We have noted that the United States and Korea have a variety of economic and political motivations in pursuing an FTA. In this connection, the present study has been designed to assess the economic effects involved in such an agreement. The Korea-U.S. FTA negotiations were initiated in May 2006 and are ongoing. It is hoped to conclude the negotiations and sign the agreement prior to the expiration of the president’s negotiating authority in mid-2007.
The computational analysis presented has been based on the Michigan Model of World Production and Trade, which is a multicountry, multisector computable general equilibrium (CGE) model that has been used for more than three decades to provide estimates of the economic effects of multilateral, regional, and bilateral trade negotiations and other aspects of changes in trade policies of the United States and other major trading countries or regions. The version of the model used covers 27 economic sectors, including agriculture, manufactures, and services, in each of 30 countries or regions. The distinguishing feature of the Michigan Model is that it incorporates elements of the New Trade Theory, including increasing returns to scale, monopolistic competition, and product variety. The data for the model are based on version 6.0 of the GTAP database for 2001 together with data derived from other sources.