45
Journal of Korea Trade
Vol. 13, No. 1, February 2009, 45-64
A CGE Analysis of Free Trade Agreements
among China, Japan, and Korea*
YOUNG MAN YOON,** CHI GONG,*** TAEK-DONG YEO****
Abstract
In this paper, we investigate the economic impacts of possible free trade agreements
(FTAs) among China, Japan, and Korea, and then compare the GDP and welfare effects
of those FTAs. To conduct the investigation, we employ a multi-region, multi-sector
static computable general equilibrium (CGE) model with 6 regions, 12 sectors and 5
endowments, assuming that land, unskilled labor and natural resource are not mobile
among the regions and that skilled labor and capital are mobile among them.
Considering four possible FTA scenarios, we examine the economic effects of the FTAs
and then rank them to show which form of FTA is most beneficial for each country. For
the best FTA outcome, Korea would establish an FTA with China; China would form a
trilateral FTA with Korea and Japan; and Japan would choose to form a trilateral FTA
with China and Korea. In addition, we provide the output and trade effects of two
different FTA scenarios for Korea.
Keywords: Free Trade Agreement (FTA), Northeast Asian FTA, Computable General
Equilibrium (CGE) analysis
8
I. Introduction
Recent years have witnessed the rising tide of regionalism in the form of regional
trade agreements (RTAs), such as customs unions (CUs) and free trade agreements
(FTAs). Over a 47-year period, the General Agreement on Tariffs and Trade
(GATT) received 143 notifications of RTAs, while the World Trade Organization
(WTO), the successor to GATT, was notified 275 times about the formation of new
RTAs (up to November 15, 2008). A total of 227 RTAs have entered into force as of
____________________
* This research was partially supported by a University of Incheon research grant in 2008.
** Main Author: Department of Economics, University of Incheon, Korea; E-mail: ymyoon@
incheon.ac.kr
*** School of Economics, Seoul National University, Korea; E-mail: [email protected]
**** Corresponding Author: School of International Economics and Business, Yeungnam University,
Gyeongsan, Kyung-Buk 712-749, Korea ; FAX: +82-53-810-4653, E-mail: [email protected]
46
Journal of Korea Trade
Vol. 13, No. 1, February 2009
November 2008. It is expected that the surge in RTAs will continue unabated in the
21st century as they become a popular trade policy for many governments.
Northeast Asia was a late-comer in a sense that it had remained the only major
region in the world without any meaningful RTAs until the late 1990s. But
regionalism is spreading into Northeast Asia. The three Northeast Asian countries,
China, Japan, and Korea, have joined the worldwide trend of regionalism. Since the
late 1990s, they have actively engaged in establishing FTAs and are involved in
FTA-related research and official FTA negotiations.
Since the early 2000s, Northeast Asian countries have been pursuing bilateral and
trilateral FTA negotiations within the region. The first FTA negotiation between
Korea and Japan started in December 2002, but the talks stalled after the sixth round
in November 2004. Korea and China have been conducting joint research since 2005
on the possible macroeconomic and industrial impacts of an FTA between the two
countries (FTA-KC). Joint research on a trilateral FTA among China, Japan, and
Korea (FTA-CJK) has been under way since Chinese Premier Zhu Rongji proposed
exploring the possibility of a Northeast Asian FTA in 2002. The three countries are
involved in examining the possible macroeconomic and sectoral effects of such an
FTA.
Research institutions and academics have joined the governments in examining
the effects of a trilateral FTA for Northeast Asia. Ko (2000), Lee, J.W. (2002), Abe
(2003), Park (2004), and Lee et al. (2005) have all used the computable general
equilibrium (CGE) model to assess the economic impacts of such an FTA. However,
these prior studies differ in the type of CGE model used, the version of the Global
Trade Analysis Project (GTAP) database used, and the scenarios used to assess the
effects of trade liberalization, especially in the area of services. Some utilized the
static CGE model only, while others considered the dynamic or capital accumulation
CGE model as well. Most of them simulated the CGE model using the GTAP
Database version 5.0, except for Lee et al. (2005).
The CGE analysis enables researchers to quantitatively assess changes in national
income, industrial production, and welfare resulting from a policy change or
economic shock. In the trade literature, it has been extensively used to analyze the
effects of changes in trade policy, such as RTAs and multilateral trade liberalization
negotiations, for individual countries and industries. Examples are Hertel et al.
(2001) and Tongzon (2001) among many others. Hertel et al. (2001) analyzed the
economic impacts of an FTA between Japan and Singapore using the CGE model.
Tongzon (2001) used the CGE model to investigate the influence of China’s joining
the WTO on other East Asian countries. The standardized CGE model has the
advantage of deriving many valuable results at a relatively small expense and little
effort.
Meanwhile, trade economists have used the CGE model to investigate the
economic effects of bilateral FTAs between Northeast Asian countries. Lee, H.S. et
al. (2005) and Zhang (2006) conducted a CGE analysis to obtain the economic
impacts of an FTA between Korea and China. Cheong (2001) and Ahn et al. (2005)
analyzed the economic effects of an FTA between Korea and Japan (FTA-KJ) using
A CGE Analysis of Free Trade Agreements
47
the CGE model. However, few researchers have comparatively analyzed the
economic impacts of three possible bilateral FTAs and a trilateral FTA for the three
Northeast Asian countries. Lee, C.J. et al. (2005) examined bilateral FTAs between
Korea and China and between Korea and Japan, but they did not actually compare
the macroeconomic and sectoral effects of these bilateral agreements or a trilateral
FTA. This paper intends to fill the gap in the prior literature.
The purpose of this paper is to explore the economic impacts of four possible
FTAs for Northeast Asia and then compare the effects of the FTAs with each other.
By examining the effects of the four possible FTAs on GDP, welfare, trade volume,
and terms of trade, this paper plans to analyze which form of FTAs would be most
beneficial for each country, with a focus on the best option for Korea’s FTA strategy.
In addition, this paper will investigate the effects of an FTA-CJK on industrial
production, as well as the sectoral effects of an FTA-KC, which would result in the
largest GDP and welfare effects for Korea according to our model.
