KDI 정책포럼 Trade Liberalization and Manufacturing Productivity Changes in Korea During the Past Three Decades
- | 관련정보 |
This study examines the effects of Korea’s trade policies in terms of bolstering the productivity of existing firms in the tradable sector. It shows that Korea’s FTAs with major trade partners, such as the EU, US and China, have failed to provide meaningful impetus. Please check out the video!
- Yeongkwan Song, Fellow at KDI
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- Trade Liberalization and Manufacturing Productivity Changes in Korea During the Past Three Decades
- | 스크립트 |
We have all heard of FTAs.
FTAs liberalize trade between firms and their overseas counterparts.
This not only improves the productivity of firms but also the productivity of the economy as a whole.
In Korea, numerous FTAs have been pushed through by the government since the 1990s.
So, has productivity improved?
Let’s take a look at the manufacturing industry.
The manufacturing industry was first divided into the non-tradable sector and tradable sector, which has a high share of imports and exports.
Then, an analysis was conducted to examine, first, whether the productivity of the tradable sector improved compared to the non-tradable sector,
and, second, whether the exit of low-productivity firms in the tradable sector improved the average productivity of the sector.
In terms of productivity, it was found that the tradable sector saw an improvement in productivity as trade volume surged in the 2000s on the back of China’s membership to the World Trade Organization.
But, as we enter into the 2010s, there were no meaningful growths despite FTAs with major countries.
This is because world trade came to a standstill after the global financial crisis of 2007, and the real effective tariff rate failed to depreciate.
As for whether the exit of low-productivity firms raised the average productivity of the tradable sector in spite of the lack of productivity improvements in existing firms,
it was revealed that exit firms had lower productivity than existing firms in all tradable sectors, hence their departure,
indeed served to bolster average productivity of the sector.
The analysis, however, did not confirm if the increased productivity of the tradable sector was due to the FTAs.
If FTAs did have an impact, there should have been an increase in firm exits in the import industry as FTAs increased competition, and a decrease in the export industry as FTAs provided more opportunities.
But, this did not show up in the analysis results.
■ One of the key goals of trade policy, which includes FTAs, should be the enhancement of productivity in the overall economy through the improved productivity of the tradable sector.
- This can be achieved by ① enhancing the productivity of existing firms, and ② eliminating lowproductivity firms to improve overall industrial productivity.
■ This study examines the effects of Korea’s trade policies in terms of bolstering the productivity of existing firms in the tradable sector. It shows that Korea’s FTAs with major trade partners, such as the EU, US and China, have failed to provide meaningful impetus.
■ As for raising productivity through firm exits, this study confirms that it has a positive impact on raising total factor productivity (TFP) across industry. However, further studies are needed to substantiate that this is owed to trade liberalization.
■ To raise overall economic productivity, future trade policies should be designed ① to enhance the productivity of existing firms, and ② expel those with low productivity. A trade policy-driven expansion of imports and exports could brighten the prospects for the tradable sector, encouraging firms to boost productivity.
■ It is imperative that efforts are made to increase the positive effects of trade liberalization and minimize the negative effects on society by shifting the focus of the current Trade Adjustment Assistance system towards supporting workers instead of firms, and improving retraining and vocational programs for the unemployed, among others.
2. After the 1990s: Share of Industry, Firm Exits, and Productivity by Trade Type
3. Empirical Analysis Result
4. Conclusion and Policy Implications
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