff equivalents listed here include the effects of TRQs imposed on certain agricultural
products. As shown in table F.2, the tariffs on Korea’s imports from the United States (i.e.,
U.S. exports) are higher than the tariffs on U.S. imports from Korea. Services are restricted
by nontariff barriers but these barriers are not measured in the GTAP data, precluding a
quantitative assessment of the services sector liberalization under the FTA on these sectors.
In addition, the Commission did not explicitly model the impact of rules of origin, but the
simulation performed is consistent with the existence of such rules. In the simulation, it is
assumed that traded commodities are differentiated by country of origin, which implies a
limit to the substitutability of imports sourced from a third country.
Solution Technique
Full FTA Implementation
The analysis employs a comparative static framework in which a benchmark equilibrium
depiction of the U.S. economy, as of January 1, 2008, is derived through a set of balanced
accounts of trade, production, consumption, and taxes. Once this benchmark has been
created, policy shocks are imposed on the balanced model. A policy shock simply means a
change in policy imposed on the model to measure its effect. In this analysis, the policy
shocks consist of the reduction or elimination of tariffs and measurable TRQs agreed to in
the FTA shown in table F.2.
To estimate the marginal effect of the FTA, the trade policies (tariffs and TRQs) shown in
table F.2 are replaced with new levels (generally zero) to represent the new, post-FTA
economic state. The model is rebalanced, and new values for trade flows, outputs,
employment, welfare, and GDP are generated. The difference between the benchmark values
of these variables and their new values is the estimated marginal effect of the removal of
tariffs and measurable TRQs under the FTA. It is expected that sectors facing relatively high
trade barriers will show relatively larger effects as a result of the implementation of the FTA.
5 A price gap summarizes the price impact of several border measures: ad valorem duties and specific
duties that insulate domestic prices from short-term fluctuations in world markets. These price gaps are
modeled as constant ad valorem gaps between domestic and world prices.
6 Global Trade, Assistance, and Production: The GTAP 6 Data Base.
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