This paper is organized as follows. Section II summarizes the development of
FTAs in Northeast Asia. Section III explains the trade structures and trade relations
of China, Japan, and Korea. In section IV, the economic impacts of bilateral and
trilateral FTAs involving China, Japan, and Korea are quantitatively analyzed using
a CGE model and extensively compared. The sectoral effects of an FTA-KC and a
trilateral FTA-CJK are examined in section V, while section VI concludes the paper.
II. FTAs in Northeast Asia
Until the late 1990s, the three Northeast Asian countries had shown little interest
in RTAs, despite the growing fever for regionalism in other parts of the world.
However, the attitude of the three countries toward regionalism dramatically
changed after the 1997 Financial Crisis in East Asia. The three governments began
to show much more enthusiasm toward regional economic cooperation.
Up until the late-1990s, Korea remained within the multilateral framework of
GATT/WTO and implemented its trade policy consistent with those agreements.
However, both external and internal factors led Korea to consider adoption of an
FTA approach in the wake of the financial crisis. In November 1998, the Korean
government announced its trade policy strategy to launch FTA negotiations with
Chile, negotiate FTAs with similar small and medium-sized countries, and then
pursue FTAs with major countries such as Japan, the United States, and the
European Union.
As a result of its aggressive efforts, Korea succeeded in establishing FTAs with
Chile, Singapore, the European Free Trade Association1 (EFTA), the Association of
Southeast Asian Nations2 (ASEAN: goods and services only), and the United States.
____________________
1
EFTA consists of four member countries: Iceland, Liechtenstein, Norway, and Switzerland.
ASEAN was established in 1967 by the five original member countries, namely, Indonesia, Malaysia,
Philippines, Singapore, and Thailand. Brunei joined in 1984, Vietnam in 1995, Laos and Myanmar in
1997, and Cambodia in 1999.
2
48
Journal of Korea Trade
Vol. 13, No. 1, February 2009
At the present time, Korea is involved in FTA negotiations with the European Union
(EU), Canada, India, Mexico, the Gulf Cooperation Council3 (GCC), and ASEAN
(investment).
Korea also raised the possibility of a trilateral FTA between China, Japan, and
Korea to counterbalance other regional economic blocs, such as the EU and the
North American Free Trade Agreement (NAFTA). The three countries first made an
official attempt to discuss stronger economic cooperation during a trilateral summit
meeting in Manila in November 1999. Two years later, in another summit meeting
in Brunei, the three countries finally took steps toward trilateral economic
cooperation and integration. In 2002, the Chinese Premier Zhu Rongji proposed
conducting a feasibility study of a Northeast Asian FTA in a summit meeting in
Phnom Penh.
Since 2002, the trilateral joint research project has been under way involving the
Development Research Center (DRC) of the China State Council, Japan’s National
Institute for Research Advancement (NIRA), and the Korea Institute for
International Economic Policy (KIEP). These institutes examined the economic
effects of a possible FTA among China, Japan, and Korea. The research results were
reported at a trilateral meeting in Bali in October 2003; next, a joint study of sectoral
impacts of an FTA-CJK was undertaken in 2004-2005.The three institutions
examined the economic impacts of an FTA-CJK on the agriculture and
manufacturing sectors in 2004 and the fisheries and service sectors in 2005.
They also studied rules of origin and other sensitive issues in the context of a
trilateral FTA. In 2007, they investigated the possibility of forming an FTA among
the three countries and, in 2008, developed an action plan to launch the FTA. In the
course of a 2008 joint symposium, they examined the economic impacts of possible
scenarios (in terms of structure and timing) of an FTA-CJK on the basis of CGE
analysis and derived the policy implications and possible direction to take for the
FTA.
The institutions analyzed the macroeconomic effects of an FTA-CJK using static
and capital accumulation CGE models based on two scenarios. Scenario 1 assumed
complete liberalization of the agricultural and manufacturing sectors, but no
liberalization of the service market; scenario 2 included a 50% reduction in service
trade barriers into scenario 1. Korea’s GDP would increase by 3.27 percent to 4.74
percent under scenario 1, depending on whether the static or capital accumulation
CGE model was used, and it would increase by 3.54 percent to 5.15 percent under
scenario 2, according to this analysis. Korea’s exports would increase by 7.9 percent
to 9.8 percent as a result of the FTA-CJK.
Korea’s terms of trade would improve 0.40 percent to 0.79 percent as a result of
an FTA-CJK. Meanwhile, China’s terms of trade would improve 0.29 percent to
0.35 percent and Japan’s would improve 1.37 percent to 1.42 percent. In this respect,
Japan would be the largest terms of trade beneficiary from an FTA-CJK. Using the
____________________
3
GCC is a customs union whose member countries are Saudi Arabia, Kuwait, the United Arab
Emirates, Bahrain, Oman, and Qatar.
A CGE Analysis of Free Trade Agreements
49
static model under scenario 1, Korea’s exports to China would increase by US$24.4
billion and its exports to Japan would increase by US$3.5 billion. Under scenario 2,
Korea’s exports to China would increase by US$24.28 billion and its exports to
Japan would increase by US$4.3 billion. Thus, the liberalization of services under
scenario 2 would increase Korea’s exports to China by only US$120 million and its
exports to Japan by US$800 million. This is because the service market in China is
still underdeveloped, so the service trade between Korea and China is quite small.
Now let us briefly summarize the FTA policies of China and Japan. Since the late
1990s, Japan has shifted its trade policy toward RTAs under the multilateral trade
system of the WTO and has been promoting regionalism and establishing FTAs with
major trading partners. This policy resulted in the signing of the Japan-Singapore
FTA. Japan’s first-ever FTA, the New Age Economic Partnership Agreement, was
put into effect in November 2002. Since that FTA with Singapore, Japan has
established economic partnership agreements (EPAs) with other ASEAN countries
such as Thailand, Malaysia, and the Philippines, as well as Mexico.
