the u.s.-republic of korea free trade agreement and its ......subsequently balassa distinguishes...

The U.S.-Republic of Korea Free Trade Agreement

and its Impact on Latin America

Diploma Thesis

Anja Breuer

International Degree Course in Economics University of Applied Sciences Bremen

1. Examiner: Prof. Dr. Hans H. Bass, University of Applied Sciences Bremen

2. Examiner: Raquel Artecona, UN Economic Commission for Latin America and the Caribbean

August 2008

iii

Contents

List of Figures and Tables..............................................................................iv

List of Abbreviations and Acronyms.............................................................vi

1 Preferential Trade Arrangements: Forms, Development and Implications ......................................................................................................1

1.1 Forms of Preferential Trade Arrangements .............................................................2

1.2 The Recent Proliferation of Preferential Trade Arrangements................................5

1.3 The Economic Impact of Free Trade Agreements in Theory..................................8

2 The KorUS FTA and its Impact on Latin American Exports to the U.S. and Korea........................................................................................................17

2.1 History and Basic Facts of the KorUS FTA..........................................................18

2.2 The Impact of the KorUS FTA on the Member Countries....................................20

2.2.1 Current U.S.-Korea Trade and Its Development .............................................21

2.2.2 Estimated Effects on Trade and Welfare for the U.S. and Korea....................25

2.3 The Impact of the KorUS FTA on Latin American Exports .................................31

2.3.1 A Short Literature Review on Trade and Welfare Effects ..............................33

2.3.2 Current Latin American Trade with Korea and the U.S. and its Dynamics ....35

2.3.3 Composition of Latin American Exports.........................................................42

2.3.4 Comparison of Export Structures ....................................................................49

2.3.5 Competitiveness of Latin American Exports...................................................60

2.3.6 Conclusions .....................................................................................................66

3 The Nature of International Trade Relations Under Construction ........71

3.1 Is There a Superior Construction Plan?.................................................................72

3.2 PTAs: Building Blocks or Stumbling Blocks?......................................................78

3.3 Changing the Design? An Assessment of Policy Options.....................................83

References......................................................................................................87

iv

List of Figures and Tables

Figure 1: Main forms of economic integration.................................................................4

Figure 2: Preferential Trade Arrangements Notified to the WTO....................................6

Figure 3: Static Partial Equilibrium Analysis of a Free Trade Area ..............................10

Figure 4: U.S. Commodity Trade with South Korea......................................................21

Figure 5: Shares of Total U.S. Commodity Trade..........................................................22

Figure 6: Shares of Total Korean Commodity Trade.....................................................22

Figure 7: Development of Exports to the Republic of Korea.........................................38

Figure 8: Development of Exports to the United States.................................................41

Figure 9: ESI and WESI Values for the Korean Market................................................51

Figure 10: ESI and WESI Values for the U.S. Market...................................................55

Figure 11: Static Impact and Dynamic Time-Paths of Regionalism..............................79

Table 1: Summary of Modeled Sectoral Output Effects of the KorUS FTA .................28

Table 2: Summary of Modeled Welfare Effects of the KorUS FTA..............................30

Table 3: Basic Information on Selected Latin American Countries...............................33

Table 4: Welfare Effects of the KorUS FTA on Latin America ....................................34

Table 5: Changes in Latin American Exports due to the KorUS FTA...........................34

v

Table 6: Trade with the Republic of Korea in 2006.......................................................36

Table 7: Trade with the United States in 2006 ...............................................................40

Table 8: Import Shares in the Korean Market in 2006...................................................43

Table 9: Import Shares in the U.S. Market in 2006........................................................44

Table 10: Product Penetration in the Korean Market in 2006........................................45

Table 11: Product Penetration in the U.S. Market in 2006.............................................46

Table 12: Top 5 Exports to the Korean Market in 2006.................................................47

Table 13: Top 5 Exports to the U.S. Market in 2006 .....................................................48

Table 14: Decomposition of ESI Values for the Korean Market ...................................52

Table 15: Decomposition of WESI Values for the Korean Market ...............................53

Table 16: Decomposition of ESI Values for the U.S. Market........................................56

Table 17: Decomposition of WESI Values for the U.S. Market ....................................57

Table 18: Highest Latin American RCAs in the Korean Market ...................................62

Table 19: RCAs Shared by the U.S. and Latin American Countries in the Korean Market.............................................................................................................................63

Table 20: Highest Latin American RCAs in the U.S. Market........................................64

Table 21: RCAs Shared by Korea and Latin American Countries in the U.S. Market ..65

vi

List of Abbreviations and Acronyms

APEC Asia-Pacific Economic Cooperation

CGE computable general equilibrium

CU customs union

ESI export similarity index

FDI foreign direct investment

FTA free trade agreement

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

GTAP Global Trade Analysis Project

KorUS FTA United States - Republic of Korea free trade agreement

LA Latin America

MFN most-favored-nation

NAFTA North American Free Trade Agreement

n.e.s. not elsewhere specified

PTA preferential trade arrangement

RCA revealed comparative advantage

SITC Rev.3 Standard International Trade Classification, Revision 3

vii

UN Comtrade United Nations Commodity Trade Statistics Database

USITC United States International Trade Commission

WESI weighted export similarity index

WTO World Trade Organization

1 Preferential Trade Arrangements: Forms, Development and Implications

The world economy has changed considerably over the last few decades. The world

grew together in many ways experiencing an improvement of transportation networks,

an expansion of information and communication networks, the liberalization of

financial markets and an increase in world trade. The last decade, however, is

particularly marked by a new development:

“The growth of regional trade blocs has been one of the major developments in international relations in recent years. Virtually all countries are members of a bloc, and many belong to more than one. Over a third of world trade takes place within such agreements.” (Schiff and Winters 2003, p. 1)

There is a long list of reasons given by different stakeholders on why countries seek

economic integration. Jovanović (2006, p. 192) mentions e.g. the reduction in the cost

of trade through the elimination of trade barriers, technological advances and downward

pressure on prices through increased competition, the exploitation of economies of scale

in larger markets, improved efficiencies and a strengthened bargaining position with

external partners. This new aspect of the current economic reality also leaves the world

with many questions. What are the characteristics and determinants of the recent

proliferation of preferential trade arrangements1 (PTAs)? How will this new trend

influence the economic landscape? What impact of a preferential trade agreement can

be expected by member countries and by the rest of the world not party to the

agreement? Will there be winners and losers in the race towards trade blocs? How will

1 The term ‘preferential trade arrangements’ is used as an umbrella term for all discriminatory forms of economic integration in the context of this thesis.


the expansion of bilateral (or in a few cases plurilateral) trade negotiations as a trade

policy instrument change the way countries negotiate multilaterally?

In the light of the recent developments this paper tries to answer these complex

questions making use of relevant literature and analyzing trade data. In the first chapter

the paper explores the framework surrounding preferential trade arrangements giving an

introduction to basic theoretic concepts and highlighting recent trends concerning PTAs.

The second chapter analyzes the economic impact of a specific preferential trade

agreement. For this purpose the proposed free trade agreement (FTA) between the U.S.

and the Republic of Korea has been chosen, because it would be the United States’

“most commercially significant FTA in over a decade” (USTR 2007) and a FTA is the

form of economic integration most often chosen by countries negotiating bilaterally (see

section 1.2). A special emphasis of the second chapter lies on the impact that the FTA,

upon entering into force, might have on Latin American exports to the FTA member

countries and is performed with the help of case studies of Brazilian, Chilean, Costa

Rican, Mexican and Peruvian exports. The competitiveness of Latin American countries

in the U.S. and in the Korean market is of substantial interest as the U.S. is a traditional

export market for Latin America and the South Korean market could provide Latin

America with a valuable option for a diversification of export markets. Therefore the

impact of the proposed FTA on this region of the world seems especially relevant, but

has, so far, not been analyzed thoroughly in recent studies. Finally, the third chapter

addresses the influence of the recent spread of PTAs on the multilateral trading system

and its future as discussed in the respective literature.

1.1 Forms of Preferential Trade Arrangements

Countries have many options for structuring their trade relations with other nations. They

can pursue a multilateral approach seeking and granting market access via multilateral

negotiations on the rules of trade within the framework of the World Trade Organization

(WTO). One of the guiding principles of the WTO is the most-favored-nation (MFN)

principle according to which in general all countries have to receive equal treatment (WTO

2007, p. 10). Alternatively, countries can pursue strategies that are based on preferential

market access between two partner countries or among a group of several partner countries.

Although the pursuit of strategies giving preferential access to some countries seems to be

an apparent contradiction to the WTO’s MFN principle, there are provisions within the

1 Preferential Trade Arrangements: Forms, Development and Implications 3

General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in

Services (GATS) that allow for certain exceptions (WTO 2007, p. 64). GATT article 24 and

GATS article 5 give permission to set up preferential trade arrangements provided that

certain criteria are met (WTO 2008b; WTO 2008d). They specify that “barriers should be

reduced or removed on substantially all sectors of trade in the group” and that barriers for

the outside world should not be raised. Under the so-called Enabling Clause (WTO 2008c)

there are also exceptions provided for developing countries that wish to reduce or eliminate

trade barriers among themselves. Since these possibilities for exceptions to the MFN

principle have become widely used over the last decades in the following an overview of

different forms of economic integration is given and the extent of commitments that these

forms of preferential trade arrangements entail is explained.

According to Balassa (1961, p. 4) economic integration can be defined “as a process and

as a state of affairs”. With regard to the definition as a process, the analysis of economic

integration is concerned with the “measures leading to the suppression of

discrimination” between different national states. Understood as a state of affairs,

economic integration results in “forms of economic integration” that “can be

characterized by the absence of discrimination in various areas” (Balassa 1961, p. 5).

Subsequently Balassa distinguishes five forms of economic integration each

characterized by varying degrees of integration.

The first of the five forms of economic integration mentioned by Balassa (1961, pp. 5-

6) is the free trade area, which is characterized by the abolition of tariffs and

quantitative restrictions in trade between the participating countries. The second form

introduced is the customs union, which in addition to the provisions of a free trade area

also requires the establishment of a common external tariff towards non-member

countries. The next higher form of integration is represented by a common market,

characterized by the elimination of not only trade restrictions but also restrictions

concerning factor movements. An economic union as the fourth form of economic

integration according to Balassa goes even further in its requirements and calls for the

“harmonization of economic, monetary, fiscal, social, and countercyclical policies.” The

highest form of integration is total economic integration. It is achieved by the

unification of all policies and the setting up of a supranational authority whose decisions

are binding for all member-countries. Figure 1 illustrates the first four forms (by other


authors also called ´types´, ´tiers´ or ´stages´) of economic integration of Balassa’s

concept matching each form with the corresponding areas that are characterized by the

absence of discrimination.

Figure 1: Main Forms of Economic Integration; Source: based on Blank et al. 1998, p. 35.

When comparing economic integration initiatives in real life with Balassa’s theoretic

categorization, it is noticeable that the distinctions between the different forms of

integration are not always as clear cut as Balassa’s concept might suggest. Nevertheless,

Balassa’s categorization is generally accepted and adopted by the relevant literature.

Some authors, however, do not include the last form (total economic integration)

because it is not viewed as a form of strictly economic integration but rather as political

integration (compare e.g. Blank et al. 1998, p. 34; Das 2004, p. 15). Others include this

stage of integration and express their differing view by adjusting the form’s name. It is,

e.g., termed ´complete political integration´ by El-Agraa (1989, p. 2) and ´political

union´ by Kaiser (2003, p. 28).

Furthermore, some authors add additional stages to the scheme that are embedded at a

degree of integration inferior to that of a free trade area. Jovanović (2006, p. 22), Das

(2004, p. 15) and Kaiser (2003, p. 27) e.g. include preferential trade (or tariff)

agreements, which eliminate tariffs on a specified number of commodities only or lower

tariffs among member countries relative to third parties without eliminating tariffs

completely. Jovanović also mentions the form of partial customs unions, which retain

their initial tariffs for trade among the member countries, but establish a common

external tariff on trade with the rest of the world.

In his contribution Das (2004, p. 15) distinguishes between shallow and deep stages of

integration grouping preferential trade (tariff) agreements, free trade areas and customs

unions as forms of shallow integration and common markets and economic unions as

Characteristics

Form

Free Trade Area

Customs Union

Common Market

Economic Union

harmonization/unification

of economic policy

free tradebetween members

common external tariff

full mobility offactors of production


forms of deep integration. Regardless of where you chose to draw the line between

shallow and deep integration, however, it is important to observe that economic

integration is not necessarily a gradual process in which countries continuously advance

from one stage of integration to the next higher form (Jovanović 2006, pp. 22-23).

According to their wishes and needs countries can negotiate to start at the degree of

integration that best fits their interests, they can remain at the same stage, advance

slowly, skip stages or they can cancel existing integration agreements. Furthermore, in

practice many agreements do not enter into force entailing immediate elimination or

reduction of tariffs, but are ´phased in´ lowering tariffs in various steps over a specified

period of time.

1.2 The Recent Proliferation of Preferential Trade Arrangements

Much has been talked and written about the ´new regionalism´ since the 1990s and

“´proliferation´of RTAs [regional trade arrangements] has become a common term, in

the press and relevant literature, to account for the increasing number of RTAs being

recorded in recent years” (Fiorentino et al. 2006, p. 2). But is regionalism (understood

as the spread of preferential trade arrangements) really a new phenomenon? In short:

yes and no.

Regionalism is, in fact, not a new phenomenon in itself. In 1664 e.g. a customs union of

the provinces of France was proposed and in 1834 the German Zollverein was

established as one of the earlier examples of a customs union (compare Schiff and

Winters 2003, p. 4; Jovanović 2006, p. 16; Blank et al. 1998, pp. 43-44). Furthermore,

according to Kaiser (2003, p. 20) multilateralism and regionalism have co-existed since

the multilateral trading system was established in form of the General Agreement on

Tariffs and Trade (GATT) in 1947. As she notes, however, in the past for most

countries multilateral negotiations were the dominant approach for arranging

international economic relations, whereas the massive proliferation of regional

arrangements within the last decade has definitely changed the current weighting of the

two approaches. Looking back at the last century two waves of regionalism can be

identified of which the first appears starting with the establishment of the European

Economic Community in 1957 and the second wave of regionalism dates to the 1990s

(Das 2004, p. 10; Kaiser 2003, p. 30).


Figure 2: Preferential Trade Arrangements Notified to the WTO according to GATT Art. 24, GATS Art. 5 and Enabling Clause; Source: based on WTO data (WTO 2008a).

As figure 2 shows the number of PTAs notified to the GATT increased slowly over time

and until into the mid-1970s there were still less than 50 notified agreements. Only in

the 1990s the number of notifications increased substantially and by now almost 400

PTAs have been notified to the GATT and the WTO. Therefore, first of all, a significant

quantitative change concerning PTAs can be observed. Nevertheless, it is important to

note, that out of the almost 400 PTAs notified only slightly more than 200 are actually

active. Additionally, it has to be mentioned that the WTO figures overstate the physical

number of agreements as countries have to submit a notification in case of accession to

an existing agreement and, since 1995, have to submit separate notifications for an

agreement containing provisions on trade and services (Fiorentino et al. 2006, p. 2). In

spite of methodological limitations, however, the increasing number of notifications

received by the WTO is still a valuable indicator for the spread of PTAs. In addition, the

percentage of world trade conducted under such agreements gives an impression of the

importance of regionalism in the modern world: According to direct communication

with the WTO’s Economic Research and Statistics Division the share of exports among

partners of PTAs (excluding the overlap of PTAs) in world exports was slightly over

40% in 2005 and 2006.

Preferential Trade Arrangements Notified to the WTO

0

5

10

15

20

25

30

35

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

0

50

100

150

200

250

300

350

400

450

notif ications(left-hand scale)

notif ied(cumulative)

notif ied and active(cumulative)


There is not only a quantitative change regarding the spread of PTAs, there is also a

qualitative change. Whereas the old wave of PTAs consisted mostly of agreements

among neighboring countries, the new wave of regionalism is first and foremost

characterized by an ever increasing number of cross-regional alliances with a diverse

range of partners (Das 2004, p. 17). While in 2006 only 12% of the PTAs notified and

in force were cross-regional, among the agreements signed but not yet notified and

those still under negotiation 43% were of a cross-regional nature (Fiorentino et al. 2007,

p. 9). This steep increase in cross-regional alliances in combination with the trend to

rely increasingly on bilateral2, not plurilateral, negotiations is, according to Fiorentino et

al. (2007, p. 8), evidence for the new focus on strategic market access that guides

modern trade policy in most countries. Since most countries are members of various

PTAs simultaneously, in fact, some members are party to more than 20 different PTAs

(WTO 2008), an ever more complex net of preferential trade relationships is created

(see also chapter 3).

Yet another distinguishing characteristic of the recent development of PTAs is the

increase in alliances between developing/emerging-market economies and industrialized

countries (Das 2004, p. 64). As of December 2006 among the PTAs in goods notified to

the WTO 27% are between a partner from a developed and a partner from a developing

country. Among the agreements in services notified to the WTO 44% fall within this

category (Fiorentino et al. 2007, p 11).

The statistics also reveal that there is a strong tendency towards forming a free trade

area (FTA) instead of a customs union (CU). As of December 2006 84% of notified

PTAs in force were intended to be FTAs, 8% CUs and 8% partial scope agreements.

Among the PTAs signed, under negotiation and proposed as of December 2006 the

share of FTAs rises to 92%, whereas the share of partial scope agreements remains

almost unchanged at 7% and the share of customs unions drops to only 1% (Fiorentino

et al. 2007, p. 6). Schiff and Winters (2003, pp. 78-82) believes the current tendency

towards the creation of FTAs is due to the fact that CUs require common external

tariffs, that can be hard to agree on, and after their establishment more ongoing

2 Bilateral in this context means that the negotiations take place between two parties. One or both of the parties can, however, be a trade bloc consisting of more than one country.


coordination in all areas of trade policy thereby limiting the members’ sovereignty. He

points out that in order to reap the benefits of absent customs inspections for all goods

at intra-area borders in a CU trade policy has to be harmonized not only with regard to

tariffs but also with regard to non-tariff barriers. Fiorentino et al. (2007, p. 5) attribute

the increasing popularity of FTAs among the forms of economic integration to three

characteristics of this form: Fist, FTAs usually allow for faster negotiations. Second,

they offer more flexibility regarding the scope of the agreement and the choice of

partners. And third, they provide higher selectivity by allowing member countries to

agree to ambitious preferential concession while, at the same time, safeguarding each

member’s sovereignty over its trade policy. He concludes that the FTA is the form of

economic integration that best fits the modern world’s trade policy needs and

objectives.

Although the quantitative and qualitative changes regarding PTAs have been recorded

and continue to be monitored closely, the underlying reasons for the proliferation of

PTAs over the last decade are hard to single out. Kaiser (2003, pp. 31-32) e.g. identifies

several determinants leading to a more intense second wave of PTAs such as a changed

economic environment with better integration of world markets through the successive

liberalizations of trade under the GATT, financial liberalization and better information,

communication and transportation networks. She also points to a greater willingness of

developing countries to open up their economies and the changed attitude of the U.S.

towards bilateral trade agreements as likely causes for the recent proliferation of PTAs.

1.3 The Economic Impact of Free Trade Agreements in Theory

“The decision about entering into a customs union or any other type of integration has always been primarily political, but economic considerations usually play a very important role.” (Jovanović 2006, p. 23)

Not surprisingly, therefore the analysis of the economic impact of CUs, although with

small variations in the focus of analysis, is a frequent subject in introductory books to

economic integration and trade policy (compare e.g. Robson 1998, pp. 18-19;

Zimmermann 1999, p. 10; Jovanović 2006, p. 40; Schiff and Winters 2003, p. 55). A

partial equilibrium analysis of a FTA, however, is much harder to find in the relevant

literature. This might reflect the view that FTAs and CUs are similar forms of

preferential trade arrangements (for definitions see section 1.1) and thus the analysis of


one form is sufficient to shed light on the effects of both forms of economic integration

(Kreinin and Plummer 2002, p. 5). However, there are also essential differences

between customs unions and free trade areas regarding their operation and economic

impact, which should attract the observer’s attention (Robson 1998, p. 28). Taking into

account the special role of FTAs in the proliferation of PTAs this section will focus

particularly on the economic impact of FTAs. In the following a theoretical analysis of

the economic impact of free trade areas in a comparative static partial equilibrium

setting is presented and rounded off with further explanations.

The main observation and the main concern of the so-called traditional customs union

theory, starting with Viner’s famous contribution (Viner 1950), is summed up by Schiff

and Winters (2003, p. 31) with the following words:

“A trade bloc usually increases trade between its members. An important issue, however, is whether it “creates” trade […] or “diverts” it.”

To illustrate the concepts of trade creation and trade diversion and their economic and

welfare impact on a free trade area this section uses an example given by Robson (1998,

pp. 30-35). With the help of the model we can observe how trade in a certain good

between two FTA member countries and the rest of the world is affected by the entering

into force of the FTA. Being a comparative static partial equilibrium model Robson’s

example is subject to the typical but rather restrictive assumptions of homogeneous

goods, perfect competition in goods and factor markets, increasing marginal costs, the

absence of transportation costs and production factors that are mobile on a national level

but immobile across national borders.

Robson’s example (figure 3) shows a country (country H) forming a free trade area with

a partner country (P) and their respective domestic demand (Dh, Dp) and supply curves

(Sh, Sp). Whereas demand conditions are similar in both countries for the good in

question, the partner country is a more efficient producer with a relatively elastic supply

curve (Sp). The world supply price is given by Pw for both countries with world supply

assumed to be perfectly elastic. Before the free trade area is formed the home country

applies a tariff to all imports represented by the difference between Pw (the world

supply price) and Th (the tariff-inclusive price for imports in H). Before the entering

into force of the FTA H’s market is supplied by domestic production up to the quantity


L and the quantity LN is imported at the tariff-inclusive price of Th from the rest of the

world. The partner country (P) applies a prohibitive tariff to imports from the rest of the

world meaning that at the tariff-inclusive price of Tp demand in P is satisfied by

domestic production only.

Figure 3: Static Partial Equilibrium Analysis of a Free Trade Area; Source: Robson 1998, p. 31.

When a free trade area is formed between H and P the two countries eliminate all tariffs

on imports from the member countries but continue to apply their respective tariffs to

the imports from the rest of the world. In order to avoid that imports from the rest of the

world enter the free trade area through the country with the lowest tariff and are

subsequently distributed duty-free to the different FTA member countries (which would

be termed ‘trade deflection’) most FTAs establish rules of origin (Robson 1998, p. 28).

Rules of origin that determine which products are sought to have originated within the

free trade area and are therefore eligible for duty-free treatment have been created using

different criteria. Frequently used rules of origin are e.g. that a commodity needs to

have changed tariff classifications between import and export by a FTA member

country, that a specified percentage of the commodity’s sales price must consist of value

added in a member country or that a specified percentage of a commodity’s parts and

components must be purchased from member countries (Krueger 1999, p. 263).

