A Study On KORUS FTA And Its Possible Effect

A look at the recent global trading environment shows that regionalism is increasing rapidly, led by free trade agreements under the WTO regime. If we look at the conclusions of186regional agreements which are in effect globally by time periods, the number of regional agreements was a mere5before the1970s,12in the1970s and10in the1980s. However, it shot up to64in the1990s, and95after2000, clearly showing widespread effects of regionalism.The Korean government is establishing a FTA network, pursuing the Korea-China-Japan FTA, Korea-India FTA and Korea-Mexico FTA at the same time, based on the Korea-Chile FTA concluded in2006, the Korea-Singapore FTA and the Korea-EU FTA, which took effect in2006and2010respectively. Under the circumstances, the KORUS FTA came into force in2012with the passage of the ratification bill in the National Assembly in October2011. The US is the world’s largest market whose size of imports accounts for12.8%of the global import market as of2011. The KORUS FTA is expected to serve as a stepping stone for Korea to drastically increase its exports to this important market. In particular, given that Korea signed this FTA ahead of China and Japan, its strong rivals in the US market, the KORUS FTA is expected to give Korea the first mover advantage in the US market to some extent, and to accelerate the conclusion of the FTA with China and Japan.Contribution of exports to the economic growth is much higher in Korea than in other countries due to Korea’s relatively small domestic market and a lack of natural resources. Korea expects that KORUS FTA will bring about many positive effects, such as the securing of an export market, increase of foreign investment through greater international credibility, and the advancement of industrial structures. Given that trade accounts for70%of the Korean economy, a trade structure concentrated in one country can act as an economic risk. Currently, China is Korea’s largest trading partner and Korea’s dependence on exports and imports to China reached24%and16%, respectively, as of2011. Based on its ability to diversify its exports and investment through the KORUS FTA, Korea should make the KORUS FTA a stepping stone for its economic restructuring in the medium-to long-term. China, for its part, can be concerned about the weakening of its competitiveness in the US and Korean markets. But China once said that it had little to be concerned about, saying that tariffs imposed on its main export items were already low in the US market, and its export structures to the US and to Korea were different from that of Korea and that of the US respectively. However, there has been not enough empirical and concrete research on this. So this paper tries to look into the possibility of import diversion from China after the KORUS FTA through the analysis of micro trade structure. First, this paper identifies the characteristics, background behind the KORUS FTA and its details, and then examines theoretical grounds for the effect of the FTA, and results of existing empirical analyses. Finally, the paper analyzes what effect the KORUS FTA will have on China’s exports to Korea, in other words, the possibility of Korea’s import diversion from China.The analysis of the import diversion from China is based on the comparison of China’s and the US’ market shares in the Korean market in terms of China’s main export items, MCA(Market Comparative Advantage index), the extent of tariff cut, ESI(Export Similarity Index), and RCA(Revealed Comparative Advantage index).The analysis shows that, among the10categories of China’s core export items to Korea, import diversion is likely to take place in the5categories with3categories with high possibility, and2categories with low possibility of import diversion.It is necessary for Korea to improve its economic fundamentals by diversifying its trade structure, and China is expected to pursue diversified FTAs as part of its response to this situation.