In 2003, Korea and Japan began official negotiations for a bilateral FTA, but
stopped the negotiations over disagreements about agricultural liberalization. The
countries have so far not resumed negotiations. Japan also sought to create an
ASEAN+3 FTA linking itself, China, Korea and the ASEAN countries. This move
reflects what appears to be Japan’s more ambitious vision of establishing an East
Asian FTA by 2010 to take advantage of an integrated market of two billion people,
encompassing Japan, Korea, China, Hong Kong, Taiwan, and the ASEAN countries.
This grouping, dubbed “ASEAN plus five,” would represent a third of the world’s
population; such an FTA would liberalize trade and investment in East Asia’s vast
markets.
The Chinese government first announced its plan to promote FTAs at the end of
2000 and then launched negotiations with the ASEAN and GCC countries, Chile,
and other countries. In July 2005, China and the ASEAN countries reached an
agreement on the complete liberalization of trade in goods among them. These FTA
talks are expected to be finished by 2010. China has so far concluded four bilateral
FTAs with Chile, Pakistan, New Zealand, and Peru. In 2003, China also concluded
closer economic partnership agreements (CEPAs) with Hong Kong and Macao,
which liberalized trade in both goods and services between the countries. China is
currently engaged in FTA negotiations with Australia and Singapore. In addition,
the country has raised energy security issues in its FTA negotiation with the GCC,
which has been under way since 2004. China is also engaged in the joint study with
Korea about a bilateral FTA. The joint research team has analyzed the
macroeconomic and sectoral impacts of a Korea-China FTA and discussed sensitive
issues and coverage of the FTA. A Korea-China FTA would have considerable
economic impacts on both countries as a result of the removal of trade barriers as
well as trade and foreign direct investment (FDI) promotion effects.
50
Journal of Korea Trade
Vol. 13, No. 1, February 2009
III. Trade Relations among China, Japan, and Korea
This paper will now focus on trade relations among China, Japan, and Korea. The
discussion will shed light on some features of the proposed bilateral and trilateral
FTAs. Table 1 shows some important information about the economies of the three
countries.
[Table 1] The Economic Index of Three Countries in 2006
Area (thousands of sq.km.)
Population（millions）
Korea
9.9
China
960
Japan
37.8
48.3
1,304
127
GDP（trillions of US$）
0.89
2.7
4.34
GDP rank
GDP per capital (US$）
11th
4th
2nd
18,426
2,070
34,173
Growth rate of GDP (%)
Foreign exchange reserves (billions US$)
Total Trade Volume（billions US$)
5%
238.4
11.1%
1,066.3
2.2%
895.32
634.85
1,760.9
1,224.0
Export (billions US$）
325.47
969.1
647
Import (billions US$）
309.38
791.8
577
Source: World Bank, World Development Indicators 2007
[Table 2] Comparison between CJK, EU, and NAFTA in 2006
CJK
Population
Millions
%
1,490.5
23.20
GDP
Billions US$
7,910.1
%
16.31
Total Trade Volume
Millions US$
%
3,565,089
14.66
EU
487.6
7.59
14,392.9
29.67
9,164,481
37.69
NAFTA
435.9
6.79
15,310
31.56
4,261,068
17.52
Source: Korea International Trade Association, Trade Statistics
Table 2 shows general information about the CJK, EU and NAFTA countries. The
Northeast Asian region had about 1.49 billion people in 2006, around 23.3 percent
of the world’s population, and possessed 16.31 percent of the world’s GDP and
14.66 percent of the world’s trade volume. Compared with the EU and NAFTA,
CJK’s shares of the world’s GDP and trade are low, but the region still has a
significant portion of the world’s totals. At the same time, the CJK region has the
largest number of potential consumers and the greatest potential for economic
growth among the three regions of the world.
Table 3 shows the bilateral and intra-regional trade among China, Japan, and
Korea. The bilateral trade between China, Japan, and Korea has been increasing
rapidly, and the inter-regional trade share has been rising in recent years. This means
that China, Japan, and Korea are very important trading partners with each other.
Given their deepening economic interdependency, the need for policy cooperation
51
A CGE Analysis of Free Trade Agreements
among them is obvious. Trade imbalance is another measure of the trade structure of
the three countries. In recent years, Korea and China have run continuous trade
deficits with Japan, while Korea and Japan have run continuous trade surpluses with
China.
[Table 3] Trilateral Trade among China, Japan, and Korea
(Unit: millions US$, %)
exports(A)
Korea
imports(B)
to(from) China
A-B
2000
2001
2002
2003
2004
2005
2006
18,455
18,190
23,754
35,110
49,763
61,915
69,459
12,799
13,303
17,400
21,909
29,585
38,648
48,557
20,902
5,656
4,887
6,354
13,201
20,178
23,267
exports(A)
20,466
16,506
15,143
17,276
21,701
24,027
exports(A)
China
imports(B)
to (from) Japan
A-B
41,611
45,078
48,483
59,454
73,536
84,097
41,520
42,810
53,489
74,204
94,192 100,468 115,811
91
2,268
-5,006
-14,750 -20,656 -16,371 -24,039
exports
19.5
19.6
20.3
22.4
23.2
22.4
20.8
imports
22.9
22.0
23.5
25.4
26.3
25.6
24.1
26,534
Korea
imports(B) 31,828 26,633 29,856 36,313 46,144 48,403 51,926
to(from) Japan
A-B
-11,362 -10,127 -14,713 -19,037 -24,443 -24,376 -25,392
Intra-regional
Trade Share
91,772
Source: Korea International Trade Association, KOTIS Data
[Table 4] Trade in Agricultural Products among China, Japan, and Korea, and with the Rest
of the World in 2005
(Unit: %)
From
Korea
China
Japan
Rest of World
Korea
-
7.7
0.66
4.1
China
0.49
-
0.47
3.04
Japan
5.3
8.9
-
9.3
Rest of World
0.96
3.25
0.45
-
To
Note: Yoon and Yeo (2007)
Let us now examine trade in agricultural products among the three countries and
with the rest of the world. The agricultural sectors in Korea and Japan are highly
protected and this poses a potential obstacle to a bilateral or trilateral FTA. Table 4
shows the percentage trade in agriculture (HS01 to HS23) among China, Japan,
Korea, and with the rest of world in 2005.
