DOES THE GRAVITY MODEL EXPLAIN SOUTH KOREA'S TRADE FLOWS?*

Abstract

This paper applies the gravity model to explain South Korea's bilateral trade flows and to extract practical trade policy applications. A trade structure and an Asian-Pacific trade network are included in the gravity equation to characterize the peculiarity of South Korea's trade patterns. The empirical result shows that South Korea's trade follows a Heckscher–Ohlin model more than an increasing returns or a product differentiation model. South Korea has large unrealized trade potentials with Japan and China, suggesting that they are desirable partners for an FTA. North–South Korean trade will expand markedly if bilateral relation normalizes and North Korea participates in APEC.