Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

News Release

Korea-US Free Trade Agreement Could Boost the Two Economies and Catalyze Additional Trade Reforms in the Asia-Pacific Region

May 25, 2001

Contact:    Jeffrey J. Schott    (202) 328-9000
    Inbom Choi    (202) 328-9000

Washington, DC—A free trade agreement (FTA) between Korea and the United States would increase growth in both countries and reinforce their strong political and security partnership. To reap these gains, however, both sides would have to overcome deep-rooted opposition to trade reform among key industrial and agricultural groups.

Free Trade between Korea and the United States? by Inbom Choi and Jeffrey J. Schott, examines the economic and political benefits and costs of negotiating a bilateral FTA, and its implications for trade with other major nations in the Asia-Pacific region. The authors conclude that an FTA would substantially increase bilateral trade and contribute to a significant improvement in per capita income. Korean income would increase between 0.4 percent and 2 percent of GDP under the most favorable scenario; US gains would be comparable in dollar size but smaller (0.05 to 0.1 percent of GDP) in relation to its $10 trillion economy. These gains would be cut in half if the FTA excluded agricultural products.

Most US gains come from preferential access to the more highly protected Korean market. By contrast, Korea benefits more from the increased efficiency of Korean firms spurred by the liberalization of its own policies than from preferential access to the relatively open US market.

US and Korean gains from an FTA would come at the expense of their trading partners in East Asia, particularly Japan and China. A Korea-US pact could therefore spur those countries and others in the region to pursue their own discriminatory trading arrangements to offset the trade diverted by the Korea-US preferences, with adverse effects on regional relationships and the global trading system. On the other hand, a Korea-US pact could catalyze broader liberalization in the Asia-Pacific region and even revitalize efforts to achieve the APEC goal of free trade and investment there. The authors argue that the United States and Korea should pursue concurrent reforms bilaterally, in APEC, and in a new round of WTO negotiations to minimize potential trade diversion and conflict from an FTA.

Trade between the United States and Korea is substantial but replete with problems. Total bilateral merchandise trade was $68 billion in 2000. The United States is Korea's largest trading partner, accounting for about 20 percent of its total trade; Korea ranks sixth among US trading partners. However, trade disputes involving antidumping and countervailing duties, and violations of other WTO trading rules, affect about $5.5 billion or 8 percent of two-way trade. In addition, about $400 million in Korean exports are subject to high US tariffs.

Eliminating tariffs on bilateral trade and resolving current disputes would contribute to a sharp expansion of trade. Doing so, however, would incite strong political opposition in both countries. In Korea, the most vociferous resistance would come from the heavily subsidized agricultural interests. Steel and electronics industries also would likely object if the pact did not reduce their exposure to US antidumping and countervailing duty cases. But reforms of US unfair trade laws would precipitate strong opposition from some US industries and key members of Congress. The US textile and apparel industries also would resist granting tariff preferences to highly competitive Korean firms.

About the Authors

Inbom Choi, visiting fellow, was assistant secretary to the president for economic affairs and director of international economic policy in the Office of the President of Korea (1995-96). He has been a research fellow at the Korea Institute for International Economic Policy since 1990. He has also been a consultant to the World Bank and a visiting professor at Georgetown University. In 1998 and 1999, he was selected by the Asia-Europe Meeting (ASEM) as one of the Next Generation Leaders of Asia. He is the author of Competitiveness of Korean Products in the U.S. Market (1993, in Korean), Trade Barriers in Government Procurement Practices of Developed Countries (1992, in Korean), and Effects of FDI on Productivity in the Manufacturing Industries of Korea and Taiwan (1991, in Korean), among others.

Jeffrey J. Schott, senior fellow, was a senior associate at the Carnegie Endowment for International Peace (1982-83) and an international economist at the US Treasury (1974-82). He is the editor of The WTO after Seattle (2000), Launching New Global Trade Talks: An Action Agenda (1998), Restarting Fast Track (1998), The World Trading System: Challenges Ahead (1996); author of WTO 2000: Setting the Course for World Trade (1996), The Uruguay Round: An Assessment (1994); coauthor of Western Hemisphere Economic Integration (1994), NAFTA: An Assessment (rev. 1993), North American Free Trade: Issues and Recommendations (1992), Completing the Uruguay Round (1990), and Economic Sanctions Reconsidered (2d edition 1990), among others.

About the Institute

The Institute for International Economics is a private, nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade and investment issues and recommends practical policy approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations.