An Empirical Study Of China-Korea FTA With The Gravity Model

Regionalism and multilaterism have had a big impact on the world trade order and finance, even on the whole economic field. From DDA, which led by WTO, to TPP, the main trend in the world trading field is changing from multilaterism to new regionalism. From 1990s, East-Asia area became ’new world factory’, comparing with EU and NAFTA, the ratio of trade volume on world kept rising, East-Asia area has the most developed supply-chain in every economic region. Recently, to raise up the efficiency of the production, many East-Asian countries started to realize that the necessity of a wide range of economic integration, In such a background, Korea, which has been a traditionally depending on foreign trade from 1960s, decided to take FTA as the main tool to catch up the world trend. Starting from Chile, Korea turned their eyes on those large economies. The first aid is the USA, which has a deep relationship on the economic and political fields with Korea. Though there is no negative opinion on the necessity of Korea-USA FTA, but the negotiation process was always with the ’noise’from both inside and outside of the country. The noise was mainly caused by the Korean government’s impotent attitude against the US government, and the’poisonous clauses’. After the Korea-EU and Korea-USA FTA, the one and only subject left to korea is China-Korea FTA. Considering on both the size of trading market and the visible and invisible industry chain between China and Korea, China-Korea FTA will bring an unlimitied developing opportunity to Korea.This paper will start from the basic theory of free-trade-agreement, described the meaning and history of regionalism and multilaterism, and reached a conclusion that the key of the future of Korea’s economy is the FTA by analyzing the FTA blueprint of Korea. Based on this research, checked the background and meaning of Korea-USA FTA and China-Korea FTA, found out that both FTAs have a economic and political significancy to Korea. This paper mainly analyzed the ’poisonous clauses’ of Korea-USA FTA, knowing that the direction and the amount of profit that the FTA brought to two countries are significantly distorted, and also these ’poisonous clauses’ left Korea economy a huge hidden risk, by giving the example of mexico in NAFTA, proved this point.After theoretical analysis, this article used a modified gravity model to find out the necessity of China-Korea FTA and the effect of the FTA on the trading volume of Korea. And by using an empirical analysis with the data of 32 Korea’s trading partners, reached the conclusion that China-Korea FTA will bring the positive effect to Korea, and by this emprical analysis, I proved the necessity of Korea-China FTA.As conclusion, thie paper reorganized the results of both theoretical and empirical analysis, gave some political recommendation, and through the trend of FTA, this paper predicted the future of Korea economy.