Korea is not a big exporter of agricultural products. For example, 0.96% of the
global exports from Korea were in agricultural products; Korea’s agricultural
exports to China were a mere 0.49% in 2005. However, Japan relied more on Korea,
as 5.3% of its agricultural imports came from Korea. However, Korea was a big
52
Journal of Korea Trade
Vol. 13, No. 1, February 2009
importer of agriculture, as 4.1% of its agricultural imports came from the rest of the
world. Korea depended the most on China for its imports of agricultural products.
Table 4 also shows that Japan is a big importer of agriculture, not only from the rest
of the world but also from Korea and China.
[Table 5] Import Tariff Rate by Source Country
(Unit: %)
Agriculture, Forestry, and Fishery
Mining
Textile products
Pulp, paper and wooden products
Chemical and petroleum products
Iron and metal
Motor vehicles and transport equipment
Electronic equipment
Machinery and equipment
Manufactures
Electricity, gas, and water
Other Services
Korea
China Japan
China
Korea Japan
Japan
Korea China
140.2
3.0
10.7
5.6
6.8
4.6
6.9
2.5
6.5
8.1
0
0
20.3
13.4
18.8
15.4
11.6
9.4
45.6
11.3
13.0
20.3
0
0
11.8
1.4
9.9
0.8
3.1
0.9
0
0
0.2
2.3
0
0
22.2
7.6
8.8
4.5
6.8
3.9
7.4
1.7
6.4
7.3
0
0
20.4
11.9
21.7
13.8
12.6
8.0
38.1
10.5
13.0
21.5
0
0
20.7
0.0
9.7
0.7
0.3
0.3
0
0
0.0
0.7
0
0
Source: GTAP database 6.0.
High tariffs can throttle trade between countries. Although China, Japan, and
Korea are significant trading partners, they still have significant tariff barriers
between them (see Table 5). For example, the average tariff rate between Korea and
China is above 15%. Korea’s import tariff rate on agriculture, forestry, and fishery
products from China is a whopping 140.2%. Tariff barriers restrict further
development of the trade relations among China, Japan, and Korea. If they eliminate
the tariff and non-tariff barriers with each other, their trade relations will receive a
strong impetus. According to a survey conducted from April to June 2004 by the
joint study group, a significant majority of enterprises supported the FTA-CJK and
thought trade liberalization would have a positive impact. A full 85.4% of Chinese
enterprises supported the FTA-CJK, while 70.9% of Korean enterprises and 78.7%
of Japanese enterprises supported it. Between 70% and 80% of the enterprises
surveyed supported a launch of the FTA-CJK negotiation within next three years.
IV. CGE Analysis of FTAs
4.1 Data and GTAP model
This paper investigates the static effects of FTAs using the CGE analysis, which
53
A CGE Analysis of Free Trade Agreements
is widely used to assess the effects of future policy change. The CGE analysis
incorporates all economic activities into the theoretical model, so that it can capture
the outcomes of complicated interactions among diverse economic activities.
[Table 6] Sectors and Goods (12 sectors)
Symbol
Description
The original GTAP sections
AFF
Agriculture, forestry, and
fishery
PDR, WHT, GRO, V_F, OSD, C_B, PFB, OCR,
CTL, OAP, RMK, WOL, FRS, FSH. CMT, OMT,
VOL, MIL, PCR, SGR, OFD, B_T
MIN
Mining
COL, OIL, GAS, OMN. NMM
TEX
Textile products
TEX, WAP, LEA.
PPP
Pulp, paper and wooden
products
LUM, PPP.
CHM
Chemical and petroleum
refinery products
P_C, CRP.
IAM
Iron and metal
I_S, NFM, FMP.
MVT
Motor vehicles and transport
equipment
MVH, OTN
ELE
Electronic equipment
ELE
OME
Machinery and equipment
OME
OMF
Manufactures
OMF
EGW
Electricity, gas manufacture,
and water
ELY, GDT, WTR.
OSP
Other Services
CNS, TRD, OTP, WTP, ATP, CMN, OFI, ISR,
OBS, ROS, OSG, DWE
[Table 7] Regions (6 regions)
The original GTAP regions
Description
JPN
Japan
KOR
Korea
CHN
China
US
United States
ROA
Rest of advanced countries
ROD
Rest of developing countries
This paper utilizes the version 6.0 GTAP database, which is a global economic
database that consists of regional input-output data, macroeconomic data, bilateral
trade flows, trade protection and energy data. The GTAP database, which uses 2001
as a reference year, includes 87 countries/regions, 57 sectors, and five
endowments/factors (land, skilled labor, unskilled labor, capital, and natural
resources). The regional databases are derived from individual country input-output
54
Journal of Korea Trade
Vol. 13, No. 1, February 2009
tables. For the model simulation, we make use of the GTAP Agg. to aggregate the
data into six regions, 12 sectors, and five endowments. We suppose that land,
unskilled labor, and nature resources are not mobile among the regions and that
skilled labor and capital are mobile among the regions. The lists of sectors and
regions are displayed in Tables 6 and 7.
4.2 Analysis of FTAs
We conduct simulations of the four possible forms of FTAs presented in the table
8 below and compare the results to determine which form of FTAs is most beneficial
for each country.
[Table 8] Four Different Scenarios for FTAs in Northeast Asia
FTA-CJK
Trilateral FTA among China, Japan, and Korea
FTA-KC
Bilateral FTA between Korea and China
FTA-KJ
Bilateral FTA between Korea and Japan
FTA-CJ
Bilateral FTA between China and Japan
We will now discuss the FTA scenarios analyzed in this paper. Because it is hard
to predict the exact contents of FTAs in detail, this study assumes complete
liberalization (tariff removal across all products) in the agriculture and
manufacturing sectors for the FTAs. This is similar to the treatment of FTAs in a
recent study by Lee et al. (2005). Since the services sectors of the three countries are
in different stages of development and trade liberalization, this study simply
assumes that the FTAs make no changes to the services sectors.
