Two Empirical Studies on the Economic Effects of FTA Focusing on Both U.S. and China

Abstract

Free Trade Agreement (FTA) is a legally binding treaty signed by two or more countries to promote economic development and realize trade liberalization. This study includes two studies, which empirically analyze the economic effects of bilateral or multilateral FTA from the perspective of industry and country, and calculate the social welfare changes brought by tariff reduction in FTA. Based on the panel regression model, the first study empirically analyzes the impact of the U.S.-Korea FTA on the import and export of U.S. agriculture and manufacturing industries with South Korea. We uses the import and export annual panel data of 198 agricultural and 1066 manufacturing industries classified by 4-digit HSCODE from 2002 to 2017. Difference-in-Difference (DID) estimation is used by dividing these industries into treatment group and control group, which is the industries affected by the U.S.-Korea FTA and the industries not affected by the U.S.-Korea FTA respectively. Finally, we analyzes the changes of U.S producer surplus, consumer surplus and calculate social welfare effect caused by the tariff reduction due to the U.S.-Korea FTA. From the empirical analysis results, we find that the U.S.-Korea FTA has a significant effect in promoting the import and export of agriculture and manufacturing industries of United States. According to the calculation results of the import and export creation effect of U.S.-Korea FTA, the export creation effect of the United States is greater than the import creation effect. It can be predicted that with the further development of the U.S.-Korea FTA and the further reduction of tariffs, the trade creation effect brought by the U.S.-Korea FTA will further increase. The second study aims to empirical analyze the economic effects of Free Trade Agreements (FTAs) on China’s exports, imports and trade balance with RCEP member countries though panel data model by using Difference-in-Difference (DID) estimation. Annual export, import and trade balance panel data of China and 15 RCEP member countries for a period of 1995-2017 were used in the present study. Also, this study analyzes the changes of China's social welfare caused by FTAs, and further predicts the impact of RCEP on foreign trade and social welfare of China. According to the empirical results, Firstly, the FTAs signed by China with RCEP member countries have positive and significant effects in promoting China's import and export trade, and will significantly improve the trade deficit between China and its trading partners. Secondly, the empirical results of China’s social welfare caused by tariff reduction show that China’s import and export trade creation effect and the ratio of the total trade creation effect to the total trade volume are all increasing year by year. Therefore, this study predicts that RCEP agreement will further explore the trade potential of each member country, increase China's total import and export volume to other RCEP member countries, and further improve China's trade deficit with RCEP members. In addition, it will further improve China's import and export creation effect and increase China's overall social welfare.