Free trade agreements and market integration: Evidence from South Korea |
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| Institution: | 1. Department of International Relations, Kobe City University of Foreign Studies, 9-1 Gakuen-Higashimachi, Nishi-ku, Kobe 651-2187, Japan;2. College of Business Administration, Ritsumeikan University, 2-150 Iwakura-cho, Ibaraki, Osaka 567-8570, Japan;1. University of the Thai Chamber of Commerce, Thailand;2. University of Essex and KOF Swiss Economic Institute, Wivenhoe Park, Colchester CO43SQ, UK;3. University of Portsmouth, UK;1. Emeritus at the University of Oklahoma, 3747 Peachtree Rd NE, apt 2422 Atlanta, GA 30319, United States;2. Finance at the Kate Tiedemann College of Business, University of South Florida St. Petersburg, St. Petersburg, FL 33701, United States;3. Finance at the Jake Jabs College of Business & Entrepreneurship, Montana State University, Bozeman, MT 59717, United States;1. EconomiX-CNRS, University Paris Nanterre, 200 avenue de la République, 92001 Nanterre cedex, France;2. Ecole Normale Supérieure Paris Saclay and National Research University Higher School of Economics, Moscow |
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| Abstract: | We consider the effects of free trade agreements on market integration between South Korea and its solo and trade-bloc FTA partners. Free trade agreements should reduce tariffs and trade costs and lead to faster home-to-foreign price convergence. We investigate these ideas with a non-linear self-exciting threshold autoregressive (TAR) model, by introducing a threshold break at the effective FTA date. This strategy allows us to consider: (1) whether trade costs have declined after the free trade agreement; and (2) whether the speed of mean reversion in the home-foreign price differential is faster after the FTA. Our study includes nine of South Korea’s free trade agreements and covers twenty-eight partner countries. We find evidence that after free trade agreements, trade costs have been reduced for nine countries, providing evidence that greater market integration has been achieved on this score. However, evidence on whether the speed of home-to-foreign price convergence increases after free trade agreements is lacking. |
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