We conduct a simulation using the GTAP database and then discuss our
simulation results for the four possible FTA forms involving China, Japan, and
Korea. First, let us examine the GDP effects of the four possible FTAs (see Table 9).
[Table 9] GDP Effects of FTAs
(Unit: %)
Korea
China
Japan
United States
Rest of advanced countries
Rest of developing countries
FTA-CJK
2.53
0.60
0.99
-0.26
-0.26
-0.34
FTA-KC
2.80
0.34
-0.1
-0.06
-0.05
-0.09
FTA-KJ
0.32
-0.07
0.22
-0.04
-0.04
-0.05
FTA-CJ
-0.59
0.34
0.87
-0.16
-0.17
-0.20
The simulation results derived from Table 9 are summarized as follows. First,
member countries can increase their GDP by establishing any form of FTA. This
means that once a country signs an FTA with one or more other countries, it will
benefit economically from that FTA. However, the amount of change in GDP
55
A CGE Analysis of Free Trade Agreements
depends on the form of FTA used for the simulation.
An FTA between Korea and China (FTA-KC), which would bring a 2.80%
increase in GDP for Korea, is best for Korea. With an FTA with Korea or Japan,
China would benefit from the same increase in GDP. However, a trilateral FTA
among China, Japan, and Korea (FTA-CJK) would be most beneficial for China,
which would experience a 0.60% increase in GDP. At the same time, Japan would
experience a greater increase in GDP from a trilateral FTA-CJK than from bilateral
FTAs with either Korea or China. More importantly, Korea would benefit more
from FTAs than would China and Japan. This is why Korea has recently been the
most active in its FTA policy among the three countries. In fact, since 2004 the
Korean government has shifted its FTA policy from a step-by-step approach to a
simultaneous multi-track one.
Next, let us examine the social welfare effects of FTAs. From table 10, it can be
seen that once a country establishes an FTA, the social welfare of that country would
increase. The social welfare of the world would reach US$8,122.08 million from a
trilateral FTA-CJK, US$4,740.05 million from an FTA-KC, US$389.48 million
from an FTA-KJ, and US$2,992.56 million from an FTA-CJ. So the FTA-CJK
would bring the largest increase in social welfare for the world. Meanwhile, Korea
would get the largest increase in social welfare from an FTA-KC. However, a
trilateral FTA-CJK would be most beneficial for China and Japan in terms of social
welfare.
[Table 10] Social Welfare (equivalent variation) of FTAs
(Unit: millions of US$)
FTA-CJK
FTA-KC
FTA-KJ
FTA-CJ
Korea
6,133.04
6,494.86
451.04
-812.86
China
3,595.32
1,077.09
-172.16
2,690.38
Japan
5,938.79
-384.21
1,162.88
5,160.12
United States
-1,743.00
-496.96
-317.67
-928.36
Rest of advanced countries
-2,604.24
-723.55
-294.66
-1,586.02
Rest of developing countries
-3,197.83
-1,227.18
-439.95
-1,530.70
World
8,122.08
4,740.05
389.48
2,992.56
[Table 11] Terms of Trade Effects of FTAs
(Unit: %)
FTA-CJK
FTA-KC
FTA-KJ
FTA-CJ
Korea
1.20
1.56
-0.00
-0.37
China
-0.24
-0.09
-0.05
-0.11
Japan
1.07
-0.09
0.22
0.94
United States
-0.15
-0.05
-0.03
-0.08
Rest of advanced countries
-0.07
-0.02
-0.01
-0.04
Rest of developing countries
-0.15
-0.06
-0.02
-0.07
56
Journal of Korea Trade
Vol. 13, No. 1, February 2009
Terms of trade effects are shown in Table 11. Korea would experience an
improvement in terms of trade from an FTA-CJK and an FTA-KC, while China
would experience a deterioration in terms of trade from all four FTA scenarios.
Korea would see no gains from an FTA-KJ, which confirms the general objection to
an FTA-KJ from the public and academics. But, Korea would lose in terms of trade
effects from an FTA-CJ due to its exclusion from the FTA. China, in particular,
should be concerned about the deteriorating terms of trade from FTAs. Japan is the
only country whose terms of trade would not deteriorate; rather Japan’s terms of
trade would improve 0.22% to 1.07% for any form of FTA with China and/or Korea.
As can be seen in Tables 12 and 13, Korea would get a much larger increase in
merchandise exports and imports from any form of FTA, while it would experience
a reduction in its merchandise trade balance because its imports would surpass its
exports. In recent years, China and Japan have had large trade surpluses, which
might bring about trade friction with the United States and cause problems to
sustainable and harmonious economic development for the whole world. China and
Japan would undergo a decrease in trade balance by joining FTAs, thus reducing
their large trade surpluses.
[Table 12] Change in Merchandise Trade
(Unit: %)
FTA-CJK
FTA-KC
FTA-KJ
FTA-CJ
exports imports exports imports exports imports exports imports
Korea
3.17
5.98
1.92
4.60
1.52
2.2
-0.28
-0.82
China
5.98
8.37
2.27
3.12
-0.06
-0.13
3.12
5.38
Japan
2.13
4.58
-0.13
-0.30
0.33
0.81
1.93
4.07
United States
-0.15
-0.39
-0.08
-0.12
-0.01
-0.07
-0.06
-0.20
Rest of advanced
-0.02
-0.16
-0.02
-0.05
0.01
-0.02
0.00
-0.09
Rest of developing
-0.05
-0.31
-0.03
-0.11
0.00
-0.04
-0.02
-0.16
[Table 13] Change in Trade Balance
(Unit: millions of US$)
FTA-CJK
FTA-KC
FTA-KJ
FTA-CJ
Korea
-1,358.99
-804.44
-657.63
103.08
China
-1,172.65
-198.03
-43.53
-931.08
Japan
-3,691.63
185.26
-706.79
-3,170.11
United States
2,659.80
368.38
620.54
1,670.89
Rest of advanced
1,972.90
164.09
473.61
1,335.21
Rest of developing
1,590.57
284.75
313.81
992.02
Meanwhile, the United States would get an increase in trade balance from any
form of FTA. However, should Korea form an FTA with China or Japan, U.S. firms
would face tougher competition with Chinese or Japanese firms in the Korean
57
A CGE Analysis of Free Trade Agreements
market and they may lose their relative advantages from the Korea-US FTA. Thus
the U.S. would experience a decrease in its trade balance after the establishment of
an FTA-KC or an FTA-KJ.
