A Comparative Analysis on Macroeconomic and Industrial Effects of the Korea-China FTA in the CGE Model
Authors:   Asia-Europe Perspective Association, Cin Beom-Cheol 
Published: June 2018

East Asian countries including Korea were mainly interested in multilateral cooperation trade policy under the GATT/WTO system in early 1990s. Due to the financial crisis of 1997-1998, however, their interests were changed toward bilateral and regional free trade arrangements, development of regional financial arrangements and a regional crisis prevention and management capability. Korean government, since the Korean financial crisis in 1997, has emphasized more on regional cooperation trade policy rather than multilateral cooperation so as to minimize negative effects caused by other FTAs. As the first bilateral free trade arrangements, the Korea-Chile FTA(free trade agreement) took effect in 2004, three more FTAs, with Singapore, EFTA, and ASEAN, have come into effect and Korea has been further negotiating free trade agreements with Mexico, Peru, Australia, New Zealand, GCC, and Canada.
Korean government has considered the FTA between Korea and China very important because they are increasingly interdependent, economically and politically. China is one of major trading partners to Korea. In 2008, China is the first largest export market to Korea and the first largest importing partner. Furthermore, Korea is also one of major foreign investors in China.
Although Korean government arguing that the Korea-China FTA should be most beneficial to Korea among the FTAs, many economists have worried that the FTA might have detrimetal effects on Korean agricultural sectors and manufacturing sectors as well.
Despite the importance and worries of the bilateral FTA between Korea and China, their macroeconomic and industrial effects have not been evaluated enough yet in contrast with much debate on the Korea-U.S. FTA or the Korea-EU FTA. In particular, as most of studies did not take into account the impacts of worldwide tariff cuts due to free trade arrangements pervasive in the 2000s, especially among the East Asian countries and thus the macroeconomic effects of the Korea-China FTA would be incorrectly over-estimated, the issue should be examined again. It has been argued that the economic effects of the Korea-China FTA would not be fully examined for lack of information about the content and negotiation process between them, which should have been provided by government.
This paper critically investigates the macroeconomic and industrial effects of the free trade agreement between Korea and China using the GTAP CGE model under various scenarios allowing for the Korea-Chile, the Korea-ASEAN, the Korea-EU, and the Korea-U.S.A. FTAs which are currently in effect. In simulating economic effects of such free trade arrangements, the paper uses the GTAP static CGE model based on a new GTAP data set. The paper comparatively analyzes the macroeconomic and industrial effects of the bilateral and regional free trade arrangements of the three countries can be caused by either tariff reduction or elimination.
Most of all, the GTAP CGE simulation results show that under the assumption of the full elimination of tariffs in all agricultural and manufacturing sectors except the service industries, Korea's real GDP would increase by 0.26-0.91% due to the Korea-China FTA.
Second, the CGE simulation results indicate that the Korea-China FTA could have a positive effect on industrial production in chemical products, textile and leather industries but it could have, in contrast with government argument, a negative impact on production of agricultural products, steel and metal products, and motor vehicle which are major exporting industries Third, the simulation results indicate that the economic effects of the Korea-China FTA in terms of a change of GDPs would have smaller effects with other FTAs effective than without them.