Although rules of origin are essential for protecting the effectiveness of the external

tariffs of the individual member countries (Zimmermann 1999, p. 16), they can also

give rise to “exported” protectionism and distortions in trade flows as producers within


the free trade area might be forced to import more expensive within-area inputs to fulfill

the requirements for duty-free exports to other member countries (Schiff and Winters

2003, p. 79; Carlowitz 2003, p. 116)

After the entering into force of the FTA, imports from P can enter H duty-free. P’s

suppliers are willing to export to H at the minimum price of Tp (which is the price they

could obtain in their domestic market) any quantity demanded that can be domestically

produced in P at the respective price. Essentially, the demand in H determines the price

of the good in question in country H in the range between Tp (P’s minimum supply

price) and Th (the tariff-inclusive price of perfectly elastic world supply as an

alternative source) in combination with P’s maximum capacity to supply. The price in

country P under the FTA continues to be Tp since this is the tariff-inclusive price of

perfectly elastic world supply in P. The fact that the price in H (depending on H’s

demand and P’s capacity to supply) can range from Tp to Th and the price in P remains

at Tp leads to the possibility of price differences between the markets of H and P, which

is not possible in a customs union (Zimmermann 1999, p. 16). El-Agraa (1989, p. 63),

however, stresses that in the long-run “a price differential for an identical product is

neither theoretically nor practically feasible under the specified circumstances” as

producers in P will have an incentive to expand their production capacities due to the

excess profits in H’s market.

In the case of the example presented, after the free trade area is formed, H consumes at

the price Tp the quantity 0L´ of domestic production and imports the quantity L´N´

from P. At the price of Tp consumers in P consume the quantity 0M, of which 0L´´ is

produced domestically and L´´M is imported from the rest of the world. The quantity of

P’s production that is exported to H (L´N´) equals P’s imports from the rest of the world

(L´´M). This effect of P exporting to H and satisfying its own consumption needs of

equal quantity by imports from the rest of the world is called ‘indirect trade deflection’

(Robson 1998, p. 30; Schiff and Winters 2003, p. 81). Unlike pure trade deflection,

indirect trade deflection cannot be prevented by rules of origin since P’s exports to H

are commodities that originated within the free trade area.

Just like it is done in traditional customs union theory, trade creation and trade diversion

effects can be shown for the partial equilibrium analysis of the two FTA member


countries in figure 3. Trade creation refers to the positive effect on resource allocation

from a shift from higher-cost domestic products to lower-cost partner country products.

Trade diversion refers to the negative resource allocation effect from a shift from lower-

cost imports from the rest of the world to higher-cost imports from the partner country

(Johnson 1960, p. 68.). The overall welfare effect induced by economic integration

depends on the balance between trade creation and trade diversion (Zimmermann 1999,

p. 11; Schiff and Winters 2003, p. 35).

Due to the lower prevailing price of Tp in H after the FTA consumers in H enjoy an

increased consumer surplus constituted by the area between Th and Tp to the left of the

demand curve (Dh) in figure 3. The decreased domestic production of 0L´ leads to a

decreased producer surplus equal to the area between Th and Tp to the left of the supply

curve (Sh). Since H does not import from the rest of the world anymore the government

in H will face a loss of tariff revenue shown by the area b and the rectangle above b.

The trade creation for H is therefore represented by the triangles a and c. Trade

diversion is shown by the rectangle b in figure 3. Since in our example the triangles a

and c are larger than the rectangle b the home country experiences a net welfare gain

after the free trade area is formed.

In country P the price remains unchanged at Tp after the FTA enters into force and

consequentially there are no changes in consumer or producer surplus. As P starts to

import from the rest of the world when the free trade area is formed P’s government

receives tariff revenue represented by the rectangle between Tp and Pw between L´´ and

M. Due to the effect of indirect trade deflection the partner country enjoys a net welfare

gain. The FTA would also lead to an improved position for the rest of the world as

exports to the newly formed free trade area increase due to indirect trade deflection and

make up for the loss in H’s market (L´´M > LN).

Within the scope of comparative static partial equilibrium analysis the main difference

between the effects of a tariff-averaging customs union and a free trade area lies in the

existence of indirect trade deflection. Due to trade diversion when a free trade area is

formed the rest of the world can face decreased exports to the FTA member countries

with higher tariffs for a certain good. Through the effect of indirect trade deflection,

however, imports from the rest of the world enter the free trade area at the more


efficiently producing countries (with assumed lower tariffs) making up for the shortfall

in domestic products in these countries due to their increased intra-FTA exports. Unlike

in the case of a tariff-averaging customs union with a common external tariff in a free

trade area imports from the rest of the world cannot be diverted completely (assuming

that the rest of the world is in fact the least-cost source for imports and that the partner

countries supply is not perfectly elastic). In fact, in the setting of a static partial

equilibrium model the rest of the world can gain from the creation of the free trade area

through the effect of indirect trade deflection (Zimmermann 1999, p. 18).

A glance at the theoretical structure of international trade and the directions of trade

flows, however, reveals that in real life the outcomes of the model cannot be observed

with the accuracy suggested by traditional customs union theory. The static partial

equilibrium model and the effect of indirect trade deflection e.g. suggest that for a given

commodity one of the following two scenarios should hold true:

Scenario A: The quantity produced in P is sufficient to satisfy H’s demand for

imports. Therefore the prevailing price in H’s market is lower than Th and P is

the exclusive source of imports in H.

Scenario B: The quantity produced in P is not sufficient to satisfy H’s demand

for imports. Therefore the prevailing price of the commodity in H is Th and H

imports from the partner country up to its maximum capacity to supply and

imports the remaining quantity from the rest of the world. Consequently, P’s

entire production is sold to H.

In the real world though we can observe that usually countries do not import from one

exclusive source only and that countries do not tend to sell their entire domestic

production abroad either. The reason for the incongruence of the model’s suggestions

with our observations may well lie in the model’s assumptions.

According to Schiff and Winters (2003, p. 31) the static partial equilibrium analysis is

“based on a view of the world in which intercountry trade is driven entirely by

differences in productivity and factor endowments.” Parting with the assumption of

homogeneous goods and assuming product differentiation instead allows for the

existence of intra-industry trade, which makes up a good part of actual international


trade. Allowing for product differentiation might lead to monopoly power or imperfect

competition among the producers, which would contradict the assumption of perfect

competition. Whereas the model assumes constant returns to scale there are many

products for which economies of scale can be exploited during the production process.

In fact, reaping economies of scale in production is often seen as one of the main

benefits of the access to an expanded market through economic integration (Kreinin and

Plummer 2002, p. 24; Robson 1998, pp. 37-38). Another point often stressed is that

economic integration increases competition and therefore leads to the elimination of

internal inefficiencies increasing productivity levels (Schiff and Winters 2003, p. 50). In

the world depicted by a static partial equilibrium model, however, this would not be

feasible since it is assumed that all factors of production at all times are used optimally

so that there are no inefficiencies to be eliminated. Furthermore the existence of

transport costs in the real world is not taken into account by static partial equilibrium

models either and might help to explain why there must be limits to the effect of

indirect trade deflection.

Being static in nature the model presented also disregards some dynamic effects that are

key elements within the forces that affect economic activity, such as technological

advances and decisions concerning the location of investment and its rate of growth

(Robson 1998, p. 37). In fact, regional integration might induce changes in investment

behavior and frequently leads to a temporary investment boom in the newly integrated

area (Kreinin and Plummer 2002, p. 28; Schiff and Winters 2003, pp. 220-221).

Investment opportunities in the partner country might be perceived as more attractive

due to strategic decisions to locate new production facilities in the partner country

market and, possibly, due to a more clearly defined investment environment after the

implementation of a PTA. Assuming international mobility of capital and a finite

volume of investable funds investments may be made within the economic integration

area that otherwise would have been more efficiently made outside the integration area.

Although all issues mentioned above have been discussed in more recent literature on

customs union theory no model has emerged that seems as illustrative as the “classic”

way to show the effects of trade creation, trade diversion and indirect trade deflection

with the help of a static partial equilibrium analysis. El-Agraa (1989, p. 27) concludes

that most of the effects not included in the standard static partial equilibrium analysis


are long term in nature and, with the exception of internal economies of scale, “cannot

be tackled in orthodox economic terms”. (For examples on the effects of internal

economies of scale in customs unions see El-Agraa 1989, pp. 27-28 or Robson 1998,

pp. 41-48.) Taking into account the various limitations of the assumptions of this

approach, special care has to be taken when interpreting the results of the static partial

equilibrium analysis presented in this section (Jovanović 2006, p. 30). As Robson

(1998, p. 18) puts it: taking into account “the character of modern production and trade

[…] the outcome of customs unions (and other trading blocs) may significantly differ

from the ‘predictions’ of orthodox theory.” It therefore remains up to debate if the

entering into force of a FTA might displace exports of the rest of the world to the free

trade area. Depending on the question if demand for the exports of the rest of the world

changes terms of trade changes would have to be considered as well.

In the case that after the economic integration of two countries the displacement of

exports of the rest of the world occurs, it seems relevant to dedicate a few sentences to

the situation of these third parties. According to orthodox theory a displacement of

exports of the rest of the world does not matter as far as the welfare of the rest of the

world is concerned. The resources used to produce the exports can be redirected to the

production of goods that are consumed domestically and since factors are perfectly

mobile within national borders there will be an immediate and costless adjustment to the

new situation. In the real world in contrast we might find that adjustment processes do

not run quite as smoothly as workers trained for export industries might have to change

workplaces and fixed capital has to be transferred to different industries. Furthermore,

there might be a welfare loss for the rest of the world incurred if the factors used for one

unit of exports create larger welfare as exports than the same factors redirected to

alternative uses. According to Schiff and Winters (2003, p. 214) this might be the case

if exporting generates supernormal profits because of imperfectly competitive export

markets, if the decrease in exports leads to a loss of economies of scale in production or

if exports have positive externalities.

Since no general statement about the economic impact of a free trade agreement can be

derived theoretically the effects on trade patterns and welfare have to be studied on a

case-by-case basis. Using the example of the proposed FTA between the U.S. and the


Republic of Korea an analysis of estimated welfare effects and possible changes in trade

flows will be performed in the following chapter.

2 The KorUS FTA and its Impact on Latin American Exports to the U.S. and Korea

The proposed FTA between the U.S. and the Republic of Korea is an interesting

example for the analysis of economic integration for various reasons. First of all, the

economic size and importance of the FTA members draws attention. A FTA between

the world’s largest economy and the world’s 13th largest economy (ranked by GDP in

2006 according to the World Bank’s World Development Indicators database) leads to

the expectation of a sizeable impact of the KorUS FTA on worldwide trade relations. In

fact, the KorUS FTA “would be the largest bilateral accord America has struck since

NAFTA was passed in 1993, as well as the first with a large Asian economy”

(Economist 2007).

Secondly, being a bilateral and cross-regional FTA the agreement between the U.S. and

Korea demonstrates the main characteristics of the form of economic integration most

commonly chosen by trade partners in the recent wave of proliferation of PTAs. In

addition, the U.S. and the Korean market play both interesting as well as differing roles

as a destination for Latin American exports. Whereas the U.S. market is a rather

established destination for Latin American countries’ exports and in many cases is of

vital importance, the Korean market could offer an interesting opportunity for

diversifying export partners and for taking advantage of the Asian economic

development.

In the following this chapter provides some background information on the

development and basic provisions of the KorUS FTA. Subsequently, the expected

effects of the agreement on the member countries are presented starting with an

overview of the state of current U.S.-Korea trade relations and moving on to the

summary of the results of different economic impact studies. As chapter 1 has


demonstrated FTAs can also have a profound impact on third countries not party to the

FTA since the FTA partners’ preferential market access can lead to increased

competition and altered trade flows. Therefore the chapter closes with an analysis of

current Brazilian, Chilean, Costa Rican, Mexican and Peruvian exports to the U.S. and

the Korean market in order to subsequently draw conclusions on the magnitude and

areas of impact of the entering into force of the KorUS FTA.

2.1 History and Basic Facts of the KorUS FTA

Based on the extensive trade relation between the U.S. and Korea some business groups

as well as single politicians and the academia had been discussing a possible FTA

between the two countries for several years and in late 2004 trade officials started

exploratory trade talks (Schott 2006). Only in February 2006, however, the U.S. and the

Republic of Korea announced that they intended to launch the official negotiation of a

FTA, which was to start in May 2006 (USTR 2006). From there negotiations proceeded

at an accelerated pace and after only ten months and eight rounds of negotiations the

successful conclusion of a FTA was reached on 1 April 2007 (USTR 2007). Due to the

speedy negotiations and the immediate notification of the U.S. Congress the KorUS

FTA became the last U.S. trade agreement still eligible for the so-called “fast-track”

procedures (Schott 2008, p. 83). In order to be eligible for “fast-track” procedures the

U.S. president has to notify Congress 90 days in advance about any trade agreement he

plans to sign and President Bush’s trade promotion authority was to expire the end of

June 2007. The “fast-track” rules require Congress to limit debate and cast a yes or no

vote on a trade agreement without being able to single out any provision of the

agreement (Economist 2007/2007a).

The KorUS FTA was finally signed by the two countries’ representatives on 30 June

2007 (USTR 2007a) and is still awaiting its ratification by the U.S. Congress and the

Korean National Assembly. After the U.S. International Trade Commission had

submitted its required report (USITC 2007) on the FTA the formal legislative process

could have begun in the U.S., but since then things have been moving rather slowly.

Schott (2008, p. 79) sees the ratification of the agreement as “a major challenge for both

governments in 2008.” He points to three main reasons for the slow progress which he

sees in U.S. reservations concerning Korea’s ban of American beef exports, tariff-

2 The KorUS FTA and its Impact on Latin American Exports to the U.S. and Korea 19

structures for automobile exports to Korea and the U.S. presidential primaries (Schott

2008, p. 84).

The campaigning for the U.S. presidential elections makes a passing through Congress

of the KorUS FTA unlikely in the near future as especially the Democratic majority

seems reluctant to support trade agreements (Economist 2007a). Furthermore Korea’s

17th National Assembly has not ratified the KorUS FTA before the elections in April

2008 so that the 18th National Assembly had to start a new debate on the topic, which is

expected to lead to time-consuming disputes (Cheong 2008). However, the Korean

president Lee Myung-bak said that he is “confident that the U.S. Congress will ratify

the Korea-U.S. free trade agreement by the end of this year” after having met President

Bush for consultations in April (Korea.net 2008). Additionally, the Korean government

lifted the ban on imports of U.S. beef (USTR 2008). The recent violent protests in South

Korea, however, cast a shadow on the progress towards the ratification of the KorUS

FTA (Sang-hun 2008, Economist 2008).

If ratified by the two countries’ legislative bodies, the FTA between the U.S. and South

Korea will cover more trade than any other U.S. trade agreement except NAFTA

(Schott et al. 2006, p. 17) and will encompass a wide range of topics. Of the over

10,000 tariff lines of the two countries on commodities currently 38% of U.S. and 13%

of Korean tariff lines are free of duty under MFN treatment. Upon entry into force of

the KorUS FTA an additional 45% of U.S. tariff lines and 67% of Korean tariff lines

will become free of duty immediately for the respective FTA partner country. Over the

five years following the entry into force of the KorUS FTA the total number of duty-

free tariff rates will rise to over 90% for both countries and will eventually reach 99%

for U.S. tariff lines and 98% for Korean tariff lines ten years after the trade agreement’s

implementation (USITC 2007, pp. 1-7 to 1-8). Thereby within the area of industrial and

consumer products almost 95% of bilateral trade will become duty-free within three

years of the KorUS FTA’s entry into force. The U.S. government also estimates that

over 50% of current U.S. agricultural exports will become duty-free immediately while

many of the remaining agricultural products will enjoy two- or five-year tariff phase-

outs (USTR 2007b).


Furthermore under the KorUS FTA the U.S. and Korea will grant each other market

access to almost all major service sectors and expand the obligations to open

government procurement processes beyond their WTO commitments among each other.

The KorUS FTA will also establish a stronger legal framework and broader protection

for investments among the member countries. Additionally, the FTA includes

provisions promoting greater protection of intellectual property rights and their

enforcement. Through the exchange of comments, the establishment of working groups

and dispute settlement mechanisms the KorUS FTA also seeks to improve transparency

and coordination in the area of regulations and technical barriers to trade.

2.2 The Impact of the KorUS FTA on the Member Countries

Since a possible FTA between the U.S. and the Republic of Korea had been discussed

for several years the effects that can be expected by the member countries upon the

entry into force of such an agreement are well studied. There is a rich set of literature

and economic impact studies on the topic that gives valuable input to the evaluation of

the likely effects of the KorUS FTA on its member countries. Although the impact

studies reviewed part from very different liberalization scenarios and use different

methods, models and database inputs, in the following a short literature summary

presents the most important findings of these contributions.

But before the different studies are presented it is essential to take a look at the status

quo of U.S.-Korea trade relations in order to get an impression of the base that leverage

is to be brought to bear on by the proposed KorUS FTA. Therefore in the following

section the quantity and characteristics of trade between the U.S. and the Republic of

Korea are analyzed. The main focus of analysis is on trade in commodities since trade

data is more readily available and classified in more detail in contrast to trade data in

services. Unless otherwise stated in the following all trade data is obtained from the

United Nations Commodity Trade Statistics Database in the classification of SITC

Rev.3.


2.2.1 Current U.S.-Korea Trade and Its Development

Since the Republic of Korea began its remarkable path of export driven growth in the

1960s it gradually turned into one of the United States’ leading trading partners. U.S.

exports to South Korea were only about US$ 5 billion in 1981, but amounted to over

US$ 32 billion in 2006. The growth in U.S. imports from Korea was even more

impressive: Whereas U.S. imports from Korea were only US$ 5.5 billion in 1981, they

reached US$ 47.5 billion in 2006. For the last twenty years, with the exception of the

years around the Asian financial crisis, the U.S. ran a trade deficit with South Korea.

Figure 4: U.S. Commodity Trade with South Korea; Source: based on UN Comtrade data.

Based on total trade South Korea is the United States’ seventh largest trading partner

(USITC 2007, p. 1-3). Korea’s share of total U.S. commodity trade was, however, only

3% in 2006, compared to a share of 18% for the United States’ neighbor and top trading

partner Canada, 12% for China of 11% for Mexico. Over the last decade Korea’s trade

share has been relatively stable, whereas Japan’s trade share decreased gradually and

China’s trade share has doubled since the year 2000 (see figure 5). In 2006 Korea was

the United States’ seventh largest export market as well as the seventh largest source of

U.S. imports.

U.S. Commodity Trade with South Korea(billions of US$)

0

10

20

30

40

50

60

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Exports Imports


Figure 5: Shares of Total U.S. Commodity Trade; Source: author’s calculations, based on UN Comtrade data.

Considering total commodity trade the U.S. accounts for about 12% of the trade flows

with Korea thereby taking third place in the list of Korea’s leading trade partners after

China with a share of 19% and Japan with a share of about 12%. Whereas the United

States’ share has been decreasing since 1999 from a former level of about 20%, China’s

share of trade with South Korea has tripled since 1995. In 2006 the U.S. was Korea’s

second largest export market (following China) and its third largest source of imports

(following Japan and China).

Figure 6: Shares of Total Korean Commodity Trade; Source: author’s calculations, based on UN Comtrade data.

Shares of Total U.S. Commodity Trade for Selected Countries(Percentage)

0%

5%

10%

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Canada China Japan Mexico Korea

Shares of Total Korean Commodity Trade for Selected Countries(Percentage)

0%

5%

10%

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

China Japan USA


A measure for the intensity of trade flows between two countries (Michaely 2004, p.

125) sets home country imports from a partner country divided by total home country

imports in relation to the partner country’s share of world exports (which also represents

its share of world imports). A value of one therefore indicates that the partner country’s

share of home country imports equals its average share in worldwide trade flows. A

value above unity indicates a preference of the home country for the partner country’s

exports and a value below unity the contrary. The intensity ratio jointly reflects all

factors that contribute to the bilateral trade flow with the exception of the partner

country’s size. Calculating the respective figures for the U.S. and Korea reveals that

Korea (with a value of 1.09) has a slight preference for importing from the U.S.,

whereas something is constraining U.S. imports from Korea for which the intensity ratio

is only 0.79.

A factor that can influence the intensity of trade flows is the compatibility of the

commodity structure of the home and the partner country’s bilateral trade flows. An

index of compatibility of trade flows can measure if the partner country exports to the

world market are exactly the commodities the home country seeks to import. Such an

index (Michaely 2004, pp. 127-129) can be devised as

Smjxk = 1 - ∑׀mij - xik2 / ׀

where Smjxk = index of compatibility of imports of country j (home) with exports of country k (partner), mij = share of good i in total imports of the home country and xik = share of good i in total exports of the partner country.

The index can range between zero and one. A value of one signals that the structures of

the commodity flows match exactly, whereas a value of zero would imply that there is

no similarity at all between the imports of the home country and the exports of the

partner country. The higher the index value, the stronger is also the potential for a

displacement of imports from the rest of the world by imports from the partner country

in the case that the two countries implement a PTA.

According to calculations based on data on a three digit aggregation level and as a

three-year average of import and export shares between 2004 and 2006 the index


assumes a value of 0.51 for the compatibility of U.S. imports and Korean exports and a

value of 0.55 for the compatibility of Korean imports and U.S. exports. Thus, the index

shows that there is a significant overlap between the two countries’ exports to the world

market and their respective import demands, although they are far less than a perfect

match. In order to take a more detailed look on the trade relation between the U.S. and

South Korea in the following the composition of the bilateral commodity trade flows is

analyzed.

Looked at on a one-digit aggregation level in 2006 U.S. exports to Korea mainly

consisted of machines and transport equipment (52%), chemicals (13%) and

miscellaneous manufactured articles (11%). Broken down on a two-digit aggregation

level U.S. exports mainly fell into the division of electrical machinery, apparatus and

appliances (20%), other transport equipment (11%), special industries machinery (6%),

organic chemicals (5%) and scientific equipment (5%). Korean exports on a one-digit

aggregation level were mostly concentrated in the area of machines and transport

equipment accounting for 67% of Korean exports to the U.S. in 2006. Manufactured

goods classified chiefly by material ranked second with 13% and mineral fuels and

lubricants and miscellaneous manufactured articles competed for third place with 7%

each. Analyzed on a two-digit level Korea exports to the U.S. mainly consisted of road

vehicles (26%), telecommunications and sound equipment (14%), electrical machinery,

apparatus and appliances (11%), petroleum and petroleum products (7%) and office and

automatic data-processing machines (6%).

According to information of the Economic Research Service of the U.S. Department of

Agriculture (USDA 2008) the U.S. has been one of the main sources of Korean

agricultural imports for decades. In 2006 the U.S. exported US$ 2.85 billion in

agricultural goods to Korea, which made Korea the sixth-largest market for agricultural

exports. Major U.S. agricultural export items were corn, meat, hides, soybeans, milling

wheat and cotton. Growth potential is seen especially in the area of consumer-ready

products (e.g. fruits, nuts, vegetables, meat, preparations thereof), which account for

roughly a third of current U.S. agricultural exports to Korea. Due to a relatively small

arable land area Korea’s agricultural production shows a weak export-focus. In 2006

U.S. agricultural imports from South Korea amounted to only US$ 217 million with the

main export items being ramen instant noodles, pears and bean pastes.


U.S. service exports to Korea in 2007 add up to US$ 13.6 billion according to U.S.

international transactions accounts data (BEA 2008). At an average annual growth rate

of about 9% U.S. service exports to Korea almost doubled between 1999 and 2007.

They currently account for 29% of total U.S. exports of goods and services to Korea, up

from 24% in 1999. In 2007 the biggest subgroup of U.S. service exports was the

subgroup of ‘other private services’ comprising about a third of service exports to

Korea. U.S. services imports from Korea amounted to US$ 8.8 billion in 2007. Their

share of total U.S. imports of goods and services from Korea has remained relatively

stable around 15% since 1999. The annual growth rate of U.S. services imports from

Korea between 1999 and 2007 was 6% on average. The biggest services subgroup in

2007 was ‘other transportation’ with a share of 36% of total U.S. services imports from

Korea.

