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

Tariff Equivalents in Korean
Banking Services 1
Introduction
The Commission estimates the price effects of trade barriers on net interest margins (NIMs),
which are the spread between lending and deposit interest rates, by using a two-stage
econometric method. In the first stage, bank-level data are used to estimate country-level
pure spreads, which are net interest margins corrected for the effect of prudential regulations.
Prudential regulations are governmental measures intended to ensure the integrity and
stability of the financial system, but they increase NIMs due to the costs of compliance. In
the second stage, data from 57 countries are used to estimate the effects of macroeconomic
variables, including one trade policy index measuring nontariff trade impediments found in
the General Agreement in Trade in Services (GATS) and another reflecting the latest
available GATS offers tabled in the Doha Round. From these results, the Commission
estimates multilateral “tariff equivalents” (TEs), which measure the percentage increase in
NIMs due to trade impediments. The Commission then creates a trade policy score from the
U.S.-Korea FTA and, drawing on the findings of the second-stage regression, constructs a
TE consistent with that agreement. The Commission finds a 76 percent TE for Korea under
Uruguay Round GATS commitments, a 59 percent TE under the Doha Round GATS offers,
and a 29 percent TE under the FTA.
It is acknowledged that the TEs developed in this appendix, which are not directly
comparable to an import tariff, are not used here in the strictly conventional sense in that
these restrictions are not applied at the border and therefore are not applied in the GTAP
model in chapter 2. 2 In using the term, the Commission follows work performed by
Deardorff and Stern, who use “tariff equivalent” to describe the price and quantity effects
of services trade restrictions. 3
1 The methodology used in developing tariff equivalents (TEs) used in this analysis differs from the
methodology used to develop TEs in the USITC’s 2006 publication entitled Recent Trends in U.S. Services
Trade in that, based on input received from industry and academic sources, more variables and banking
sectors are now analyzed. Therefore, TEs developed in this analysis are not directly comparable with TEs
found in Recent Trends 2006. The TEs are, however, comparable with those developed in the USITC’s
report entitled U.S.-Colombia Trade Promotion Agreement: Potential Economy-wide and Selected Sectoral
Effects, where a similar methodology was employed. See also the Financial Services section of chapter 4 of
this report for a discussion on the interpretation of tariff equivalents in Korean banking services.
2 Commercial presence is not captured in the GTAP model, whereas commercial presence restrictions are
a crucial component of the TEs developed in this section.
3 Deardorff and Stern, “Empirical Analysis of Barriers to International Services Transactions and the
Consequences of Liberalization,” 2005, 550-5.
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