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Do Free Trade Agreements Increase the New Goods Margin? Evidence from Korea

Abstract

We analyze the changes in the composition of bilateral trade—and more specifically, in the new goods margin—following the free trade agreements (FTAs) signed by Korea between 2004 and 2008. We find that new goods trade increased disproportionately after the FTAs came into effect, and that least-traded goods (LTG)—those accounting for the lowest 10% of trade prior to the FTAs—ended up accounting for 37% of post-FTA trade with FTA partners. In contrast, the corresponding share for a comparable group of countries that did not sign FTAs with Korea was only half as large, averaging close to 20%. We also find that only less than 2% of all least-traded products accounted for most of the growth in LTG trade, and that those goods tended to be clustered in the same industries as the intensively-traded goods. Furthermore, a larger fraction of LTG became heavily traded for the case of FTA partners than for non-FTA countries. Finally, we find evidence that least-traded imports were subject to higher pre-FTA tariff protection than other products.

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Notes

  1. One advantage of using the WITS database is that their data are publicly and readily available. Finer levels of disaggregation for Korea do exist, but access to such information is restricted.

  2. Those six countries represent 98% of Korea’s trade with the ASEAN bloc. We leave out the remaining members—Brunei, Myanmar, Cambodia and Laos—because of their limited importance in Korea’s trade.

  3. We do not match it exactly because doing so would reduce our country sample size significantly.

  4. Because FTAs were not all signed during the same year, the periods analyzed for non-FTA countries were chosen according to the geographical distribution of their FTA counterparts. Thus, for example, for Argentina and Panama, we consider the years 1996–2012, which is the period of analysis for Chile.

  5. For convenience, we use the term “country” to refer to the members of the non-FTA group, even though some of them are not precisely countries (like the EFTA bloc) or are not widely recognized as such by the international community (e.g., Taiwan).

  6. The KR methodology is not the only approach to analyze the patterns of the extensive margin. Our decision to follow the KR methodology over other competing techniques is due to one of its main attributes: it determines whether a good is least-traded or not by using a threshold that considers its relative, rather than absolute, importance in total trade. Since there is no absolute concept of zero in trade data because of the under-reporting of small-value shipments, alternative studies, most notably among them Evenett and Venables (2002), use a fixed cutoff value (for example $50,000) to classify a good as not traded. But depending on the specific country pair—in particular, trade with small nations—an arbitrary value of $50,000 can have significant implications and can lead to very few goods being treated as actually traded. Since our article deals with Korean trade with many countries—large and small—the country-pair specific nature of the KR methodology seems to be most appropriate one to employ. Other studies, such as Amarsanaa and Kurokawa (2012), Dalton (2017) and Cho and Díaz (2018) share this view and use the KR methodology as well.

  7. Unless otherwise noted, the averages we report in the following sections are weighted averages for the FTA and non-FTA countries. The weights correspond to each country’s share in total trade between 1996 and 2004 as shown in Table 2. Trends for specific FTA and non-FTA countries are presented in the Appendix.

  8. It should be noted that the pattern of a rising surplus in LT goods upon implementation of FTAs is in fact a trend observed for the trade balance of all goods. Prior to the FTAs, the average trade surplus for all goods was at 0.36% of GDP. This value rose to 1.35% of GDP in the post-FTA period.

  9. Alternative definitions have been used to analyze the trade margins at the product level. For example, Cassey and Schmeiser (2013) document export growth along five margins: newly-exported products, exports exiting the market, and continuously-traded products to the same, new and lost markets.

  10. Note that by computing correlations, we do not intend to assign any causality implications, but rather to summarize the large data sets we work with.

  11. The WITS tariff data is organized according to the 1996 HS classification. Since the classification system we use throughout the paper is the 1992 HS one, we use the concordance tables provided in the WITS database to convert the 1996 classification into the 1992 nomenclature.

  12. Note that some countries like Chile and Singapore have a uniform tariff schedule, with no variation in tariff rates.

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Acknowledgments

We thank the Editor, the Associate Editor and two anonymous referees for their excellent comments and helpful suggestions that significantly improved this article. We also thank Arpita Chatterjee, Scott French, Dongryul Lee and participants at the Western Economic Association Annual Meetings and KAEA-KIET Joint Conference for their comments.

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Correspondence to Hansoo Choi.

Appendix

Appendix

Table 10 Composition of post-FTA exports (FTA Countries)
Table 11 Composition of post-FTA imports (FTA Countries)
Table 12 Composition of post-FTA exports (non-FTA Countries)
Table 13 Composition of post-FTA imports (non-FTA Countries)
Table 14 Share of LT exports in total exports (FTA Countries)
Table 15 Share of LT imports in total imports (FTA Countries)
Table 16 Share of LT exports in total exports (non-FTA Countries)
Table 17 Share of LT imports in total imports (non-FTA Countries)

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Cho, Sw.(., Choi, H. & Díaz, J.P. Do Free Trade Agreements Increase the New Goods Margin? Evidence from Korea. Open Econ Rev 29, 1095–1122 (2018). https://doi.org/10.1007/s11079-018-9500-5

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  • DOI: https://doi.org/10.1007/s11079-018-9500-5

Keywords

  • Trade liberalization
  • Free trade agreements
  • Extensive margin
  • New goods margin
  • Intensive margin

JEL Classification

  • F13
  • F14