Appendix B GTAP Model Analysis: Simulating the Effect of a ... · 89 Appendix B GTAP Model...
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89 Appendix B GTAP Model Analysis: Simulating the Effect of a Korea-US FTA Using Computable General Equilibrium Techniques JOHN P. GILBERT To analyze the potential impact of a Korea-US free trade agreement, we have used counterfactual simulation with a computable general equilib- rium (CGE) model. General equilibrium refers to the study of models in which an equilibrium is simultaneously obtained in more than one market. CGE models attempt to turn the abstract models of general equilibrium theory into a practical tool for policy analysis. This appendix provides a brief overview of the CGE approach, the particulars of the model used in this study, and more detailed simulation results than those presented in the main text. The basic structure of a multiregional CGE model can be described as follows. Consider a global economy consisting of M regions indexed by r. Let V r be a vector (length F) of factor endowments in each region r, and P r be a vector (length N) of prices in each region r. We can then define the GNP functions for each region as G r (P r ,V r )max{P r ·Y r :V r }, and similarly the expenditure functions as E r (P r ,U r )min{P r ·D r :U r }, where U r is aggregate utility in region r. The aggregate budget constraints are then: S r (P r ,V r ,U r )G(P r ,V r )E r (P r ,U r )0 r1,...,M (1) From the first-order conditions to the GNP maximization problem, we obtain sectoral supply functions by Hotelling’s lemma and Hicksian John P. Gilbert is currently a postdoctoral fellow in the Department of Agricultural Economics at Washington State University. He was previously a research economist at the APEC Study Center of New Zealand. Institute for International Economics | http://www.iie.com
Transcript of Appendix B GTAP Model Analysis: Simulating the Effect of a ... · 89 Appendix B GTAP Model...
89
Appendix BGTAP Model Analysis: Simulating theEffect of a Korea-US FTA UsingComputable General EquilibriumTechniques
JOHN P. GILBERT
To analyze the potential impact of a Korea-US free trade agreement, wehave used counterfactual simulation with a computable general equilib-rium (CGE) model. General equilibrium refers to the study of models inwhich an equilibrium is simultaneously obtained in more than one market.CGE models attempt to turn the abstract models of general equilibriumtheory into a practical tool for policy analysis. This appendix provides abrief overview of the CGE approach, the particulars of the model usedin this study, and more detailed simulation results than those presentedin the main text.
The basic structure of a multiregional CGE model can be described asfollows. Consider a global economy consisting of M regions indexed byr. Let Vr be a vector (length F) of factor endowments in each region r,and Pr be a vector (length N) of prices in each region r. We can thendefine the GNP functions for each region as Gr(Pr,Vr)�max{Pr·Yr:Vr}, andsimilarly the expenditure functions as Er(Pr,Ur)�min{Pr·Dr:Ur}, where Ur
is aggregate utility in region r. The aggregate budget constraints are then:
Sr(Pr,Vr,Ur)�G(Pr,Vr)�Er(Pr,Ur)�0 r�1,...,M (1)
From the first-order conditions to the GNP maximization problem, weobtain sectoral supply functions by Hotelling’s lemma and Hicksian
John P. Gilbert is currently a postdoctoral fellow in the Department of Agricultural Economics atWashington State University. He was previously a research economist at the APEC Study Centerof New Zealand.
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90 FREE TRADE BETWEEN KOREA AND THE UNITED STATES?
demand functions follow similarly from the derivative properties of theexpenditure function, hence:
Sri(Pr,Vr,Ur)�Dr
i(Pr,Ur)�Yri(Pr,Vr) i�1,...,N ; r�1,...,M (2)
Equation 2 defines Hicksian net exports. With trade, there can be only oneprice vector, which we denote P. International equilibrium then requires:
�M
r�1Sr
i(P,Vr,Ur)�0 i�1,...,N (3)
By Walras’s law, these equilibrium conditions are not independent, andany one of them can be dropped. Hence, one element of P (say P1) mustbe declared a numeraire price. The solution to the system of equations 1through 3 then yields a relative price vector, aggregate utility levels, andnet exports. We can subsequently derive factor prices from the GNP func-tion:
Wrj�Wr
j(P,Vr) j�1,...,F ; r�1,...,M (4)
Finally, since each sector is a price taker in factor markets, from the first-order conditions of sectoral cost minimization Cr
i(Wr,Yri)�min{Wr·Xr:Yr
i},we obtain factor demands:
Xrij�Xr
ij(Wr,Yri) i�1,...,N ; j�1,...,F ; r�1,...,M (5)
In this simple model we have M�MN�N�2MF�MFN�1 variables butwe have only M�MN�N�MF�MFN�1 independent equations. In aneoclassical model the Vr are declared exogenous, enabling the systemto be solved.
While the basic framework described here is abstract, it illustrates theimportant features of CGE models. First, we can see that optimizingbehavior is explicitly built into the model through the utility maximizationconditions underlying the expenditure function and the profit maximiza-tion conditions underlying the cost and GNP functions. Second, economy-wide constraints are enforced, as the conditions underlying the GNP andexpenditure functions reflect. Finally, we can see that the system explicitlycaptures the relationships between sectors—demand and supply in eachmarket is a function of the complete relative price vector.
The typical applied model adds considerable complexity but retainsthe basic framework described by equations 1 through 5. Typical modifica-tions include the introduction of intermediate inputs in production andfinal demands distinguished between households, government, trade,and capital creation. Most models also incorporate imperfect substitutionbetween foreign and domestic goods and between alternative sources ofimports (if multiregional). This latter assumption, known as the Arming-
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APPENDIX B 91
ton (1969) specification, serves the dual purposes of dampening the tradeand output responses to changes in relative prices and of allowing cross-hauling of products in the same category to be easily accommodated.Because they are designed for policy analysis by counterfactual simula-tion, most models will also incorporate a variety of distortions, mostcommonly in the form of taxes on various activities and rigidities invarious markets.
