Comparative advantage
In On the Principles of Political Economy and Taxation (1817), David Ricardo used England and Portugal trading cloth and wine to show that even a country with absolute advantage in both goods gains by specialising where its relative opportunity cost is lower. The Heckscher-Ohlin model later traced comparative advantage to differences in factor endowments.
What an FTA is
A free trade agreement is a preferential arrangement that removes tariffs and non-tariff barriers among members. It is an exception to WTO most-favoured-nation treatment, permitted by GATT Article XXIV if duties are eliminated on substantially all trade and barriers to outsiders are not raised. Unlike a customs union, members keep their own external tariffs.
Trade creation and diversion
- Trade creation: costly domestic production is replaced by cheaper imports from partners.
- Trade diversion: imports shift from a cheaper outside supplier to a preferred partner.
Jacob Viner (1950) showed that the welfare effect depends on which force dominates.
Rules of origin
Goods must meet origin rules to receive preferences. Overlapping rules across many agreements create what Jagdish Bhagwati called the spaghetti bowl effect.
Korea's FTAs
Starting with Chile in 2004, Korea signed FTAs with the United States, the EU, China and RCEP partners. Export gains come with pressure on less competitive sectors such as agriculture, so trade adjustment assistance and compensation payments accompany them.
References
- Ricardo, D. (1817). On the Principles of Political Economy and Taxation. John Murray.
- Viner, J. (1950). The Customs Union Issue. Carnegie Endowment for International Peace.
- Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (11th ed.). Pearson.
- Bhagwati, J. (1995). US trade policy: The infatuation with FTAs. Columbia University Discussion Paper Series, No. 726.
- 산업통상자원부. FTA 강국 KOREA. https://www.fta.go.kr