Has the FTA Promoted Trade? Empirical Evidence from Korea

Abstract

Purpose - This study aims to analyze how the FTAs concluded by Korea over the past 20 years have affected Korea’s trade.
 Design/methodology/approach - Using the gravity model, this study examines how the FTAs concluded by Korea with its trading partners from 1995 to 2020 have affected Korea’s trade. To this end, panel data was constructed based on trade data with 58 countries spanning 26 years, and the effects were analyzed using techniques such as Pooled OLS, GLS, and System GMM.
 Findings - It was found that a larger economic size (GDP), higher income level (per capita GDP), and larger market size (population) have a positive effect on Korean trade. Conversely and consistent with expectations, distance (the greater the distance) appears to have a negative impact on trade. FTA, the variable of interest in this study, was confirmed to have a positive effect on Korean trade, and it seems that trade between Korea and its trading partners increased significantly (trade creation effect). Although the trade diversion effect is not statistically significant, it can be inferred that trade diversion occurred as it shows a negative sign. An increase in the size of Korea’s trade is also evident as time passes by year.
 Research implications or Originality - Most previous studies treated FTAs only as dummy variables. This study is different in that it undertakes the analysis of FTAs as dummy variables, including trade creation, trade diversion, and FTA effects over time. In addition, while the previous studies mainly conducted analysis on a small number of advanced or OECD countries, this study is distinguishable in that it provides policy implications by limiting the analysis to Korea’s trade with its trading partners of 18 FTAs that have taken effect.