CGE models may differ from the models of neoclassical general equilib-rium in two other fundamental ways. First there is the question of clo-sure—the selection of which variables in the model are to be exogenous.Various closures are possible and have been discussed at length elsewhere(Dewatripont and Michel 1987). The key point is that selecting differentclosures can have a significant impact on the model results. Second, somemodels do not maintain the assumption of perfect competition in allmarkets. A variety of specifications have been adopted to introduce imper-fect competition into CGE models (Harris 1984 is the seminal contributionin this area). Again, this can have a significant effect on model results.
Because CGE models attempt to capture the features of real-worldeconomies, they incorporate data on the structure of production and tradein the economy under consideration. In general, the starting point willbe a national input-output table or SAM, and a set of trade matrices (formultiregional models). These data represent the state of the economy inquestion at one point in time—the base year. Also, specific functionalforms must be employed to define the substitution relationships of a CGEmodel. Once the functional forms are decided upon, free parameters areobtained by either econometric estimation or (more frequently) literaturesearches. Profit and utility maximizing conditions are then assumed tohold in the base year, allowing the remaining parameters to be determinedfrom the base data, a process called calibration.
Simulation in most CGE models involves examining comparative staticresults. That is, most models consider the role that changes in exogenousparameters (‘‘shocks’’) have on the allocation of goods among consumersand of resources among productive activities, and the consequences foreconomic efficiency. The models compare alternative equilibrium statesbut do not consider the path between the two states. The models thushave no explicit time dimension, and instead represent different timeframes by altering microeconomic elements of the closure. The results ofstatic simulations are often interpreted as representing how the economicsystem in question would have looked had the new policy been in placein the base year, after all relevant adjustments had taken place. Net welfareeffects will generally be presented in terms of a money equivalent.1
1. For further discussion of CGE models and their applications see Bandara (1991) andDecaluwe and Martens (1988). For a useful overview of the structure of Armington trademodels see Devarajan and Lewis (1990).
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92 FREE TRADE BETWEEN KOREA AND THE UNITED STATES?
Having introduced the basic terminology and provided an overviewof the way in which CGE models are constructed and used, we turn toa brief overview of the specifics of the model used in this study.
The GTAP Model
The specific model used here is the Global Trade Analysis Project (GTAP)model. This is a publicly available, multiregional CGE model that hasbeen extensively used in the literature. It has been fully documented inHertel (1997).
The production side of the model assumes constant returns to scaletechnology and perfect competition. Production in each identified sectorin each identified region is represented by a nested constant elasticityof substitution (CES) function. The model incorporates the Armingtonassumption, and as such, each firm uses a CES composite of domesticallyproduced and imported intermediate goods in fixed proportions with avalue-added CES composite (based on five endowed factors of produc-tion—land, natural resources, unskilled labor, skilled labor, and capital).
On the demand side, total income is allocated using fixed value sharesacross government, household, and savings expenditure. The single repre-sentative household then maximizes a constant differences in elasticities(CDE) objective function, which is calibrated to differing income and priceelasticities of demand in each region and allows a rich description of finaldemand. In each case, consumption is of a CES composite of domesticallyproduced and imported goods.
We adopt two microeconomic closures that reflect the choice of timeframe. It is important to emphasize again that the time frame elementcannot be interpreted in terms of calendar years, but rather in termsof the adjustments that are allowed to take place in the (unobservable)transition to a new equilibrium. In the first closure, we adopt a neoclassicalapproach—fixing the endowments of productive factors and allowingmarket prices to adjust to maintain full employment. This type of closureis often interpreted as representing the medium run, since it envisages asituation where the existing capital stock is able to move between sectorsin response to variations in the rates of return to capital across sectors(thereby eliminating these variations). However, the period considered isnot long enough for new investment to come online as productive capital.
The second closure we adopt is often termed a ‘‘steady-state’’ closure.Here the rate of return to capital is set exogenously and the level of thecapital stock is allowed to adjust. We can interpret the time frame hereas the time required for both the allocation and the level of the capitalstock to adjust to a given policy change so as to equilibrate rates of returnacross sectors and to restore rates of return to their initial levels. Thechanges under this closure approximate the effect of investment expansion
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APPENDIX B 93
Table B.1 Initial tariff levels by sector (weighted averages, percent)
United Korea-US States- Korea United
Sector average Koreaa average Statesb
Agriculture, forestry, and fisheries 4.4 0.6 45.8 75.9Processed food 9.8 4.9 27.1 32.8Mining and quarrying 0.2 0.4 3.8 1.6Textiles and apparel 9.9 11.8 6.9 4.7Chemical, rubbers, and plastics 3.2 7.6 7.2 7.3Metals 1.8 4.5 5.6 3.4Transportation equipment 1.4 2.4 4.8 3.1Electronics 1.1 0.7 8.0 8.0Other manufactures 2.0 3.4 7.7 7.4Services 0.0 0.0 0.1 0.1All sectors (average) 2.4 3.6 8.1 13.2
a. Weighted average tariff imposed by the United States on imports from Korea.
b. Weighted average tariff imposed by Korea on imports from the United States.
Source: GTAP4 database (McDougall et al., 1998).
following trade liberalization in a neoclassical model (see Wang andZhai 1998).
The two macroeconomic closures reflect different assumptions aboutthe current account balance. The first closure is the standard GTAP modelclosure. Global investment is assumed to be responsive to changes in therelative rates of return across regions. This does not affect productivecapital stocks but does have an impact on saving and thus on the currentaccount balance in each region (for further details see Hertel 1997). In thesecond closure, the current account balance is explicitly fixed. This is aconservative closure and can be interpreted as a partial long-run equilib-rium with international capital mobility ignored.
Data and Aggregation
We have used version 4 of the GTAP database, which is detailed inMcDougall, Elbehri, and Truong (1998). The full database contains infor-mation on 45 regions and 50 commodities and has a base year of 1995.The simulations presented here are based on an aggregated version ofthe data consisting of 10 regions and 10 commodities.
