South Korea recently signed a free trade agreement (FTA) with Chile and is currently negotiating or studying bilateral FTAs with about 20 countries. However, some South Koreans oppose such agreements because they fear that trade liberalization would result in costly factor adjustment. Many researchers believe that intra-industry trade expansion generates smaller inter-industry factor adjustment (and therefore lower costs) compared with the costs associated with inter-industry trade expansion. This paper analyzes the extent and nature of intra-industry trade and marginal intra-industry trade in South Korea, to help predict the relative costs it might face upon opening its markets to various countries.
This is a revised version of a paper presented at the sixth Asian Economic Panel meeting held on 9–10 October 2003 at the Korea Institute for International Economic Policy (KIEP), Seoul. The authors are grateful to Kwanho Shin, Mari Pangestu, Shigeyuki Abe, and other participants for their useful comments and suggestions. The authors are also grateful to Euijung Park and Hongchul Rha for their research assistance. This research was supported in part by Korea Sanhak Foundation.