Economic Impact of a Potential Free Trade Agreement (FTA) Between the European Union and South Korea

Abstract

We analyze the effects of potential measures to liberalize trade between the European Union (EU25) and South Korea. Using a computable general equilibrium (CGE) model of world trade that incorporates the GTAP database, we evaluate two scenarios for an EU-Korea free trade agreement (FTA) and compare it to the maximum potential given by a full free trade agreement. We show that a realistic FTA scenario (called ÒPartial 1Ó) yields a total gain for the two economies of 26 percent of the potential in a full FTA. If liberalization of trade in services is taken a step further, as in our more ambitious scenario (called ÒPartial 2Ó), total gains increase to 46 percent of the total potential from a full FTA between EU and Korea. Our results show that both economies stand to gain economically from all analyzed levels of trade liberalization, but the gains are unevenly distributed. Korea will obtain two-thirds of the total gains from an EU-Korea FTA in all scenarios, basically because the Korean economy initially is more protected from international competition than the EU economy, and therefore will benefit more from increased competition.CGE, EU-Korea Free Trade Area, GTAP