Within the GTAP database, tariffs and other taxes are represented asad valorem equivalents of the actual applied rates. The GTAP databaseincorporates extensive information on distortions in goods sectors, includ-ing trade taxes/subsidies, output and input taxes/subsidies, and con-sumption taxes/subsidies. The database does not at present account fordistortions in trade in services. The taxes are weighted appropriatelyduring the aggregation procedure (table B.1). Tariffs and export subsidies
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94 FREE TRADE BETWEEN KOREA AND THE UNITED STATES?
are defined on a region-to-region basis, which allows the model to beeasily used for analysis of regional trading arrangements. This also impliesthat differing applied rates across regions reflect the different importcompositions of trade within a given aggregation.
Simulation Procedure and Assumptions
We simulate the formation of an FTA between Korea and the UnitedStates by eliminating the bilateral tariffs between these two economiesfrom the 1995 base, holding all other distortion levels in the system con-stant. Because of the likely sensitivity regarding agriculture in any agree-ment, we also simulate the removal of bilateral tariffs excluding those inthe agricultural and food sectors. The scenarios are all run as comparativestatic simulations. We again emphasize that this gives us information onpossible end outcomes, but not on the transition path, and that the timeelement is represented by the alternative microeconomic closures.
Because there is considerable uncertainty surrounding the parametersused in the model, we have adopted the approach of Arndt et al. (1997)in treating the Armington elasticities (which have the most significantimpact on the results) as random variables. This implies that the resultsgenerated by the model are also random variables. Using the Gaussianquadratures technique developed by Arndt et al. (1996) and Arndt andPearson (1998) for the GTAP model, it is possible to calculate meansand standard deviations for the results, which give an indication of thesensitivity of the model to parameter changes and the degree of confidencethat can be ascribed to any given result. (We use the same triangulardistribution—with central values as in the GTAP database and minimumvalues of 0.1 and 0.2 for the lower and upper levels, respectively—of theArmington parameters assumed by Arndt et al. 1997).
Results
Net Welfare Effects
The welfare measure used in the results is the equivalent variation (EV)for each regional household, expressed in millions of 1995 US dollars.This can be interpreted as the change in regional household income atconstant prices that is equivalent to the proposed change. Because the EVuses beginning-period prices as its base, welfare results from alternativesimulations can be directly compared (although the time frame envisagedin the various closures needs to be taken into account). To give some ideaof the magnitude of the welfare gains, we have also expressed them as
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APPENDIX B 95
a percentage of initial regional GDP. These figures are presented in tablesB.2 and B.3, respectively.
We have also included standard deviation estimates. Here and else-where, the units of the standard deviation figures match the units of themean figures (i.e., in this case they are in millions of 1995 dollars). Asrule of thumb, if a figure maintains the same sign within two standarddeviations, we can be confident (more than 95 percent) that the sign iscorrect. Obviously, smaller deviations around the mean values indicategreater confidence in the results.
The results indicate that both Korea and the United States benefit innet welfare terms under all scenarios. Agricultural trade is shown to bequite important; the net gains are less than half if agriculture is excludedfrom the agreement. The net gains are roughly evenly spread betweenthe two economies in absolute terms but are much bigger for Korea inrelative terms. However, there is less confidence in the results for Korea—a reflection of the size of the economy. We also have quite clear evidenceof substantial trade diversion: virtually all other economies lose in netwelfare terms under all scenarios. This includes NAFTA partners. Themost substantial losses are to Japan in absolute terms and to China andASEAN in relative terms.
In order to help better understand the sources of welfare gains, wehave used the welfare decomposition routines of Huff and Hertel (1996).In essence, this technique incorporates Harberger’s fundamental equationof applied welfare economics into the GTAP model (breaking down wel-fare changes using the changes in movements of goods/factors acrossthe distortions in the system—changes in the marginal utility of incomereflect the fact that the CDE utility function is not homothetic). Thesefigures are presented in tables B.4 and B.5, and again, the figures areexpressed in millions of 1995 dollars.
We observe that the sources of gains from an FTA are quite differentfor the two economies. In the US case, most of the gains are from improve-ments in the terms of trade. These improvements reflect the benefits ofexport expansion into the Korean market. Allocative efficiency gains/losses are small (reflecting relatively low distortion levels in the economy).In the Korean case, terms-of-trade effects are less significant and some-times even negative. Negative terms-of-trade effects reflect the costs asso-ciated with trade diversion. The largest gains for Korea come fromimprovements in allocative efficiency in production and imports (Vineriantrade creation). One interpretation would be that Korea has little to gainfrom an agreement with the United States relative to unilateral liberaliza-tion.
The net welfare results estimated in this model reflect the benefits ofreallocation of resources (efficiency gains). These are generally relativelysmall. Dynamic gains from investment effects are approximated by the
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96
Tab
leB
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net
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97
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98
Tab
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rts
imp
ort
str
ade
inco
me
cap
ital
sto
ckT
ota
l
Fle
xib
lecu
rren
tac
cou
nt
Ful
llib
eral
izat
ion,
med
ium
run
862.
775
.950
.51,
645.
11,
509.
5�
44.0
0.0
4,09
9.6
Ful
llib
eral
izat
ion,
long
run
1,88
0.7
82.3
58.3
1,88
0.9
�12
0.1
�85
.87,
164.
310
,860
.7E
xclu
ding
agric
ultu
re,
med
ium
run
89.4
11.2
55.7
110.
11,
445.
9�
0.2
0.0
1,71
2.2
Exc
ludi
ngag
ricul
ture
,lo
ngru
n56
9.6
14.2
58.2
237.
864
6.4
�1.
43,
398.
54,
923.
4
Fix
edcu
rren
tac
cou
nt
Ful
llib
eral
izat
ion,
med
ium
run
869.
969
.256
.61,
576.
0�
102.
0�
36.7
0.0
2,43
3.0
Ful
llib
eral
izat
ion,
long
run
1,60
3.7
74.3
62.3
1,75
5.1
�1,
150.
0�
64.5
5,16
3.0
7,44
3.9
Exc
ludi
ngag
ricul
ture
,m
ediu
mru
n91
.29.
556
.090
.31,
029.
7�
0.1
0.0
1,27
6.6
Exc
ludi
ngag
ricul
ture
,lo
ngru
n51
2.2
12.5
59.0
208.
242
7.3
�1.
02,
978.
34,
196.
