U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC
U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC
U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC
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The Petersen Institute for International Economics has produced a series of reports on a U.S.-<br />
<strong>Korea</strong> FTA. The first report was Choi and Schott, discussed above. Schott, Bradford, and<br />
Moll updated these results in 2006. 8 Schott, Bradford, and Moll incorporated GTAP version<br />
6 data into a model originally created by Harrison, Rutherford, and Tarr. 9<br />
Relative to the GTAP model, their model produced much higher estimates of sectoral<br />
reallocation resulting from liberalization, although both models estimated similar welfare<br />
gains for the United States. U.S. welfare would increase by 0.10 percent in the long run in<br />
their liberalization scenario that excluded service sectors and rice. The inclusion of <strong>Korea</strong>n<br />
rice in the liberalization scenario slightly reduced the estimated U.S. welfare gain, despite<br />
increased U.S. rice production, because of increased payments under U.S. agricultural<br />
support programs.<br />
There are two studies that have estimated ad valorem equivalents of U.S. and <strong>Korea</strong>n service<br />
barriers and included reductions in these barriers as part of the FTA analysis. Lee and Lee<br />
used GTAP to analyze an 80-percent reduction in agricultural tariffs and complete<br />
elimination of all manufacturing tariffs. 10 They estimated service barriers based on Uruguay<br />
Round Schedules submitted to the WTO, and assumed the FTA would reduce these barriers<br />
by 50 percent. They did not report U.S. gains, but they estimated that liberalization of all<br />
sectors would increase <strong>Korea</strong>n welfare more than liberalization of only agriculture and<br />
manufacturing.<br />
Kiyota and Stern used the Michigan model to separately analyze the economy-<strong>wide</strong> effects<br />
of four liberalization experiments: agricultural, manufacturing, services, and full<br />
liberalization. 11 The Michigan model, unlike the GTAP model, incorporates increasing<br />
returns to scale and monopolistic competition in all nonagricultural sectors. 12 The use of<br />
increasing returns did not significantly alter the results relative to the GTAP model except<br />
in the agricultural liberalization scenario, which they estimated would lead to a very small<br />
U.S. welfare decline of 0.01 percent. 13 Manufacturing liberalization would increase U.S.<br />
welfare by 0.04 percent, in line with other studies. Kiyota and Stern included estimated<br />
service barriers based on financial data on price-cost margins constructed by Hoekman. 14<br />
Services liberalization produced an 0.11-percent welfare gain for the United States, the<br />
largest U.S. gain in their model.<br />
In all of the models discussed in this review, U.S. trade with <strong>Korea</strong> is expected to increase,<br />
and U.S. exports consistently rise more than U.S. imports, in both value and percentage<br />
8 Schott, Bradford, and Moll, “Negotiating the <strong>Korea</strong>-United States <strong>Free</strong> <strong>Trade</strong> <strong>Agreement</strong>,” June 2006,<br />
26–27. In this series, Choi and Schott updated the policy discussion without providing new model results in<br />
Choi and Schott, “<strong>Korea</strong>-U.S. <strong>Free</strong> <strong>Trade</strong> Revisited.” In <strong>Free</strong> <strong>Trade</strong> <strong>Agreement</strong>s: U.S. Strategies and<br />
Priorities, 2004.<br />
9 Harrison, Rutherford, and Tarr, “Quantifying the Uruguay Round,” 1997,1406–1409.<br />
10 Lee and Lee, “Feasability and Economic Effects of a <strong>Korea</strong>-U.S. FTA,” December 30, 2005, 78–104.<br />
11 Kiyota and Stern, “Economic Effects of a <strong>Korea</strong>-U.S. <strong>Free</strong> <strong>Trade</strong> <strong>Agreement</strong>,” 2007, 39. Kiyota and<br />
Stern used a liberalization scenario with a time frame considerably different from the other studies. They<br />
estimated changes from a U.S.-<strong>Korea</strong> FTA relative to an extrapolation to 2020 that incorporated potential<br />
Doha tariff liberalization.<br />
12 The GTAP model assumes constant returns to scale and perfect competition, whereas the Michigan<br />
model assumes increasing returns to scale and monopolistic competition.<br />
13 They reported that this welfare decline may reflect the movement of workers and capital away from<br />
increasing-returns manufacturing sectors to constant-returns agricultural sectors. The U.S. welfare decline<br />
was not because of increased payments under U.S. agricultural programs as in Schott, Bradford, and Moll.<br />
14 Hoekman, “The Next Round of Services Negotiations: Identifying Priorities and Options,” 2000, 38.<br />
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