2.2.2 Estimated Effects on Trade and Welfare for the U.S. and Korea

During the years leading up to the conclusion of negotiations between the U.S. and the

Republic of Korea a range of studies has been prepared concerning the possible effects

of a U.S.-Republic of Korea FTA. The studies simulate the results of trade policy

changes under a bilateral trade agreement in areas such as changes in imports and

exports, sectoral output and welfare. Most studies surveyed made use of the widespread

Global Trade Analysis Project (GTAP) model. Only the study by Kiyota and Stern used

the Michigan model. These two models both belong to the class of computable general

equilibrium (CGE) models and have become the two most commonly used CGE models

over the last years (Piermartini and Teh 2005, pp. 10-11).

A CGE model tries to mirror the functional relations and sectoral linkages of an

economy with the help of a large set of equations solved by a computer. It can thus be

used for the ex-ante evaluation of effects on resource allocation, distribution and

economic welfare induced by a trade policy change represented by the change in the

model’s exogenous variables (Willenbockel 1994, pp. 40-44). A large majority of CGE

models adheres to the assumptions of general equilibrium theory implying perfect

competition in goods and factor markets, market clearing, full employment of factors

and products differentiated only by country of origin. Most CGE models are

comparative static in nature and compare the equilibrium before and after the policy

change without taking into account the timeframe and costs required for the adjustment


or the evolution of macroeconomic variables. CGE models should therefore not be

regarded as forecasts of economic data such as the change in GDP that will actually

occur in the year following the implementation of an FTA. Instead the numbers

produced by CGE simulations should only be used to give an impression of the order of

magnitude that a trade policy change is expected to induce regarding resource

allocation, trade flows and welfare holding all other things equal (Piermartini and Teh

2005, p. 53).

With the exception of the study of the U.S. International Trade Commission (USITC)

dating from September 2007 all studies taken into account in the following had been

prepared before FTA negotiations between the U.S. and Korea have been concluded or

negotiation results were publicly available. Therefore the surveyed studies part from

different liberalization scenarios according to the authors’ interests at the time of

preparation. Whereas in general the studies analyze the effects of tariff removal for

agricultural products and manufactures, some studies exclude certain agricultural

products or additionally include a partial liberalization of trade in services. But the

studies presented do not only differ in terms of the liberalization scenario assumed, they

also use different models, databases and base years, which can affect their results (see

figure 8). The Kiyota and Stern study e.g. uses the Michigan model which, in contrast to

a typical GTAP model, allows for imperfect competition and product differentiation at

the firm level and thus does not exhibit large terms of trade effects common in the

GTAP model (Kiyota and Stern 2007, p. 6). Furthermore some studies have also

included dynamic simulations in which they allow for capital accumulation in form of

foreign direct investment.

In line with general expectations derived from customs union theory all studies

surveyed estimate a significant increase in bilateral trade flows between the U.S. and

Korea due to the preferential market access granted under the FTA. The USITC (2007,

p. 2-9) e.g. estimates that U.S. exports of goods to Korea increase by US$ 9.7 to 10.9

billion (22.6-25.3%) and U.S. imports of goods from Korea by US$ 6.4 to 6.9 billion

(9.9-10.6%) after the implementation of the KorUS FTA. According to Kiyota and

Stern (2007, p. 44) U.S. exports to Korea increase by US$ 9.2 billion and U.S. imports

from Korea by US$ 6.9 billion. Choi and Schott (2004, p. 185) give an estimate of a


46% increase of U.S. exports to Korea and a 26% increase in U.S. imports from Korea

in the medium run following the implementation of an FTA.

Some of the studies reviewed give simulation results on sectoral effects possibly

induced by a FTA between the U.S. and Korea. The USITC (2007, p. 2.12) e.g. expects

the largest percentage growth in U.S. exports to Korea in agricultural goods (dairy,

bovine and other meat products), wearing apparel and beverages and tobacco. The

largest increase in value of U.S. exports to Korea is expected in chemical, rubber and

plastic products, bovine and other meat products and food products. Schott et al. (2006,

p. 3) are of the opinion that the largest increase in U.S. exports to Korea might occur in

services, especially in financial and knowledge-based sectors, whose liberalization is

not analyzed in many CGE models. U.S. imports from Korea are found to increase the

most in percentage terms for dairy products, wearing apparel, leather products, textiles

and vegetable oils and fats by the USITC. In terms of value imports from Korea are

expected to increase the most in textiles, motor vehicles, wearing apparel, machinery

and equipment, and chemical, rubber and plastic products. Much of the estimated

increase in U.S. imports of Korean textiles and apparel (85% and 91% respectively) and

more than half of the increase in passenger vehicles will, however, be a result of trade

diversion from other sources (USITC 2007, p. 2-12). Overall the different studies found

positive sectoral output effects (see table 1) for the U.S. economy mostly for

agricultural goods and processed foods, whereas negative output effects are estimated

especially for textiles and apparel. Choi and Schott (2004, p. 190) also expect a negative

impact on the U.S. steel and electronics sector. Nevertheless, the output and

employment effects of the KorUS FTA for the U.S. are expected to be negligible

considering the overall size of the U.S. economy relative to the Korean economy

(USITC 2007, p. xvii).


Un

ited

Sta

tes

So

uth

Ko

rea

Un

ited

Sta

tes

Sou

th K

ore

a

McD

anie

l an

d F

ox

(200

1)ag

ricul

ture

text

iles

and

appa

rel

Ch

oi a

nd

Sch

ott

(200

1)

agric

ultu

re,

fore

stry

and

fish

erie

s,

proc

esse

d fo

od

proc

esse

d fo

od,

text

iles

and

appa

rel,

chem

ical

s, r

ubbe

r, p

last

ics

text

iles

and

appa

rel

agric

ultu

re,

fore

stry

and

fish

erie

s,

dura

ble

man

ufac

ture

s

Lee

and

Lee

(200

5)

garm

ents

and

leat

her,

text

iles,

auto

mob

iles

and

part

s,ch

emic

als,

ser

vice

s

othe

r tr

ansp

ort e

quip

men

t,el

ectr

onic

s,m

achi

nery

Sch

ott

et

al. (

2006

)(f

or v

ersi

on o

f FT

A

excl

udin

g ric

e)ot

her

prim

ary

prod

ucts

text

iles,

app

arel

, lea

ther

,m

etal

s an

d ot

her

low

er-t

echn

olog

y m

anuf

actu

ring

very

sm

all r

educ

tions

fo

r m

ost s

ecto

rs

othe

r pr

imar

y pr

oduc

ts,

dura

ble

man

ufac

ture

s,bu

sine

ss s

ervi

ces

Kiy

ota

an

d S

tern

(200

7)

agric

ultu

re, f

ood,

beve

rage

s, to

bacc

o,ch

emic

als,

nonm

etal

lic m

iner

al p

rodu

cts,

mac

hine

ry a

nd e

quip

men

t,ot

her

man

ufac

ture

s,

othe

r pr

ivat

e se

rvic

es

rice,

whe

at, l

ives

tock

, te

xtile

s an

d ap

pare

l, le

athe

r pr

oduc

ts a

nd fo

otw

ear,

tr

ansp

orta

tion

equi

pmen

t

text

iles

and

appa

rel

othe

r gr

ains

,ve

geta

bles

and

frui

ts,

oil s

eeds

, oth

er c

rops

,ot

her

man

ufac

turin

g,se

rvic

es

U.S

. Int

ern

atio

nal

Tra

de

Co

mm

issi

on(2

007)

smal

l cha

nges

in th

e ag

ricul

tura

l sec

tor

(bov

ine

and

othe

r m

eat p

rodu

cts,

ca

ttle,

cer

eal g

rain

s, d

airy

pr

oduc

ts, o

ther

ani

mal

pro

duct

s),

proc

esse

d fo

ods,

bev

erag

es

smal

l cha

nges

for

padd

y an

dpr

oces

sed

rice,

oils

eeds

,w

heat

, pla

nt-b

ased

fibe

rs,

wea

ring

appa

rel,

text

iles,

man

ufac

ture

s,el

ectr

onic

equ

ipm

ent

Su

mm

ary

of M

od

eled

Sec

tora

l Out

pu

t Eff

ects

of

the

Kor

US

FT

A

Tab

le 1

: Sum

mar

y of

Mod

eled

Sec

tora

l Out

put E

ffect

s of t

he K

orU

S F

TA

; Sou

rce:

pre

pare

d by

aut

hor.

Stu

dy

Po

siti

veN

egat

ive

Ch

ang

es in

Sec

tora

l Ou

tput


Positive output effects for the Korean economy are expected especially for textiles and

apparel as well as for leather products and footwear (see table 1). Some studies see

positive output effects also for chemicals, lower-technology manufacturing and

automobiles and parts. Negative output effects are expected for Korean agriculture and

durable manufactures. In general Choi and Schott (2004, p. 189) expect the heavily

subsidized Korean agricultural sector to be “the biggest loser” from a possible FTA

between the U.S. and Korea. Kiyota and Stern’s model foresees a shift of Korean

employment from the more capital-intensive to the relatively labor-intensive

manufacturing sectors. Depending on the pace of the implementation of the FTA the

arising sectoral changes might be large enough to cause adjustment problems for the

Korean labor market (Kiyota and Stern 2007, pp. 43-44).

Forecasts on the welfare effects of the proposed FTA vary depending on model

specifications and data input as well as on the inclusion of FTA induced changes in

capital flows3. However, all studies reviewed forecasted positive welfare gains for both

countries (see table 2). The welfare gains forecasted for the Republic of Korea range

from US$ 1.6 billion to US$ 20.2 billion with fixed capital accounts and from US$ 6.8

billion to US$ 40.9 billion for estimates allowing for foreign direct investment (FDI)

flows. This translates into Korean welfare gains ranging from 0.37% to 2.58% of GDP

and from 1.99% to 5.21% including FDI flows. The welfare gain estimates for the U.S.

vary between US$ 1.8 billion and US$ 25.1 billion for studies with fixed capital

accounts and between US$ 8.9 billion and US$ 22.9 billion allowing for FDI flows. As

the United States is the far larger economy the welfare effects translate into smaller

percentage term gains and range from less than 0.05% to 0.23% of GDP and from

0.10% to 0.13% of GDP including FDI flows.

3 Most CGE models are “timeless” rather than dated simulations and do not allow for foreign direct investment flows due to problems associated with additionally required exogenous macroeconomic variables/forecasts (Willenbockel 1994, p. 21). Models allowing for a varying capital stock generally yield higher welfare estimates.


Un

ited

Sta

tes

Ko

rea

Un

ited

Sta

tes

Ko

rea

Ch

eon

g a

nd

W

ang

(19

99)

GT

AP

mod

el,

base

yea

r 19

95,

11 r

egio

ns,

14 s

ecto

rs

tarif

f rem

oval

fo

r ag

ricul

tura

l pro

duct

s an

d m

anuf

actu

res

US

$ 3.

7 bi

llion

(0.0

7% o

f GD

P)

US

$ 4.

8 bi

llion

(1.7

% o

f GD

P)

McD

anie

l an

d

Fo

x (2

001)

GT

AP

mod

el,

base

yea

r 19

95,

5 re

gion

s,10

sec

tors

elim

inat

ion

of a

ll tr

ade

barr

iers

com

men

cing

in 2

001

US

$ 19

.6 b

illio

n(0

.23%

of G

DP

)U

S$

3.9

billi

on(0

.69%

of G

DP

)

Ch

oi a

nd

Sch

ott

(200

1)

GT

AP

mod

el,

base

yea

r 19

95,

10 r

egio

ns,

10 s

ecto

rs

tarif

f rem

oval

fo

r ag

ricul

tura

l pro

duct

s an

d m

anuf

actu

res

US

$ 3.

8 bi

llion

(0.0

5% o

f GD

P)

US

$ 4.

1 bi

llion

(0.9

1% o

f GD

P)

US

$ 8.

9 bi

llion

(0.1

3% o

f GD

P)

US

$ 10

.9 b

illio

n(2

.41%

of G

DP

)

DeR

osa

an

d G

ilber

t(2

004)

GT

AP

mod

el,

base

yea

r 19

97,

23 r

egio

ns,

19 s

ecto

rs

tarif

f rem

oval

fo

r ag

ricul

tura

l pro

duct

s an

d m

anuf

actu

res

US

$ 2.

7 bi

llion

(0.0

3% o

f GD

P)

1.6

billi

on U

S$

(0.3

7% o

f GD

P)

Lee

an

d L

ee

(200

5)

GT

AP

mod

el,

base

yea

r 20

01,

6 re

gion

s,13

sec

tors

80%

in a

gric

ultu

re10

0% in

man

ufac

ture

s20

% fo

r se

rvic

es b

arrie

rs

US

$ 2.

4 bi

llion

(0.4

2% o

f GD

P)

US

$ 6.

8 bi

llion

(1.9

9% o

f GD

P)

Sch

ott

et

al.

(200

6)

GT

AP

mod

el,

base

yea

r 20

014

regi

ons,

22 s

ecto

rs

tarif

f rem

oval

for

agric

ultu

ral p

rodu

cts

(exl

udin

g ric

e)an

d m

anuf

actu

res

US

$ 6.

3 bi

llion

(0.0

5% o

f GD

P)

US

$ 20

.2 b

illio

n(2

.58%

of G

DP

)U

S$

13.7

bill

ion

(0.1

0% o

f GD

P)

US

$ 40

.9 b

illio

n(5

.21%

of G

DP

)

Kiy

ota

an

d S

tern

(200

7)

Mic

higa

n M

odel

,ba

se y

ear

2001

,30

reg

ions

,27

sec

tors

rem

oval

of a

gric

ultu

ral t

ariff

s an

dex

port

sub

sidi

es,

tarif

f rem

oval

for

man

ufac

ture

s,se

rvic

es li

bera

lizat

ion

US

$ 25

.1 b

illio

n(0

.14%

of G

DP

)U

S$

9.28

bill

ion

(1.2

6% o

f GD

P)

US

$ 22

.9 b

illio

n(0

.13%

of G

DP

)U

S$

19.3

bill

ion

(2.6

2% o

f GD

P)

U. S

. In

tern

atio

nal

T

rad

e C

om

mis

sio

n

(200

7)

GT

AP

mod

el,

base

yea

r 20

01,

proj

ecte

d to

200

8,

10 r

egio

ns, 5

4 se

ctor

s

rem

oval

of t

ariff

s in

agr

icul

ture

and

man

ufac

ture

sac

cord

ing

to th

e F

TA

sch

edul

es

US

$ 1.

8 -

2.1

billi

on(<

0.0

5% o

f GD

P)

Su

mm

ary

of

Mo

del

ed W

elfa

re E

ffec

ts o

f th

e K

orU

S F

TA

Tab

le 2

: Sum

mar

y of

Mod

eled

Wel

fare

Effe

cts

of th

e K

orU

S F

TA

; Sour

ce: p

repa

red

by a

utho

r.

Incl

ud

ing

FD

IR

esu

lts

for

eco

no

mic

wel

fare

aft

er F

TA

imp

lem

enta

tio

nF

ixed

Cap

ital

Sto

ckS

tud

yM

od

elL

iber

aliz

atio

n S

cen

ario


Whereas Choi and Schott (2004, p. 185) estimate the welfare gains in the U.S. to derive

mostly from terms of trade improvements through export expansion into the Korean

market after the implementation of the FTA, Korea’s welfare gains would stem from

allocative efficiency gains through resources shifted between sectors. A publication by

the Korean Ministry of Finance and Economy (2007, pp. 42-44) foresees significant

contributions to Korean productivity growth, especially in the services sector, due to the

increased competition under the KorUS FTA. Furthermore favorable effects of the FTA

for Korean small and medium-sized enterprises are expected by the Korean Ministry as

their main exports (textiles, leather and rubber) will experience large tariff cuts and

sectoral export growth.

Overall it seems that both FTA partners would experience significant welfare gains and

benefit from the implementation of the KorUS FTA. However, compared to the possible

welfare gains under multilateral free trade which according to a simulation by Kiyota

and Stern (2007, p. 51) have been estimated to be 3.4% of GDP for the U.S. and 11.7%

of GDP for South Korea the results of any proposed bilateral FTA seem to be relatively

small.

Hallaert (2008, p.18), however, argues that in general one has to be very critical of

welfare gains estimated by CGE models as long as these models do not take into

account the fast proliferation of PTAs that has been identified recently. Considering the

extent of data needed for a CGE model, data collection and preparation is a challenging

task. Therefore the databases available suffer a considerable time-lag. The fast

proliferation of PTAs leads to a process of establishing preferences and subsequent

preference erosion that affects trade diversion and the reversal of trade diversion and

produces “frequent and large” distortions of CGE model welfare estimates including

estimates of the wrong sign (Hallaert 2008, pp. 10-11).

2.3 The Impact of the KorUS FTA on Latin American Exports

One of the fundamental findings of customs union theory is that for a certain market a

PTA can lead to a change in international trade flows termed trade diversion

characterized by increased imports from the partner country at the expense of imports

from third countries that do not enjoy preferential market access. As these third

countries might lose exports and market share a PTA they are not part of can represent a


major concern and cost to them. The proposed FTA between the U.S. and the Republic

of Korea might have a significant impact on international trade flows since it has to be

considered big in terms of the economic size of the partner countries, the amount of

bilateral trade flows and the extent of its coverage. The KorUS FTA would lead to

immediate duty-free treatment of approximately 65% of U.S. exports to Korea and of

about 55% of U.S. imports from Korea by value and is expected to increase U.S.

exports to Korea by about 25% and Korean exports to the U.S. by approximately 10%

(USITC 2007, pp. 2-9, 2-16). But what would be the impact on third countries,

especially in Latin America, where many countries have close economic ties with the

U.S. and have been encouraged to diversify their economic ties towards Asian countries

(ECLAC 2007)?

Although there are various economic impact studies on the proposed FTA between the

U.S. and the Republic of Korea, so far little attention has been paid in the literature to

the possible impact of the FTA on Latin America. The studies generally focus on the

analysis of the impact on the two partner countries and Korea’s and the United States’

trading partners in the Asia Pacific that are expected to be most affected, such as Japan,

China and Taiwan.

In view of a lack of detailed information on possible impacts of the KorUS FTA on

trade with Latin America in the following a short literature review is performed and

supplemented by a detailed analysis of the current characteristics of trade and

competitiveness among the U.S., Korea and Latin America. The quantity, dynamics,

composition and structure of Latin American exports to the U.S. and to the Korean

market are the focus of analysis. Thereby the following sections seek to explore the

extent to which the implementation of the KorUS FTA might affect the existing trade

links between Latin America and its trade partners the U.S. and Korea and the

challenges and opportunities that arise.

As Latin America is a large and diverse region the following analysis cannot be

undertaken in detail for all Latin American countries and will therefore focus on a few

selected countries. In order to compile a sample that reflects some of the region’s

diversity Brazil, Chile, Costa Rica, Mexico and Peru have been chosen. The countries

that make up the sample differ in economic size, population, geographic conditions,


commodity focus of exports, extent of export diversification and in their links to the

U.S. or Korean market through a FTA.

Basic Information on Selected Latin American Countries

Table 3: Basic Information on Selected Latin American Countries; Source: based on World Bank 2008a, UN Comtrade data, USTR 2008a and OAS 2008.

2.3.1 A Short Literature Review on Trade and Welfare Effects

In case the KorUS FTA is ratified, Choi and Schott (2001, p. 63) expect increased

exports between the two FTA partner countries partially at the expense of reduced

imports from third countries. This trade diversion effect would hence lead to a loss in

market share in the U.S. or Korean market for countries that compete with one of the

two FTA partners in the respective market. Choi and Schott’s simulation results (2001,

p.67) show that Korea will increase its imports from the U.S., but import less from all

other regions. They briefly mention the cases of Chile and Mexico. Choi and Schott

(2001, pp. 69-70) do not expect a significant impact on Chile since Chile’s exports

supposedly do not compete with Korean nor U.S. exports in the respective partner

country market. For Mexico they estimate a 4.9% decrease of Korean imports from

Mexico in the medium run (Choi and Schott 2001, p. 58). The adverse effect on imports

from Mexico is expected to be much smaller in the U.S., because an expansion of U.S.

income might lead to overall increased U.S. imports and could partially counterbalance

the trade diversion effect. In the U.S. market trade diversion affecting Mexico is

expected to occur mostly in the sectors of textile fibers, telecommunications and

electrical machinery (Choi and Schott 2001, p. 67). Overall Choi and Schott (2001, p.

56) estimate welfare losses for all countries/regions not participating in the FTA. For

CountryPopulation(millions)

GDP(US$ billions)

GDP(per capita)

CommodityExports

(US$ billions)

FTA with U.S.

FTA with Korea

Brazil 189.32 1,067.47 5,638 137.8

Chile 16.43 145.84 8,876 55.9 since 2004 since 2004

Costa Rica 4.40 22.23 5,052 7.3 CAFTA-DR

implementation pending

Mexico 104.22 839.18 8,052 250.0 NAFTA

since 1994

Peru 27.59 92.42 3,350 23.8 signed butnot in force


Country/RegionBillionsof US$

% of GDP

Mexico 0.17 0.02

Argentina -0.05 -0.01

Brazil 0.51 0.06

Chile 0.04 0.03

Colombia 0.02 0.02

Peru 0.03 0.01

Uruguay 0.00 0.01

Rest of Central and Latin America

0.12 0.02

Mexico they identify a welfare loss between 0.05% and 0.14% of GDP as a

consequence of a FTA between the U.S. and Korea.

Welfare Effects of the KorUS FTA on Latin America

Table 4: Welfare Effects of the KorUS FTA on Latin America; Source: based on Kiyota and Stern 2007, p. 39.

In contrast to Choi and Schott’s estimates of trade diversion and negative welfare

effects for most countries not part of the FTA, Kiyota and Stern (2007, p. 39) expect

small welfare increases for most countries. In fact, positive, but very small, welfare

effects have been estimated for Mexico, Brazil, Chile, Colombia, Peru, Uruguay and the

rest of the region of Central and Latin America, with the exception of Argentina (see

table 4).

Changes in Latin American Exports due to the KorUS FTA

Table 5: Changes in Latin American Exports due to the KorUS FTA; Source: based on Kiyota and Stern 2007, pp. 44-45.

Kiyota and Stern (2007, pp. 44-45) estimate Latin American exports to the United

States to increase by US$ 45 million and exports to Korea to decrease by US$ 256

U.S. Korea

Mexico -8 -3

Argentina 9 -90

Brazil 41 -156

Chile 6 6

Colombia 1 0

Peru 12 0

Uruguay 0 -1

Rest of Central and Latin America

-16 -12

Total 45 -256

exports toCountry/Region


million. Imports of the region from the U.S. are expected to decline by US$ 256 million

and imports from Korea to increase by US$ 168 million.

Hinting at trade diversion Schott (2007, p. 6) assesses that the FTA between the U.S.

and South Korea, that is expected to increase U.S. agricultural exports to Korea, might

not only generate competition for Korean farmers, but also for farmers in other

countries that export to Korea under existing FTAs, e.g. in Chile. The USITC briefly

mentions Brazil in its analysis of U.S. grain exports and Chile in its analysis of U.S.

noncitrus fruit exports to Korea. The report (USITC 2007, p. 3-3) expects increased

U.S. exports of corn (that currently make up 57% of Korean corn consumption) that will

likely result from increased corn consumption and slightly lower Korean corn

production. Although Brazil’s corn exports are found not to be adversely affected in

terms of quantity exported by the proposed FTA Brazil’s market share might drop if the

U.S. is able to take greater advantage of the market expansion. The USITC (2007, pp. 3-

21 to 3-22) expects U.S. grape exports to increase in volume and to expand their market

share since under the KorUS FTA U.S. grape exports would become more price-

competitive compared to Korean or Chilean grape supplies. The effect on Chilean grape

exports would, however, be of a limited nature as most of U.S. table grape exports occur

during the months when the counterseasonal Chilean grapes are not yet in the market.

