It has been 10 years passed since the first Korea-Chile FTA went into effect. A bilateral FTA has become more widespread, due to lack of progress in WTO DDA negotiations since the 2000s. Korea, being a country highly dependent on trade, has switched the direction of trade policy from multilateralism towards bilateralism in order to respond to changes in the commercial environment.
In this study, we analyzed Korea’s FTAs policy based on the outcome of recent bilateral FTAs from the perspective of achievement of policy objectives. This study focused more on areas where evaluation of the effectuated FTAs was possible, to enable differentiated and in-depth contribution from previous studies. This evaluation has been made in two categories: internal and external issues. The following issues were assessed in connection with internal issues; FTA network, the products, service and investment in bilateral trade; and the assessment of external issues included economic growth, consumer welfare, distribution structure over industry and business scale, and changes in domestic policy.
Korea has consistently pursued its FTA policy based on the FTA roadmap of 2003 that encompassed FTA promotion strategies, selection standards for FTA partners as well as its order of priority. It ultimately emphasizes three strategic principles for FTAs: first, multiple simultaneous approach; second, comprehensive and high-quality coverage; and public consensus-based procedures.
By evaluating the result of a decade of effectuated FTAs, Korea has successfully established a comprehensive and high-quality, multi-FTA network. Starting with the first Korea-Chile FTA in 2004, as of 2014 Korea has effectuated nine FTAs with 46 partners including the US, EU and ASEAN, and concluded three. In the meantime, the number of bilateral FTAs in the East Asian region has gradually increased to 71 FTAs in comparison with 58 FTAs a decade ago. According to Social Network Analysis, the degree to which Korea is connection-centered (the number of FTAs) and betweenness-centered (linkage between nations) was the second highest among East Asian countries after Japan. Nevertheless, Korea preferred to be economic partners with more comprehensive and advanced economies such as the EU.
As for the change in trade volume through bilateral FTAs with Chile and ASEAN, Korea has greater market shares, especially in favorable industries since the FTAs went into effect. However, a first mover advantage was lost due to bilateral FTAs between major competing nations and Chile/ASEAN. In the case of FTAs with the US and EU, although Korea achieved some increases in market share immediately after the effectuation of FTAs, the economic effect of FTAs was smaller than expected because of delays in economic recovery in these countries caused by the global financial crisis. In this context, this study contains a regression analysis using a gravity model, with the amount of imports as dependent variables and each FTA as key explanatory variables. As a result, the concluded FTA has a positive effect on the growth in trade between trading partners.
The number of export items in terms of FTA trading partners has grown by 6.1%p and 1.3%p in Chile and the US respectively, as the diversity of export items has improved. By measuring the concentration of import items, the import concentration is expected to lead to an increase in consumer welfare from improvements in diversity and competitive structural change, but export intensity actually deepened in some countries as to require 'discovery' of various export items. The FTA resulted in positive effects both on the number of export and import items by industrial analysis, whereas the impact on the value of imports and exports has suggested the need for industry-specific measures tailored to the different industries.
Services trade effect due to the FTA has mainly occurred in transportation, telecommunications, insurance, computer services and trade-related businesses. After the effectuation of the FTA, FDI from the US, EU, ASEAN and others has increased but there was no evidence of increased FDI to the FTA partners. Only FDI in manufacturing and service sectors to the US, EU, ASEAN has slightly increased. However, a questionnaire survey of enterprises operating in ASEAN and Central Europe showed that the effect of FTA was very limited since they generally consider variety factors such as market scale and production cost when investing overseas.
While previous studies mainly focused on the impacts of trade within bilateral FTAs, this study will analyze the overall economic impacts of FTAs in terms of growth and welfare as changes in bilateral trade may affect world trading and the overall economy in a variety of ways. Regarding growth effect of FTAs, the results for EU was the highest with 0.9%; growth of 0.43% and 0.11% were seen in ASEAN and Chile respectively. In addition, by comparing the overall growth effect from FTAs to the total economic growth in 2013, the growth effect of FTA accounted for 1.19% of the 3% total economic growth in Korea. It means that an FTA can be considered as having a significant supporting role in Korea's economic growth.
Regarding the result of business performance, the number of domestic export enterprises has increased continuously from 2007 until 2012; the growth rates in numbers of both large and small/medium-sized enterprises increased faster with FTA partners. Despite the fact that most enterprises were inevitably subject to market openness in the time of the launch of the FTA, some enterprises could recover prior profit rates through export; however, domestic companies are likely to experience difficulties due to decreased average profit rates.
The Korean government proposed institutional advancement as one of its important policy measures while promoting additional FTAs with advanced economies. In this study, the amendments into national law instruments based on KORUS FTA were organized and evaluated in terms of their institutional linkages by 6 different categories: ‘regulatory harmonization’ (4 cases), ‘institutional streamlining’ (3 cases), ‘transparency’ (3 cases), ‘value-added services market access’ (5 cases), ‘strengthening the level of protection in intellectual property rights’ (9 cases) and ‘system of transparency’ (1 case). These institutional changes shall ultimately promote competition through trade and investment in order to improve industrial competitiveness, and continue to be monitored as to whether the link is functioning properly.