4
Sou
rce:
Mod
elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
99
Tab
leB
.5D
eco
mp
osi
tio
no
fes
tim
ated
net
wel
fare
effe
cto
nth
eU
nit
edS
tate
su
nd
erva
rio
us
scen
ario
s(m
ean
equi
vale
ntva
riatio
n,m
illio
nsof
US
dolla
rs)
Ch
ang
ein
Allo
cati
veef
fici
ency
effe
ctC
han
ge
inm
arg
inal
Ch
ang
ein
Ch
ang
ein
Ch
ang
ein
Ch
ang
ein
term
so
fu
tilit
yo
fC
han
ge
inS
cen
ario
pro
du
ctio
nco
nsu
mp
tio
nex
po
rts
imp
ort
str
ade
inco
me
cap
ital
sto
ckT
ota
l
Fle
xib
lecu
rren
tac
cou
nt
Ful
llib
eral
izat
ion,
med
ium
run
�15
4.5
84.4
�77
.714
9.7
3,78
1.4
0.2
0.0
3,78
3.4
Ful
llib
eral
izat
ion,
long
run
41.8
355.
4�
7.8
112.
62,
773.
60.
55,
658.
68,
934.
6E
xclu
ding
agric
ultu
re,
med
ium
run
28.3
13.8
15.6
36.5
1,43
8.2
0.0
0.0
1,53
2.4
Exc
ludi
ngag
ricul
ture
,lo
ngru
n13
4.7
154.
751
.822
.386
6.6
0.0
2,95
6.0
4,18
6.1
Fix
edcu
rren
tac
cou
nt
Ful
llib
eral
izat
ion,
med
ium
run
�16
2.4
76.9
�66
.412
5.2
3,63
2.8
0.2
0.0
3,60
6.2
Ful
llib
eral
izat
ion,
long
run
161.
545
6.5
�42
.513
5.6
3,30
9.7
0.5
7,29
0.3
11,3
11.6
Exc
ludi
ngag
ricul
ture
,m
ediu
mru
n15
.87.
028
.626
.81,
220.
60.
00.
01,
298.
8E
xclu
ding
agric
ultu
re,
long
run
172.
918
8.9
41.3
31.8
1,04
8.5
0.0
3,50
4.2
4,98
7.5
Sou
rce:
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elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
100 FREE TRADE BETWEEN KOREA AND THE UNITED STATES?
use of a steady-state closure. However, the effects of scale economiesthat can exist under imperfect competition are not captured. Moreover,because of limitations in the available data, services protection is notcaptured. For this reason, the results presented here are probably lower-bound estimates of the potential welfare effects of the formation of a freetrade area.
International Trade
We present trade effects in percentage change and volume terms, explor-ing the changes from different angles. Tables B.6 and B.7 give the percent-age changes and standard deviations in Korea-US exports and US-Koreaexports by sector. Tables B.8 and B.9 give the percentage changes andstandard deviations of total Korean and US exports by sector. It is neces-sary to consider the initial level of trade (in some instances, for example,large percentage changes merely reflect very small initial trade levels).We have provided original trade data from the database in tables B.10and B.11 for this purpose.
Tables B.12 and B.13 give the volume and percentage changes in totalKorean and US exports by region (free on board [FOB] weights). TablesB.14 and B.15 give the volume and percentage changes in total Koreanand US imports by region (again, using FOB weights). The model separatesprices and quantities in the database by assuming initial prices equal tounity. Since the data values are expressed in millions of dollars, thequantity unit for volume changes in each sector is the amount that wouldhave been sold in the initial equilibrium for $1 million.
The results indicate small changes for the United States in terms ofthe overall export volume. There are moderate increases in agriculturalexports when these goods are included in the agreement. The changes inexport volumes are larger for Korea (table B.8). The largest percentagechanges are for agriculture, but from a very small base and with a highdegree of uncertainty (there is a heavy dependence on parameter valuesas indicated by high standard deviations). The figures are also large, butmore stable, for textiles.
In terms of US-Korea trade (table B.7), there are large increases in USexports of agriculture and food products (where liberalized), transporta-tion equipment, electronics, and other manufactures. All figures are rea-sonably robust. There are also large percentage increases in Korea-USexports of agriculture and food, but again from a tiny base and withconsiderable uncertainty (table B.6). There are more robust results fortextiles, chemicals, and other manufactures.
The regional export and import patterns in tables B.12 through B.15confirm the presence of trade diversion in trade from the United Statesto Korea. The United States increases exports to Korea substantially (table
Institute for International Economics | http://www.iie.com
101
Tab
leB
.6E
stim
ated
bila
tera
ltr
ade
effe
cts
on
Ko
rea
un
der
vari
ou
ssc
enar
ios
(per
cent
age
chan
gein
Kor
ea’s
expo
rtvo
lum
esto
the
Uni
ted
Sta
tes’
volu
mes
,st
anda
rdde
viat
ion
inpa
rent
hese
s)
Fle
xib
lecu
rren
tac
cou
nt
Fix
edcu
rren
tac
cou
nt
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Sec
tor
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Agr
icul
ture
,fo
rest
ry,
and
fishe
ries
64.2
58.5
�3.
1�
5.3
68.3
63.8
�2.
5�
4.5
(49.
9)(4
7.9)
(1.7
)(2
.6)
(52.
0)(5
0.6)
(1.5
)(2
.4)
Pro
cess
edfo
od92
.491
.2�
3.2
�3.
997
.496
.2�
2.6
�3.
3(5
2.3)
(52.
6)(1
.6)
(1.9
)(5
5.4)
(55.
4)(1
.4)
(1.8
)
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ing
and
quar
ryin
g�
3.5
�5.
1�
0.4
�1.
2�
1.8
�3.
00.
1�
0.7
(2.3
)(3
.2)
(1.1
)(1
.5)
(1.9
)(2
.7)
(1.0
)(1
.4)
Tex
tiles
and
appa
rel
143.
115
1.4
111.
611
2.3
151.
515
7.4
110.
711
3.4
(71.
0)(7
6.9)
(54.
4)(5
5.5)
(75.
9)(8
0.3)
(54.