2.3.2 Current Latin American Trade with Korea and the U.S. and its

Dynamics

The Korean market is a relatively little explored market for Latin American countries, in

terms of both value of exports in US$ and share of total exports that is destined to this

market. In 2006 exports for the whole Latin American region to Korea amounted to

only US$ 7.2 billion, compared to the United States exporting US$ 32.5 billion, Japan

with US$ 50.3 billion or China’s exports of US$ 44.5 billion. The small Southeast

Asian country Malaysia with a population of only 25 million, for example, exported

US$ 5.8 billion to Korea. The only two Latin American countries that had exports of

over US$ 1 billion to the Korean market in 2006 were Chile and Brazil, whose exports

of US$ 3.4 billion and US$ 2 billion accounted for more than 70% of the region’s total

exports to Korea.


Trade with the Republic of Korea in 2006 (US$, percentage)

Table 6: Trade with the Republic of Korea in 2006;Source: author’s calculations, based on UN Comtrade data.

Whereas in 2006 the U.S. directed 3.1% of its total exports to Korea, Japan 7.8%,

Malaysia 3.6% and China 4.6%, Latin America directed only 1.1% of its total exports to

the Korean market. The Latin American countries with the highest export shares to the

Korean market are Chile (6.1%), Peru (2.3%) and Guatemala (1.9%). For the other

fourteen Latin American countries for which data is available ten countries direct less

than 1% of their total exports to Korea and four countries export slightly more than 1%.

Latin America does not seem to be an important source for Korean imports in general

since Korean imports from Latin America accounted for only 3.1% of total Korean

imports in 2006, compared to 16.8% for imports from Japan, 15.7% for China and

10.9% for the United States. In 2006 imports from Chile alone, who signed a free trade

agreement with the Republic of Korea in 2003, accounted for more than a third of

Korean imports from Latin America.

Choi and Schott (2004, p. 191) note that a look at import shares for countries in a

certain market can provide a “first-order approximation of countries at risk” to suffer

trade diversion in the respective market. Consequently, the higher the import share of a

country, the more it possibly stands to lose from trade diversion. And the higher the

share of exports to the specific market in total exports, the higher is the country’s

dependence on these exports. Considering the data on current trade relations presented

overall the trade links between Latin America and the Republic of Korea seem to be

relatively weak in comparison to other countries. If due to the implementation of the

exports to Koreapercentage

of total exportsKorean imports

from partnerpercentage

of total Korean imports

United States 32,455,280,553 3.1 33,796,573,866 10.9

Canada 2,879,592,023 0.7 3,091,214,457 1.0

China 44,522,206,859 4.6 48,556,596,186 15.7

Japan 50,270,020,226 7.8 51,926,274,535 16.8

Malaysia 5,808,375,138 3.6 7,242,465,515 2.3

Brazil 1,962,513,782 1.4 2,706,904,327 0.9

Chile 3,405,160,341 6.1 3,812,944,588 1.2

Costa Rica 36,452,935 0.5 58,069,829 0.0

Mexico 457,494,779 0.2 797,651,292 0.3

Peru 548,480,653 2.3 675,897,150 0.2

Rest of LA 860,146,946 0.5 1,504,417,000 0.5

Total of LA 7,270,249,436 1.1 9,555,884,186 3.1


FTA between the U.S. and Korea trade diversion occurs, it seems that currently the

region has not much to lose in the Korean market, except for Chile and Brazil who

direct larger amounts of exports to Korea as well as Peru who directs a relatively large

share of exports to the Korean market. Whereas exports to Korea accounted for only

0.1% of Mexican GDP in 2006, for 0.2% of Brazilian and Costa Rican GDP and for

0.6% of the Peruvian GDP, they accounted for 2.3% of the Chilean GDP. In order to

better understand the extent of possible effects of the KorUS FTA on Latin American

trade flows, however, it is essential to take a look at the growth performance of Latin

American exports to the Korean market. Since the implementation of the KorUS FTA

might harm the chances of Latin American exporters to expand trade with Korea in the

following an analysis of the dynamics of Latin American exports to the Korean market

is presented.

To analyze the export dynamics in Latin America’s trade relations with Korea a period

of 12 years (1994-2006) was chosen in order to gain a longer term perspective and in

order to avoid starting observations at the onset of the Asian financial crisis or shortly

after, when exports might have been especially low. To put Latin American export

growth into perspective data has also been analyzed for a few additional Korean trading

partners.

From a very low level of only US$ 1.7 billion in 1994 Latin American exports to Korea

have been growing considerably over the last twelve years at an annual average of

15.6%. In fact, Latin American exports grew at a faster pace than the exports of the two

big players in the Korean market: U.S. exports grew by 7.2% annually and Japanese

exports by 9.2% annually over the same period. Since these countries started from a

much higher level of exports they were less likely to expand exports with large

percentage increases. Latin American exports to Korea, however, also grew faster than

Malaysian exports (13.5%) that were at a similar level as Latin American exports in

1994. On the other hand Latin American export growth cannot match China’s

impressive annual export expansion of 23.3% over the same period.


Development of Exports to the Republic of Korea (billions of US$)

Figure 7: Development of Exports to the Republic of Korea; Source: based on UN Comtrade data.

In total Latin American exports grew by 319%4 over the whole period from 1994 to

2006. In comparison the U.S. grew by 80%, Japan by 107%, China by 911% and

Malaysia by 252% over the same period. Dividing this period in two intervals, a

stronger export expansion of 208% can be noticed for Latin America for the second

interval, in contrast to an expansion of only 36% between 1994 and 2000. The pace of

Latin American export growth seems to have accelerated over the last years. This is,

however, mainly a result of Brazil’s and Chile’s stronger growth performance during

the second interval since these two countries account for more than 70% of Latin

American exports to Korea. Chile’s large increase of exports to the Korean market in

the second interval can be explained by the implementation of an FTA between the two

countries, which entered into force in 2002. The strong growth of Brazilian exports to

Korea in recent years might be a result of a Korean strategy to promote economic

cooperation with large emerging markets rich in energy and natural resources

(AsiaPulse News 2004). Comparing export growth between 1994 and 2000 and between

2000 and 2006 along with Latin America, Japan and China also showed a higher

4 calculated as (X2006 – X1994) / X1994 · 100

0

10

20

30

40

50

60

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

United States Japan China Malaysia Latin America


relative export growth over the second half of the period analyzed, whereas the U.S. and

Malaysia grew faster during the first half of the entire period.

The two biggest Latin American exporters to Korea, Chile and Brazil, had an average

annual export growth rate of 22.9% and 12.4% respectively between 1994 and 2006.

Peru that exported only US$ 548 million to Korea in 2006, but was the second largest

Latin American exporter in terms of its share of total exports directed to Korea showed

an average annual export growth rate of 33.1% and Mexican exports grew by 46.9% on

average. Since Costa Rica exported very little (seen as a dollar value) to the Korean

market annual export growth rates fluctuated widely.

Although exports to the Korean market by Latin American countries are relatively

small, export expansion has occurred over the last decade and seems to have picked up

pace over the last years. A free trade agreement between the U.S. and South Korea

would give U.S. exports preferential access to the Korean market and would therefore

generally increase the competitiveness of U.S. goods. Therefore there is reason to

believe that the KorUS FTA might harm the chances of Latin American countries to

further expand exports in case similar products are exported to the Korean market.

In contrast to the Korean market, the U.S. market currently is a very important

destination for Latin American exports, especially for Mexico. In total the region

exported US$ 309 billion to the U.S. in 2006, topping Korean exports of US$ 43 billion

and Japanese exports of US$ 147 billion to the U.S. market, but not reaching the level

of Canadian exports of US$ 317 billion. Since almost 70% of Latin American exports to

the U.S. are accounted for by Mexico, which is linked to the U.S. market through

NAFTA, the regions exports not including Mexico, however, were only US$ 97 billion

in 2006.

The regions leading exporters to the U.S. market were Mexico with US$ 212 billion,

Venezuela with US$ 30 billion and Brazil with US$ 25 billion. In 2006 China came

close to catching up with Mexico’s export level exporting US$ 204 billion to the United

States. Out of the other 14 Latin American countries for which data was available four

countries exported between US$ 5 billion and 10 billion in 2006, three exported

between US$ 1 billion and 5 billion and only seven countries exported less than US$ 1

billion.


Trade with the United States in 2006 (US$, percentage)

Table 7: Trade with the United States in 2006; Source: author’s calculations, based on UN Comtrade data.

The share of total exports that Latin American countries direct to the U.S. is very high.

As a special trade partner under NAFTA Mexico directed 84.9% of its total exports to

the U.S. in 2006, which is in the same range as the other NAFTA partner Canada with a

share of 81.6% of export going to the U.S. market. The rest of the Latin American

countries on average still exported one fourth of total exports to the U.S. in 2006,

compared to 13.3% for Korea, 21% for China and 22.8% for Japan. Including Mexico

almost half (48.5%) of Latin American exports go to the U.S. market. Following

Mexico the highest Latin American export shares directed to the U.S. in 2006 showed

Ecuador with 54% and Venezuela with 49%. Only one country (Paraguay) exported less

than 5% of its exports to the U.S. in 2006 and only two more countries (Argentina and

Bolivia) stayed slightly below the 10% mark.

Latin American exports seen as a share of U.S. imports are relatively high as well. In

2006 Mexico supplied 10.4% of U.S. imports and the rest of Latin America 6.6%,

thereby totaling 17.0% of U.S. imports. Mexico’s share of U.S. imports did not quite

match Canada’s share of 16.0% or China’s 15.9% in 2006, but it does make Mexico a

very significant supplier for the U.S. market. The rest of Latin America held a good

share of U.S. imports in 2006 compared to Korea’s 2.5%, but trailed the 7.9% of U.S.

imports from Japan. Analyzed individually, however, most Latin American countries

did not seem to play an important role for U.S. imports. The second biggest Latin

American supplier, Venezuela, supplied 2.0% of U.S. imports and Brazil 1.5% in 2006.

The other 17 Latin American countries each supplied far less than 1% of U.S. imports.

exports to the U.S.percentage

of total exportsU.S. imports from partner

percentage of total U.S. imports

Korea 43,320,311,038 13.3 47,636,132,257 2.5

Canada 316,664,811,997 81.6 307,723,064,224 16.0

China 203,801,045,737 21.0 305,778,876,099 15.9

Japan 147,197,746,505 22.8 152,244,039,824 7.9

Malaysia 30,186,524,970 18.8 37,521,096,729 2.0

Brazil 24,774,417,482 18.0 28,031,247,072 1.5

Chile 8,947,470,009 16.0 10,291,072,878 0.5

Costa Rica 3,080,218,846 42.5 4,083,806,036 0.2

Mexico 212,131,772,801 84.9 200,499,681,947 10.4

Peru 5,707,486,624 24.0 6,155,107,712 0.3

Rest of LA 54,475,652,438 33.4 77,335,672,325 4.0

Total of LA 309,117,018,200 48.5 326,396,587,970 17.0

LA not including Mexico 96,985,245,399 25.0 125,896,906,023 6.6


Although it does not seem to be an important supplier from the U.S. point of view (with

the exception of Mexico), overall the U.S. seems to be a very important market for

almost all Latin American countries. In 2006 e.g. exports to the U.S. accounted for

about a quarter of Mexican GDP, for 14% of Costa Rica’s GDP, 6% of Chilean and

Peruvian GDP and for 2% of Brazilian GDP. Stronger competition from South Korea in

the U.S. market might therefore have a significant impact on Latin America if similar

commodities are exported.

Development of Exports to the United States (billions of US$)

Figure 8: Development of Exports to the United States; Source: based on UN Comtrade data.

Latin American exports (not including Mexico) also grew strongly by 230% from US$

29.3 billion in 1994 to almost US$ 97 billion in 2006, which is more than twice the

relative increase of 109% in Korean exports to the U.S. over the same period. This

strong growth performance also helped to narrow the gap between Latin American and

Japanese exports which only grew by 24% between 1994 and 2006. Mexico’s exports to

the U.S. showed an even stronger increase of 310% from US$ 51.7 billion in 1994 to

US$ 212.1 billion in 2006, but still cannot match China’s exceptional growth of 849%

over the same period, which helped China to almost catch up with Mexican export

levels.

0

50

100

150

200

250

300

350

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Korea Canada China Japan Malaysia Latin America Latin America (-Mexico)


Average annual export growth rates between 1994 and 2006 for Mexico and the rest of

Latin America which are 12.9% and 11.4% respectively are much higher than Korea’s

average annual export growth rate of 7.3%, Canada’s export growth rate of 7.5% or

Japan’s of 2.1%. Brazil’s average annual export growth rate between 1994 and 2006 is

9%, Costa Rica’s 13.1%, Chile’s 14.8% and Peru achieved an average growth rate of

20.2% with a significant export expansion of over 600% for the total period. China’s

average annual export growth rate of 21% and export expansion of almost 850% over

the whole period, however, remains unmatched by the countries analyzed.

The pace of Latin American export growth to the U.S. seems to have slowed down a

little over the past years. Whereas Mexico’s and the rest of Latin America’s exports to

the U.S. market increased by 184.6% and 84.5% respectively between 1994 and 2000,

Mexican and other Latin American exports increased by only 44.1% and 78.8%

respectively between 2000 and 2006. Mexico’s strong growth performance between

1994 and 2000, which in fact topped China’s export growth figures, was probably due

to Mexico’s accelerated export growth rates shortly after the implementation of NAFTA

in 1994 with export growth rates of 28% in 1995 and 20% in 1996.

The U.S. is not only an important market for Latin American exports, but it is also a

market in expansion. Since most Latin American countries are already linked by some

kind of trade agreement with the U.S. (e.g. NAFTA, CAFTA-DR, Andean Trade

Preference Program, Chile-U.S. FTA, Peru-U.S. TPA) there would be little scope for

gaining an additional competitive edge over Korean exports in the U.S. market through

classic trade policy instruments if Korean exports get preferential access as well under

the KorUS FTA. In case similar goods are exported to the U.S. market by Latin

American countries and South Korea the implementation of the KorUS FTA might bear

a significant challenge for the further expansion of Latin American exports in this

market. In case the overlap in exported goods is small, the true challenge for Latin

American exports might rather lie in having to face stronger competition when

attempting diversification of Latin American exports.

2.3.3 Composition of Latin American Exports

In order to get an impression of the level of competition that Latin American exports

might face in the U.S. or in the Korean market after the implementation of the KorUS


FTA it is important to take a look at the composition of Latin American exports to these

markets. Competition might occur in a broad way across many or all segments of the

economy or it might occur in a concentrated way in special industries. To analyze the

composition of Latin American exports several indicators have been devised and will be

presented in the following.

At first an analysis of import shares of U.S. and Korean imports from Latin America

was performed by country and main industry section in order to illustrate the

quantitative perspective of the composition of Latin American exports. A look at the

figures shows that Latin America held considerable shares of Korean imports in crude

materials (21.35%) and animal/vegetable oils (20.61%) in 2006. The high import share

in crude materials was due to high import shares of Chile (9.07%), Brazil (5.99%), Peru

(3.07%) and Mexico (1.12%) in this industry. Latin America’s high import share in

animal/vegetable oils in the Korean market was due to Argentina’s high import share of

19.08%. Other industries with import shares exceeding Latin America’s share in total

Korean imports were food/animals with 9.35%, beverages/tobacco with 9.16% and

manufactured goods with 6.17%.

Import Shares in the Korean Market in 2006 (percentage)

Table 8: Import Shares in the Korean Market in 2006; Source: author’s calculations, based on UN Comtrade data.

Whereas Latin American exports seemed to be specialized largely towards natural

resource-intensive industries in 2006, the U.S. had its highest shares across a wider

range of industry sections such as in food/animals (21.30%), machinery (18.29%),

miscellaneous manufacturing (16.39%) and chemicals (15.58%). Considering the

country profiles of Brazil, Chile, Mexico and Peru it is noticeable that all countries held

an import market share in crude materials that is substantially higher than the countries’

market shares in total imports. Costa Rica, which accounts for only a very small share

of total Korean imports, in contrast had its highest import market share in machinery in

0 1 2 3 4 5 6 7 8 9 TotalFood/

AnimalsBeverages/

TobaccoCrude

MaterialsMineral Fuels

Animal/Veg. Oils

ChemicalsManufact.

GoodsMachinery

Misc. Manufact.

Not class. elsewhere

USA 21.30 11.78 13.07 1.05 8.25 15.58 5.06 18.29 16.39 0.83 10.92Brazil 3.41 5.04 5.99 0.31 0.95 0.26 1.35 0.20 0.03 0.47 0.87Chile 1.84 2.61 9.07 0.00 0.56 0.82 3.71 0.00 0.00 0.45 1.23Costa Rica 0.01 0.04 0.02 0.00 0.00 0.00 0.00 0.05 0.02 0.00 0.02Mexico 0.35 0.75 1.12 0.00 0.01 0.13 0.36 0.28 0.33 0.02 0.26Peru 0.43 0.00 3.07 0.00 0.00 0.00 0.05 0.00 0.01 0.00 0.22Rest of LA 3.32 0.73 2.09 0.03 19.09 0.04 0.71 0.26 0.05 0.00 0.49Total of LA 9.35 9.16 21.35 0.34 20.61 1.26 6.17 0.79 0.44 0.94 3.09


2006. Brazil and Chile also held import market shares exceeding 1% in food/animals,

beverages/tobacco and manufactured goods.

Latin American exports to the U.S. market seemed to be specialized in natural resource-

intensive industries in 2006 as well. Latin America’s highest share of U.S. imports was

accounted for by food/animals (35.95%), followed by mineral fuels (26.45%),

beverages/tobacco (22.74%) and crude materials (20.25%). Whereas several Latin

American countries held import shares of over 1% in food/animals, only Mexico, Brazil

and Chile showed significant shares in manufactured goods and machinery in the U.S.

market in 2006. In fact, Mexico accounted for almost half of Latin America’s share in

chemicals, manufactured goods and machinery and also accounted for a good part of

Latin America’s share in beverages/tobacco and most of Latin America’s share in

miscellaneous manufacturing. Whereas Chile, Costa Rica and Peru held their highest

import market share in food/animals in 2006, Brazil had its highest import market share

in crude materials and Mexico in beverages/tobacco.

Import Shares in the U.S. Market in 2006 (percentage)

Table 9: Import Shares in the U.S. Market in 2006; Source: author’s calculations, based on UN Comtrade data.

In order to add a qualitative perspective to the analysis of the composition of exports in

the following a look at the diversification of Latin American exports across different

industry sections will be taken. One indicator to measure the diversification of Latin

American exports to the U.S. and to the Korean market is the degree of product

penetration that exports have achieved. For the calculations the number of varieties of

goods (according to SITC five digit codes) exported to the U.S. or to Korea in 2006 has

been analyzed not taking into account dollar values of exports. Figures are then

expressed as the percentage of actually exported products relative to the 3,115 items

classified within the SITC sections 0 to 8. The main idea behind this approach is to take

a look at the breadth rather than at the volume of exports to a certain market. Figures are

presented broken down into main industry categories (according to SITC one digit) to

0 1 2 3 4 5 6 7 8 9 TotalFood/

AnimalsBeverages/

TobaccoCrude


Animal/Veg. Oils

ChemicalsManufact.

GoodsMachinery

Misc. Manufact.

Not class.elsewhere

Rep. of Korea 0.44 0.42 1.05 0.83 0.04 1.41 2.65 2.65 4.43 0.98 1.37Brazil 3.38 1.62 6.47 1.15 0.72 1.56 3.26 3.26 0.95 0.65 1.41Chile 4.96 1.10 3.50 0.07 0.10 0.19 2.03 2.03 0.01 0.04 0.80Costa Rica 2.18 0.01 0.36 0.00 0.00 0.08 0.09 0.09 0.12 0.43 0.31Mexico 13.42 15.42 3.87 9.87 1.83 2.62 6.53 6.53 14.50 7.61 12.61Peru 1.29 0.02 0.87 0.25 0.11 0.02 0.72 0.72 0.00 0.35 2.25Rest of LA 10.28 4.15 4.14 14.28 2.86 1.02 1.45 1.45 0.24 3.81 3.08Total of LA 35.95 22.74 20.25 26.45 5.67 6.90 16.73 16.73 20.25 13.87 21.84


shed some light on possibly differing degrees of export diversification within the

different sections.

The overall look at Latin American product penetration in the Korean market shows that

all countries have rather poorly diversified export baskets compared with U.S. product

penetration of a total of 2,341 different products (75.2% of all classified items) exported

to the Korean market in 2006. Performance of Latin American countries, however,

varies considerably. In 2006 Mexico exported 15.5% of all possible product varieties to

Korea, Brazil 12.3%, Chile 5%, Peru 3.4% and Costa Rica only 1%. There are also

several Latin American countries that each exported less than 10 different products to

the Korean market. In fact, according to data available from the UN Comtrade Database

Nicaragua exported only one type of product (03611 – shrimps and prawns, frozen) to

the Republic of Korea in 2006. It is also noteworthy that the diversification of exports

does not come automatically with a higher export volume. Chile that has a free trade

agreement with Korea and shows a relatively large export volume had its exports

concentrated in only 5% of total products. And although Mexico and Peru were similar

in their import market shares in total Korean imports (0.26% and 0.22% respectively),

Peru exported a significantly smaller number of product varieties to Korea in 2006.

Product Penetration in the Korean Market in 2006 (percentage of product varieties classified)

Table 10: Product Penetration in the Korean Market in 2006; Source: prepared by author, based on UN Comtrade data.

Mexico and Brazil were the only two countries that showed more diversified exports to

Korea across the industry sections machinery, manufactured goods and chemicals in

2006. Chile’s most diversified exports fell within the two categories of

beverages/tobacco and food and live animals. Peru’s exports showed the highest

diversity in food and live animals as well as in miscellaneous manufacturing. Costa

Rican exports were generally poorly diversified, but showed their highest level of

diversification in crude materials in the Korean market in 2006.

0 1 2 3 4 5 6 7 8 TotalFood/

AnimalsBeverages/

TobaccoCrude


Animal/Veg. Oils

ChemicalsManufact.

GoodsMachinery

Misc. Manufact.

USA 60.2 54.5 48.3 34.2 75.0 82.7 73.8 85.5 86.7 75.2Brazil 11.9 4.5 6.7 0.0 1.1 12.4 12.5 14.5 13.3 12.3Chile 12.2 27.3 8.6 0.0 0.5 5.1 2.5 3.8 2.3 5.0Costa Rica 1.7 0.0 3.0 0.0 0.0 0.2 0.4 1.1 1.1 1.0Mexico 10.8 9.1 7.9 0.0 0.5 15.2 14.7 22.2 18.7 15.5Peru 6.4 0.0 4.9 0.0 0.0 1.5 3.3 1.5 6.1 3.4


A look at Latin American product penetration in the U.S. market in 2006 reveals that

export baskets were much more diverse than they were in the Korean market. Whereas

very few Latin American countries exported more than 200 different products to the

Korean market, all Latin American countries for which data was available exported

more than 200 product varieties to the U.S. market. Nevertheless, it is evident that the

level of product penetration varies significantly across different Latin American

countries. In fact, with a share of 77.8% of exported product varieties Mexico’s exports

were even more diverse than the Korean export basket in the U.S. market in 2006 and

also showed a higher level of diversification in each of the main industry sections.

Brazil enjoyed a level of total product penetration equal to Korea’s level in the U.S.

market with a share of exported product varieties of 61.3% of total product varieties. In

2006 Chile, Costa Rica and Peru each exported about a third of all possible product

varieties to the U.S.

Product Penetration in the U.S. Market in 2006 (percentage of product varieties classified)

Table 11: Product Penetration in the U.S. Market in 2006; Source: prepared by author, based on UN Comtrade data.

Brazil, Chile, Costa Rica, Mexico and Peru all showed the highest diversification level

of exports in the section of miscellaneous manufacturing. In this area as well as in

machinery and manufactured goods Mexico even achieved an export diversification

level of over 80%. Whereas for the country cases presented the export diversification

level in the Korean market in 2006 hardly exceeded 10%, in the U.S. market Brazil,

Chile, Costa Rica, Mexico and Peru all exceeded this level in almost all industries.

Additionally the share of total exports made up by the top five product groups was

examined for the exports of the selected Latin American countries in order to get an

impression of the level of concentration of exports. It attracts attention that in 2006 most

of the selected Latin American countries’ exports to the Korean market were heavily

concentrated in only a few SITC three digit product groups (see table 12). The two

biggest export product groups of Chile, Costa Rica and Peru alone accounted for

0 1 2 3 4 5 6 7 8 TotalFood/

AnimalsBeverages/

TobaccoCrude


Animal/Veg. Oils

ChemicalsManufact.

GoodsMachinery

Misc. Manufact.

Rep. of Korea 39.2 18.2 21.3 13.2 13.6 56.1 69.4 74.3 83.5 61.1Brazil 48.3 45.5 30.0 15.8 43.2 57.6 68.8 67.9 77.2 61.3Chile 32.6 27.3 18.0 0.0 11.4 17.7 26.4 40.2 47.9 30.5Costa Rica 31.1 18.2 13.5 2.6 4.5 21.1 29.6 41.9 46.3 31.3Mexico 66.3 40.9 53.2 28.9 54.5 75.9 83.8 86.5 87.8 77.8Peru 39.8 31.8 18.0 5.3 15.9 19.4 41.1 35.6 59.8 36.3


roughly three fourths of total exports in 2006. The share of the top five exports to the

Korean market made up 95% of total Costa Rican exports, around 90% of Chilean and

Peruvian exports and was somewhat lower for Mexico accounting for 65% of total

export and for only 61% for the case of Brazil. Another interesting characteristic of the

five most important export product groups is that they mostly fall within natural

resource-based and –related product groups such as metals, metal ores and edible or

non-edible agricultural products. Only Cost Rica escapes this general trend having the

three most important exports concentrated in the SITC section of machinery.

Top 5 Exports to the Korean Market in 2006

Table 12: Top 5 Exports to the Korean Market in 2006; Source: based on UN Comtrade data.

The picture for the top five export product groups in the U.S. market for 2006 looks

somewhat different (see table 13). The level of concentration of exports for the top five

product groups is lower for all countries in the U.S. market. The highest concentration is

shown by Chile with a share of 73% of total exports made up by the top five export

product groups, followed by Peru with 67%, Costa Rica with 54% and Mexico and

Brazil with only 37% and 26% respectively. Export shares were also more evenly

distributed over the different product groups. Especially Brazil and Mexico showed a

Percentage oftotal exports

SITCcode

Commodity description

Brazil 22.6 281 iron ore14.3 672 primary forms of iron and steel12.3 333 petroleum oils (crude)6.9 222 oil-seeds and oleaginous fruits4.7 044 maize, unmilled

sum 60.8Chile 42.4 682 copper

32.3 283 copper ores8.6 512 alcohols3.4 251 pulp and waste paper2.6 287 ores of base metals

sum 89.3Costa Rica 39.3 776 thermionic/cold cathode valves, diodes, semiconductor devices

34.6 764 telecommunications equipment15.3 759 parts and accessories for office/automatic data-proc. machines3.5 292 crude vegetable materials2.9 288 non-ferrous base metal waste and scrap

sum 95.6Mexico 26.8 682 copper

16.3 287 ores of base metals14.2 288 non-ferrous base metal waste and scrap4.5 881 photographic apparatus and equipment3.6 011 meat of bovine animals

65.4Peru 59.4 287 ores of base metals

23.1 283 copper ores3.8 281 iron ore2.7 682 copper1.8 071 coffee and coffee substitutes

sum 90.8


more diversified composition of exports. Chile, however, exhibited a noteworthy

concentration of exports in the product group of copper that individually accounted for a

share of 44% of total Chilean exports to the U.S. market in 2006.

Top 5 Exports to the U.S. Market in 2006

Table 13: Top 5 Exports to the U.S. Market in 2006; Source: based on UN Comtrade data.

The composition of the top five export product groups of the selected Latin American

countries in the U.S. market according to the SITC sections they fall in also differs from

the composition noted in the Korean market. Although there were still many natural

resource-based and –related products among the top five exports to the U.S. market in

2006 many important export groups fell into the SITC section of machinery. Four out of

Mexico’s top five exports to the U.S., e.g., fell into this area and two export product

groups for the cases of Brazil and Costa Rica.

The fact that especially in the Korean market Latin American countries exhibited high

levels of concentration on a few export product groups shows a high potential

vulnerability. In case similar products are exported to the respective market by the trade

partner gaining preferential access under the KorUS FTA Latin American exports might

face a significantly increased pressure of competition on their exports. Therefore in the

Percentage oftotal exports

SITCcode

Commodity description

Brazil 7.9 333 petroleum oils (crude)5.1 792 aircraft5.0 671 forms of iron4.7 713 engines3.7 512 alcohols/phenols and their derivatives

sum 26.4Chile 44.4 682 copper

9.1 034 fish (fresh, chilled or frozen)9.1 057 fruit and nuts (fresh or dried)7.0 248 wood (simply worked)3.8 971 gold (non-monetary)

sum 73.4Costa Rica 19.8 057 fruit and nuts (fresh or dried)

17.3 872 instruments/appliances for medical/surgical purposes8.6 759 parts and accessories for office/automatic data-proc. machines4.2 772 electrical apparatus for switching or protecting electrical circuits3.9 071 coffee and coffee substitutes

sum 53.8Mexico 13.2 333 petroleum oils (crude)

7.1 761 television receivers6.5 781 motor vehicles5.3 764 telecommunications equipment5.1 784 parts of motor vehicles

sum 37.2Peru 24.0 971 gold (non-monetary)

18.0 682 copper12.4 334 petroleum oils (other than crude)8.3 845 articles of apparel (of textile fabrics)4.4 681 silver, platinum and other metals of the platinum group

sum 67.1


following section the structure of exports of the competitors is compared with the help

of adequate indicators.

2.3.4 Comparison of Export Structures

Having rather narrowly specialized exports in many cases Latin American countries are

especially vulnerable to increased competition in these industries and might therefore be

adversely affected by the implementation of new free trade agreements between their

trade partners. To investigate to what extent a free trade agreement between the

Republic of Korea and the U.S. might affect exports of Latin American countries it is

useful to have a look at the overlap in export structures of the competitors in the two

markets. Choi (2001, p. 64) notes that “the closer the similarity in export structure, the

greater the possibility of trade diversion.” In the following the export structures of

Brazil, Chile, Costa Rica, Mexico and Peru are compared to the export structure of the

U.S. and Korea with the help of two indicators: the Export Similarity Index (ESI) and

the Weighted Export Similarity Index (WESI).

For the purpose of measuring the overlap in the structure of two countries’ exports to a

certain market Finger and Kreinin have devised the Export Similarity Index. The index

(World Bank 2008) for country j is calculated with the following equation:

ESIj = ∑ [min (Xij, Xik) · 100]

where X ij is the share of industry i of country j’s total exports to a certain market and X ik is the share of industry i of the competitor country k.

Index values can range from 0 to 100 and the higher the index value for a country is, the

bigger is the overlap in its export structure compared to its competitor in the market

analyzed. Since the index is calculated based on industry or product group shares of

total exports it focuses solely on export structure abstracting from the economic size of

a country and its volume of exports to a certain market.

For this analysis the ESI was calculated on a three digit-level to allow for a more

detailed perspective on overlapping product groups. To reduce the effect of possible

fluctuations in export levels the ESI was calculated using the average export share over

three years (2004 to 2006) for every product group and country. Furthermore, Japan was


included in the analysis as a reference for benchmarking Latin American index values.

Many studies about the economic impact of the KorUS FTA (see e.g. Choi 2004, p.

192) have estimated that Japan would face a high level of trade diversion due to the

implementation of the FTA in both the U.S. and the Korean market. Therefore, it is

assumed that Japan’s index values in the U.S. and the Korean market will be an

adequate reference mark for a degree of export structure overlap that will cause a

significant negative impact on a country’s exports.

Whereas the ESI purely focuses on export structure and is widely used, the second and

more uncommon indicator used for analysis, the Weighted Export Similarity Index

(WESI), takes into account the dollar amount of exports to a certain market by the two

competing countries and a product group’s importance for the overall export basket.

The WESI (Leelawath 2007) is calculated as

WESIj = ∑ [xij (1- ((|Xij-X ik|)/(Xij+Xik))) · 100]

where X ij (X ik) is country j’s (k’s) exports of product group i to a certain market and xij is the share of product group i in country j’s total exports to a certain market.

As the ESI the WESI can range from 0 to 100 with higher WESI values indicating a

possibly stronger impact of increased competition in a certain market for a certain

country. For the analysis WESI values were calculated on a SITC three digit level and

are based on average exports and average export shares between 2004 and 2006.

ESI values generally depend more on the competitor’s export shares (due to the use of

the smaller export share in the equation) and therefore tend to be lower if exports are

highly concentrated for one country and diversified for the competitor country. In

contrast, WESI values tend to be higher for countries with highly concentrated exports

due to the multiplication with country j’s shares in total exports. All else being equal

WESI values tend to be lower for countries of unequal economic size since the dollar

amount of exports tends to be unequal to the competitor’s exports. Since in many cases

Latin American exports to the Korean market are highly concentrated on a few product

groups in this market the concentration effect might offset the effects of unequal

economic size between the U.S. and the Latin American countries. In fact, Latin

American WESI values in many cases were found to be higher than the corresponding


ESI values, whereas Japan’s WESI has a lesser value than its ESI in the Korean as well

as in the U.S. market.

According to ESI calculations for the Korean market (see figure 9) Japan’s export

structure exhibits a much higher degree of similarity to the structure of U.S. exports to

Korea than the structure of Latin American exports does compared to the structure of

U.S. exports in this market. Whereas Japan shows an ESI value of 57.7 in the Korean

market the Latin American country with the highest ESI value in this market was Costa

Rica with an index of 26.9. Mexico with an ESI of 22.9 also scores in the higher Latin

American ESI range while Brazil with an index value of 12.2 takes a position in the

middle. Peru shows the lowest ESI value of the countries analyzed indicating that its

export structure in the Korean market is the least similar to the structure of U.S. exports.

ESI and WESI Values for the Korean Market (index value)

Figure 9: ESI and WESI Values for the Korean Market; Source: author’s calculations, based on UN Comtrade data.

In contrast to its low ESI value, however, Peru shows a very high WESI value of 56.9

index points. This value is even higher than Japan’s (the benchmark country) WESI

value of 50.8 and might be a result of narrowly diversified exports to the Korean

market. Mexico, Brazil and Chile also show significantly higher WESI than ESI values

in the Korean market, whereas Costa Rica exhibits a very low WESI value of only 2.2

index points.

Although (due to differences in the equations used for calculations) ESI and WESI

values differ, both indices seem to indicate that Mexico will face a moderate increase in

57.7

12.2

7.5

26.9

22.9

3.9

50.8

24.7

22.5

2.2

31.5

56.9

0 10 20 30 40 50 60 70

Japan

Brazil

Chile

Costa Rica

Mexico

Peru

ESI WESI


overall competition due to the fact, that its export structure to some extent matches that

of the U.S. in the Korean market. The increase in the overall level of competition with

the U.S. will, however, be significantly less severe than for Japan. Brazil and Chile

might expect to be mildly affected as well. The extent to which Costa Rica and Peru are

expected to be affected depends on the observer’s preference for the traditional or for

the weighted export similarity index. Giving preference to the one or the other either

Costa Rica or Peru is likely to be the Latin American country most affected by an

overlap in export product groups in the Korean market. In order to analyze the nature of

Latin American ESI and WESI scores and whether they are the result of an overlap of a

high number of various product groups or of only a few, but important, product groups

in the following the decomposition of ESI and WESI values will be presented.

Decomposition of ESI Values for the Korean Market (percentage of total ESI value)

Table 14: Decomposition of ESI Values for the Korean Market; Source: author’s calculations, based on UN Comtrade data.

Whereas Chile and Peru predominantly owe their ESI values to an overlap in export

structure in the natural resource-intensive areas of food and live animals (section 0) and

crude materials (section 2), 90% of Costa Rica’s ESI is accounted for by machinery and

transport equipment (section 7). About half of Mexico’s ESI value is comprised of an

overlap in the section of machinery and transport equipment, but similar to Brazil and

Chile it also shows a small overlap of about 16% in section 5 (chemicals). Brazil’s ESI

value is derived from the contributions of several SITC sections with a slight tendency

towards the resource-intensive sections 0 and 2.

Whereas the overlap in export structure of Costa Rica and the U.S. in the Korean market

is mainly due to a common specialization in thermionic and cold cathode valves and

SITC Section

Japan Brazil Chile Costa Rica Mexico Peru

0 1.1 29.6 37.8 2.6 6.0 48.8

1 0.1 0.7 0.9 0.0 0.5 0.0

2 3.2 23.7 37.8 5.5 12.7 29.4

3 2.2 0.0 0.1 0.0 0.5 0.0

4 0.0 0.6 0.7 0.0 0.0 0.2

5 19.0 17.8 16.5 0.0 16.2 1.4

6 5.9 10.2 5.9 1.8 6.2 14.7

7 51.9 15.3 0.3 90.0 47.0 2.1

8 13.4 1.9 0.0 0.2 10.2 3.4

9 3.3 0.2 0.0 0.0 0.8 0.0


tubes, diodes and semiconductor devices (SITC product group 776), Mexico and Brazil

show a broader range of overlapping product groups. In fact, about 60% (or 16.6 index

points) of Costa Rica’s high ESI value are due to its exports of the single product group

776. Other product groups that make up smaller parts of Costa Rica’s ESI value are the

product groups 728 (other machinery), 764 (telecommunications equipment), 288 (non-

ferrous base metal waste) and 772 (electrical apparatus). Contrastingly, Mexico’s ESI

value is accounted for by several product groups that each make a contribution equal to

or smaller than 2.2 index points. The five product groups that contributed the most to

Mexico’s ESI value are the SITC product groups 764 (telecommunications equipment),

752 (automated data-processing machines), 784 (parts of motor-vehicles), 874

(measuring instruments) and 288 (non-ferrous base metal waste). Brazil’s ESI value is

also composed of several product groups each contributing 1.7 index points or less. The

biggest overlaps between U.S. and Brazilian export structure in the Korean market fall

within the SITC product groups 044 (maize, unmilled), 251 (pulp and waste paper), 512

(alcohols/phenols), 222 (oil-seeds) and 012 (other meat). Chile’s lower ESI value of 7.5

index points is accounted for by small contributions of product groups such as pulp and

waste paper (251), non-ferrous base metal waste and scrap (288) and fish (034). 1.2

index points of Peru’s ESI of only 3.9 index points is made up by fish (034) and product

groups such as feeding stuff for animals (081) and ores and concentrates of base metals

(287) each contribute less than 0.5 index points.

Decomposition of WESI Values for the Korean Market (percentage of total WESI value)

Table 15: Decomposition of WESI Values for the Korean Market; Source: author’s calculations, based on UN Comtrade.

A more detailed look at the WESI values of Latin American countries in the Korean

market reveals that in the cases of Costa Rica, Mexico and Peru more than two thirds of

SITCSection

JAP BRA CHI COS MEX PER

0 0.7 39.2 9.6 9.1 4.1 11.3

1 0.0 3.4 1.5 0.0 1.7 0.0

2 2.9 19.8 32.2 8.7 10.8 84.4

3 2.0 0.3 0.0 0.0 0.0 0.0

4 0.0 0.8 0.1 0.0 0.0 0.0

5 18.5 7.8 37.0 0.0 2.3 0.4

6 6.3 22.5 19.7 0.1 67.1 3.9

7 53.4 6.2 0.0 82.1 5.5 0.0

8 12.7 0.0 0.0 0.0 8.4 0.0

9 3.5 0.0 0.0 0.0 0.1 0.0


their WESI values are accounted for by exports within a single SITC section. Whereas

81% Costa Rica’s insignificant WESI of only 2.2 index points falls into the section of

machinery and transport equipment, Mexico’s WESI was largely accounted for by

section 6 (manufactured goods classified chiefly by material) and Peru’s very high

WESI of 56.9 index points is predominantly composed of products from the section of

crude materials. Brazil’s and Chile’s WESI is mainly composed of contributions across

three different sections. Interestingly, the dominant section for the decomposition of

Chile’s WESI (compared with the decomposition of its ESI) shifts to chemicals and

related products (section 5), whereas for Brazil food and live animals gains increased

weight compared to the decomposition of its ESI value.

An even closer look at the highest Latin American WESI scores in the Korean market

reveals that these high values in some cases are due to only one or two product groups

that make up most of the sum. Almost 44 of Peru’s 56.9 index points, e.g., are made up

by ores and concentrates of base metals (product group 287). In fact, UN Comtrade data

on the top five Korean import sources for ores and concentrates of base metals in 2006

reveals that Peru was the second largest import source while the U.S. was the fourth

largest source. Competition occurred mainly in the market segments of lead ores (SITC

2874) and zinc ores (2875). More than half of Mexico’s WESI is accounted for by

copper (682). In 2006 Mexico was, however, only the seventh largest supplier of copper

to the Korean market while Chile supplied most of the Korean copper imports and the

U.S. was ranked 10th. Chile owes 8 of its 22.5 index points to alcohols and phenols

(512) and 4 index points to its copper exports. About a quarter of the Brazilian WESI is

accounted for by feeding stuff for animals (081) for which Brazil was the fourth largest

import source competing with the U.S. who took first place in 2006. About half of

Costa Rica’s 2.2 index points come from telecommunications equipment (764).

Generally the ESI values for Latin American countries in the U.S. market are slightly

higher than in the Korean market. Whereas the highest ESI value in the Korean market

was 26.9 index points shown by Costa Rica, in the U.S. market Mexico exhibits an ESI

value of 44 index points, followed by Brazil with 30.7and Costa Rica with 23.7 index

points. Peru and Chile also show higher ESI values in the U.S. than in the Korean

market, but remain in a lower range with index values around 10. Again, the selected

Latin American countries do not reach the level of export structure overlap found


between the KorUS FTA partner and Japan, but Mexico does show a rather high ESI

value and is very likely to be affected by an increase in competition with Korea in the

U.S. market. After the implementation of the KorUS FTA Brazil and Costa Rica,

compared to Japan, might face moderate increases in competition with Korea in the U.S.

market due to their overlaps in export structure.

ESI and WESI Values for the U.S. Market (index value)

Figure 10: ESI and WESI Values for the U.S. Market; Source: author’s calculations, based on UN Comtrade data.

For Brazil, Chile and Costa Rica the calculations of the ESI and the WESI return quite

similar values, whereas Mexico’s WESI value is significantly lower than its ESI value

and Peru’s WESI value is significantly higher than its ESI value. The difference for

Mexico’s lower WESI value might be explained by its relatively high export amounts to

the U.S. market when compared to Korea, which might cause a tendency towards lower

Mexican WESI values. When comparing the Japanese and the Latin American WESI

values it is noteworthy, however, that the Brazilian, the Mexican and the Peruvian

WESI are lower than Japan’s, but do fall roughly in the same range as Japan’s WESI.

Brazil’s WESI of 28.4 index points, which is the highest among the selected Latin

American countries, stays only about 5 index points behind Japan’s WESI of 33.6.

According to this measure it might be expected that Brazil, Mexico, Peru and Costa

Rica are likely to be affected by the KorUS FTA in a to some extent less severe, but

generally similar way as Japan in the U.S. market.

The decomposition of ESI values for the U.S. market shows that more than two thirds of

Mexico’s ESI value is accounted for by an overlap in export structure in the section of

60.1

30.7

9.1

23.7

11.2

33.6

28.4

10.7

25.2

26.8

26.6

44.0

0 10 20 30 40 50 60 70

Japan

Brazil

Chile

Costa Rica

Mexico

Peru

ESI WESI


machinery and transport equipment (section 7). Costa Rica’s overlap in this area makes

up 56.7% of its total ESI value and 48.7% of Brazil’s ESI are explained by it exports of

machinery and transport equipment. As Korean exports to the U.S. are largely made up

by machinery and transport equipment, it is not surprising that the countries with higher

ESI values in the U.S. market owe much of their score to their exports in this section.

Chile and Peru who showed significantly lower ESI values than the other selected Latin

American countries have the biggest share of their ESI values accounted for by an

export structure overlap in section 3 (mineral fuels, lubricants and related materials).

Other sections that account for higher shares of ESI values are manufactured good

classified chiefly by material (section 6) in the cases of Brazil and Chile and

miscellaneous manufacturing (section 8) in the cases of Costa Rica and Peru.

Decomposition of ESI Values for the U.S. Market (percentage of total ESI value)

Table 16: Decomposition of ESI Values for the U.S. Market; Source: author’s calculations, based on UN Comtrade data.

The countries with higher ESI values in the U.S. market owe their overlap in export

structure with Korea to a range of different product groups, many of them within the

category of machinery. The product groups that contribute most to Mexico’s high ESI

value in the U.S. market are the SITC product groups 781 (cars and motor vehicles),

764 (telecommunications equipment), 784 (parts of motor vehicles), 752 (automated

data-processing machines) and 761 (television receivers). Brazil’s high ESI value is

accounted for by product groups 784 (parts of motor vehicles), 334 (petroleum oils,

other than crude), 764 (telecommunications equipment), 723 (civil engineering

equipment) and 781 (cars and motor vehicles). The biggest product groups within the

overlap of export structures between Costa Rica and Korea in the U.S. market are the

SITC groups 759 (parts and accessories of office machines), 776 (thermionic and cold

SITCSection


0 0.5 1.1 3.9 2.5 1.1 3.0

1 0.1 0.3 0.4 0.1 0.1 0.8

2 0.4 1.1 0.9 0.4 0.4 0.6

3 0.7 9.3 38.5 1.2 3.1 43.2

4 0.0 0.0 0.0 0.0 0.0 0.0

5 3.4 7.9 5.0 3.3 3.3 3.1

6 7.9 24.2 25.8 14.8 9.4 13.1

7 82.1 48.7 15.2 56.7 70.7 8.0

8 5.0 7.2 10.1 21.0 11.8 28.2

9 0.0 0.1 0.2 0.0 0.0 0.0


cathode valves and tubes, diodes, semiconductor devices), 625 (rubber tires), 775

(household-type equipment) and 764 (telecommunications equipment). Accounting for

almost 3.5 of Chile’s 9.1 index points the biggest product group within its export

structure overlap with Korea is the SITC group 334 (petroleum oils, other than crude)

followed by much smaller contributions from the product groups 625 (rubber tires), 841

(articles of apparel for boys and men), 699 (manufactures of base metals) and 893

(articles of plastics). Peru’s biggest overlapping export product group is petroleum oils,

other than crude as well accounting for almost 5 of its 11.2 index points. The next

biggest groups that account for far less than one Peruvian index point are 845 (articles

of apparel not elsewhere specified), 841 (articles of apparel for boys and men), 842

(articles of apparel for girls and women) and 897 (jewelry and other articles of

precious/semi-precious materials).

