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Trade Diversion and Trade Deficits: The Case of the Korea-US Free Trade Agreement

In: Globalization and Welfare Impacts of International Trade

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  • Katheryn Russ
  • Deborah Swenson

Abstract

We study whether tariff preferences conferred on South Korean goods through the implementation of the Korea-U.S. Free Trade Agreement (KORUS) drew U.S. import demand away from other U.S. trading partners through the phenomenon known as trade diversion. In the two years following the implementation of KORUS, trade diversion was particularly strong for U.S. imports of consumption goods and for trade partners who already had free trade agreements with the U.S. Our estimates of trade diversion sum to $13.1 billion in 2013 and $13.8 billion in 2014. Notably, these estimates of trade diversion are roughly of the same magnitude as the increase in the U.S. bilateral goods trade deficit with South Korea. Thus, while increased U.S. imports from South Korea may have increased the U.S.-South Korea bilateral trade deficit, the fact that KORUS diverted U.S. import demand away from other trading partners implies new U.S. imports from Korea stimulated by the KORUS did not expand the overall U.S. trade deficit.
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Suggested Citation

  • Katheryn Russ & Deborah Swenson, 2018. "Trade Diversion and Trade Deficits: The Case of the Korea-US Free Trade Agreement," NBER Chapters, in: Globalization and Welfare Impacts of International Trade, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:14334
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    References listed on IDEAS

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    Cited by:

    1. Yi, Chae-Deug, 2020. "The computable general equilibrium analysis of the reduction in tariffs and non-tariff measures within the Korea-Japan-European Union free trade agreement," Japan and the World Economy, Elsevier, vol. 56(C).
    2. Chae‐Deug Yi, 2022. "Economic impacts of UK's free trade agreements with Korea, Japan, and EU as a breakthrough of Brexit," Manchester School, University of Manchester, vol. 90(5), pages 541-564, September.
    3. Yoon Heo & Nguyen Khanh Doanh, 2020. "Is NAFTA Trade‐Creating or Trade‐Diverting? A System GMM Approach," Economic Papers, The Economic Society of Australia, vol. 39(3), pages 222-238, September.
    4. Chun, Hyunbae & Hur, Jung & Son, Nyeong Seon, 2021. "Global value chains and servicification of manufacturing: Evidence from firm-level data," Japan and the World Economy, Elsevier, vol. 58(C).
    5. Loitongbam Bishwanjit Singh, 2021. "Impact of India-ASEAN Free Trade Agreement: An Assessment from the Trade Creation and Trade Diversion Effects," Foreign Trade Review, , vol. 56(4), pages 400-414, November.
    6. Meinen, Philipp & Schulte, Patrick & Cigna, Simone & Steinhoff, Nils, 2019. "The impact of US tariffs against China on US imports: Evidence for trade diversion?," Discussion Papers 46/2019, Deutsche Bundesbank.
    7. Lee, Dongyeol, 2021. "Propagation of economic shocks through vertical and trade linkages in Korea: An empirical analysis," Japan and the World Economy, Elsevier, vol. 60(C).
    8. Simone Cigna & Philipp Meinen & Patrick Schulte & Nils Steinhoff, 2022. "The impact of US tariffs against China on US imports: Evidence for trade diversion?," Economic Inquiry, Western Economic Association International, vol. 60(1), pages 162-173, January.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General

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