1)(5
6.0)
Che
mic
al,
rubb
ers,
and
plas
tics
32.3
35.5
32.3
33.5
34.9
37.1
32.6
33.8
(13.
8)(1
5.3)
(13.
8)(1
4.4)
(15.
0)(1
6.0)
(14.
0)(1
4.6)
Met
als
19.7
25.1
23.2
26.7
23.1
27.0
24.8
27.1
(8.5
)(1
0.6)
(10.
0)(1
1.3)
(10.
0)(1
1.5)
(10.
5)(1
1.5)
Tra
nspo
rtat
ion
equi
pmen
t16
.523
.022
.526
.723
.027
.724
.927
.8(8
.3)
(10.
3)(1
0.1)
(11.
5)(1
0.9)
(12.
3)(1
0.8)
(12.
0)
Ele
ctro
nics
�1.
81.
91.
83.
81.
33.
92.
64.
2(2
.4)
(1.8
)(1
.4)
(1.6
)(2
.5)
(2.2
)(1
.6)
(1.8
)
Oth
erm
anuf
actu
res
15.5
18.8
16.9
18.4
18.8
21.2
17.5
18.9
(6.6
)(7
.6)
(6.7
)(7
.4)
(7.7
)(8
.5)
(7.1
)(7
.6)
Ser
vice
s�
6.2
�3.
5�
3.9
�2.
4�
3.6
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7�
3.1
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0(2
.9)
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)(1
.7)
(1.2
)(2
.5)
(1.9
)(1
.5)
(1.1
)
Sou
rce:
Mod
elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
102
Tab
leB
.7E
stim
ated
bila
tera
ltr
ade
effe
cts
on
the
Un
ited
Sta
tes
un
der
vari
ou
ssc
enar
ios
(per
cent
age
chan
gein
US
expo
rtvo
lum
esto
Kor
ea,
stan
dard
devi
atio
nin
pare
nthe
ses)
Fle
xib
lecu
rren
tac
cou
nt
Fix
edcu
rren
tac
cou
nt
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Sec
tor
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Agr
icul
ture
,fo
rest
ry,
and
fishe
ries
192.
320
0.1
2.3
3.8
191.
219
6.8
2.2
3.6
(52.
4)(5
4.5)
(1.0
)(1
.4)
(51.
7)(5
3.0)
(1.0
)(1
.4)
Pro
cess
edfo
od14
5.0
150.
02.
33.
414
4.5
148.
12.
23.
2(6
2.4)
(64.
0)(1
.2)
(1.4
)(6
2.4)
(63.
6)(1
.2)
(1.4
)
Min
ing
and
quar
ryin
g9.
913
.29.
110
.510
.512
.79.
110
.4(3
.7)
(3.9
)(3
.6)
(3.7
)(3
.7)
(3.8
)(3
.7)
(3.7
)
Tex
tiles
and
appa
rel
48.3
51.7
47.7
48.3
49.4
51.5
47.0
48.2
(24.
5)(2
6.6)
(21.
8)(2
2.3)
(25.
7)(2
7.1)
(21.
7)(2
2.3)
Che
mic
al,
rubb
ers,
and
plas
tics
28.8
31.6
28.1
29.3
28.8
30.8
27.9
29.1
(10.
2)(1
0.7)
(10.
3)(1
0.5)
(10.
3)(1
0.7)
(10.
3)(1
0.5)
Met
als
18.6
21.4
18.7
20.6
19.0
20.8
19.4
20.4
(7.2
)(7
.7)
(7.5
)(7
.8)
(7.4
)(7
.6)
(7.7
)(7
.8)
Tra
nspo
rtat
ion
equi
pmen
t26
.528
.324
.325
.522
.623
.923
.824
.5(7
.9)
(8.1
)(7
.9)
(7.9
)(7
.6)
(7.8
)(7
.7)
(7.8
)
Ele
ctro
nics
39.5
42.0
38.4
39.4
36.9
38.7
37.6
38.7
(12.
9)(1
3.3)
(13.
0)(1
3.2)
(12.
7)(1
3.0)
(13.
0)(1
3.1)
Oth
erm
anuf
actu
res
36.6
40.2
37.0
38.3
34.7
37.3
36.1
37.6
(13.
8)(1
4.7)
(14.
1)(1
4.7)
(13.
9)(1
4.5)
(14.
1)(1
4.5)
Ser
vice
s2.
94.
41.
82.
51.
32.
41.
52.
1(1
.6)
(1.4
)(0
.9)
(0.8
)(1
.2)
(1.3
)(0
.7)
(0.7
)
Sou
rce:
Mod
elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
103
Tab
leB
.8E
stim
ated
trad
eef
fect
so
nK
ore
au
nd
erva
rio
us
scen
ario
s(p
erce
ntag
ech
ange
inK
orea
’sto
tale
xpor
tvo
lum
es,
stan
dard
devi
atio
nin
pare
nthe
ses)
Fle
xib
lecu
rren
tac
cou
nt
Fix
edcu
rren
tac
cou
nt
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Sec
tor
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Agr
icul
ture
,fo
rest
ry,
and
fishe
ries
53.6
48.2
�3.
2�
5.3
57.3
52.9
�2.
6�
4.6
(42.
8)(4
1.0)
(1.6
)(2
.5)
(44.
6)(4
3.3)
(1.4
)(2
.3)
Pro
cess
edfo
od51
.450
.6�
3.5
�4.
155
.354
.3�
2.8
�3.
5(3
0.2)
(30.
6)(1
.5)
(1.9
)(3
2.2)
(32.
3)(1
.4)
(1.7
)
Min
ing
and
quar
ryin
g�
5.4
�7.
1�
2.6
�3.
4�
3.8
�5.
2�
2.1
�3.
0(2
.6)
(3.4
)(1
.3)
(1.8
)(2
.2)
(2.9
)(1
.2)
(1.7
)
Tex
tiles
and
appa
rel
30.5
34.7
13.8
15.1
34.8
37.6
14.4
15.7
(12.
8)(1
5.1)
(6.5
)(7
.2)
(14.
