Economic Effects of a Korea-U.S. Free Trade Agreement

Abstract

This study presents an analysis of the bilateral free trade agreement (FTA) that is being negotiated between Korea and the United States. The bilateral FTA negotiations were notified to the U.S. Congress by the United States Trade Representative in February 2006, and formal negotiations began in May 2006.1 It is anticipated that the negotiations may be completed and the agreement signed before mid-2007, which is when the current U.S. presidential negotiating authority expires. Once signed, the implementing legislation can be introduced in the U.S. Congress at any time. In Chapter 1, we set out what appear to be the primary objectives of the United States and Korea in their pursuit of an FTA. In Chapter 2, we review the existing studies of a Korea-U.S. FTA that have been done to date. Chapter 3 is devoted to comparative static and dynamic analyses of the FTA. We first provide an overview of the features and benchmark data of the Michigan Model of World Production and Trade, which is the computational general equilibrium (CGE) modeling framework that we use to analyze the economic effects of a Korea-U.S. FTA. Thereafter, we present the comparative static modeling results for the bilateral removal of tariffs and other trade barriers for agricultural products, manufactures, services, and all of these combined. This is followed by presentation of results of some dynamic computational scenarios that are specially constructed to take into account possible changes in capital formation that may be generated by the Korea-U.S. FTA. We then draw together the main conclusions from the review of previous studies and our own computational work. In Chapter 4, we provide a broader perspective on a Korea-U.S. FTA that takes into account alternative negotiating options for the two nations. These options include computational analyses of the other FTAs that each nation has concluded in recent years and that are currently in process. We also calculate the potential effects of the unilateral removal of trade barriers by the United States and Korea and the effects of global free trade in which all countries or regions covered in the model are assumed to remove their existing trade barriers on a multilateral basis. In Chapter 5, we present conclusions and implications for further research and policy.

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