According to our analysis above, the best scenario for Korea would be an FTA
with China, followed by a trilateral FTA-CJK. China would benefit most from an
FTA-CJK. Meanwhile, Japan would not benefit much from an FTA-KJ. Japan
would not welcome an FTA-KC either. Rather, Japan would prefer to form an FTACJK.
V. Output and Trade Effects of FTAs
Following the analysis described in the previous section, the present section will
examine the sectoral effects of an FTA-CJK and FTA-KC on output, export and
import volume, and trade balance. First, we will analyze the impacts of an FTA-KC
because it is the best FTA option for Korea (see Table 14). As a result of an FTAKC, the outputs of textile products and chemical and petroleum refinery products
would increase in Korea, while the output of agriculture, forestry, and fishery
products would decrease by US$2,440.19 million. For China, the output of
agriculture, forestry, and fishery products and electronic equipment would increase
from the FTA-KC.
[Table 14] Change in Output from FTA-KC
(Unit: %, millions of US$)
Korea
China
Japan
AFF
-3.31
-2,440.19
0.58
2,911.63
-0.03
-135.34
MIN
-1.45
-190.74
-0.16
-359.08
0.07
63.12
Textile
9.77
3,402.04
-0.69
-1,889.56
-0.82
-848.01
Paper
1.44
292.83
-0.54
-507.59
0.02
32.16
Chemical
3.46
3,118.06
-0.76
-2,157.03
-0.04
-158.53
Iron
-2.55
-1,425.86
-0.41
-891.09
0.07
230.72
MVT
-4.39
-2,435.84
-0.20
-166.13
0.21
726.31
ELE
-1.42
-982.95
1.07
1,339.58
0.01
38.41
OME
-2.16
-1,617.44
-0.24
-652.16
0.14
404.44
OMF
-0.48
-27.38
-0.41
-366.39
0.01
10.28
EGW
0.88
246.08
-0.25
-166.99
0.00
1.48
Other Services
0.32
1,450.25
0.03
258.00
-0.00
-110.50
Table 15 shows the trade effects of an FTA-KC. The exports of most industries in
Korea and China would increase as a result of an FTA-KC, especially textile
products and chemical and petroleum refinery products in Korea, and agriculture,
forestry, and fishery and textile products and electronic equipment in China.
58
Journal of Korea Trade
Vol. 13, No. 1, February 2009
Meanwhile, after the launch of an FTA-KC, exports of most industries in Japan
would decrease, with the exception of motor vehicles and transport equipment and
machinery and equipment.
[Table 15] Changes in Exports and Imports from FTA-KC
(Unit: million of US$, %)
Korea
Exports
Imports
China
Exports
Imports
Japan
Exports
Imports
AFF
525.38
(19.76)
3,167.54
(16.61)
3,120.80
(18.99)
626.92
(2.92)
-141.09
(-3.84)
-71.41
(-0.12)
MIN
235.93
(14.55)
926.18
(3.31)
275.46
(2.04)
254.07
(1.53)
16.80
(0.23)
-40.06
(-0.07)
TEXTILE
3,669.62
(18.99)
1,527.61
(20.12)
2,014.49
(2.16)
2,967.19
(11.06)
-840.96
(-8.48)
-208.32
(-0.61)
Paper
340.29
(13.54)
227.25
(6.20)
-31.60
(-0.20)
307.28
(3.06)
-5.10
(-0.16)
-45.18
(-0.26)
Chemical
2,728.88
(12.06)
1,152.29
(6.15)
540.50
(1.96)
1,941.10
(4.18)
-219.20
(-0.51)
-148.23
(-0.40)
Iron
112.47
(0.94)
412.91
(3.28)
253.08
(1.36)
656.61
(2.87)
-52.58
(-0.19)
-109.64
(-0.62)
MVT
-1,737.87
(-6.86)
290.83
(4.26)
177.87
(2.07)
371.85
(2.49)
434.44
(0.44)
-29.50
(-0.20)
ELE
-485.49
(-0.97)
720.85
(2.66)
2,079.46
(3.07)
1,389.76
(2.41)
-233.67
(-0.25)
-269.33
(-0.48)
OME
215.88
(1.05)
1,263.34
(5.30)
643.94
(1.11)
1,364.03
(2.50)
187.02
(0.16)
-175.95
(-0.41)
OMF
76.57
(2.80)
136.65
(7.93)
-45.21
(-0.11)
242.05
(7.70)
-8.93
(-0.10)
-47.05
(-0.44)
EGW
-3.69
(-14.46)
9.31
(8.43)
-4.44
(-1.25)
0.57
(0.38)
0.05
(0.37)
-0.49
(-0.17)
Other
Services
-1,987.68
(-6.14)
1,271.59
(4.68)
-203.88
(-0.78)
182.50
(0.47)
260.91
(0.40)
-138.65
(-0.16)
Note: The numbers in parentheses represent the percentage change in exports and imports.
The FTA-KC also would result in import volume increases for Korea and China.
The industries with the higher import tariffs before the FTA-KC would see the
largest import volume increases. For example, imports of agriculture, forestry, and
fishery products would increase by 16.61% (US$3,167.54 million) and imports of
textiles by 20.12% (US$1,527.61 million) in Korea; textile imports would increase
by US$2,967.19 million and imports of chemical and petroleum refinery products
would increase by US$1,941.1 million in China.
Let us now discuss the changes in Korean and Chinese exports to each other and
other trading partners after the formation of an FTA-KC. The results are summarized
in tables 16 and 17. As we have already discussed, the exports of Korea and China
59
A CGE Analysis of Free Trade Agreements
would increase significantly with the establishment of an FTA-KC. The AFF, MVT,
ELE, OME and OMF sectors in Korea would experience an increase in exports.