6)(1
6.4)
(6.7
)(7
.4)
Che
mic
al,
rubb
ers,
and
plas
tics
0.9
3.1
0.8
1.9
2.7
4.2
1.3
2.1
(1.4
)(1
.7)
(0.9
)(1
.0)
(1.9
)(2
.1)
(1.0
)(1
.1)
Met
als
�3.
90.
1�
0.7
1.4
�1.
31.
40.
01.
7(2
.3)
(1.2
)(1
.0)
(0.9
)(2
.1)
(1.5
)(1
.0)
(1.0
)
Tra
nspo
rtat
ion
equi
pmen
t�
5.8
�0.
5�
0.1
2.7
�0.
53.
01.
43.
6(4
.1)
(2.9
)(2
.0)
(1.9
)(4
.0)
(3.5
)(2
.1)
(2.1
)
Ele
ctro
nics
�4.
4�
0.8
�0.
71.
1�
1.3
1.2
0.1
1.6
(2.7
)(1
.6)
(1.2
)(1
.0)
(2.5
)(1
.8)
(1.2
)(1
.0)
Oth
erm
anuf
actu
res
1.3
4.1
2.5
3.9
4.2
6.1
3.2
4.3
(2.2
)(2
.2)
(1.4
)(1
.7)
(2.6
)(2
.8)
(1.6
)(1
.8)
Ser
vice
s�
5.5
�3.
2�
3.4
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2�
3.2
�1.
7�
2.7
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8(2
.2)
(1.6
)(1
.3)
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)(2
.0)
(1.5
)(1
.2)
(0.9
)
Sou
rce:
Mod
elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
104
Tab
leB
.9E
stim
ated
trad
eef
fect
so
nth
eU
nit
edS
tate
su
nd
erva
rio
us
scen
ario
s(p
erce
ntag
ech
ange
into
talU
Sex
port
volu
mes
,st
anda
rdde
viat
ion
inpa
rent
hese
s)
Fle
xib
lecu
rren
tac
cou
nt
Fix
edcu
rren
tac
cou
nt
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Sec
tor
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Agr
icul
ture
,fo
rest
ry,
and
fishe
ries
11.8
12.4
�0.
10.
011
.812
.1�
0.1
0.0
(2.8
)(2
.9)
(0.1
)(0
.1)
(2.7
)(2
.8)
(0.1
)(0
.1)
Pro
cess
edfo
od2.
63.
2�
0.4
�0.
22.
73.
1�
0.3
�0.
2(1
.3)
(1.5
)(0
.2)
(0.1
)(1
.4)
(1.5
)(0
.2)
(0.2
)
Min
ing
and
quar
ryin
g0.
00.
00.
00.
00.
00.
00.
00.
0(0
.1)
(0.2
)(0
.1)
(0.1
)(0
.1)
(0.2
)(0
.1)
(0.2
)
Tex
tiles
and
appa
rel
�1.
1�
0.6
0.6
0.9
�1.
0�
0.9
0.7
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Mod
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mul
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ns.
Institute for International Economics | http://www.iie.com
105
Tab
leB
.10
Su
mm
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stat
isti
csfr
om
init
ial
equ
ilib
riu
m(m
illio
nsof
1995
dolla
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tal
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lim
po
rts
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GD
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tral
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GT
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taba
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cDou
gall
etal
.19
98).
Institute for International Economics | http://www.iie.com
106 FREE TRADE BETWEEN KOREA AND THE UNITED STATES?
Table B.11 Initial exports/imports by sector (millions of 1995 dollars)
Exports Exports Totalfrom Total from exports Total
Korea to exports United from Total importsUnited from States to United imports to United
Sector States Korea Korea States to Korea States
Agriculture, forestry, 20.4 786.8 3,364.6 37,718.4 7,730.9 18,026.0and fisheries
Processed food 147.9 2,195.6 1,070.8 27,859.3 4,383.2 22,638.6Mining and quarrying 27.0 240.8 344.4 9,287.4 18,141.3 64,600.7Textiles and apparel 3,368.8 21,634.1 388.7 17,408.6 6,984.0 70,432.2Chemical, rubbers, 1,094.9 14,015.2 3,731.0 80,792.9 18,367.8 78,220.4
and plasticsMetals 632.8 6,495.9 1,249.2 15,638.1 12,273.4 31,680.6Transportation equipment 1,935.8 13,561.1 2,615.1 73,958.2 5,562.5 115,495.7Electronics 5,175.9 13,862.0 2,072.8 53,558.7 5,487.0 88,371.9Other manufactures 11,136.5 44,012.9 11,807.1 220,223.7 49,034.2 264,106.1Services 3,628.3 22,684.4 6,917.6 181,214.0 24,902.8 129,728.3Total 27,168.2 139,488.7 33,561.2 717,659.3 152,867.0 883,300.5
Source: GTAP4 database (McDougall et al. 1998).
B.13), but exports to all other regions fall. On the flip side of the equation,Korea imports more from the United States (by definition), but importsfrom most other regions fall (table B.14). The pattern is not quite so clearin the case of Korean exports and US imports (tables B.12 and B.15). Whileexports to the United States increase substantially (and US imports fromKorea increase by definition), exports to other economies do not necessar-ily fall. Expansion of US income tends to result in increases in imports fromJapan and in some cases ASEAN and Australia/New Zealand. Similarly,efficiency gains seem to allow Korea to expand exports to Japan, China,and ASEAN in some cases.
In terms of the limitations of this framework, it should be noted thattrade estimates tend to be highly dependent on the Armington elasticities.This is reflected in the relatively high estimated standard deviations ofsome results. Also, the model is unable to capture ‘‘new’’ trade, onlyexpansions and contractions in existing trade. However, at this level ofaggregation, this issue does not come into play (since there are few initialzero trade flows).
Balance of Trade
The results presented in table B.16 are changes in the balance of trade(the value of exports at world prices less the value of imports at worldprices), expressed in millions of dollars. Clearly, this statistic is relevantonly when the closure allows flexibility of the current account (otherwise
Institute for International Economics | http://www.iie.com
107
Tab
leB
.12
Est
imat
edch
ang
ein
Ko
rean
exp
ort
volu
mes
by
reg
ion
un
der
vari
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ume
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Institute for International Economics | http://www.iie.com
108
Tab
leB
.13
Est
imat
edch
ang
ein
US
exp
ort
volu
mes
by
reg
ion
un
der
vari
ou
ssc
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(vol
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port
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ses)
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mul
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ns.
