What's potentially at stake in the U.S. - Korea FTA negotiations? Economically, a lot for Korea, somewhat less for the U.S.
Jeffrey Schott, Scott Bradford, and Thomas Moll estimate that the Korean agriculture and manufacturing benefits of complete free trade could amount to something like $28 billion in the medium term to $52 billion in the long run, or 3.5% to 6.6% of of its GDP.
If rice is left out of the deal, say $20 to $41 billion, or 2.6% and 5.2% of GDP.
U.S. benefits? Not so large. In the medium term, these could be about three-quarters of a billion dollars; in the long term, about $9 billion (0.01% and 0.07% of GDP).
If rice is excluded... U.S. benefits are larger! Without rice, U.S. benefits are abut $6 billion in the medium term, and $14 billion in the longer term. Why? If rice is included, subsidized U.S. rice production expands. Subsidized production may benefit U.S. rice farmers, but not the U.S. as a whole.
The model used to make these benefit estimates has a primitive services component, and understates potential benefits because it doesn't fully capture benefits from services liberalization. These could be a big deal.
On the other hand, the numbers don't take account of the costs many people and firms would face when they have to move to new jobs or businesses.
The results are summarized in the new Institute for International Economics working paper: Negotiating the Korea-United States Free Trade Agreement . Schott and the others used an applied general equilibrium model to estimate the potential benefits from an agreement.
Benefits to the two countries have different sources. "Korean welfare gains derive primarily from allocative efficiency effects, related to reforms of Korea's own restrictions. US welfare gains come from increased export opportunities in the Korean market."
Beyond these benefits from increased efficiency, the two countries have other goals.
The Koreans want access to the U.S. market, they expect an agreement to help their firms become more competitive (particularly important, given competitive challenges from China and India), and hope to contribute to development of their political relationship with the U.S. "In part, they expect that the FTA will produce a better climate for pursuing North-South trade and investment on the Korean peninsula."
The Americans look for export gains and an improvement in the political relationship.
The rest of the world would be affected by an agreement. Schott and his co-authors see a modest benefit for Japan, and a loss - due to trade diversion - for the rest of the world.
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