Quantitative Estimates of the Economic Impacts of a Korea–United States Free Trade Agreement

Abstract

This paper investigates the bilateral trade pattern between South Korea and the United States and examines the economic impact of a Korea–United States (KORUS) free trade agreement (FTA). Three related general equilibrium approaches were used to investigate the effects of a KORUS FTA. The static general equilibrium model estimates the efficiency gains from resource allocation. The capital accumulation general equilibrium model includes the growth bonus from the increased incentives for savings and investment created by the static efficiency gains. The productivity enhancement general equilibrium model augments the capital accumulation model by taking into consideration the dynamic efficiency improvements from competitive effects in the economies over time. The last welfare gain turns out to be the biggest gain from the KORUS FTA, dwarfing the static efficiency gains. The results indicate that Korea could gain an estimated 0.32 to 5.97 percent in GDP from a KORUS FTA. Much of the gains that would accrue to Korea from the FTA with the United States would be productivity gains from increased competition between U.S. producers and domestic Korean producers. Another important area of gain for Korea would be increased efficiency from lower non-tariff barriers. This provides a strong argument for ensuring that an FTA between Korea and the United States is comprehensive and facilitates regulatory cooperation and the reduction of non-tariff barriers.