The Impact Of The Korea-US FTA On China

On April 2,2007, the negotiations of Korea-US FTA, lasting for ten months, finally came to an end, and signed the formal agreement on June 30,2007. Although there were much dispute in such areas as agriculture, textiles and automobiles and many remaining issues to resolve, the two parts reached an agreement successfully in a relatively short time, considering the common interests of the two countries. Compromises, especially US, contributed to the successful agreement to a great extent. The motives of the compromises are from economic and political considerations. China, a developing country with rapid development, may be affected by Korea-US FTA both in economy and politics.Although the two sides had signed the Korea-US FTA, it had not been approved until now by the congress of the two countries because of the political reasons. Two governments have a positive attitude on the Korea-US FTA coming into force. On April 12,2010, the Korea president put pressure on America with the China-Korea FTA as a lever, hoping that the Korea-US FTA can be signed as soon as possible. On June,26,2010, the American president expressed that the disputes about the Korea-US FTA would be settled in November before the visit to Korea and will submit the approving draft to the congress early next year. Therefore, the Korea-US FTA is likely to make a substantial progress in a short time.As the customs union, the free trade agreement also has the trade creation and the trade diversion effect. The essay selects GDP, population size, area and distance in 26 countries from 2004 to 2008 as the basic explanatory variables, and adding dummy variables to establish the gravity model. With the empirical study, we conclude that, the establishment of the Korea-US FTA can make Korea and America enjoy the benefits of the trade creation effect, while the countries outside the agreement will suffer from the trade diversion effect. This part is the biggest advantage of the essay. The effect of Korea-US FTA on China can be mainly manifested in two aspects. On the one hand, the tariff barriers between the Korea and America will be reduced or eliminated, while the two countries remain the sane tariff barriers as before. Therefore, the products exporting to Korea and America will be less competitive, and the exports to the two countries will be reduced. The essay use the export similarity index and revealed comparative advantage index to analysis the trade diversion effect from the whole export structure and concrete industries. On the other hand, the Korea-US mutual market access can be guarantied due to the Korea-US FTA, while China's market access to the two countries is often threatened, making the exports of China seriously affected.The signing of the Korea-US FTA has a double motivation:one is the pursuit of the economic interests; the other is the political considerations of the two countries, of which China is the important one. Therefore, the Korea-US FTA will not only bring the trade diversion effect to china but also make an effect on China from the political level, especially on China's participation in regional economic integration. This can be reflected in two parts:one is the effect on the construction of China-Korea FTA. The beginning of the China-US FTA negotiations will be highly subject to the Korea-US FTA, because, at present, Korea will put the implementation of the Korea-US FTA in the first place. Even if the negotiations of the China-Korea FTA started, Korea will make full use of the dominance to force china make greater concessions. The other is that the two countries, for their own interests, would like to weaken China's influence in East Asia. The Korea-US FTA will make the focus of the regional integration in East Asia incline to the parts of Korea and America; the two countries will have more influence.In the face of the negative effect of Korea-US FTA, the Chinese government and enterprises should take active measures to deal with, turning the challenges into opportunities. From the perspective of the government, we should implement our free trade area strategy step by step basing on our national conditions and look for constructing a wide range free trade area, winning the initiative in the FTA process; In search of the East Asia regional economic cooperation, China should focus on the economic cooperation, avoiding sensitive issues, and make full use of the China-ASEAN FTA; We should fully realize the arduousness of China-Korea FTA negotiations and don't have a rush to sign the FTA.; Facing the trade diversion effect, our government should take appropriate measures to the upgrade our industrial structure and product quality and give suitable support to the industries that suffer great loss. As for the enterprises, we should focus on enhancing the ability of the innovation and upgrading the technology and product quality. In the meantime, we should diversify the export markets, ensuring our exports safety.