Korea’s Accession to the TPP: A Quantitative Approach Based on Firm-Delocation

We empirically estimate Korea’s potential welfare gain from joining the TPP (Trans-Pacific Partnership). Among the multiple aims of the TPP, we focus on one specific channel of welfare gain –the TPP eradicates the tariffs among the member countries. We construct a multi-country trade model where import tariffs generate negative externality across the countries through firm-delocation à la Ossa (2011). We find that the overall welfare impact from joining the TPP is critically dependent on China’s presence in the TPP. To be specific, when Korea joins the TPP without China, overall welfare impact is slightly negative; however when China subsequently oins the TPP, Korea experiences a net welfare gain. In the counter-factual scenario where neither Korea nor China joins the TPP, but there is a bilateral free-trade agreement between the two countries, Korea gains the most in terms of welfare. The policy implication of this paper is that the Korean government should cautiously compare the cost of joining the TPP with its potential benefits that are not related to tariff reduction in nature (such as strengthened diplomatic relations with the TPP membership countries).