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Implications of the U.S.-Korea Free Trade Agreement: A General Equilibrium Approach
Author: Won W. Koo, Renan Zhuang
Published May 25, 2011
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The bilateral trade volume between the United States and South Korea has been growing dramatically since 1989. According to U.S. statistics (ITA, various years), the bilateral trade volume between the two countries increased from $33.2 billion in 1989 to $78.3 billion in 2006, or an average annual growth of 5.2 percent. The United States has had a trade deficit with South Korea, with the exception of the 1995–97 period. The U.S. trade deficit with South Korea jumped from $6.3 billion in 1989 to $19.8 billion in 2004, a historical record high. During the past two years, the U.S. trade deficit with South Korea has started to improve; it declined to $16.1 billion in 2005 and $13.4 in 2006.

South Korea is the 10th largest economy in the world, with an annual GDP rapidly approaching $1 trillion. While South Korea was the seventh-largest export market for the United States in 2004, the United States was South Korea’s third-largest trading partner—its third-largest supplier behind Japan and China—and second-largest export market (behind China) in 2005 (Manyin 2006; CalTrade Report 2006). Moreover, South Korea is the sixth-largest market for U.S. agricultural exports. The United States provides more than one-fifth of South Korea’s agricultural imports (Johanns 2006).

Informal discussions on a U.S.-Korea Free Trade Agreement (KORUS FTA) started in the mid-1980s but were suspended in the 1990s owing to disputes over tariff concessions in the agricultural sector under the Uruguay Round of the World Trade Organization (WTO) negotiation and disputes over the screen-quota issue (Cheong 2004; Lee and Lee 2005). The two countries agreed to resume informal talks on a free trade agreement (FTA) at the U.S.-Korea Business Meeting held in Hawaii in January 2001 (Cheong 2004). On 2 February 2006, the two countries formally announced commencement of FTA talks beginning in May 2006 (USTR 2006; Cooper and Manyin 2006), and they concluded historic FTA negotiations on 1 April 2007. For the United States, the KORUS FTA is the most commercially significant FTA in 15 years.

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