The Korea-USA FTA and Its Economic Impact

The Korea-USA FTA and Its Economic Impact

PRESENTED BY: LILI, ZESHAN AND ABDULLAH

PUKYONG, NATIONAL UNIVERSITY,INTERNATIONAL & AREA STUDIES DEPARTMENT

CONTENT OF STUDY Introduction History of FTA (Free Trade Agreement) Current Trade Scenario Model Data Different Policy Scenarios:

Scenario 1: 50% cut in tariffScenario 2: 75% cut in tariffScenario 3: (i) 100% cut in manufacturing sector (ii) 95% cut in agriculture sector by Korea (iii) 95% cut in textile sector by USA

Empirical Results: (i) Macroeconomic Results (ii) Microeconomic Results

Conclusion

INTRODUCTION – WHAT EFFECTS WILL BRING?

The KORUS FTA is the second-largest USA FTA (next to NAFTA). The USA International Trade Commission estimates that the reduc-

tion of Korean tariffs and tariff-rate quotas on goods alone will add $10 billion to $12 billion to annual USA Gross Domestic Product and around $10 billion to annual merchandise exports to Korea.

On the other hand, Korea’s exports to USA would increase by $6.4 billion to $6.9 billion, primarily in textiles, apparel, leather products, footwear, machinery, electronics, and passenger vehicles and parts (USITC, 2007).

Under the KORUS Agreement, over 95 percent of bilateral trade in consumer and industrial products would become duty free within five years of the date the agreement enters into force, and most re-maining tariffs would be eliminated within 10 years.

INTRODUCTION – WHAT EFFECTS WILL BRING? For agricultural products, the FTA will immediately eliminate or phase

out tariffs and quotas on a broad range of products, with almost two-thirds (by value) of Korea's agriculture imports from the United States becoming duty free upon entry into force.

The KORUS Agreement would also open Korea’s $560 billion services market to highly competitive American companies, supporting jobs for American workers in sectors ranging from delivery and telecommuni-cations services to education and health care services.

FTA would eventually lead to a 0.42% to 0.59% increase in South Ko-rea’s GDP according to a static analysis, and 1.99% to 2.27% accord-ing to a dynamic analysis (Korea Institute for International Economic Policy, 2005).

Overall, USA-Korea goods and services trade has risen from $126.5 billion in 2011 to $145.2 billion in 2014.

HISTORY OF FTA(SOURCE: OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE, GOVERNMENT OF USA)

June 5, 2006The United States and the Republic of Korea Began negations for the

USA-Korea FTA (Free Trade Agreement)

June 30, 2007The USA and Korea signed the USA-

Korea FTAJune 26, 2010

President Barack Obama and President Lee Myung-bak expressed renewed

commitment to the treaty, stating that they would direct their governments to

resolve remaining obstacles to the agreement by November2010. February 10,2011

The USA and Korea signed letters on new agreements designed to more

passages of the agreement forward.October 12, 2011

The USA Congress approved the agreement.

November 22, 2011The Korean National Assembly

approved the agreement.February 21, 2012

The USA and Korea completed their review of the measures both sides

had taken to implement the FTA and exchanged diplomatic notes on

agreeing to bring the agreement into force.

March 15,2012USA-Korea FTA Implemented

TOP EXPORT BENEFICIARY ITEMS (USA TO KOREA): 2014 (SOURCE: EMBASSY OF THE REPUBLIC OF KOREA IN WASHINGTON, DC )

Commodity Pre-KORUS Tariff Elimination ScheduleGrowth Be-tween 2011 and 2014

Exports to Ko-rea (2013)

Machines for manufacturing semiconductor de-vices

8% eliminated immediately or over 10 years 41.20% $2.2 billion

Motor cars & vehicles for transporting per-sons 8% eliminated over 5 years 142.70% $1 billion

Medicaments 8% eliminated immediately or over 3 yearsated over 15 years 90.90% $758.2 million

Petrol and bitum mineral oil (not crude) 3% or 5% eliminated immediately 558.60% $670.2 millionFrozen beef (bone-in) 40% eliminated over 15 years 71.40% $365 million

Food preparations 8%, 30% or 754.3% being eliminated im-mediately or over 10 years 18.80% $255 million

Parts of taps, cocks, valves for pipes 8% eliminated over 5 years 532.90% $216.8 millionBeauty & skin care preparation 6.5% eliminated immediately or over 10

years 30.10% $208 millionAlmonds (shelled and in shell) 8% eliminated immediately 174.40% $204.4 million

Fresh cheese (e.g. mozzarella, cream cheese)

36% eliminated over 15 years575.50% $199.4 million(0% tariff applied for quantity less than

7,000t)

CURRENT TRADE SCENARIO:USA TRADE IN GOODS WITH KOREA (USD BILLIONS)

Exports Imports Balance

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

36.8

60.7

-24.0

37.1

57.2

-20.1

20152014

Source: United States Census Bureau

USA TRADE IN GOODS WITH KO-REA (USD BILLIONS)