Surprisingly, the percentage increase in Korea’s AFF exports to China would be
much larger than we have expected. This is because, before the FTA-KC, Korea’s
AFF exports to China were at a very low level and China’s import tariff was very
high. China would benefit from increases in exports for its AFF, TEXTILE, MVT,
OME, and OMF sectors as a result of an FTA-KC.
[Table 16] Changes in Korea’s Exports from FTA-KC
(Unit: %)
China
Japan
US
ROA
ROD
AFF
100.64
13.59
14.2
14.5
14.34
MIN
112.62
-21.06
-21.22
-21.41
-21.82
Textile
94.92
-9.75
-9.16
-9.4
-9.01
Paper
71.06
-9.53
-9.63
-9.75
-9.66
Chemical
48.6
-7.16
-7.37
-7.45
-7.33
Iron
47.85
-10.59
-10.88
-11.18
-10.95
MVT
188.56
-9.31
-9.31
-9.28
-8.99
ELE
70.74
-11.06
-10.91
-11.04
-10.88
OME
75.04
-14.03
-14.23
-14.19
-13.99
OMF
105.76
-12.17
-12.12
-12.23
-12.14
EGW
-14.04
-14.56
-14.45
-14.44
-14.53
Other Services
-8.99
-9.55
-9.44
-9.44
-9.5
[Table 17] Changes in China’s Exports from FTA-KC
(Unit: %)
AFF
Korea
Japan
US
ROA
ROD
240.43
-4.6
-4.86
-4.68
-4.73
MIN
33.18
-1.81
-1.96
-1.96
-1.95
Textile
59.94
-0.12
0.47
0.21
0.57
Paper
35.97
-0.84
-0.81
-0.87
-0.85
Chemical
41.84
0.16
-0.03
-0.08
0.00
Iron
31.48
-0.17
-0.48
-0.6
-0.49
MVT
42.27
-0.33
-0.14
-0.12
0.13
ELE
23.64
2.12
2.32
2.16
2.3
OME
50.43
-0.08
-0.26
-0.32
-0.15
OMF
48.54
-0.52
-0.47
-0.68
-0.68
EGW
7.14
-1.37
-1.26
-1.26
-1.35
Other Services
3.61
-1.09
-0.98
-0.98
-1.04
60
Journal of Korea Trade
Vol. 13, No. 1, February 2009
Now we turn to analyze the possible impacts of an FTA-CJK. Table 18 reports the
expected percentage changes in output for the three countries under an FTA-CJK.
For Korea, the output of textile products would increase by 8.81%, the output of
chemical and petroleum refinery products by 3.43%, the output of manufactures by
0.74%, while the output of agriculture, forestry, and fishery products would drop by
2.72%. After the launch of an FTA-CJK, China would experience an increase in the
output of electronic equipment by 2.87%, agriculture, forestry, and fishery products
by 1.28%, and textile products by 0.50%.
[Table 18] Changes in Output from FTA-CJK
(Unit: %, millions of US$)
Korea
China
Japan
AFF
-2.72
-2,001.84
1.28
6,402.72
-0.74
-3,093.13
MIN
-1.70
-224.30
-0.79
-1,734.66
0.65
558.34
TEXTILE
8.81
3,067.65
0.50
1,365.75
0.37
380.79
Paper
1.40
285.42
-1.06
-1,005.55
-0.22
-420.78
Chemical
3.43
3,091.40
-1.80
-5,1107.88
0.52
1,953.22
Iron
-2.81
-1,575.65
-1.65
-3,582.19
0.09
287.56
MVT
-3.75
-2,079.55
-2.37
-1,963.18
-1.00
-3,491.59
ELE
-0.23
-159.47
2.87
3,577.84
-0.36
-1,305.91
OME
-3.08
-2,311.32
-1.64
-4,524.75
0.72
2,124.97
OMF
0.01
0.67
-1.03
-924.77
-0.41
-300.88
EGW
0.74
206.29
-0.72
-474.35
0.05
98.97
Other Services
0.33
1,464.00
0.18
1,624.31
0.03
1,287.00
Table 19 shows the expected changes in exports and imports for the three
countries resulting from an FTA-CJK. The exports of Korea, China and Japan would
increase in most industries, especially textile and chemical products in Korea;
agricultural, textile and electronic products in China; and machinery and chemical
products in Japan. The FTA-CJK also would increase imports in the three countries.
The industries with the higher import tariffs before the FTA-CJK would see the
largest import volume increases. For instance, imports of agricultural products
would increase by US$3,422.09 million (17.94%) and textile products by
US$1,549.45 million (8.85%) in Korea; imports of chemical products would
increase by US$3,696.81 million (7.97%), motor vehicles and transport equipment
by US$2,084.70 million (13.94%), and machinery products by US$6,117.37 million
(11.21%) in China; imports of agricultural, forestry, and fishery products would
increase by US$3,456.89 million (5.79%), and textile products by US$6,453.98
million (19.04%) in Japan.