Decomposition of WESI Values for the U.S. Market (percentage of total WESI value)

Table 17: Decomposition of WESI Values for the U.S. Market; Source: author’s calculations, based on UN Comtrade data.

The decomposition of WESI values in the U.S. market according to SITC sections

reveals that about three quarters of Mexico’s WESI value are made up by machinery

and transport equipment (section 7), which is also an important section for Brazil

accounting for 46% of its weighted export structure overlap. For Costa Rica and Peru

the dominant section is miscellaneous manufacturing (8) and Chile’s highest WESI

share falls into section 6 (manufactured goods classified chiefly by material). It is also

interesting that almost a quarter of Chile’s WESI is accounted for by section 0 (food and

live animals), whereas this section does not contribute significantly to Brazil’s and

Mexico’s WESI.

SITCSection


0 0.6 2.2 23.0 11.8 0.9 7.5

1 0.1 0.1 3.8 0.0 0.1 0.1

2 0.4 1.4 5.9 5.4 0.4 1.0

3 0.5 5.0 6.8 0.0 4.5 18.5

4 0.0 0.0 0.1 0.0 0.0 0.0

5 3.7 10.0 19.0 1.5 3.2 3.0

6 9.2 27.7 31.3 10.4 8.6 19.2

7 79.9 46.3 0.8 22.4 73.5 0.1

8 5.5 7.1 7.1 48.1 8.7 50.2

9 0.0 0.2 2.1 0.3 0.0 0.2


Broken down to the level of SITC product groups Mexico’s WESI is composed of a

relatively diverse profile of machinery and transport equipment exports. The product

group with the highest contribution (5 index points) to Mexico’s WESI of 26.8 index

points is motor vehicle (781), in which Mexico is the fourth largest supplier in the U.S.

market, whereas Korea is the fifth largest supplier. Telecommunications equipment

(764) accounts for 4 index points and parts of motor vehicles (784) for 2 index points of

Mexoco’s WESI. For both product groups Mexico is the second largest supplier in the

U.S. market competing with Korea in the market for telecommunications equipment

where Korea is the fourth largest supplier. The highest contributions to the Brazilian

WESI are fairly evenly distributed between the product groups 784 (parts of motor

vehicles), 723 (civil engineering) and 792 (aircraft/spacecraft vehicles and parts

thereof), 334 (petroleum oils, other than crude) and 743 (pumps, compressors and fans)

each contributing between 1 and 2 index points. The contribution of Peru’s overlapping

product groups to its WESI in the U.S. market is less evenly distributed. Whereas the

SITC group 845 (articles of apparel not elsewhere specified) accounts for 6.5 index

points, the product group 843 (men’s and boys’ apparel, knitted or crocheted) accounts

for only 2.5 index points. In the range between the product groups 334 (petroleum oils,

other than crude), 682 (copper) and 844 (women’s and girls’ apparel, knitted or

crocheted) are to be found. The highest contributions to the Costa Rican WESI range

between 1.6 and 3.8 index points and are accounted for by the product groups 872

(instruments and appliances for medical or surgical purposes), 844 (women’s and girls’

apparel, knitted or crocheted), 759 (parts and accessories for office and data-processing

machines), 841 (articles of apparel for men and boys) and 629 (articles of rubber).

Chile’s biggest overlaps in export structure according to its WESI are to be found in the

groups of 682 (copper), 522 (inorganic chemicals), 334 (petroleum oils, other than

crude), 057 (fruit and nuts) and 512 (alcohols and phenols) each contributing between

0.6 and 2.3 index points.

As was highlighted earlier there are crucial differences in the equations for the index

values of the ESI and WESI. In a few cases these differences led to significantly

different values for the two indicators, demonstrated par excellence by the cases of

Costa Rica and Peru in the Korean market. In order to give a brief summary of the

section’s findings it seems to be necessary to take a decision on the question which


results should be emphasized at this point. Generally the method of the ESI is found to

be more straightforward for comparing export structures due to its characteristic of

abstracting from the countries’ economic sizes.

Therefore the conclusions this section offers are the following. Comparing the overlap

in export structures Costa Rica and Mexico are found to exhibit the most similar export

structure with the U.S. in the Korean market. However, since their ESI values are

significantly lower than the benchmark country’s (Japan’s) ESI value, it is assumed that

Costa Rica and Mexico will face only a moderate increase in overall competition due to

the KorUS FTA in the Korean market. Both countries owe the largest share of their

export structure overlap to the area of machinery and transport equipment. Whereas

Mexico’s ESI value in the Korean market is due to an overlap of a broader range of

product groups, Costa Rica’s export structure overlap with the U.S. is mainly accounted

for by a common specialization in SITC product group 776 composed of thermionic and

cold cathode valves and tubes, diodes and semiconductor devices. In the U.S. market in

general the overlap in export structure with Korea is found to be slightly higher. Due to

its relatively large overlap in export structure Mexico is likely to be affected by an

increase in competition with Korea and Brazil and Costa Rica might face a moderate

increase in competition in the U.S. market. As Korea exports a lot within the section of

machinery and transport equipment, it was to be expected that the countries with higher

ESI values owe the lion’s share of their index points to this area. Export product groups

that are important contributors to their ESI values are cars and motor vehicles as well as

parts thereof, office and data-processing machines and parts thereof and

telecommunications equipment. For Costa Rica, again, the SITC product group 776

played an important role.

By including an element to introduce the weight of different export product groups for

the overall exports to a market, however, the WESI gives valuable input. Actually,

increased competition in an important sector (according to its weight in the export

volume) can temporarily pose a significant challenge for an economy. The WESI draws

attention to the fact that this might be the case for some countries in the Latin American

region that will not be affected by an overall increase in competition, but instead by a

significant increase in competition limited to a very specific segment of their exports.


To further investigate this issue in the following section an addition indicator is

introduced to identify sensitive sectors in more detail.

2.3.5 Competitiveness of Latin American Exports

The last section presented an analysis of the extent of the overlap in export structures of

the KorUS FTA trade partners and selected Latin American countries for the U.S. and

Korean market. Furthermore it highlighted some sectors that contribute more than

others to the identified overlap. Focusing more closely on the degree of competition that

might be expected for certain sectors an additional indicator measuring the intensity of

trade specialization and the degree of competitiveness of a country in a certain market is

introduced in the following.

The Index of Revealed Comparative Advantage (RCA) was introduced by Balassa in

1965 (Benedictis and Tamberi 2001, p. 3). The index is calculated as the share of a

certain product in a country’s total exports divided by the world’s share of the product

in total worldwide exports (World Bank 2008). Therefore RCA measures if a product is

more important or less important in a country’s export basket than it is on average for

countries worldwide. If the RCA for a country’s product assumes the value of 1 the

product has the same importance in the country’s export basket as it has on average

worldwide. If the RCA assumes a value higher than unity, the country is said to have a

revealed comparative advantage in this product and a value less than unity represents a

revealed comparative disadvantage for exporting the product. The respective advantages

and disadvantages are said to be ‘revealed’ advantages/disadvantages because they are

not derived theoretically, but observed in and calculated from actual trade data. The

trade specialization shown by the RCA for a country’s products can also be a result of

increased competitiveness due to trade policy distortions. For the analysis at hand,

however, it does not matter which causes led to a country’s RCA profile.

The purpose of this section is to identify areas where both the U.S./Korea and the

selected Latin American countries have comparative advantages in the Korean/U.S.

market. These areas of specialization might be the areas where competition will get

especially fierce as the respective trade partner might gain preferential market access

under the KorUS FTA. Since the interest of the analysis lies in specific markets the

countries’ RCA profiles are calculated only for trade flows to these specific markets


sometimes referred to as ‘local’ RCA. Due to questions of data availability5 RCA is

calculated for data on U.S. imports so that the equation used is

RCAij = (Mji/M ti) / (Mjn/M tn)

where M ji are Korean (U.S.) imports of product j from country i, M ti are total Korean (U.S.) imports from country i, M jn are Korean (U.S.) imports of product j from all countries and M tn are Korean (U.S.) total imports.

Calculations are based on data from UN Comtrade in the classification of SITC Rev.3

on a three digit level and as an average of imports between 2004 and 2006 to reduce

distortions due to annual fluctuations.

When analyzing of the competitiveness of Brazilian, Chilean, Costa Rican, Mexican

and Peruvian exports to the Korean market the first thing to note is that the number of

competitive U.S. exports to the Korean market largely exceeds the number of

competitive Latin American exports. Whereas the U.S. exported 115 product groups

competitively to the Korean market, Mexico exported only 55 product groups with a

RCA above unity, followed by Brazil with 31, Peru with 18, Chile with 17 and Costa

Rica with 15 export product groups.

For all of the selected Latin American countries the most competitive exports are

mainly related to natural-resources. Copper, ores and concentrates of different metals

and minerals, as well as agricultural products rank high in the list of competitive export

product groups. Brazil’s third most competitive export product group in the Korean

market, however, are motor vehicles for the transport of goods (SITC group 782) and

Chile, Mexico and Peru have one out of their five most competitive export product

groups in the area of chemicals (SITC section 5). Costa Rica, in addition to its

agricultural exports, is very competitive in the manufacturing of clothing accessories of

textile fabrics.

5 UN Comtrade does not provide aggregate world exports to the Korean/U.S. market. Therefore the reversed perspective of the same trade flow (Korean/U.S. imports from the world) is used as the next best substitute for obtaining UN Comtrade data.


Highest Latin American RCAs in the Korean Market

Table 18: Highest Latin American RCAs in the Korean Market; Source: author’s calculations, based on UN Comtrade data.

The extent to which Latin American countries have competitive export product groups

in common with the U.S. differs significantly. Whereas Mexico has 24 product groups

among its exports for which the U.S. as well as itself holds a RCA above unity, Peru

shows only three such groups. Brazil with 16, Chile with 10 and Costa Rica with 11

overlapping competitive product groups showed values in between. Subsequently,

Mexico will face increased competition due to the implementation of the KorUS FTA in

various segments of its economy, whereas Peru will be affected according to RCA

measures mostly in the areas of feeding stuff for animals, ores/concentrates of base

metals and crude animal materials.

RCASITC

CommodityCode

CommodityDescription

Brazil 37.6 281 iron ore and concentrates

33.0 059 fruit juices

28.1 782 motor vehicles for transport of goods

26.9 222 oil-seeds

21.0 121 tobacco, unmanufactured

Chile 41.1 283 copper ores and concentrates

35.5 682 copper

10.0 012 other meat

8.7 287 ores/concentrates of base metals

7.8 512 alcohols, phenols

Costa Rica 28.2 071 coffee and coffee substitutes

19.9 292 crude vegetable material, n.e.s.

17.1 111 non-alcoholic beverages


11.3 846 clothing accessories of textile fabrics

Mexico 37.7 278 other crude minerals

14.8 579 waste/scrap of plastics


12.0 288 non-ferrous base metal waste/scrap

11.4 682 copper

Peru 85.6 287 ores/concentrates of base metals

34.2 283 copper ores and concentrates

33.9 071 coffee and coffee substitutes

31.6 037 fish/crustaceans, prepared or preserved

16.3 532 dyeing and tanning extracts


RCAs Shared by the U.S. and Latin American Countries in the Korean Market

Table 19: RCAs Shared by the U.S. and Latin American Countries in the Korean Market; Source: author’s calculations, based on UN Comtrade data.

Shared RCAs are not distributed evenly across the different SITC sections. Brazil holds

its highest number of competitive export product groups within the section of food and

live animals. All countries show various shared RCAs within the section of crude

materials, but only Mexico and Costa Rica show a significant number of competitive

export product groups in common with the U.S. in the areas of machinery and transport

equipment and miscellaneous manufacturing. Mexico also faces increased competition

with the U.S. in various chemical products.

SITCCode


U.S. Brazil ChileCostaRica

Mexico Peru

012 other meat 1.8 1.7 10.0 3.8017 meat/offal, prepared 1.7 1.5024 cheese and curd 1.5 4.4025 eggs, fresh, dried or preserved 3.2 2.3044 maize, unmilled 4.2 12.1057 fruit and nuts 3.8 6.1059 fruit juices 2.9 33.0 1.1 15.2062 sugar confectionery 1.2 2.3 10.0073 chocolate and preparations 2.7 2.2081 feeding stuff for animals 1.4 19.0 2.9 1.9098 edible products and preparations 2.2 2.1111 non-alcoholic beverages 4.9 17.1121 tobacco, unmanufactured 1.7 21.0 1.7222 oil-seeds 4.6 26.9246 wood in chips/particles, wood waste 1.8 3.2251 pulp and waste paper 2.2 6.6 7.3263 cotton 3.6 9.9 1.4267 other fibers 1.3 2.3277 natural abrasives, n.e.s. 1.6 1.2287 ore/concentrates of base metals 1.0 8.7 12.2 85.6288 non-frrous base metal waste/scrap 2.6 4.4 12.0291 crude animal materials 1.5 5.6 3.6 2.7411 animal oils and fats 2.1 3.8512 alcohols, phenols 1.1 2.3 7.8513 carboxylic acids 1.0 1.1 1.9515 organo-inorganic compounds 1.3 2.6523 metal salts, peroxysalts 1.2 2.4 4.6541 medicinal/pharmaceutical products 1.6 2.6542 medicaments (incl. veterinary) 1.0 1.6 2.4573 polymers of vinyl chloride 1.9 1.3696 cutlery 2.6 4.2722 tractors 1.0 13.0747 taps, cocks, valves for pipes 1.4 1.4762 radio-broadcast receivers 1.1 9.4764 telecommunications equipment 1.4 2.5 7.1776 tubes, diodes, semiconductor devices 2.0 7.2784 parts of motor vehicles 1.3 1.1872 instruments for medical purposes 3.0 3.1 1.6873 meters and counters 1.4 1.7874 measuring instruments, n.e.s. 2.5 2.2 3.0884 optical goods, n.e.s. 1.8 1.1931 special transactions not classified 3.7 1.9


In contrast to the situation in the Korean market in the U.S. market Latin American

countries exhibit a higher number of competitive exports. With its 84 competitively

exported product groups for the case of Brazil and 70 competitive product groups for

the case of Mexico these two countries even show a number that exceed the number of

competitive Korean export product groups in the U.S. market. Chile holds a RCA above

unity for 41 product groups exported to the U.S. market, Peru for 40 and Costa Rica for

37 export product groups.

Highest Latin American RCAs in the U.S. Market

Table 20: Highest Latin American RCAs in the U.S. Market; Source: author’s calculations, based on UN Comtrade data.

The export product groups for which the selected Latin American countries hold the

highest RCAs fall predominantly in natural resource-based areas such as agricultural

products, crude materials and different metals. Mexico, however, holds three out of its

five highest RCAs in product groups from the miscellaneous manufacturing and the

machinery and transport equipment section.

RCASITC

CommodityCode


Brazil 24.2 281 iron ore

23.8 017 meat, preserved

19.8 121 tobacco, unmanufactured

19.7 671 iron granulates

14.6 345 other gases

Chile 113.0 044 maize, unmilled

58.6 682 copper

45.9 057 fruit and nuts

43.1 287 cores/concentrates of base metals

42.2 034 fish, fresh, chilled or frozen

Costa Rica 47.9 057 fruit and nuts

23.4 071 coffee and coffee substitutes

20.8 872 instruments for medical purposes


12.8 292 crude vegetable material, n.e.s.

Mexico 9.1 283 copper ores

5.8 873 meters and counters

5.6 054 vegetables

5.4 773 equipment for distributing electricity

4.6 761 television receivers

Peru 144.4 687 tin

96.4 971 gold, non-monetary


29.3 685 lead

28.7 682 copper


RCAs Shared by Korea and Latin American Countries in the U.S. Market

Table 21: RCAs Shared by Korea and Latin American Countries in the U.S. Market;

Source: author’s calculations, based on UN Comtrade data.

The number of shared RCAs between Korea and the selected Latin American countries

in the U.S. market differs widely. Brazil and Mexico export 16 and 15 product groups

respectively with a RCAs above unity and in common with Korea in the U.S. market.

The number of shared RCAs between Korea and Costa Rica as well as Peru is limited to

six while Chile shares only two competitive export groups with Korea in the U.S.

market.

Regarding the distribution of shared RCAs between Korea and the selected Latin

American countries it is noteworthy that most export product groups with shared high

SITCCode


Korea Brazil ChileCostaRica

Mexico Peru

098 edible products and preparations 1.2 1.0

122 tobacco, manufactured 2.0 1.3 1.1

232 synthetic rubber 3.1 4.1 1.1

289 ores of precious metals 1.9 1.1 3.4 8.9 1.3

334 petroleum oils, other than crude 1.1 1.2 3.5

335 residual petroleum products 1.1 1.7

511 hydrocarbons 3.1 4.6

531 synthetic organic colouring matter 1.4 1.4

572 polymers of styrene 5.1 2.6

574 polyacetals, other polyethers 2.2 1.6

625 rubber tires 3.5 1.7 1.4 3.5

651 textile yarn 2.0 1.5 1.3

652 cotton fabrics, woven 2.8 1.0

657 special yarns 1.7 2.0

673 flat-rolled products of iron, not clad 3.8 2.7

674 flat-rolled products of iron 3.8 4.2

678 wire of iron or steel 3.4 1.1

679 household equipment of base metal 2.5 1.5

691 structures of iron 1.6 1.2

693 wire products 4.8 1.3

696 cutlery 1.1 1.7

711 steam/vapour-generating boilers 3.3 1.1

722 tractors 1.6 1.8

723 civil engineering equipment 2.1 3.3

741 heating and cooling equipment 1.5 2.5

746 ball- or roller bearings 1.0 2.1

759 parts/acc. of office/data-proc. machines 2.4 3.3

761 television receivers 1.5 4.6

762 radio-broadcast receivers 1.1 2.4

764 telecommunications equipment 4.6 1.4

775 household-type equipment 3.6 2.0

776 tubes, diodes, semiconductor devices 4.5 6.0

778 electrical machinery 1.3 2.1

784 parts of motor vehicles 1.2 1.3 1.8

846 clothing accessories of textile fabrics 3.8 11.7


RCAs fall within the sections of manufactured goods chiefly classified by material and

machinery and transport equipment. It is mostly Brazil and Mexico that will compete in

these different product groups with Korea. Brazil and Mexico can therefore expect to

face fiercer competition in various sectors due to the implementation of the KorUS

FTA. Countries like Peru and Costa Rica will probably be affected in only very few

sectors. Nevertheless, adverse effects of the KorUS FTA in the U.S. market might be

felt by Peru e.g. in the sector of textile yarns and cotton fabrics and by Costa Rica

foremost in the field of tubes, diodes and semiconductor devices and parts and

accessories of office and data-processing machines.

2.3.6 Conclusions

Considering the value of exports and the share of total exports destined to the Korean

market, Korea seems to be a little explored market for Latin American countries. Chile

and Brazil are the only two countries that had significant exports to Korea in 2006 and

together accounted for more than 70% of Latin American exports the Korean market.

From the Korean perspective Latin America also does not seem to be an important

source for imports. However, Latin American exports to Korea have been growing

strongly over the last decade. In fact, Latin American exports grew at a faster pace than

U.S. or Japanese exports to the Korean market. Although the extent of immediate trade

diversion due to the KorUS FTA possibly affecting Latin American countries seen as

the sum across all sectors is most likely of a minor significance, the FTA might hamper

the chances of further export expansion and diversification in the future.

An analysis of import shares in the Korean market reveals that Latin American

countries hold considerable import shares in the areas of crude materials and

animal/vegetable oils. Overall the region seemed to be specialized largely towards

natural resource-intensive industries. Brazil, Chile and Peru generally follow this trend.

Mexico, Costa Rica and to some extent Brazil have found areas of specialization also in

machinery and transport equipment as well as in some manufacturing areas. Taking a

look at export diversification from a qualitative point of view all Latin American

countries compared to the U.S. had rather poorly diversified export baskets in the

Korean market. Mexico and Brazil, however, reached significantly higher levels of

export diversification than Chile, Costa Rica and Peru. The analysis of export

concentration shows that Latin American exports to the Korean market are heavily


concentrated in only a few dominant product groups that make up the lion’s share of

total exports. These product groups mostly fall within natural resource-based and

related areas with Costa Rica being the exception with its top exports concentrated in

the area of machinery.

According to the ESI as a measure for an overlap in export structure Costa Rica and

Mexico are found to exhibit the highest similarity to the U.S. in the Korean market,

mostly due to their overlap in machinery and transport equipment. Whereas Mexico

showed a broader range of overlapping product groups, Costa Rica’s overlap is largely

due to its specialization on tubes, diodes and semiconductor devices for the Korean

market. This finding was also reconfirmed for the number of sectors with shared RCAs

in the Korean market, which are more numerous for the case of Mexico and jointly with

Costa Rica’s shared RCAs to be found in the less natural resource-related areas.

Contrastingly, Brazil’s Chile’s and Peru’s competitive export groups lie in natural

resource-intensive areas and Peru’s exports are even restricted to only three different

competitive export groups.

The U.S. market, in contrast to the Korean market, currently plays a very important role

as a destination for Latin American exports. Especially Mexico that is connected to the

U.S. via NAFTA exports very much to the U.S. seen both in terms of value of exports

and share of total exports and actually accounts for almost 70% of the region’s exports

to the U.S. market. Many countries in the Latin American regions depend significantly

on exports to the U.S. market as they direct very high shares of their total exports to this

market. From the U.S. perspective Latin America as a region is also an important

supplier for U.S. imports, seen individually, however, only Mexico accounts for a quite

large share of U.S. imports. Latin American exports to the U.S. market grew strongly

over the last decade, although the pace of export growth has slowed down a little over

the past years. Due to its currently outstanding importance as a destination for Latin

American exports and the countries’ dependence on these exports the Latin American

region stands to lose much from the possible impact of the KorUS FTA.

Similarly as in the Korean market Latin America’s exports to the U.S. market were

specialized predominantly in natural resource-intensive industries as well. The analysis

of import shares revealed high import shares for the area of food and live animals. Only


Mexico, Brazil and Chile showed significant shares in manufactured goods and

machinery and transport equipment in the U.S. market. Measuring export diversification

in terms of product penetration it is noteworthy that Latin American countries show

much more diverse export baskets in the U.S. market than in the Korean market. But

just like it is the case for the Korean market Mexico and Brazil reached a significantly

higher level of export diversification than Chile, Costa Rica and Peru. Mexico’s and

Brazil’s level of product penetration actually exceeds Korea’s level of product

penetration in the U.S. market. The dependence on certain product groups due to a high

concentration of exports is found to be lower in the U.S. than in the Korean market as

well, especially for Mexico and Brazil. The mix of important export groups was also

more heterogeneous: Many top export groups fall within natural resource-based and –

related areas, but there are also product groups from the section of machinery and

transport equipment to be found. This could be noted mainly for the case of Mexico, but

also to some extent for the cases of Brazil and Costa Rica.