2015 2014 2013 2012 2011 2010

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

36.8 37.1 33.9 35.8 36.0

32.2

60.7 57.2

52.5 49.5 47.3

40.0

-24.0 -20.1 -18.6

-13.7 -11.3

-7.8

ExportsImportsBalance

Sources: United States Census Bureau

USA TRADE IN GOODS WITH KOREA (USD MILLIONS)

Jan/85

Jul/86

Jan/88

Jul/89

Jan/91

Jul/92

Jan/94

Jul/95

Jan/97

Jul/98

Jan/00

Jul/01

Jan/03

Jul/04

Jan/06

Jul/07

Jan/09

Jul/10

Jan/12

Jul/13

Jan/15

-4,000.00

-2,000.00

0.00

2,000.00

4,000.00

6,000.00

8,000.00

Exports

Imports

Balance

Sources: United States Census Bureau

Source: GTAP Modeling Lec Professor Dr. Ko Jong-Hwan

Regional Household

PrivateHousehold

SavingGovernment

Producer

Rest of World

SaveTaxTax

PRIVEXPVOAEndow

Tax GOVEXP

MTax

XTax

VDPA

VIPA

VDGA

VIGA

NETINV

VIFA VXMDVDFA

GTAP MODEL

2. EIGHT SECTORS: 1) GRAINSCROPS 2) MEATLSTK 3) EXTRACTION 4) PROCFOOD 5) TEXTWAPP 6) LIGHTMNFC 7) HEAVYMNFC 8) SERVICES

3. SCENARIOS 1) K-CHINA FTA 2) K-JAPAN FTA 3) K-USA FTA 4) K-EU FTA

1. SIX REGIONS 1) KOR 2) CHN 3) JPN 4) USA 5) EU27 6) ROW

GTAP Model GTAP DB Version 8: Base year 2007 (June 2012)

BASIC TRADE FACTS: SECTORAL IMPORT SHARES (%)

GrainsCrops MeatLstk Extraction ProcFood TextWapp LightMnfc HeavyMnfc Services0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0.1 0.0 0.1 0.73.2

19.9

66.2

9.8

3.71.1 1.4 2.4 1.2

20.4

45.3

24.4

KOR USA

IMPORTS SHARES BY COUNTRY (%)

KOR CHN JPN USA EU27 ROW0.0

10.0

20.0

30.0

40.0

50.0

60.0

0.0

17.315.2

13.711.5

42.3

2.5

15.3

7.0

0.0

20.9

54.3

KOR USA

SECTORAL EXPORTS SHARES (%)

GrainsCrops MeatLstk Extraction ProcFood TextWapp LightMnfc HeavyMnfc Services0

5

10

15

20

25

30

35

40

45

50

1.3 0.8

21.2

2.1 2.4

7.4

47.2

17.7

1 0.5

12.7

2.64.6

22.5

41.3

14.7

KOR USA

EXPORTS SHARES BY COUNTRY (%)

KOR CHN JPN USA EU27 ROW0.0

10.0

20.0

30.0

40.0

50.0

60.0

0.0

17.315.3 14.0

11.7

41.8

2.5

15.2

7.1

0.0

21.2

54.0

KOR USA

SIMULATION RESULTS: MACROECONOMIC EFFECTS Change in Korea's GDP (% Change)

SC1 SC2 SC30.00

0.10

0.20

0.30

0.40

0.50

0.60

0.22

0.35

0.51

CHANGE IN USA'S GDP (% CHANGE)

SC1 SC2 SC3

-0.0006

-0.0005

-0.0004

-0.0003

-0.0002

-0.0001

0.0000

0.0001

0.0002

0.0001

-0.0002

-0.0005

WELFARE (EQUIVALENT VARIATION, USD MILLION)

SC1 SC2 SC30

1000

2000

3000

4000

5000

6000

2467

3755

5286

1702

2738

3207

KOR USA

CHANGE IN EXPORTS (% CHANGE)

SC1

S2

SC3

0.00 0.10 0.20 0.30 0.40 0.50 0.60

0.17

0.39

0.57

0.23

0.37

0.47

USA KOR

SC1: DECOMPOSING EXPORTS (% CHANGE)

GrainsCrops MeatLstk Extraction ProcFood TextWapp LightMnfc HeavyMnfc Services

-10.0

0.0

10.0

20.0

30.0

40.0

50.046.6

35.6

-2.1

26.8

6.1

-0.3 -0.2 -0.2

4.9

0.8 0.0 1.3 0.3-0.1

0.2-0.2

KOR USA



-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

102.4

76.8

-3.8

54.0

10.5

-0.5 -0.3 -0.3

8.51.0 0.1 2.2 0.5

-0.20.3

-0.3

KOR USA



-50.0

0.0

50.0

100.0

150.0

200.0

175.3

131.1

-6.1

79.6

14.2

-0.8 -0.4 -0.4

12.01.1

-0.2 -2.1 -0.8 -0.20.6

-0.3

KOR USA

CHANGE IN IMPORTS (% CHANGE)

