Effects of Agricultural Trade Liberalization through Free Trade Agreements: Trade Creation and Trade Diversion in Korea's Differentiated Beef Market

The effects of a free trade agreement (FTA) on Korea's beef industry are analyzed under the assumptions that the beef market in Korea is not only differentiated by country-sources, but also Korea, as an importing country, is large enough that its trade policy can directly influence the export markets of partner countries. A theoretical model is first explored within a partial equilibrium framework, and then an empirical examination is conducted for Korea's FTA with the US. Empirical results show that, unlike the case of homogeneous goods and small importing countries, Korea's beef industry is expected to lose overall. Although beef consumption will increase due to the increase in imports from the partner country at lowered prices, the consumer surplus will not increase enough to offset the decrease in producer surplus together with tariff revenue and the welfare loss in the import market from non-member countries. Trade diversion, as well as trade creation, occurs in this case regardless of cost-efficiency differences between member and non-member countries. Regarding FTA deals with particular countries such as the US, the general belief that the industry as a whole will gain, despite a large producer loss, might be flawed where Korea's beef market is concerned.