In general the selected Latin American countries showed a higher degree of similarity in

exports structure with Korea in the U.S. market than with the U.S. in the Korean

market. The highest overlap in export structure exhibits Mexico, which is expected to be

significantly affected by the implementation of the KorUS FTA. But also Brazil and

Costa Rica might face a moderate increase of competition in the U.S. market due to

their similarity in exports structure with Korea. Their higher overlap in export structure

is a result of overlapping export product groups predominantly within the section of

machinery and transport equipment, with special relevance of the automotive sector, of

office and data-processing machines and telecommunications equipment. In the case of

Costa Rica the product group of tubes, diodes and semiconductor devices, for which it

also exhibits a strong shared RCA with Korea in the U.S. market, plays an important

role as well. According to the analysis of shared RCAs, areas of increased competition

in the U.S. market due to the implementation of the KorUS FTA will mainly arise

within the SITC sections 6 (manufactured goods chiefly classified by material) and

SITC section 7 (machinery and transport equipment). In these areas especially Mexico

and Brazil might face increased competition and to some extent Costa Rica as well. Of

special importance to Mexico might be the increased competition for

telecommunications equipment and sound-recording and reproducing apparatus, while


Brazil might be affected e.g. with regard to iron products. Contrastingly competition is

likely to be experienced by Peru in a rather restricted way in areas such as textile yarns

and cotton fabrics.

The analysis of dynamics, composition and structure as well as common areas of

specialization with regard to the respective KorUS FTA member country in the Korean

and U.S. market showed that generalizations on the effects of the proposed FTA on

Latin America are not advisable. As the analysis revealed different countries are likely

to be affected to different extents, in different segments of their economies and in

different ways by the proposed FTA.

3 The Nature of International Trade Relations Under Construction

As the first chapter has highlighted one of the distinguishing characteristics of the last

decade has been the accelerated global proliferation of PTAs. These agreements,

however, do not stand in isolation. Looking at the reality of trade relations today we

observe neither a world with an exclusive net of preferential trade agreements nor a

world with trade relationships exclusively governed by multilateral negotiations. While

countries negotiate bilateral agreements like the KorUS FTA with their specific effects

on third parties, the official multilateral Doha Development Round of negotiations in

the WTO is dragging on. We observe that PTAs exist along parallel lines to the

multilateral framework of the WTO. One could also say that PTAs are embedded in the

multilateral framework of the WTO through the provisions of GATT article XXIV,

GATS article V and the Enabling Clause. As both strategies claim to pursue the same

goal of raising world welfare by liberalizing trade the following section presents the

pros and cons of regionalism6 and multilateralism7 as an approach to the international

liberalization of trade. Can one approach be said to be the superior construction plan for

structuring a country’s international relations with its trading partners?

6 In accordance with a definition given by Winters (1996, p. 2) in the following the term ‘regionalism’ is used to describe “any policy designed to reduce trade barriers between a subset of countries” regardless of their actual proximity in a strictly geographic sense.

7 In the following the term ‘multilateralism’ is used as an opposing term to ‘regionalism’. It describes an individual country’s behavior with respect to the degree of absence of discrimination in its trade policy, the “extent to which the country’s trading regime approximates free trade” (Winters 1996, p. 3) and the extent to which a country seeks to resolve questions of trade policy in multilateral fora like the WTO.


Since regionalism and multilateralism exist at the same time the question if and how

these two strategies interact gains special importance as well. In a discussion paper on

the extent and nature of modern PTAs and their significance as a policy instrument

Fiorentino et al. (2006, p. 1) note that:

“The significance of the phenomenon should not be overlooked since it will ultimately influence the nature of international trade relations and the policy choices and behaviour of the operating actors.”

Do regional and multilateral negotiations mutually reinforce each other and lead to an

overall faster accomplishment of international trade liberalization? Or does the

occurrence of one strategy obstruct progress under the respective other form of

negotiation? The second section of this chapter addresses these questions and presents

some relevant contributions to the literature on the interaction of regionalism and

multilateralism.

Furthermore this chapter concludes with the presentation of a policy options that has

been suggested in the 1990s: The concept of ‘open regionalism’. As this concept has

been announced as an approach to reconcile regionalism and multilateralism it is of

special interest within the context of this chapter. After giving an introduction to the

basic definitions and concepts the feasibility of reconciling regionalism and

multilateralism through the application of this specific policy option is assessed and

supplemented by further suggestions for reform put forward in the literature.

3.1 Is There a Superior Construction Plan?

When liberalizing trade countries have three basic strategies they can pursue with

respect to their behavior towards their trade partners. They can focus primarily on

multilateralism where countries negotiate multilaterally in fora such as the WTO to

lower their trade barriers, generally based on the principles of MFN treatment and

reciprocity. Secondly, countries have the option to liberalize trade unilaterally, which

means they lower or eliminate trade barriers independent of their trading partners’

behavior and not linked to reciprocity. This option, however, is hardly chosen by

countries since in most cases reciprocity is seen as an important contribution to

optimizing outcomes by liberalizing trade in both directions. Deardorff (2007, p. 21)

e.g. advises countries with already low tariffs to keep their “low tariffs as bargaining

3 The Nature of International Trade Relations Under Construction 73

chips” for future negotiations. As these days the option of unilateral liberalization is

rarely chosen it is to some extent removed from the focus of this chapter. A third option

for countries that wish to liberalize trade with their trading partners is to enter into

preferential agreements with some of them. Thereby the PTA partners lower or remove

barriers between each other, but measures of protection remain in place with regard to

third parties. Compared to the lowering or removal of trade barriers to the same extent

on a multilateral level, regionalism therefore leaves the world farther away from the

ultimate goal of global free trade. But if this is the case, we must raise the question why

countries increasingly pursued the regional option in the past decade.

According to orthodox trade theory it is usually agreed that global free trade is the best

option for reaching optimum welfare worldwide. The existence of preferences under

PTAs for some countries and elements of protection (be it through tariffs or non-tariff

measures such as rules of origin or differing sanitary and phytosanitary measures)

therefore leaves the world as a whole at an inferior welfare position. However, it is

usually acknowledged that this conclusion is drawn under the assumptions of perfect

competition in all national and international commodity and factor markets. If one or

more of the assumptions is violated (which a look at the economic reality today will

reveal is the case more often than it is not), the conclusions might be different. For cases

in which a first-best solution (global free trade as a Pareto-optimum) cannot be reached

because the conditions are not fulfilled, the theory of second-best (Gandolfo 1998, pp.

193-195) seeks to find the next best situation. The essential principle of this theory is

that in a situation in which one or more conditions for the Pareto-optimum are violated,

the second-best situation is not necessarily the situation in which all the remaining

conditions are fulfilled (Kreinin and Plummer 2002, p. 5).

Applying the theory of second-best to the controversy surrounding regionalism and

multilateralism it implies that in a world of imperfect competition, distortions and

barriers to trade the removal of some protection does not necessarily lead to a better

outcome for world welfare. And it equally means that the introduction of some elements

of protection does not necessarily lead to a deterioration of world welfare. As Gandolfo

(1998, p. 193) states:

“[…] the elimination of one or more of these restrictions does not necessarily mean the achievement of a better situation, and the introduction of one or more further


restrictions does not necessarily mean a deterioration of the situation but, paradoxically, might even lead to a better situation, though still suboptimal.”

In the light of the theory of second-best it is therefore not advisable to judge a priori and

in general on the outcomes of multilateralism and regionalism as strategies for

international liberalization. Thus, there is a need to debate each proposed step into the

direction of trade liberalization and evaluate if and how the road to global free trade is

to be traveled on. Consequently, this section considers both multilateralism and

regionalism as valid approaches to structure international trade relations and tries to

highlight the respective advantages claimed by proponents and disadvantages adverted

to by opponents.

One of the merits claimed by proponent of regionalism is that it leads to freer trade as it

removes trade barriers between a subset of nations. Thereby it gives incentives to non-

members to offset their losses by either joining an existing PTA or engaging in

negotiation with other excluded countries, which creates a domino effect leading to

increasingly freer trade (Hallaert 2008, p. 13; Majluf 2004, p. 1).

Supporters of regionalism also put forward that regional trade negotiations show a

higher efficiency and ensure lower negotiation costs. Due to a smaller number of

participants negotiations are less complex and can achieve faster agreements of a wider

scope than achievable on a global level (Kaiser 2002, p. 109; Kuwayama et al. 2005, p.

11). Due to a possibly lower degree of diversity among the members of regional

initiatives a regional institutions are easier to sustain than multilateral ones (De Melo et

al. 1993, p. 188) and though issues might be solved regionally that cannot be solved at

the multilateral level (Schiff and Winters 2003, p. 241).

Regionalism can also lead to more efficient outcomes in the area of public policy when

considering overall national welfare because decision-making might be less responsive

to factional interests. If special interests appear concentrated in one or a few countries,

they will have a lesser weight in decision-making as they are reduced to a smaller part

of a new, enlarged whole (Kaiser 2002, p. 118). De Melo et al. (1993, p. 183) call this

the ‘preference-dilution effect’ of regional integration. Furthermore, regionalism might

allow for the design of better institutions in case supranational institutions are created

since these can be designed from scratch.


An additional advantage of regionalism over multilateralism is frequently seen in lower

monitoring costs and better enforceability of sanctions. As there are fewer participants

in regional agreements it is easier to detect breaches of the agreement’s provisions and

free-rider behavior by individual countries. And in case a country does violate the terms

of a PTA the smaller number of participants facilitates the coordination and

enforcement of sanctions (Kaiser 2002, pp. 111-113; Carlowitz 2003, pp. 157-158).

There is also the possibility that regionalism diminishes protectionist pressures and

enables the lowering of external trade barriers of the region. This effect can result from

the promotion of gains in efficiency for private businesses through increased

competition on a regional level (Kaiser 2002, p. 118) and the realization of lower cost

production, if production technologies and the larger market size allow for a

reorganization of operations (Chase 2005, pp. 25-27).

Furthermore, it is often proposed that regionalism offers benefits to developing

countries in several areas. As Majluf (2004, p. 7) highlights regional integration usually

creates the expectation of increased FDI flows into and within the integration area,

which might be beneficial for investment in developing countries. In addition,

regionalism can lead to the pooling of sovereignty that enhances the capacity of

developing countries to achieve sufficient leverage to influence negotiation outcomes

and therefore improves their collective bargaining position (Kuwayama 1999, p. 18;

Pizarro 1999, p. 9). Pizarro also mentions that regionalism creates the opportunity for

developing countries to buy time for the reorganization of their sectoral policies on a

regional level before opening trade multilaterally.

Last but not least there are also non-economic effects that are put forward by the

proponents of regionalism. These include but are not limited to the strengthening of

democracy (if a prerequisite for membership in a regional initiative) or the promotion of

peace and the elimination of border disputes (Kuwayama 1999, p. 19). The

strengthening of security and military alliances is frequently mentioned as well

(American Chamber of Commerce in Korea 2007).

Equally, the opponents of regionalism find many arguments for their position. They

argue that by introducing preferences regionalism entails discrimination and the

violation of the MFN principle (Schiff and Winters 2003, p. 224). Furthermore some


stress that in contrast to the multilateral system preferences granted under PTAs are

uncertain and temporary in nature due to preference erosion through the proliferation of

PTAs (Hallaert 2008, p. 18). Many opponents also advert that regionalism is not a faster

way to liberalization than multilateralism. They claim that, when considering only the

time of actual and serious negotiation, multilateral rounds advanced at the same pace as

bilateral negotiations. And furthermore regional agreements often seem to be signed

fast, but with a closer look one can detect that in practice they usually draw on periods

for phasing-in of tariff concessions or their implementation lags behind (Carlowitz

2003, p. 154-155).

Most opponents of regionalism fear that it might lead to an increase of external barriers

of the integration area as lobby groups might seek to offset increased competition

among PTA members with the introduction of new areas or measures of protection

against outside countries (Bhagwati and Panagariya 1996, p. 20). Although the WTO

framework limits the possibilities of integration areas to increase their level of external

protection, there are some options for doing so. Countries might e.g. declare certain

areas to be “sensitive sectors” in need of protection, introduce protection via rules of

origin or implement anti-dumping measures or subsidies (Kaiser 2002, p. 115-116).

Regionalism also has the potential to lower lobbying costs for protection if special

interests are evenly spread over different countries and a customs union is formed since

in this case lobbying can be limited to the supranational level. If unanimity is required

at the supranational level of an integration area increased protection can additionally

result from the practice of ‘log-rolling’ in the consensus building process (Kaiser 2002,

p. 116-117). Since an enlargement of the integration area might further increase intra-

regional competition and benefits might be derived from the exploitation of outside

countries via terms of trade gains the current members of a regional initiative also have

incentives to block new members (Schiff and Winters 2003, p. 231).

A strong concern to opponents of regionalism is that the proliferation of PTAs opens the

possibility to pursue strategic interests for developed countries. They might wish to

“establish spheres of influence” in trade policy and other areas via the selective

implementation of PTAs (Majluf 2004, p. 1). Bhagwati and Panagariya (1996, p. 29)

also stress the ability of hegemonic powers to negotiate sequentially with smaller

countries thereby reaping greater concessions from their partners in exchange for


market access through a PTA. Schiff and Winters (2003, p. 241) join in this argument

by stating that agreements negotiated bilaterally between a big power and smaller

countries might be less beneficial for the latter than those achieved multilaterally

because smaller countries are put under competition. Majluf (2004, p. 5) notes that the

recent proliferation of PTAs and the inherent “fear of exclusion” might lead countries to

join bilateral agreements under greater concessions.

Opponents of regionalism often alert that bilateral agreements are used by developed

countries for the setting and spreading of specific standards. A strong tendency to

include ‘behind-the-border’ issues such as the protection of intellectual property rights

and labor and environmental standards in bilateral agreements might create blueprints

for the multilateral level without the participation and input of developing countries. As

an increasing number of countries has conceded non-trade provisions in their PTAs,

resistance to their incorporation on the multilateral level is likely to diminish

(Kuwayama et al. 2005, p. 12). Majluf (2004, p. 8) criticizes this behavior as “rule-

making […] through a bottom-up approach […] with profound implications for the

possibilities of developing countries effectively to influence the setting of multilateral

norms and disciplines.” This tendency can reduce policy space for development-

oriented policies enjoyed by developing countries.

Development problems associated with the proliferation of PTAs might also arise in

other areas. Regionalism might create a hub-and-spokes system (Hallaert 2008, p. 7) in

which “the hub (the U.S. or the EU for example) benefits more from the agreement than

the spokes” (the various bilateral partners in a PTA). While the spokes are gaining

market access only to the hub and are competing against each other in this market

(ZIMMERMANN 1999, p. 29), the hub enjoys market access to all spokes and

investment may be diverted to the hub. This development might aggravate existing

imbalances. The competition among developing countries to attract FDI might as well

result in subsidy wars among them that leave all countries worse off than with a

multilateral negotiation outcome (Majluf 2004, p. 7).

Regionalism furthermore promotes the possibility of the creation of incompatible

regulations. This effect known as the “spaghetti bowl” phenomenon (DAS 2004, p. 22)

affects all countries by introducing multiple tariff rates for multiple trade partners under


multiple schedules and with multiple rules of origin, but might especially burden

developing countries with less administrative capacities (Kuwayama 2005 et al., p. 11).

The proliferation of PTAs therefore significantly increases the complexity of trade

relations and thereby induces higher transaction costs that could be avoided to a large

extent by pursuing multilateral liberalization.

As the contemplation of the advantages and disadvantages of regionalism has shown

there are many arguments for pursuing as well as for rejecting trade liberalization on a

regional level. A preference for relying on multilateralism exclusively as well as the

attempt to supplement it with bilateral or plurilateral initiatives has its respective

strengths and weaknesses. An additional criterion to keep in mind when taking this

decision, however, is to which way regionalism and multilateralism interact.

3.2 PTAs: Building Blocks or Stumbling Blocks?

Although the contemplation of the advantages and disadvantages of regionalism as an

approach for trade liberalization already makes for much food for thought and

investigation it is not sufficient to stop at this stage. It is also crucial to take into account

in how far the two strategies interact. Does the pursuance of regional initiatives reduce

the possibilities to achieve meaningful multilateral trade liberalization? Or do the two

approaches mutually reinforce each other?

One of the earlier contributions adverting about the possibility that an interaction

between regionalism and multilateralism is to be expected if both paths are traveled on

at the same time was made by Bhagwati and Panagariya (1996, pp. 22-29). They argue

that the focus of traditional Vinerian customs union theory was on the static welfare

effects of regionalism (see also section 1.3). This view of regionalism therefore does not

properly address neither the dynamics of regionalism nor the interaction of both

strategies towards global trade liberalization. They propose that both elements should be

included into the evaluation of the strategies. Figure 11 shows the possible dynamics of

regionalism towards freer trade and world welfare maximization. Starting at point U0

PTAs either contribute to overall welfare (U2p) or have an immediate negative welfare

impact (U1p) (static effects). From there they either show stagnating membership (paths

II and III) remaining at their respective level of initial welfare or they improve world

welfare by expanding membership (paths I and IV) in the end reaching the optimum


level of welfare at U*. Multilateralism seen as an independent process travels its

separate path that at any moment in time can be either superior or inferior to the level of

welfare reached by the different paths of regionalism. Due to free-rider problems the

maximum level of welfare that can be achieved by process multilateralism is Um.

Bhagwati and Panagariya argue that this ‘dynamic time-path question’ is to be held

more important than the static effects of regionalism and is a starting point for the

analysis of the question whether PTAs are ‘building blocs’ or ‘stumbling blocs’. They,

however, alert that this simple model of the coexistence of regionalism and

multilateralism still falls short on the inclusion of the interaction between regionalism

and multilateralism.

Static Impact and Dynamic Time-Paths of Regionalism

Figure 11: Static Impact and Dynamic Time-Paths of Regionalism; Source: Bhagwati and Panagariya 1996, appendix fig. 8.

Winters (1996) prepared a valuable summary and classification of the earlier models

introduced to investigate the interaction between regionalism and multilateralism. In his

contribution he classifies models according to whether the models’ agents focus on

national welfare or other criteria derived from political considerations, whether initially


blocs are considered to be symmetric or asymmetric, whether interaction occurs one

time or repeatedly and in which way preferences or behavior are aggregated.

Advantages and disadvantages for the different characteristics are highlighted and

debated. As Winters (1996, p. 56) notes “the only categorical statement that can be

made […] is that one incident of regionalism is not sufficient to undermine a relatively

multilateral system immediately.”

The proponents of the ‘building blocks hypothesis’ that believe in the mutual

reinforcement of regionalism and multilateralism often stress that there are efficiency

gains to be expected form the pursuance of regional initiatives. The argument that

multilateralism might advance faster as a consequence of the parallel pursuance of

regionalism again draws on the effects of a smaller number of participants. By splitting

negotiations into two stages (regional and multilateral) there might be less participants

negotiating multilaterally and therefore reduce the complexity of the negotiation process

(Kaiser 2002, p. 119). It is also argued that countries might accept higher levels of

obligation on the regional level and that they thereby lay the foundations for progress in

these areas on the multilateral level (Kuwayama 1999, p. 17). Schiff and Winters (2003,

p. 241) as well as Carlowitz (2003, pp. 156-157) also evoke the possibility that the

existence of regional solutions fosters a faster solution of tough issues on the

multilateral stage. Furthermore acting jointly countries connected by PTAs can exert

pressure on other participants of multilateral negotiations and thereby speed up the

negotiation progress (Kaiser 2002, p. 120).

Hnát (2008, p. 11) believes that the new wave of regionalism has the potential to first

“promote the necessary structural and economic reforms” at the national level and

subsequently “encourage progress in multilateral fora.” Supporters of PTAs also put

forward that by providing time to restructure and gain competitiveness through

temporary protection regionalism increases lobby support for multilateralism in the

long-run (Chase 2005, p. 260-261).

Other lines of argumentation see the recent wave of PTAs as a consequence of the slow

progress of the multilateral trading system. Regionalism in this logic does not replace

multilateralism, but supplements it temporarily and “can provide the needed push to the

slow-moving multilateral system” (Kuwayama et al. 2005, p. 11).


The proponents of the ‘stumbling blocks hypothesis’ that expect detrimental effects of

regionalism on multilateralism in contrast fear that expected efficiency gains through

regionalism will not materialize. They claim that two-staged negotiations are not in

themselves more liberal or less complex than one-stage negotiations since the faster

consensus on the second stage might be more than offset by problems to agree on a

common position on the fist stage (Schiff and Winters 2003, p. 238-9; Carlowitz 2003,

p. 154-155). And as most of the agreements signed during the recent wave of PTAs

have chosen the integration form of a FTA with all parties enjoying sovereignty on the

multilateral stage it is unlikely that the number of actors in multilateral negotiations will

be reduced in the near future. Carlowitz (2003, p. 155) also draws attention to the fact

that the increasing phenomenon of overlapping membership in different regional

groupings is likely to complicate the coordination of regional interests on the

multilateral stage. Countries that enjoy a dominant position in one group (e.g. the U.S.

in NAFTA) might have fewer incentives to contribute to the consensus building in other

regional groups (e.g. in APEC).

Schiff and Winters (2003, p. 241) also question whether solutions found at the regional

level are transferable to the multilateral level as they might be unsuitable for some

countries due to a higher degree of heterogeneity on the multilateral level. The

development and establishment of incompatible sets of regulation as a consequence of

the ‘spaghetti bowl phenomenon’ might also unfold a dynamic perspective. As each

party favors the set of regulations it has advanced in its PTAs, stances on the

multilateral level are likely to become increasingly rigid, which hampers multilateral

negotiations.

There is also a genuine fear among the proponents of the ‘stumbling block hypothesis’

that the continued proliferation of PTAs will lead to increasing power asymmetries.

These imbalances give larger groups the power to obstruct any progress towards

multilateral agreements that they deem unfavorable to their interests and creates the risk

of trade wars and fragmentation of the world trading system (Carlowitz 2003, pp. 152-

153). Kaiser (2002, p. 120) also highlights the risk that the pressure exerted by larger

blocks might make smaller countries lose trust in the multilateral system as a

negotiation forum.


A line of research that has made significant contributions to the debate about the

interaction of regionalism and multilateralism and that has gained much influence over

the last decade are political economy models. These models take into account that the

decision of politicians to pursue multilateralism or not is not only influenced by

considerations about national welfare, but also by the incentive to maximize his or her

support by voters and lobby groups. Results of these models tend to support fears that

multilateralism might be rendered more difficult or infeasible due to the proliferation of

PTAs. Export-oriented companies might lose interest in pursuing multilateral

agreements as the potential gains from multilateral liberalization are reduced by earlier

regional integration and they might consider regional markets to be big enough (Kaiser

2002, p. 121). Therefore the lobby for further multilateral liberalization decreases.

Andriamananjara formalizes this idea in an interesting political economy model with

imperfect competition. The model finds that “the range of multilateral tariff cuts for

which support increases shrinks both from below and from above as the degree of

preference in the PTA increases” (Andriamananjara 2000, p. 3). This is due to the fact

that the maximum level of multilateral liberalization supported by the PTA member

countries declines as the degree of preference within the PTA rises. (The potential

market access in the outside countries is less likely to compensate for the lost protection

within the integration area if preferences are high.) At the same time the minimum level

of multilateral tariff cuts supported by the outside countries increases as preferences

among the PTA members increase. (Small multilateral tariff cuts are not enough to

offset the profit losses from the PTA’s trade diversion effect and the increased

competition in the outside countries’ home markets.) As Andriamananjara’s model

shows regionalism can have a detrimental impact on the support for multilateral trade

liberalization both inside and outside the integration area.

