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GTAP Resource #1094

"A Korea-Japan FTA: Economic Effects and Policy Implications"
by Cheong, Inkyo


Abstract
The discussion of an FTA between Korea and Japan began in 1998 and led many research institutions to conduct studies on the economic effects of the FTA. The most prominent one is a joint study between the Korea Institute for International Economic Policy (KIEP) and Japan¡¯s Institute of Developing Economies (IDE), which are designated by the governments of Korea and Japan.

Currently, existing studies including the KIEP-IDE study illustrate that preferential tariff elimination between Korea and Japan under the FTA may worsen Korea¡¯s welfare level and trade balance with Japan and also cause a reduction in production scale in Korea¡¯s heavy and chemical industries.

However, these existing studies contain several problems. First, since they apply the GTAP parameters to all the regions in the simulations, they neglect the specific characteristics of each regional economy. Second, they only analyze the effects of tariff elimination between the two countries with the GTAP database tariff rates, ignoring the economic effects of trade liberalization in services and improvements in non-tariff barriers. Third, since the model used in these studies is a perfect competition model and does not accurately describe the effects of economies of scale and intensified competition, it may underestimate the economic effects of the FTA. The model is also inadequate in showing the positive effects of capital accumulation under the FTA.

For the new assessment of the bilateral FTA, we estimated ¡°Koreanistic¡± parameters for Korean economy which can be compatible with the GTAP database, and use the new set of parameters for simulations, rather than using the GTAP parameters. Also, it provides more focused and realistic outcomes by building a new model with parameters that more accurately represent the Korean economy and the effects of economies of scale and capital accumulation. In this study, the perfect competition model was used in tandem with a model based on economies of scale and capital accumulation, depending on the closure method with CDR coefficients and policy variables. By controlling parameters and variables, this study predicts the economic effects of the Korea-Japan FTA in the short-term and mid-term.

It is expected that the economic effects of tariff elimination and loosened non-tariff barriers between Korea and Japan will strengthen the Korean economy, bringing a higher GDP growth, unlike the previous joint study by KIEP and IDE. Tariff elimination will cause Korea¡¯s trade balance with Japan to weaken, but loosened non-tariff barriers will offset the loss by bringing a substantial trade surplus. The joint study predicts that Korea¡¯s major industries such as chemicals, steel, transport equipment, electricity, and electronics will shrink under the FTA, while this study suggests that production in many industries will expand in the mid-term.

The differences between this study and the previous studies are: 1) this study selects various subjects to consider diverse aspects of the effects of the FTA unlike the previous studies that analyze the economic effects based only on tariff elimination; 2) this study analyzes the effects of tariff elimination and loosened non-tariff barriers not only on manufacturing sectors but also on services; 3) the improved simulation model shows the mid-term effects by adding the effects of economies of scale and capital accumulation into the computational general equilibrium (CGE) model; 4) this study attempts to apply ¡°Koreanistic¡± parameters to the simulation model to enhance the quality of the analysis by providing more acceptable and realistic estimates; 5) Finally, this study projects that the Korea-Japan FTA will bring more economic benefits in the mid-term than in the short-term and analyzes the economic effects differently from the previous studies.



Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2002 Conference Paper
Status: Published
By/In: Presented at the 5th Annual Conference on Global Economic Analysis, Taipei, Taiwan
Date: 2002
Version:
Created: Cheong, I. (5/11/2002)
Updated: Bacou, M. (7/16/2002)
Visits: 4,034
- Preferential trading arrangements
- Asia (East)


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