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

The specific policy assumptions are that the bilateral AVEs 10 are all reduced to zero (i.e., free
of duty), with certain exceptions. No change in quantity traded is anticipated in products that
fall within the rice sector, the raw milk sector, the sugarcane and sugar beet sector, or the
manufactured sugar sector. 11 In addition, as U.S. exports of oranges to Korea do not
experience full liberalization because of the ongoing seasonal orange TRQ in the FTA, the
Korea AVE tariffs in the vegetable, fruits, and nuts sector declines from an initial
38.5 percent to 6.7 percent rather than to zero. To isolate the effect of FTA tariff reductions
on beef trade from the effects of SPS issues, U.S.-Korea beef trade is based on 2003 data,
the most recent year of normalized trade prior to the Korean ban on beef imports from the
United States. This assumption allows for an estimate that measures the potential changes
in trade based solely on the removal of tariffs resulting from implementation of the FTA, and
assumes no significant SPS measures that would restrict access to the Korean market. 12
Lastly, Korean liberalization with respect to motor vehicles also includes the reduction of
the excise tax on automobiles with an engine displacement over 2,000 cubic centimeters
(cc). 13 The tax, currently 10 percent, is expected to decline to 5 percent. Although the
reduction is included in the FTA, it would apply to all producers; consequently, this change
is implemented for all suppliers to the Korean market, including the United States and
domestic Korean producers, prorated based on market share across the motor vehicles and
parts sector. 14
Simulation Results 15
Table 2.1 presents the simulated gross domestic gross product (GDP) and welfare effects of
tariff and TRQ elimination or liberalization under the fully implemented FTA relative to the
projected 2008 baseline economy. 16 As a result of tariff and TRQ removal or liberalizations,
U.S. GDP is expected to be higher by approximately $10.1–11.9 billion (or by about
10 See table 2.2 for a list of the AVE tariffs.
11 The agreement provides for no change in the treatment of rice and rice products; products within the
model’s raw milk sector and within the sugarcane and sugar beet sector are effectively not traded between
the United States and Korea, and Commission staff have determined that no substantial change in
manufactured sugar trade is expected as a result of the agreement.
12 See the analysis of meat products in chap. 3 for additional information on U.S.-Korea beef trade and
related SPS issues. The ability of the industry to quickly attain 2003 export levels was confirmed by industry
representatives. Truitt, testimony before the USITC, June 20, 2007, 223.
13 See the analysis of passenger vehicles in chap. 3 for additional information on the implications of the
agreement.
14 See app. F for a full description of the model assumptions, updates, and modifications.
15 Findings of the Commission’s analysis are broadly consistent with those identified in other studies
employing a similar model and scenario assumptions. See chap. 7 of this report for a literature review of
relevant studies.
16 GDP, the measure of all economic activity within a country, consists of private consumption,
investment, government consumption, and net exports. GDP here is defined as nominal GDP, which takes
into account both the price and quantity changes of its components. Welfare, on the other hand, summarizes
the real (i.e., exclusive of price effects) value of present and deferred consumption. Welfare may be
expressed as the sum of real private consumption, real government consumption, and real net savings.
Increases in the prices of consumption or investment will lead to an increase in GDP, but not in welfare. A
decline in the depreciation rate of capital with no corresponding change in current investment will cause no
change in nominal GDP, but will increase welfare as net savings (real current investment less depreciation)
increases. These examples emphasize the difference in these two measures: GDP captures the nominal value
of all economic activity within the country, while welfare measures consumers’ benefit from economic
activity at constant real prices.
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