Korea’s exports to the European Union (EU) has declined since the implementation of the Korea-EU FTA. This study identifies main factors of this unusual trade development after implementing the FTA and analyzes the impact of EU economic growth and won-euro exchange rate on Korea’s export to the EU, using a vector error correction model (VECM). While most of the impact assessment studies of FTAs focus on tariff cut and its impact on trade, this study examines the impact of the business cycle and exchange rate. During 5 years of implementing the Korea-EU FTA, Korea’s exports to the EU dropped by 17.6% from US$ 57.89 billion in the year before the FTA was implemented to US$ 47.73 billion. Contrary to this development, Korea’s imports from the EU increased from US$ 43.37 billion to US$ 53.99 billion. This contrasting outcomes stem from several reasons, such as business cycle gap between Korea and the EU, weak euro, excessive concentration of Korean exports to a small number of products and increasing relocation of Korean production bases overseas. The analysis based on the VECM shows that Korea’s export depends heavily on the economic growth of the EU. This study suggests that an ex ante analysis of the FTA should consider the business cycle of trade partners and such analysis must take into account changes in export structure in relation with overseas investment and the global product business cycle.
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