Trade, Reform, and Structural Transformation in South Korea

We develop a quantitative two country, three-sector model to measure the effects of trade policies for Korean structural change from 1963 through 2000. The model features non-homothetic preferences, Armington trade, proportional import tariffs and export subsidies, and is carefully calibrated to match sectoral value added production and value added trade between Korea and the OECD. We find that tariff liberalization increased imports and total trade, especially agricultural imports, accelerating de-agriculturization and intensifying Korean industrialization. Subsidy liberalization lowered exports and trade, especially industrial exports, attenuating industrialization. Thus, these effects of trade reform were individually powerful, but negated each other. Korea’s subsidy reform dominated quantitatively; relative to a “no reform” regime which maintains both 1963 tariff and subsidy rates forever, observed trade reform produces comparable but lower trade volumes, a larger agricultural and lower industrial employment share, and slower industrialization. “Complete reform”, lowering tariffs and subsidies to zero from 1963 onwards, would have substantially increased trade volumes and facilitated industrialization.