Journal of Korea Trade

Korea Trade Research Association (한국무역학회)
권호 표지
DOI QR코드

DOI QR Code

The Effect of Trade Agreements on Korea's Bilateral Trade Volume: Mitigating the Impact of Economic Uncertainty in Trading Countries

  • Heedae Park (Department of International Trade, Kwangwoon University) ;
  • Jiyoung An (Division of Hydrogen Economy, Korea Energy Economics Institute)
  • Received : 2023.07.23
  • Accepted : 2023.10.13
  • Published : 2023.10.31
Download PDF
⟨ Previous Next ⟩

Abstract

Purpose - This research empirically analyzes the influence of economic policy uncertainty and free trade agreements (FTAs) on bilateral trade volumes between Korea and its trading partners. The study investigates whether fluctuations in the Economic Policy Uncertainty Index (EPUI) for both Korea and its trading partners significantly impact trade volumes and whether the implementation of FTAs mitigates these effects. Design/methodology - The study employs dynamic panel data analysis using the system generalized method of moments (system GMM) estimation method to achieve its research objectives. It utilizes country-month-level panel data, including the EPUI, trade volume between Korea and its trading partner countries, and other pertinent variables. The use of system GMM allows for the control of potential endogeneity issues and the incorporation of country-specific and time-specific effects. Findings - The analysis yields significant results regarding the impact of economic policy uncertainty on Korea's exports and imports, particularly before the implementation of FTAs. An increase in the EPUI of trading partners leads to a notable increase in Korea's exports to them. Conversely, an increase in Korea's EPUI negatively affects its imports from trading partners. However, post-FTA implementation, the influence of each country's EPUI on trade volume is neutralized, with no significant difference observed. Originality/value - This research contributes to the existing literature by providing empirical evidence on the interaction effects between economic policy uncertainty and FTAs on bilateral trade volumes. The study's uniqueness lies in its examination of how FTAs mitigate the impact of economic uncertainty on trade relations between countries. The findings underscore the importance of trade agreements as mechanisms to address economic risks and promote international trade relations. In a world where global market uncertainties persist, these insights can aid policymakers in Korea and other countries in enhancing their trade cooperation strategies and navigating challenges posed by evolving economic landscapes.

Keywords

Acknowledgement

The present research has been conducted by the Research Grant of Kwangwoon University in 2023.

References

  1. Ahn, S. C., and P. Schmidt (1995). "Efficient Estimation of Models for Dynamic Panel Data", Journal of Econometrics, 68(1), 5-27. https://doi.org/10.1016/0304-4076(94)01641-C
  2. Anderson, T. W., and C. Hsiao (1981). "Estimation of Dynamic Models with Error Components", Journal of the American Statistical Association, 76(37), 598-606. https://doi.org/10.1080/01621459.1981.10477691
  3. Ando, M, S. Urata, and K. Yamanouchi (2022). "Do Japan's Free Trade Agreements Increase Its International Trade?", Journal of Economic Integration, 37(1), 1-29. https://doi.org/10.11130/jei.2022.37.1.1
  4. Arellano, M. (1989). "A Note on the Anderson-Hsiao Estimator for Panel Data", Econometrica, 57(5), 1299-1302. https://doi.org/10.2307/1913709
  5. Arellano, M., and S. Bond (1991). "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations", The Review of Economic Studies, 58(2), 277-297. https://doi.org/10.2307/2297968
  6. Arellano, M., and O. Bover (1995). "Another Look at the Instrumental Variable Estimation of Error-Components Models", Journal of Econometrics, 68(1), 29-51. https://doi.org/10.1016/0304-4076(94)01642-D
  7. Armelius, H., I. Hull, and H. S. Kohler (2017). "The Timing of Uncertainty Shocks in a Small Open Economy", Economics Letters, 155 (June), 31-34. https://doi.org/10.1016/j.econlet.2017.03.016
  8. Baier, S. L., J. H. Bergstrand, , M. , and Feng, (2014). "Economic Integration Agreements and the Margins of International Trade", Journal of International Economics, 93(2), 339-350. https://doi.org/10.1016/j.jinteco.2014.03.005
  9. Baker, S. R., N. Bloom, and S. J. Davis (2016). "Measuring Economic Policy Uncertainty.", Quarterly Journal of Economics, 131(4), 1593-1636. https://doi.org/10.1093/qje/qjw024
  10. Dar, Q. F., F. D. Gulbadin, Jin-Hee Ma., and Young-Hyo Ahn. (2020). "Visualization, Economic Complexity Index, and forecasting of south Korea international trade profile: A time series approach", Journal of Korea Trade, 24(1), 131-145. https://doi.org/10.35611/jkt.2020.24.1.131
  11. Feng, L., Z. Li, and D. L. Swenson (2017). "The Connection Between Imported Intermediate Inputs and Exports: Evidence from Chinese firms", Journal of International Economics, 108, 244-261.
  12. Hajivassiliou, V. A., & Ruud, P. A. (1994). Classical estimation methods for LDV models using simulation. Handbook of econometrics, volume 4, 2383-2441. https://doi.org/10.1016/S1573-4412(05)80009-1
  13. Jung, B. (2023). "The Trade Effects of the EU-South Korea Free Trade Agreement: Heterogeneity Across Time, Country Pairs, and Directions of Trade within Country Pairs", Open Economies Review, 34(3), 617-656. https://doi.org/10.1007/s11079-022-09690-6
  14. Kehoe, T. J., and K. J. Ruhl (2013). "How Important is the New Goods Margins in International Trade?", Journal of Political Economy, 121(2), 358-392. https://doi.org/10.1086/670272
  15. La, Kong-Woo., and Jin-Goo, Song. (2019). "An Empirical Study on the Effects of Export Promotion on Korea-China-Japan Using Logistics Performance Index (LPI)"., Journal of Korea Trade, 23(7), 96-112. https://doi.org/10.35611/jkt.2019.23.7.96
  16. Lee, Soon-Cheul. (2019). "The Effect of the Korea-India CEPA and 3rd FTAs on the Bilateral Trade between Korea and India", Journal of International Trade and Industry Studies, 24(4), 49-79. https://doi.org/10.23030/KATIS.2019.24.4.003
  17. Mao, Z. Q., and Q. An. (2021). "Economic Complexity Index and Economic Development Level Under Globalization: An Empirical Study"., Journal of Korea Trade, 25(7), 41-55. https://doi.org/10.35611/jkt.2021.25.7.41
  18. Song, Back-Hoon. (2019). "Economic effect of Korea-Central America FTA", Latin American and Caribbean Studies, 38(4), 1-21. https://doi.org/10.17855/jlas.2019.11.38.4.1
  19. Won, Yong-Kul. (2022). "Does Korea-ASEAN Free Trade Agreement (FTA) Really Promote Korea's Exports?", Journal of International Trade & Commerce, 18(5), 175-194.
  20. Economic Policy Uncertainty (n.d.), Monthly EPU Indices for 22 Countries. Available from https://www.policyuncertainty.com/ (accessed June 15, 2023)
  21. Federal Reserve Bank of New York(n.d.), Global Supply Chain Pressure Index(GSCPI). Available from https://www.newyorkfed.org/research/policy/gscpi#/overview (accessed June 15, 2023)