A Study on the Relationship between FTA and Agricultural Trade Using Gravity Model: Based on Trade Creation and Diversion Effects

Abstract

Purpose - Free Trade Agreement (FTA) has been considered an important trade strategy in international trade since the WTO system in 1995. In response, Korea has been actively pursued the FTA, but damage from the FTA is reported in the agricultural sector. Design/methodology/approach - Under these circumstances, the main purpose of the study is to analyze the relationship between FTA signed by South Korea and agricultural trade. To analyze this, the study investigated 43 countries that are important in terms of FTA and agricultural trade with Korea from 2004 to 2017. Also, based on augmented gravity model, this study conducted three kinds of econometric procedures such as Generalized Least Square (GLS), fixed/random effect model, and dynamic panel estimation. Findings - The main results are as follows. First, the FTA signed by South Korea has had a positive effect on agricultural trade with the other country, especially the FTA has had a more sensitive impact on imports than on the country’s agricultural exports. In addition, the trade diversion effects was greater than the effect of trade creation effects related to agricultural products through the FTA. Research implications - Therefore, we need continuous efforts to investment on Korean agricultural sectors and to enhance agricultural productivity. Also, there is a need for ways to increase the utilization of FTA.