Chan-Hyun Sohn

DOES THE GRAVITY MODEL EXPLAIN SOUTH KOREA'S TRADE FLOWS?*

This paper applies the gravity model to explain South Koreas bilateral trade flows and to extract practical trade policy applications. A trade structure and an Asian‐Pacific trade network are included in the gravity equation to characterize the peculiarity of South Koreas trade patterns. The empirical result shows that South Koreas trade follows a Heckscher–Ohlin model more than an increasing returns or a product differentiation model. South Korea has large unrealized trade potentials with Japan and China, suggesting that they are desirable partners for an FTA. North–South Korean trade will expand markedly if bilateral relation normalizes and North Korea participates in APEC.

Trade and Financial Integration in East Asia: Effects on Co-Movements

In this paper we explore three important areas where deeper trade and financial integration in East Asia can influence: (1) business cycle co-movements in the region, (2) the extent of risk sharing across countries and (3) price co-movements across countries. We find evidence that trade integration enhances co-movements of output but not of consumption across countries. Especially the fact that trade integration does not raise co-movements of consumption as much as that of output is interpreted as trade integration does not improve the extent of risk sharing. Co-movements of price arise most significantly as trade integration deepens, lowering the border effects and allowing better opportunities for resource reallocation across countries. In contrast, financial integration demonstrates much weaker evidence of enhancing co-movements across countries. Deeper financial integration improves price co-movements weakly but does not enhance output or consumption co-movements at all. However, since the current level of financial integration in East Asia is quite low, our evidence is too early to firmly determine the role of financial integration.

How FTAs Affect Income Levels of Member Countries

The purpose of this paper is to analyse whether FTAs cause the income levels of member economies to converge or diverge. Although existing studies predict the possibility of convergence among FTA members to a certain degree, they fail to provide definitive evidence. By using the concept of accelerating convergence, this study aims to estimate the pure convergence effects of FTAs, separate from the conventional notion of income convergence, so-called b-convergence. The neoclassical model of economic growth has been extended to incorporate varying steady states for an open-economy framework. Applying the system GMM method to a dynamic panel of data consisting of major FTAs comprising the European Union, NAFTA, Mercosur and AFTA, and encompassing the cases of launching an FTA, expanding membership or deepening FTA integration we find considerable evidence for the income convergence effect of FTAs.

Trade Structure, FTAs, and Economic Growth

What is the relationship between trade and economic growth? Does trade positively affect economic growth? Owing to the ambiguity of this relationship, the empirical relationship has remained open (Rodriguez and Rodrik, 2001; Baldwin, 2003). This paper introduces “trade structure” variables, borrowed from the paper of Lederman and Maloney (2003), and applies them to the relationship. A dynamic panel estimation for the data of 66 countries during 1991–2004 is used to verify the validity and robustness of the relationship. Trade structure variables show strong evidence of positive effects on growth. Free-trade agreements/areas (FTAs) also enhance economic growth. East Asia shows a different relationship between trade and growth than the world and reflects a weaker role of FTAs in its growth.

How Intra-Industry Trade Is Related to Income Difference and Foreign Direct Investment in East Asia

This paper investigates how intra-industry trade (IIT) is linked to cross-country income difference and foreign direct investment (FDI). We distinguish IIT as either horizontally or vertically differentiated, using bilateral exports and imports data for Japan and the remaining East Asian countries at the SITC five-digit level over 19902000. Our results show that the income difference has a negative relationship with the share of horizontal IIT, but a positive relationship with vertical IIT, and that cross-country FDI has a positive relationship with share of horizontal IIT and a negative relationship with share of vertical IIT.

Intra‐Industry Trade and Industry Distribution of Productivity: A Cournot–Ricardo Approach

This paper constructs a Cournot-Ricardo model of trade by incorporating Cournot competition in a Ricardian trade model. In this model, the share of intra-industry trade in bilateral trade volume decreases as trading partners become more different in terms of the industry distribution of labor productivity. We show that this relationship is a special case of a more general relationship: the share of intraindustry is decreasing in a specialization index. This specialization index turns out to be equal to the difference in the industry distribution of productivity in the case of our Cournot-Ricardo model, while it is given by the difference in capital-labor in the well-known case of monopolistic competition. As both technologies and factor endowments would be important in shaping specialization patterns in the real world, we conjecture that the share of intra-industry trade is decreasing in two measures of specialization: the difference in the industry distribution of productivity and the difference in capital-ratio. Our OLS estimations strongly support this conjecture. In fixed effects regressions, both measures lose significance in the entire sample, but the industry distribution of productivity is significant in explaining trade between high income countries.

The Effect of China's Rise on FDI Competition in East Asia: Crowding‐Out or Crowding‐In?

This paper investigates the China Effect on FDI competition in East Asia: Does Chinas FDI crowd out or crowd in FDIs in ASEAN countries? Previous research utilized a gravity equation that has no theoretical foundation for FDI flows. This study applies a theory‐based Knowledge‐Capital Model modified to incorporate preferential market‐openings by FTAs and BITs that directly affect investment and trade costs. Using country‐pair data for China and ASEAN with 34 OECD home countries during 1985–2010, panel analyses are performed. The results suggest that Chinas rise does not threaten ASEAN countries but induces a strong synergetic effect on FDIs into them. In attracting FDI inflows, China and ASEAN countries are friends, not foes.

South Korea's Marginal Intra-Industry Trade and the Choice of Preferential Partners*

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.