A Study on the Factors Affecting Trade Costs between South Korea and its Trading Partners

Abstract

Purpose - Trade costs may play an important role in limiting trade across countries. There are various factors, including exchange rate volatility, distance, and trade barriers that affect trade costs across countries. This research imputes trade costs from price differentials between South Korea and its trading partners and explore what factors do affect trade costs. Design/Methodology/Approach - This research employs the Threshold Autoregressive (TAR) Model and Ordinary Least Squares (OLS) Regression Model with monthly data during the sample period from January 1998 to November 2019. Findings - The results show that exchange rate volatility increases trade costs, while FTA reduces trade costs between South Korea and its trading partners. No statistically significant evidence was found to support the effects of distance, trade barriers (tariffs and non-tariffs), and English as a common language on trade costs. Research Implications - The findings suggest that Korean policymakers may need to consider how to keep stable exchange rates with trading partners to reduce trade costs, and that an FTA works well to reduce trade costs between South Korea and its trading partners.