Institute for International Economics | http://www.iie.com
109
Tab
leB
.14
Est
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edch
ang
ein
Ko
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imp
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sb
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gio
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Institute for International Economics | http://www.iie.com
110
Tab
leB
.15
Est
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ein
US
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sb
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gio
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nd
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us
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Institute for International Economics | http://www.iie.com
APPENDIX B 111
Table B.16 Estimated effect on current account balances undervarious scenarios (mean change in millions of 1995dollars, standard deviation in parentheses)
Full liberalization Excluding agriculture
Region Medium run Long run Medium run Long run
Australia and 197.4 �19.9 32.1 37.4New Zealand (CER) (35.0) (25.3) (9.4) (8.1)
Japan 1,469.5 261.7 587.4 �278.3(177.3) (302.7) (90.2) (264.2)
Korea �5,061.4 �4,665.4 �1,253.7 �985.3(744.8) (784.3) (123.2) (78.8)
China 78.3 48.0 33.0 3.1(40.5) (46.9) (19.4) (28.2)
ASEAN 64.0 62.8 95.4 78.2(58.2) (58.3) (22.2) (24.0)
Taiwan 7.6 �10.7 2.8 �4.5(10.9) (13.9) (2.8) (4.0)
United States �509.2 2,702.0 �763.6 842.9(243.1) (432.0) (197.3) (328.2)
Canada 159.0 105.5 63.4 1.0(25.2) (35.3) (16.7) (17.1)
Mexico 112.6 51.5 45.2 �14.6(21.6) (34.7) (11.6) (18.4)
Rest of world 3,482.3 1,464.5 1,158.1 320.0(437.9) (423.1) (170.0) (114.0)
CER � Closer Economic Relations trade agreement.
ASEAN � Association of South East Asian Nations.
Source: Model simulations.
it is zero by definition). The results indicate that the US current accountposition worsens in the medium run and improves slightly in the long run.
The figures in tables B.17 and B.18 are the changes in bilateral tradebalances, calculated on the same basis as the overall balance (that is, thevalue of exports at world prices less the value of imports at world prices,by region). Since only the overall current account balance is constrainedin some closures, the bilateral balances can always vary. Because thetrade balance can be either positive or negative, we need to be careful ininterpreting the percentage changes, depending on whether the originalposition was in surplus or deficit. If the value change and the percentagechange take the same sign, then an existing surplus has either risen orfallen. If the value change and the percentage change take opposite signs,an existing deficit has either become larger (if the percentage change ispositive) or smaller (if the percentage change is negative).
The regional decomposition indicates improvement in the bilateral bal-ance between the United States and Korea and deterioration betweenKorea and the United States by definition (see tables B.17 and B.18).
Institute for International Economics | http://www.iie.com
112
Tab
leB
.17
Est
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edch
ang
ein
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tera
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ade
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ance
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der
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ou
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Institute for International Economics | http://www.iie.com
113
Tab
leB
.18
Est
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edch
ang
ein
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tera
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ance
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der
vari
ou
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Institute for International Economics | http://www.iie.com
114
Tab
leB
.19
Est
imat
edef
fect
on
Ko
rean
/US
fact
or
inco
mes
un
der
vari
ou
ssc
enar
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(per
cent
age
chan
ge,
stan
dard
devi
atio
nin
pare
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ses)
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Mod
elsi
mul
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ns.
Institute for International Economics | http://www.iie.com
APPENDIX B 115
Improvement in the US bilateral balance with Korea tends to be offset bydeterioration in bilateral balances with other economies (this is con-strained to be the case where the overall current account is fixed but istrue in general; see table B.17).
Caution needs to be used in evaluating both the overall and bilateralbalances, since the former is determined largely by saving behavior inthe domestic economy and the latter may not have a strong economicmeaning.
Factor Incomes
Factor income results are presented in table B.19. Because the modelcontains only one household per region, income distribution issues mustbe analyzed in the Ricardian tradition, in terms of factor incomes. In theinitial equilibrium, all factor incomes are normalized to unity in the initialequilibrium (i.e., we use efficiency wage units). Results are presented aspercentage changes from this initial value. Note that the change in thereturn to capital is zero in all long-run simulations (by definition in thesteady-state closure).
The results suggest insignificant income distribution effects in theUnited States under all scenarios (this in turn suggests that there isunlikely to be significant harm imposed on any particular group withinthe United States). The effects are larger for Korea. The largest changesare in land (a proxy for agricultural interests) in the simulations whereagriculture is reformed. Here there are substantial rises in the UnitedStates and very substantial falls in Korea.
Output
In a manner similar to that used with the trade figures, output effects arepresented in tables B.20 and B.21 as a percentage change in output volumesrelative to initial output levels (table B.22). They indicate very small struc-tural effects on the US economy (table B.21). There are larger but stillsmall effects on Korea, except for the large and significant expansion ofthe textiles sector (table B.20).
Institute for International Economics | http://www.iie.com
116
Tab
leB
.20
Est
imat
edo
utp
ut
effe
cts
on
Ko
rea
un
der
vari
ou
ssc
enar
ios
(per
cent
age
chan
gein
outp
utby
sect
or,
stan
dard
devi
atio
nin
pare
nthe
ses)
Fle
xib
lecu
rren
tac
cou
nt
Fix
edcu
rren
tac
cou
nt
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Sec
tor
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Agr
icul
ture
,fo
rest
ry,
and
fishe
ries
�4.
2�
3.8
�0.
20.
0�
4.1
�3.
8�
0.2
0.0
(1.7
)(1
.7)
(0.0
)(0
.1)
(1.6
)(1
.7)
(0.0
)(0
.0)
Pro
cess
edfo
od4.
15.
1�
0.1
0.3
4.1
4.8
�0.
10.