Additionally, opponents of regionalism put forward that countries dispose of a limited

pool of negotiation resources and that the focus on regional initiative shifts resources

away from multilateral negotiations (Fiorentino et al. 2006, p. 2). The need for highly

skilled professionals participating in multiple negotiations covering more and more

topics poses an especially severe challenge for the negotiation capacities of developing

countries (Kuwayama et al. 2005, p. 11; Schiff and Winters 2003, p. 240).


In 1996 Winters mentions that the debate whether regionalism is conducive to

multilateralism or exerts a negative influence on multilateral liberalization efforts is still

a very young field of research that does not provide a definite answer yet. However, the

debate has still not produced a unanimous answer. As Gavin (2007, p. 59) puts it:

“Much ink has flowed on the question of the relationship between regionalism and multilateralism. There is still, however, no definitive answer. So the debate goes on.”

Tussie and Woods (2002, p. 18) as well as Kaiser (2002, p. 121) stress the importance

of the general environment and the attitudes of the key players towards multilateralism

for the overall outcome of the interaction between regionalism and multilateralism.

As regionalism forms part of the current economic reality and PTAs further proliferate

it seems reasonable to assume that regionalism will continue to be a dominant

characteristic of international trade relations. On the other hand multilateralism is badly

needed to take account of the smaller and developing countries vulnerabilities and

cannot simply be replaced by the intensification of regional initiatives (Kuwayama et al.

2005, p. 8). Therefore the two strategies have to find a way to work together. As

Baldwin (2008) concludes: “Since regionalism is here to stay, the solution must work

with existing regionalism, not against it.” The following section presents some policy

options that claim to contribute to this goal.

3.3 Changing the Design? An Assessment of Policy Options.

During the creation of APEC in 1989 the concept of open regionalism has been

advanced which supposedly “seeks to assure that regional agreements will in practice be

building blocks for further global liberalization rather than stumbling blocks that deter

such progress” (Bergsten 2007, p. 123). Although many regional integration initiatives

claimed to practice open regionalism the concept does not have a precise definition. It

seems to be understood as a concept that in some way relates to the relationship

established with the countries outside the integration area (Pizarro 1999, p. 5).

Garnaut (1994, p. 273-274) defines open regionalism as regional economic integration

without discrimination against economies outside the region, that can be contrasted with

the traditional form of discriminatory regionalism. He mentions three analytic elements

that are characteristic of open regionalism. Firstly, a region practicing open regionalism


has to establish open policies regarding official trade barriers. Secondly, countries have

to cooperate regionally in reducing non-official barriers to trade and, thirdly, regional

integration has to be advanced through market processes without government

intervention. The facilitation of market integration can, however, be advanced by

government policies as long as these do not involve discrimination against outside

countries. The objective is to promote regional trade by overcoming resistances to trade

such as official barriers, transport and communication costs as well as subjective

resistances related to social, psychological and institutions factors such as the

perception of risk and imperfect information (Garnaut 1994, pp. 275-276). Garnaut

(1994, p. 280) basically identifies three ways to regional integration without

discrimination: Non-discriminatory reduction of protection, the expansion of public

goods to overcome resistances and the free development of market integration through

private discovery and deregulation.

Bergsten (2007, p. 128-133) gives details on five different options for defining open

regionalism. It can mean, e.g., open membership. Or it could be pursued either through

unconditional MFN treatment extended to all trade partners or through conditional MFN

extended to any country that reciprocates. A fourth option is to concentrate on both

internal liberalization and also on the lowering of external barriers as well as the

continued strong support for multilateral liberalization. The fifth option to define and

pursue open regionalism according to Bergsten is through a focus on trade facilitation

through non–tariff and non-border reforms such as the improvement of regulatory

transparency.

Concerning the lack of clear definition several aspects of the concept of open

regionalism have been criticized. Kuwayama (1999, p. 13-14) e.g. fears that the concept

as applied by APEC might lack “the rigor and institutional strength needed for an

effective process of plurilateral trade liberalization” and sees a general problem in the

fact that different members support different elements of the concept. Ziltener (2002, p.

10) notes that the Asian crisis in the 1990s led not only to a significant decrease in intra-

regional trade in East Asia, but in practice also to a stop of the implementation of the

APEC decisions.


Carlowitz (2003, pp. 244-247) concludes that the concept in general is either not viable

or inconsistent. If openness is pursued through the unconditional extension of

preferences to all countries there is no incentive for becoming a member. If preferences

are extended to non-member at a slower pace or not at all, the concept does not achieve

its goal of non-discrimination. The definition of openness through open membership

would make the group more heterogeneous and the costs for coordination and decision-

making would increase, while the focus on trade facilitation is not a unique feature of

the concept of open regionalism (Carlowitz 2003, pp. 252-254). Schiff and Winters

(2003, p. 244) come to conclude that

“…”open regionalism” is a slogan rather than an analytical term. It is defined in so many different ways that it conveys no information about [a regional integration area] other than that its members are embarrassed to be thought of as protectionist.”

Many of the more straightforward suggestions for policy responses to the recent

proliferation of PTAs include different ideas for the reform of the WTO legal

framework with regard to regionalism (see e.g. Kaiser 2002, pp. 122-124). The

elaboration of the “Understanding on the interpretation of Article XXIV of the General

Agreement on Tariffs and Trade 1994” has certainly been a step in the right direction by

clarifying some aspects. However, there is still much room for interpretation and as

Majluf (2004, pp. 11-13) states the WTO rules are still perceived as a framework of

uncertainty when it comes to the future regulation of regionalism. Baldwin (2008) also

calls for a more proactive engagement of the WTO in the area of PTAs with the WTO

playing a coordinating role and taking on responsibilities of a fair broker.

Gavin (2007, pp. 69-70) proposes the introduction of a system of multilevel trade

governance. The concept of multilevel governance originally emerged in the 1990s in

the EU due to the need to make the different layers of sub-national, national and

supranational regulations compatible. Multilevel regulatory governance is based on the

organizing principle of subsidiarity and is concerned with finding the right level for

decisions on different areas of regulation, assigning clear responsibilities and ensuring

coherence. By implementing a system of effective subsidiarity for the development and

administration of regulation in the area of trade a further aggravation of the spaghetti

bowl problem can be avoided and some of the current strands disentangled. This

measure seems to be indispensable for the future vitality of international trade relations.


Additionally, capacity building measures for developing countries have been proposed

(Majluf 2004, p. 16). This would provide them with the necessary skills to effectively

participate in different trade negotiations and implement multilateral trade regulation.

For this purpose a special fund could be set up in order to bear the adjustment costs

related to new trade regulation (Gavin 2007, p. 69). Furthermore, a constant and open

public debate on the advantages and disadvantages of specific regional and multilateral

initiatives should be encouraged. The future of international trade relations should be

characterized by inclusion and participation.

References

Andriamananjara, S. (2000) Regionalism and Incentives for Multilateralism. Journal of Economic Integration 15(1). March 2000. Seoul: Center for International Economics. pp. 1-18.

American Chamber of Commerce in Korea (2007) AMCHAM Korea Doorknock 2007.

Seoul: AMCHAM. AsiaPulse News (2004) Korea Targets Brazil in Bid to Diversify Trade, Investment. 17

November. http://goliath.ecnext.com/coms2/summary_0199-3054219_ITM [accessed 5 June 2008].

Balassa, B. (1961) ‘Towards a theory of economic integration’ In: Baudin, L. et al.

(eds.) Kyklos, International Review for Social Sciences, Vol. XIV. Oxford: Blackwell Publishing, pp. 1-17.

Baldwin, R. (2008) Multilateralising regionalism: The WTO’s next challenge. VOX.

Policy Portal. 29 February 2008. http://www.voxeu.org/index.php?q=node/959 [accessed 1 August 2008].

BEA - Bureau of Economic Analysis, U.S. Department of Commerce (2008)

‘International Transactions, by Area - Korea, Republic of’. U.S. International Transactions Accounts Data. http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=10&area_id=38 [accessed 1 July 2008].

Benedictis, L. and Tamberi M. (2001) A Note on the Balassa Index of Revealed

Comparative Advantage. Working Paper Series. Social Science Research Network. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=289602 [accessed 21 July 2008].

Bergsten, F. (2007) ‘Open Regionalism’ In: Drysdale, P. and Terada, T. (eds.) Asia

Pacific Economic Cooperation. Volume III. APEC: Foundations and Evolution. London: Routledge. pp. 123-143.

Bhagwati, J. and Panagariya, A. (1996) Preferential Trading Areas and

Multilateralism: Strangers, Friends or Foes?. Discussion Paper Series. Department of Economics. New York: Columbia University.

Blank, J., Clausen, H. and Wacker, H. (1998) Internationale ökonomische Integration:

von der Freihandelszone zur Wirtschafts- und Währungsunion. München: Vahlen.

88

Carlowitz, P. v. (2003) Regionalismus in der Weltwirtschaft. Hamburg: Verlag Dr. Kovac.

Chase, K. (2005) Trading Blocs. States, Firms, and Regions in the World Economy.

Michigan Studies in International Political Economy. Ann Arbor: The University of Michigan Press.

Cheong, I. and Wang, Y. (1999) Korea-U.S. FTA Policy: Prospects and Analysis.

Working Paper 99-03. Seoul: Korea Institute for International Economic Policy. Cheong, I. (2008) Ratification of KORUS FTA and FTA Policy for 2008. Korea.net –

The Korean Government’s official English-language homepage. 19 January 2008. http://www.korea.net/News/News/NewsView.asp?serial_no=20080116012 [accessed 13 June 2008].

Choi, I. and Schott, J. (2001) Free Trade between Korea and the United States?. Policy

Analyses in International Economics, No. 62. Washington, D.C.: Institute for International Economics.

Choi, I. and Schott, J. (2004) ‘Korea-U.S. Free Trade Revisited’ In: Schott, J. (ed.) Free

Trade Agreements: U.S. Strategies and Priorities. Washington, D.C.: Institute for International Economics. pp. 173-196.

Das, D. (2004) Regionalism in Global Trade. Cheltenham: Edward Elgar Publishing. Deardorff, A. (2007) Trade Policy Options for Developing Countries Outside the Doha

Round. Presentation prepared for the ARTNet Research Workshop on Emerging Trade Issues for Developing Countries in the Asia-Pacific Region. 11 December 2007. http://www.unescap.org/tid/projects/tradeissue_s8deardorff.pdf [accessed 1 August 2008].

De Melo, J., Panagariya, A. and Rodrik, D. (1993) ‘The new regionalism: a country

perspective’ In: De Melo, J. and Panagariya, A. (eds.) New dimensions in regional integration. Cambridge: Cambridge University Press. pp. 159-193.

DeRosa, D. and Gilbert, J (2004) ‘Technical Appendix: Quantitative Estimates of the

Economic Impacts of US Bilateral Free Trade Agreements’ In: Schott, J. (ed.) Free Trade Agreements: U.S. Strategies and Priorities. Washington, D.C.: Institute for International Economics. pp. 383-417.

ECLAC (2007) La región refuerza sus vínculos comerciales con países asiáticos. Notas

de la CEPAL, No. 54. September 2007. Santiago de Chile: Economic Commission for Latin America and the Caribbean. pp. 1 and 6.

Economist (2007) The trade two-step. The Economist, Volume 383 Number 8523.

London. 7 April 2007. pp. 41-42. Economist (2007a) Buying off the opposition. The Economist, Volume 385 Number

8554. London. 10 November 2007. p. 94.

89

Economist (2008) Still beefing. The Economist – Web Edition. 26 June 2008 http://www.economist.com/world/asia/displaystory.cfm?story_id=11622408 [accessed 27 June 2008].

El-Agraa, A. (1989) The Theory and Measurement of International Economic

Integration. London: Macmillan Press. Fiorentino, R., Verdeja, L. and Toqueboeuf, C. (2007) The Changing Landscape of

Regional Trade Agreements: 2006 Update. Discussion Paper No. 12. Geneva: World Trade Organization.

Gandolfo, G. (1998) International Trade Theory and Policy. Berlin: Springer. Garnaut, R. (1994) Open Regionalism: Its Analytic Basis and Relevance to the

International System. Journal of Asian Economics, Vol. 5, No. 2. pp. 273-290. Gavin, B. (2007) ‘Reconciling Regionalism and Multilateralism: Towards Multilevel

Trade Governance’ In: De Lombaerde, P. (ed.) Multilateralism, Regionalism and Bilateralism in Trade and Investment. 2006 World Report on Regional Integration. Dordrecht: Springer.

Hallaert, J. (2008) Proliferation of preferential trade agreements: A quantification of its

impact. GEM Working Paper. February 2008. Paris: Sciences Po. Hnát, P. (2008) Globalization, Multilateralism, Regionalism: from dilemma to multi-

dimensionality. Acta Oeconomica Pragensia, ročník 16, 2/2008. Prague: Vysoká škola ekonomická v Praze.

Johnson, H. (1960) ‘The Economic Theory of Customs Union’ In: Pomfret, R. (ed.)

(2003) Economic Analysis of Regional Trading Arrangements. Cheltenham: Edward Elgar Publishing. pp. 64-76.

Jovanović, M. (2006) The economics of International Integration. Cheltenham: Edward

Elgar Publishing. Kaiser, C. (2002) ‚Regionale versus weltwirtschaftliche Integration’ In: Schüller, A. and

Thieme, J. (eds.) Ordnungsprobleme der Weltwirtschaft. Schriften zu Ordnungsfragen der Wirtschaft. Band 71. Stuttgart: Lucius & Lucius. pp. 105-125.

Kaiser, C. (2003) Regionale Integration und das globale Handelssystem. Duisburger

Volkswirtschaftliche Schriften, Vol. 38. Berlin: Duncker & Humblot. Kreinin, M. and Plummer, M. (2002) Economic Integration and Development, Has

Regionalism Delivered for Developing Countries?. Cheltenham: Edward Elgar Publishing.

90

Krueger, A. (1999) ‘Free Trade Agreements as Protectionist Devices: Rules of Origin’ In: Pomfret, R. (ed.) (2003) Economic Analysis of Regional Trading Arrangements. Cheltenham: Edward Elgar Publishing. pp. 261-272.

Kiyota, K. and Stern, R. (2007) Economic Effects of a Korea-U.S. Free Trade

Agreement. Washington, D.C.: Korea Economic Institute. Korean Ministry of Finance and Economy (2007) KORUS FTA: Expected Effects.

Republic of Korea Economic Bulletin, Vol.29 No.4. April 2007. Seoul: Korean Ministry of Finance and Economy. pp. 40-50.

Korea.net – The Korean Government’s official English-language homepage (2008) Lee

says Washington to ratify Korea-U.S. FTA this year. 21 April 2008. http://www.korea.net/News/Issues/IssueDetailView.asp?board_no=19257 [accessed 13 June 2008].

Kuwayama, M. (1999) Open regionalism in Asia Pacific and Latin America: a survey of

the literature. CEPAL-SERIE Comercio internacional, No. 4. Santiago: United Nations.

Kuwayama, M., Durán Lima, J. and Silva, V. (2005) Bilateralism and Regionalism: Re-

establishing the primacy of Multilateralism a Latin American and Caribbean Perspective. CEPAL-SERIE Comercio internacional, No. 58. Santiago: United Nations.

Lee, J. and Lee, H. (2005) Feasibility and Economic Effects of a Korea-U.S. FTA.

Policy Analysis 05-05-02. Seoul: Korea Institute for International Economic Policy.

Leelawath, W. (2007) ‘Weighted Export Similarity Index: An alternative measurement

and its uses’. Articles 2007. International Institute for Trade and Development. http://www.itd.or.th/en/node/436 [accessed 3 June 2008].

Majluf, L. (2004) Swimming in the Spaghetti Bowl: Challenges for Developing

Countries under the „New Regionalism“. Study Series No. 27. Policy Issues in International Trade and Commodities. Geneva: UNCTAD.

McDaniel, C. and Fox, A. (2001) U.S.-Korea FTA: The Economic Impact of

Establishing a Free Trade Agreement between the United States and the Republic of Korea. Investigation No. 332-425, USITC Publication 3452. Washington, D.C.: U.S. International Trade Commission.

Michaely, M. (2004) Trade Liberalization and Trade Preferences. Burlington: Ashgate. OAS – Organization of American States (2008) ‘Foreign Trade Information System’

http://www.sice.oas.org/agreements_e.asp [accessed 4 August 2008]. Piermartini, R. and Teh, R. (2005) Demystifying Modelling Methods for Trade Policy.

WTO Discussion Paper No.10. Geneva: World Trade Organization.

91

Pizarro, R. (1999) Comparative Analysis of regionalism in Latin America and Asia-Pacific. CEPAL-SERIE Comercio internacional, No. 6. Santiago: United Nations.

Robson, P. (1998) The economics of international integration. 4. ed. London:

Routledge. Sang-hun, C. (2008) South Korea lifts ban on U.S. beef. The New York Times. 26 June

2008. Schiff, M. and Winters, A. (2003) Regional integration and development. Washington

D.C.: World Bank. Schott, J., Bradford, S. and Moll, T. (2006) Negotiating the Korea-United States Free

Trade Agreement, Policy Briefs in International Economics, Number PB06-4. Washington D.C.: Institute for International Economics.

Schott, J. (2007) The Korea-US Free Trade Agreement: A Summary Assessment. Policy

Brief PB07-7. Washington, D.C.: Institute for International Economics. Schott, J. (2008) ‘Implementing the KORUS FTA: Key Challenges and Policy

Proposals’. In: Flake, G. and Ro-byug, P. (eds.) Understanding New Political Realities in Seoul, Working toward a Common Approach to Strengthen U.S.-Korean Relations. Washington D.C.: Maureen and Mike Mansfield Foundation. pp. 79-98.

Tussie, D. and Woods, N. (2000) Trade, Regionalism and the Threat to Multilateralism.

LATN Working Papers #6. Buenos Aires: FLACSO. United Nations Commodity Trade Statistics Database. http://comtrade.un.org/db/ USDA - U.S. Department of Agriculture (2008)’South Korea: Trade’. Briefing Rooms,

Economic Research Service. http://www.ers.usda.gov/Briefing/SouthKorea/trade.htm [accessed 1 July 2008].

USITC - U.S. International Trade Commission (2007) U.S.-Korea Free Trade

Agreement: Potential Economy-wide and Selected Sectoral Effects. Investigation No. TA-2104-24, USITC Publication 3949. Washington, D.C.

USTR - Office of the U. S. Trade Representative (2006) ‘United States, South Korea

Announce Intention to Negotiate Free Trade Agreement’. Press Releases. 2 February 2006. http://www.ustr.gov/Document_Library/Press_Releases/2006/February/United_States,_South_Korea_Announce_Intention_to_Negotiate_Free_Trade_Agreement.html [accessed 30 May 2008].

USTR - Office of the U. S. Trade Representative (2007) ‘United States and Korea

Conclude Historic Trade Agreement’. Press Releases. 2 April 2007. http://www.ustr.gov/Document_Library/Press_Releases/2007/April/United_States_Korea_Conclude_Historic_Trade_Agreement.html [accessed 30 May 2008].

92

USTR - Office of the U. S. Trade Representative (2007a) ‘United States and the Republic of Korea Sign Landmark Free Trade Agreement’. Press Releases. 30 June 2007. http://www.ustr.gov/Document_Library/Press_Releases/2007/June/United_States_the_Republic_of_Korea_Sign_Lmark_Free_Trade_Agreement.html [accessed 30 May 2008].

USTR - Office of the U. S. Trade Representative (2007b) ‘Trade Facts, Free Trade with

Korea, Brief Summary of the Agreement’. KorUS FTA Briefing Book. http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2007/asset_upload_file302_11035.pdf [accessed 27 June 2008].

USTR - Office of the U. S. Trade Representative (2008) ‘Fact Sheet on South Korea

Beef Protocol’. Fact Sheets. http://www.ustr.gov/assets/Document_Library/Fact_Sheets/2008/asset_upload_file661_14966.pdf [accessed 27 June 2008].

USTR – Office of the U.S. Trade Representative (2008a) ‘Bilateral Trade Agreements’

http://www.ustr.gov/Trade_Agreements/Bilateral/Section_Index.html [accessed 4 August 2008].

Viner, J. (1950) ‘The Economics of Customs Unions’ In: Pomfret, R. (ed.) (2003)

Economic Analysis of Regional Trading Arrangements. Cheltenham: Edward Elgar Publishing. pp. 3-45.

Willenbockel, D. (1994) Applied General Equilibrium Modelling: Imperfect

Competition and European Integration. Chichester: Wiley & Sons. Winters, A. (1996) Regionalism versus Multilateralism. Policy Research Working Paper

No. 1687. International Trade Division. November 1996. Washington, D.C.: The World Bank.

World Bank (2008) Trade Indicators & Indices.

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/EXTEAPREGTOPINTECOTRA/0,,menuPK:580028~pagePK:51065911~piPK:64171011~theSitePK:580005,00.html [accessed 29 May 2008].

World Bank (2008a) World Development Indicators 2008. Washington, D.C.: The

World Bank. WTO (2007) Understanding the WTO. 3. ed. Geneva: World Trade Organization. WTO (2008) ‘Facts and Figures’ Regional Trade Agreements, Trade Topics.

http://www.wto.org/english/tratop_e/region_e/regfac_e.htm [accessed 20 June 2008].

93

WTO (2008a) ‘Notifications to the GATT/WTO’ Facts and Figures, Regional Trade Agreements, Trade Topics. Up-dated 20 May 2008. http://www.wto.org/english/tratop_e/region_e/summary_e.xls [accessed 20 June 2008].

WTO (2008b) ‘Article XXIV’ The Mandate, Facts and Figures, Regional Trade

Agreements, Trade Topics. http://www.wto.org/english/docs_e/legal_e/gatt47_02_e.htm#articleXXIV [accessed 20 June 2008].

WTO (2008c) ‘Differential and more favourable treatment reciprocity and fuller participation of developing countries’ The Mandate, Facts and Figures, Regional Trade Agreements, Trade Topics. http://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm [accessed 20 June 2008].

WTO (2008d) ‘Article V: Economic Integration’ The Mandate, Facts and Figures,

Regional Trade Agreements, Trade Topics. http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm#articleV [accessed 20 June 2008].

Ziltener, P. (2002) Ostasiatische oder pazifische Handelsdynamik? Eine Analyse von

UNCTAD-Handelsdaten, 1970-2000. MPIfG Working Paper 02/9. July 2002. Cologne: Max Planck Institute for the Study of Societies.

Zimmermann, R. (1999) Regionale Integration und multilaterale Handelsordnung.

Untersuchungen zur Wirtschaftspolitik 115. Köln: Institut für Wirtschaftspolitik an der Universität zu Köln.

95

Eidesstattliche Erklärung

Hiermit erkläre ich eidesstattlich, die vorliegende Diplomarbeit zum Thema „The U.S.-

Republic of Korea Free Trade Agreement and its Impact on Latin America“ selbständig

und ohne fremde Hilfe angefertigt zu haben. Direkte oder indirekte Angaben aus

fremden Quellen sind als solche kenntlich gemacht.

Die Arbeit wurde bisher bei noch keiner weiteren Prüfungsbehörde vorgelegt und auch

nicht veröffentlicht. Mir ist bewusst, dass eine unwahre Erklärung rechtliche Folgen

haben kann.

Bremen, den 20. August 2008 ……………………………………... Anja Breuer

the u.s.-republic of korea free trade agreement and its ......subsequently balassa distinguishes...

Documents