In the 1990s, regional trade agreements (RTAs) have become widespread and increasingly became a threat to non-member countries. Despite the GATT/WTO Article 24 and its provision for the overall trade barriers in any new regional or bilateral trade agreement to be no higher than the preexisting ones, the trade diversion effects of regionalism are having an increasingly negative effect on the trade of non-member countries. A realistic Korean policy response to the spread of RTAs would be the establishment of free trade agreements (FTAs) with major trading partners. This paper analyzes the potential effects of a Korea-U.S. FTA, as this would become the most significant trade agreement, which Korea might enter into.

Not only would a Korea-U.S. FTA allow both countries to benefit from the preferentially favorable measures, but it would likely reduce the amount of trade disputes involving Korea. The United States is the most important trading partner for Korea, and yet, it also is the greatest source of trade friction.

Although a Korea-U.S. FTA could not eliminate every trade friction between the two countries, such a liberalization effort would likely reduce the frequency and gravity of the trade disputes.

In this paper, we have performed simulations to cover five different scenarios of tariff reduction. In each of the scenarios, we have found that the welfare of Korea and the United States would both increase, with Korea receiving a relatively greater share of the welfare benefits. Korea's greater reliance on the trade with the United States and comparatively higher existing tariffs may explain its greater potential benefits. An FTA between the two countries would improve Korea's welfare by 0.73 to 1.73 percent, and that of the United States by 0.07 percent at the most. In addition to the simulations covering an exclusive FTA with the United States, we also have performed a simulation, measuring the effects of Korea's joining the NAFTA. Due to the larger market size, trading with the NAFTA would result in a 0.54 percent increase in Korea's welfare gains, which is higher than that expected from Korea's signing an FTA exclusively with the United States. The simulations also demonstrated that the United States would optimally benefit from an FTA with Korea, if it would have a clause, eliminating all of the agricultural tariffs. In effect, this would promote liberalization for this very sensitive sector.
In this paper, we have focused on the effects of tariff reduction. A more comprehensive analysis / particularly, the one which considers the effects of preferential rules of origin - yet remains undone. And while economic considerations should be the logical starting point, political benefits and burdens of signing an FTA, which this paper only briefly addresses, also require further study.

Ⅰ. Introduction

Ⅱ. Background for a Free Trade Agreement
1. Definition and Characteristics of an FTA
2. Current Influence of FTAs
3. Economic Effects of FTAs

Ⅲ. Econometric Model, Data, and Parameter
1. Description of Model
2. Parameters and Aggregation of Data

Ⅳ. Economic Effects of a Korea-U.S. FTA: Empirical Results
1. Economic Effects of a Korea-U.S. FTA, Korea-Japan FTA,and Korea's Entrance
into the NAFTA
: A Comparison
2. Economic Effects of Five Versions of an FTA betweenKorea and the United
States

Ⅴ. Conclusion

References

Appendix I: Chronology of the Growth of Regionalismin the Post-War Trading
System
Appendix II: 1. Tariff Rates of Korea and the United States
2. Trade between Korea and the United States