Trade Diversion and Trade Deficits: The Case of the Korea-U.S. Free Trade Agreement

Abstract

We study whether tariff preferences conferred on South Korean goods through the implementation of the Korea-U.S. Free Trade Agreement (KORUS) drew U.S. import demand away from other U.S. trading partners through the phenomenon known as trade diversion. In the two years following the implementation of KORUS, trade diversion was particularly strong for U.S. imports of consumption goods and for trade partners who already had free trade agreements with the U.S. Our estimates of trade diversion sum to $13.1 billion in 2013 and $13.8 billion in 2014. Notably, these estimates of trade diversion are roughly of the same magnitude as the increase in the U.S. bilateral goods trade deficit with South Korea. Thus, while increased U.S. imports from South Korea may have increased the U.S.-South Korea bilateral trade deficit, the fact that KORUS diverted U.S. import demand away from other trading partners implies new U.S. imports from Korea stimulated by the KORUS did not expand the overall U.S. trade deficit.