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

The simulation results presented in the report are given as ranges. These ranges are
calculated by performing a systematic sensitivity analysis of the model with respect to two
of its key parameters, the elasticities of substitution between domestic and imported varieties
of goods (the GTAP parameter ESUBD) and between different foreign suppliers of goods
(the GTAP parameter ESUBM). 7 The parameter ESUBM used in the model is drawn from
an econometric study of the elasticity of substitution. 8 Commission staff varied these
parameters to provide a range for the estimated impact of the tariff and TRQ liberalizations. 9
It should be noted that this exercise in systematic sensitivity analysis pertains to only one
pair of parameters—the elasticities of substiution—employed within the model. There are
a number of other behavioral parameters that have a substantial bearing on the outcome of
the model. 10 Conducting a similar analysis on these parameters would likely lead to wider
reported ranges throughout the report.
As is typical of experiments conducted in the standard GTAP framework, this analysis
measures the long-term effects of a one-time, full implementation of an agreement. 11 The
model assumes that sufficient time is allowed to let the full effect of the agreement work its
way through the economy. Reported figures show the marginal effects of a trade policy
shock as it would have appeared in the base year of the data. Said differently, effects are
expressed in terms of proportional effects relative to the projected 2008 economy, although
those effects would take several years to be actually felt.
Implementation of Immediately Duty-Free Tariff Lines
In order to assess the liberalization effect of tariff lines subject to immediate duty-free
treatment (see chapter 2 of this report), it is necessary to establish a trade-weighted measure
for each of the GTAP sectors reflecting the degree to which each of these aggregates is
immediately liberalized. This task is accomplished by developing a trade-weighted
aggregation of all the lines in the agreement to the concordance level for the GTAP data set
(HS 6-digit) for all lines and separately using a tariff of 0 for those with an “A” code. 12 The
resulting data are then concorded to GTAP sectors to establish a measure of the baseline
tariff and the level of protection once those lines slated for immediate duty-free treatment
are implemented. The proportion of liberalization thus obtained is then applied to the
baseline tariffs and simulation process identified above.
7 These parameters determine the degree to which purchasers substitute between different foreign sources,
and between domestic and foreign sources.
8 Hertel, et al., “How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?,”
2004.
9 This study provides the mean values used in the simulation for ESUBM, and the associated standard
deviations for ESUBM those values, which are employed by the sensitivity analysis. ESUBD and ESUBM
are held in a fixed relationship, the so-called “rule of two.” In the sensitivity analysis, these two parameters
are set to covary, with each sector’s elasticity pair drawn from a uniform distribution constructed to have the
same standard deviation as that estimated by Hertel et al. The entire process is conducted using Stroud’s
method of Gaussian quadrature, a computation technique that is far more computationally parsimonious than
the Monte Carlo method. The ranges for reported model results are ±2 standard deviations from the mean
result of the systematic sensitivity analysis. See also Jomini, et al., SALTER, vol. 1, 1991.
10 Dimaranan, et al., “Behavioral Parameters.”
11 See, for example, USITC, The Impact on the U.S. Economy; or USITC, Overview and Analysis of the
Economic Impact of U.S. Sanctions.
12 The code “A” in the U.S. and Korea tariff liberalization schedules indicates a tariff line that is subject to
immediate duty-free treatment upon implementation of the FTA.
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