3(1
.5)
(1.6
)(0
.1)
(0.1
)(1
.5)
(1.6
)(0
.0)
(0.1
)
Min
ing
and
quar
ryin
g�
1.9
�0.
1�
1.3
�0.
4�
1.0
0.2
�1.
0�
0.3
(0.7
)(0
.6)
(0.4
)(0
.3)
(0.7
)(0
.5)
(0.4
)(0
.3)
Tex
tiles
and
appa
rel
19.4
23.0
7.6
8.9
22.2
24.7
8.0
9.2
(7.4
)(9
.0)
(3.7
)(4
.2)
(8.5
)(9
.7)
(3.8
)(4
.3)
Che
mic
al,
rubb
ers,
and
plas
tics
0.9
3.6
�0.
11.
21.
63.
50.
01.
1(0
.4)
(0.8
)(0
.3)
(0.5
)(0
.5)
(0.9
)(0
.3)
(0.5
)
Met
als
�3.
10.
8�
1.5
0.5
�1.
61.
1�
1.1
0.6
(1.4
)(0
.7)
(0.7
)(0
.4)
(1.5
)(0
.8)
(0.7
)(0
.4)
Tra
nspo
rtat
ion
equi
pmen
t�
3.0
1.0
�0.
81.
2�
1.8
1.0
�0.
51.
2(1
.9)
(1.1
)(1
.0)
(0.8
)(1
.8)
(1.2
)(1
.0)
(0.8
)
Ele
ctro
nics
�2.
80.
5�
1.4
0.2
�2.
10.
3�
1.2
0.2
(1.3
)(0
.8)
(0.8
)(0
.5)
(1.3
)(0
.7)
(0.7
)(0
.5)
Oth
erm
anuf
actu
res
�0.
92.
2�
0.5
1.0
0.4
2.6
�0.
21.
1(1
.3)
(1.0
)(0
.8)
(0.8
)(1
.4)
(1.2
)(0
.8)
(0.9
)
Ser
vice
s0.
12.
70.
01.
2�
0.4
1.5
�0.
21.
0(0
.2)
(0.6
)(0
.1)
(0.3
)(0
.1)
(0.5
)(0
.1)
(0.3
)
Sou
rce:
Mod
elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
117
Tab
leB
.21
Est
imat
edo
utp
ut
effe
cts
on
the
Un
ited
Sta
tes
un
der
vari
ou
ssc
enar
ios
(per
cent
age
chan
gein
outp
utby
sect
or,
stan
dard
devi
atio
nin
pare
nthe
ses)
Fle
xib
lecu
rren
tac
cou
nt
Fix
edcu
rren
tac
cou
nt
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Fu
lllib
eral
izat
ion
Exc
lud
ing
agri
cult
ure
Reg
ion
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Med
ium
run
Lo
ng
run
Agr
icul
ture
,fo
rest
ry,
and
fishe
ries
1.6
1.8
�0.
10.
01.
71.
80.
00.
0(0
.3)
(0.3
)(0
.0)
(0.0
)(0
.3)
(0.3
)(0
.0)
(0.0
)
Pro
cess
edfo
od0.
10.
20.
00.
00.
10.
20.
00.
0(0
.1)
(0.1
)(0
.0)
(0.0
)(0
.1)
(0.1
)(0
.0)
(0.0
)
Min
ing
and
quar
ryin
g�
0.1
0.1
0.0
0.0
�0.
10.
10.
00.
0(0
.0)
(0.0
)(0
.0)
(0.0
)(0
.0)
(0.0
)(0
.0)
(0.0
)
Tex
tiles
and
appa
rel
�1.
2�
1.1
�0.
7�
0.6
�1.
3�
1.1
�0.
6�
0.6
(0.5
)(0
.5)
(0.3
)(0
.3)
(0.6
)(0
.6)
(0.3
)(0
.3)
Che
mic
al,
rubb
ers,
and
plas
tics
0.0
0.2
0.1
0.1
0.0
0.2
0.1
0.2
(0.0
)(0
.0)
(0.0
)(0
.1)
(0.0
)(0
.0)
(0.0
)(0
.1)
Met
als
�0.
10.
10.
10.
2�
0.1
0.1
0.1
0.2
(0.1
)(0
.1)
(0.1
)(0
.1)
(0.1
)(0
.1)
(0.1
)(0
.1)
Tra
nspo
rtat
ion
equi
pmen
t�
0.3
�0.
1�
0.1
0.0
�0.
2�
0.1
�0.
10.
0(0
.1)
(0.1
)(0
.1)
(0.0
)(0
.1)
(0.1
)(0
.1)
(0.0
)
Ele
ctro
nics
0.0
0.1
0.1
0.2
�0.
10.
10.
10.
2(0
.1)
(0.1
)(0
.1)
(0.1
)(0
.1)
(0.1
)(0
.1)
(0.1
)
Oth
erm
anuf
actu
res
0.0
0.2
0.2
0.3
0.0
0.2
0.2
0.3
(0.1
)(0
.1)
(0.1
)(0
.1)
(0.1
)(0
.1)
(0.1
)(0
.1)
Ser
vice
s0.
00.
10.
00.
00.
00.
10.
00.
1(0
.0)
(0.0
)(0
.0)
(0.0
)(0
.0)
(0.0
)(0
.0)
(0.0
)
Sou
rce:
Mod
elsi
mul
atio
ns.
Institute for International Economics | http://www.iie.com
118 FREE TRADE BETWEEN KOREA AND THE UNITED STATES?
Table B.22 Initial output levels by sector (millions of 1995 dollars)
Sector Korea United States
Agriculture, forestry, and fisheries 66,648.2 298,631.3Processed food 87,806.3 544,394.3Mining and quarrying 5,774.4 157,042.4Textiles and apparel 52,031.8 234,759.3Chemical, rubbers, and plastics 105,902.7 718,318.1Metals 62,718.9 199,087.4Transportation equipment 36,148.8 562,612.6Electronics 46,416.5 311,269.6Other manufactures 115,036.2 1,228,908.1Services 457,234.6 7,933,941.0Total 1,035,718.5 12,188,964.0
Source: GTAP4 database (McDougall et al. 1998).
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