SC1

SC2

SC3

0.00 0.50 1.00 1.50 2.00 2.50

0.70

1.36

1.96

0.18

0.29

0.35

USA KOR

SC1: DECOMPOSING IMPORTS (% CHANGE)

GrainsCrops

MeatLstk

Extraction

ProcFood

TextWapp

LightMnfc

HeavyMnfc

Services

-10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0

21.0

-3.1

-0.2

-4.2

1.6

1.4

0.8

0.4

1.3

0.6

0.0

0.3

0.4

0.2

0.2

0.1

USA KOR


GrainsCrops

MeatLstk

Extraction

ProcFood

TextWapp

LightMnfc

HeavyMnfc

Services

-20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

53.2

-6.7

-0.2

-7.3

2.7

2.2

1.2

0.6

2.2

1.0

0.0

0.5

0.7

0.3

0.3

0.2

USA KOR


GrainsCrops

MeatLstk

Extraction

ProcFood

TextWapp

LightMnfc

HeavyMnfc

Services

-40.0 -20.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0

94.3

-10.6

-0.3

-19.3

2.8

3.0

1.7

0.8

2.8

1.3

0.0

0.5

0.8

0.3

0.3

0.2

USA KOR

TERMS OF TRADE

SC1 SC2 SC30.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.05

0.04

0.02

0.09

0.14

0.17

KOR USA

MICROECONOMIC EFFECTS: SC1: DOMESTIC PRODUCTION BY SECTOR

GrainsCrops MeatLstk Extraction ProcFood TextWapp LightMnfc HeavyMnfc Services CGDS

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

-6.79

4.22

-0.01

6.29

2.79

-0.23 -0.36

0.150.710.92

-0.05 -0.040.02

-0.19 -0.08 -0.01 0.000.02

KOR USA

SC2: DOMESTIC PRODUCTION BY SECTOR


-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

-14.42

8.26

0.07

12.17

4.88

-0.33 -0.55

0.251.231.58

-0.11 -0.060.02

-0.30 -0.12 -0.03 0.000.03

KOR USA

SC3: DOMESTIC PRODUCTION BY SECTOR


-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

-24.83

12.92

0.19

19.92

6.93

-0.42 -0.77

0.391.762.17

-0.21 -0.06 -0.27 -0.52 -0.140.01

0.000.03

KOR USA

SC1: CHANGE IN VALUE ADDED (%)


-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-6.8

4.2

0.0

6.3

2.8

-0.2 -0.4

0.10.9

0.0 0.00.0

-0.2 -0.1 0.0 0.0

KOR USA



-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-14.4

8.3

0.1

12.2

4.9

-0.3 -0.6

0.31.6

-0.1 -0.10.0

-0.3 -0.1 0.0 0.0

KOR USA



-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

-24.8

12.9

0.2

19.9

6.9

-0.4 -0.8

0.42.2

-0.2 -0.1 -0.3 -0.5 -0.10.0

0.0

KOR USA

SC1: CHANGE IN EMPLOYMENT LEVEL (%)


-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

KOR USA



-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-21.4

1.20.1

12.3

5.0

-0.2 -0.4

0.42.0

0.1-0.1

0.0-0.3 -0.1 0.0

0.0

KOR USA



-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

-33.7

1.3 0.3

20.2

7.1

-0.2 -0.5

0.62.8

0.0-0.1 -0.3 -0.5 -0.1

0.0 0.0

KOR USA

CHANGE IN WAGE RATE IN EACH SECTOR (%)

SC1 SC2 SC30.00

0.20

0.40

0.60

0.80

1.00

1.20

0.47

0.75

1.00

0.060.10 0.11

KOR USA

CONCLUSION

Korea and USA both have the highest share of imports in heavy and light manufac-turing sectors.

Korea mainly exports heavy manufacturing, extractions and services while USA mainly exports heavy manufacturing, light manufacturing and services.

Korea’s GDP growth rate is positive for all scenarios but in case of USA it is positive only for SC1.

Still Korea and USA have increasing welfare level for SC1, SC2, and SC3. Tariff reduction increases exports in both countries in all scenarios. But imports of Korea from USA increase a lot, mainly in the grain sector while Ko-

rea’s imports decrease in meat and livestock and processed food sector. The higher imports deteriorate terms of trade in case of Korea while terms of trade

improves for USA. Because of the tariff reduction, output in grain crop sector falls down while produc-

tivity in meat and livestock and processed food increases. This is also shown in case of value addition and employment level as both increase.

The overall increase in wage rate is higher in Korea than USA in each scenario.

The Korea-USA FTA and Its Economic Impact

Economy & Finance

Transcript of The Korea-USA FTA and Its Economic Impact