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

CHAPTER 2
Impact of Tariff- and Tariff-rate Quotarelated
Provisions on the U.S. Economy
This chapter provides an estimate of the quantifiable impact of the fully-implemented
U.S.-Korea FTA on the U.S. economy, exports, imports, and aggregate agriculture and
manufacturing sectors. 1 To illustrate the likely impact of the U.S.-Korea FTA on the United
States, an analysis was performed implementing the agreement’s tariff and tariff-rate quota
(TRQ) reductions in a computational simulation of the U.S. economy. To assess the relative
importance of those products subject to immediate liberalization under the FTA, a separate
analysis was performed for those products that are liberalized fully and immediately upon
implementation of the FTA.
Analytical Framework
The Commission’s analysis of the possible economy-wide effects of the removal of tariffs
and TRQs under the FTA includes a number of measures of U.S. economic activity,
including the possible impact on U.S. exports, imports, production, and employment. The
lack of necessary data precludes the quantification of the impact of the FTA provisions
relating to services, investment, labor, and environment. A qualitative assessment of the
impact of these provisions is provided in chapters 4 to 6 of this report. The method chosen
for the quantitative analysis is a computable general equilibrium (CGE) simulation. The
specific CGE model used for this analysis is the Global Trade Analysis Project (GTAP)
model, described more fully in appendix F. 2 The model includes domestic economic activity
and trade patterns for the United States and Korea, as well as for multiple regions 3 of the
world economy and for multiple products produced in those regional economies. The model
describes production and trade in 54 aggregate industry sectors, including 40 merchandise
sectors and 14 service sectors. 4
The use of a CGE model permits the Commission to measure the possible incremental effect
of the negotiated U.S.-Korea FTA tariff and quota reductions on exports and imports,
aggregate economic sectors, and labor markets. The model estimates the effects of tariff- and
TRQ-related provisions of the agreement on an economy that resembles the U.S. economy
in 2008, when the agreement is anticipated to enter into effect. The standard GTAP model
begins with data reflecting conditions in 2001; for the present analysis the standard model
has been updated in two steps to reflect the 2008 economy. The model was first updated to
reflect the state of the economy in 2005 (e.g., reflecting U.S. trade with major partners and
1 The analysis in this chapter is primarily based on chapters 2–5 of the U.S.-Korea FTA.
2 The model variant employed in this report is similar to that used by other researchers who also use the
GTAP model to assess the impact of the U.S.-Korea FTA on the U.S. economy. There are important
differences in simulation structure between studies, however. This report analyzes the negotiated FTA, in
contrast to other studies, which analyze a proposed or hypothetical FTA. The baseline data used in the
Commission’s model also more accurately reflect current data. See chap. 7 for a review of the literature.
3 GTAP regions were aggregated to include, in addition to the United States and Korea, Canada, Chile,
China, the EU, Japan, the Rest of Asia, Mexico, and the Rest of World.
4 Chap. 3 provides an assessment of the effects at a more disaggregated level for selected sectors/products.
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