61
A CGE Analysis of Free Trade Agreements
[Table 19] Changes in Exports and Imports from FTA-CJK
(Unit: millions of US$, %)
Korea
AFF
MIN
Textile
Paper
Chemical
Iron
MVT
ELE
OME
OMF
EGW
Other Services
Exports
1,118.43
(42.07)
254.44
(15.69)
3,469.41
(17.96)
346.24
(13.78)
3,207.48
(14.17)
257.00
(2.14)
-1,372.56
(-5.42)
207.73
(0.41)
394.63
(1.92)
132.18
(4.83)
-3.70
(-14.49)
-1,963.91
(-5.99)
Imports
3,422.09
(17.94)
939.34
(3.36)
1,549.45
(20.41)
241.88
(6.6)
1,623.40
(8.66)
611.10
(4.86)
447.62
(6.56)
884.49
(3.26)
2,289.63
(9.61)
168.72
(9.79)
9.31
(8.43)
1,296.34
(4.77)
China
Exports
Imports
6,327.99
1,489.76
(38.52)
(6.95)
129.68
652.36
(0.96)
(3.94)
8,259.90
7,292.54
(8.85)
(27.18)
-83.04
543.69
(-0.53)
(5.42)
532.77
3,696.81
(1.93)
(7.97)
379.73
1,534.77
(2.04)
(6.71)
468.53
2,084.70
(5.44)
(13.94)
5,766.99
3850.69
(8.50)
(6.68)
1,999.64
6,117.37
(3.46)
(11.21)
-147.21
530.73
(-0.35)
(16.89)
-8.53
0.80
(-2.40)
(0.53)
-395.91
389.78
(-1.52)
(1.00)
Japan
Exports
Imports
279.28
3,456.89
(7.59)
(5.79)
1,072.35
753.31
(14.57)
(1.38)
5,390.44
6,453.98
(54.38)
(19.04)
234.08
524.51
(7.43)
(3.01)
2,648.94
1,234.08
(6.19)
(3.32)
834.09
641.23
(3.04)
(3.60)
-1,973.99
449.35
(-2.02)
(3.05)
696.03
2,232.54
(0.74)
(3.96)
2,933.06
1,780.37
(2.48)
(4.13)
-67.87
396.90
(-0.79)
(3.72)
-0.89
10.14
(-6.64)
(3.40)
-1,837.88
1,962.12
(-2.82)
(2.32)
Note: The numbers in parentheses represent the percentage change in exports and imports.
According to Table 20, the bilateral trade among the three countries would
increase considerably with the establishment of an FTA-CJK. The average rate of
increase in trade between Korea and China would be over 30 percent, while the rate
of increase in trade for Japan would be less than for Korea and China. The increase
in bilateral trade between Korea and China would be much larger than it would be
between Japan and Korea or Japan and China.
VI. Summary and Concluding Remarks
The growing trend of regionalism is one of the main features of the recent
international economic environment. In fact, regionalism is highly contagious4 and
____________________
4
The Thai trade representative, Dr. Kantathi Suphamongkhonm, said in a speech in January 2004 that
“FTAs are spreading like the flu. They are very contagious, indeed much more contagious than SARS
[severe acute respiratory syndrome] or the Bird Flu.” See Wong, K.Y. (2004) and (2007).
62
Journal of Korea Trade
Vol. 13, No. 1, February 2009
[Table 20] Change in Bilateral Trade from FTA-CJK
(Unit: %)
From
Item
Korea
China
Japan
To China
To Japan
To Korea
To Japan
To Korea
To China
AFF
100.47
59.02
235.37
70.93
40.76
85.24
MIN
106.27
-4.32
29.02
-1.37
66.13
100.64
Textile
78.06
33.84
54.89
39.22
39.07
96.09
Paper
68.9
-1.69
33.74
4.95
22.98
64.02
Chemical
43.78
14.79
35.01
3.38
29.38
48.53
Iron
41.72
0.08
27.11
5.29
14.88
34.85
MVT
168.75
-5.28
41.21
5.4
35.38
146.9
ELE
58.77
-5.08
27.34
10.28
4.24
53.06
OME
62.18
-5.89
41.43
5.52
30.34
64.81
OMF
96.49
7.48
41.06
5.67
30.13
107.12
EGW
-14.13
-11.25
5.94
1
1.65
-6.17
Other Services
-8.71
-7.44
2.69
0.21
0.18
-3.56
is finally spreading to the Northeast Asian region. Most of FTAs in the world are
established among neighboring countries, for example, NAFTA, EU, and ASEAN.
It is thus natural to consider bilateral and trilateral FTAs for China, Japan, and Korea,
which are very close to each other historically and geographically.
This paper examines the economic impacts of possible FTAs among China, Japan,
and Korea. For this purpose, we employ a multi-region multi-sector static CGE
model with 6 regions, 12 sectors, and 5 factors. Using the GTAP in version 6.0, we
analyze the economic impacts of the following four FTA scenarios and compare
their effects: (1) an FTA among China, Japan, and Korea; (2) an FTA between
Korea and China; (3) an FTA between Korea and Japan; and (4) an FTA between
China and Japan. By doing so, this paper analyzes these four FTAs in terms of
which FTA scenarios would be most beneficial for each country.
In the static CGE model, Korea’s GDP is expected to increase by 2.80 percent
from an FTA-KC, 2.53 percent from an FTA-CJK, and 0.32 percent from an FTAKJ. Under the FTA-KC, Korea would enjoy the greatest benefits in terms of GDP
growth and social welfare. This is consistent with traditional trade theory, which
predicts that a small open economy would benefit more from trade liberalization.
However, a trilateral FTA-CJK would be most beneficial for China and Japan in
terms of GDP growth and social welfare. In addition, the FTA-CJK would bring the
largest increase in social welfare for the world.
In almost all the FTA scenarios and models, the formation of an FTA would
increase the national income and social welfare of member countries. For Korea, the
best policy choice would be to form a bilateral FTA with China because that option
would produce the largest GDP and welfare effects. For China, the best policy
A CGE Analysis of Free Trade Agreements
63
choice would be a trilateral FTA with the other two countries. For Japan, the best
policy option would also be a trilateral FTA.
The static CGE model used in this paper also generated output and trade effects
for an FTA-KC as well as a trilateral FTA-CJK. As a result of an FTA-KC, the
outputs of textile products and chemical and petroleum refinery products would
increase in Korea, while the outputs of agriculture, forestry, and fishery products
would decrease. For China, the outputs of agriculture, forestry, and fishery products
and electronic equipment would increase. The exports of most industries in Korea
and China would increase as a result of an FTA-KC, especially textile products and
chemical and petroleum refinery products for Korea, and agriculture, forestry, and
fishery products, textile products, and electronic equipment for China. Under an
FTA-CJK, the outputs of textile products, chemical and petroleum refinery products,
and other manufactures would increase in Korea, while the outputs of agriculture,
forestry, and fishery products would drop.
Lastly, we hope this research contributes to a much wider and deeper discussion
involving academics, businesses, and policy makers on the formation of bilateral or
trilateral FTAs among China, Japan, and Korea. Further research on this topic is
warranted.
Received: December 29, 2008.
Accepted: February 12, 2009.
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