Trade, Reform, and Structural Transformation in South Korea

Abstract

We develop a two country, three-sector model to study the effects of trade policies for Korean structural change from 1963 through 2000. The model features Armington trade, import tariffs, and export subsidies. Tariff liberalization increases imports and total trade, especially agricultural imports, intensifying Korean industrialization. Subsidy liberalization lowers exports and trade, especially industrial exports, attenuating industrialization. These effects of policy reform are individually powerful, but offset each other. Relative to a “no reform” regime which maintains 1963 tariff and subsidy rates forever, observed trade reform produces comparable but lower trade volumes, a larger agricultural and lower industrial employment share, and slower industrialization. “Complete reform”, lowering tariffs and subsidies to zero from 1963 onwards, substantially increases trade volumes and facilitates industrialization.

Keywords: Trade policy, comparative advantage, industrialization, and structural change

JEL Classification: F13, F14, F43, O14, O41