Free Trade Agreements and Import-import Substitution Effect Evidence from a CGE Analysis: The Case of EU-Korea and EU-Japan FTAs

Abstract

Since the failure of the Doha Round, we have observed an increase in Free Trade Agreements (FTAs). These FTAs modify the market access conditions not only for the signatory countries’ companies, but also indirectly for companies of third parties to the agreement, since their exports become more expensive vis-a-vis their competitors’ benefitting from the FTA. With the FTA Road Map drawn in 2003, the Republic of Korea actively pursued an FTA strategy in trade policy; in 2011 it became the first Asian country to sign an FTA with the EU. In December 2017 Japan also finalised an FTA with the EU. Using a CGE model, implemented through GTAP, I show that Korea’s decision to sign an FTA with the EU before Japan could support Korea’s exports to the EU in the first scenario (I), where only the EU-Korea FTA is in force, and safeguard its exports from the effects of enforcing the EU-Japan FTA in the second scenario (II). On the other hand, Korea’s exports would have decreased if the EU-Japan FTA had been implemented before the EU-Korea FTA. The simulated scenarios take account of both the impact of different Armington elasticities and different actionability of NTMs. Keywords: EU-Korea FTA, EU-Japan FTA, CGE model, Armington elasticity, actionability of NTMs.