The Impact of the KORUS FTA on South Korean Passenger Vehicles Exports to the United States: An Empirical Analysis Using Vector Error Correction Model

Purpose - This study examines the effects of the Korea-US Free Trade Agreement (KORUS FTA) on South Korean passenger car exports to the United States. By employing a Vector Error Correction Model (VECM), this study provides empirical insights into the long- and short-term economic impacts of FTA on the automotive industry. Design/Methodology - This study utilises export data for 2007-2023 and key macroeconomic variables, such as real GDP and exchange rates. A VECM was employed to analyse the relationships between these variables and the volume of Korean passenger cars exported to the US. The model includes dummy variables representing the operational status of Hyundai’s Georgia plant and the application of KORUS FTA. The study incorporates the cumulative sum control chart (CUSUM) and cumulative sum of squares (CUSUMSQ) tests to ensure the structural stability of the model. Findings - The results reveal that the KORUS FTA has a significant positive long-term effect on the export volume of Korean passenger cars to the US. Oil prices also positively impact longterm sales. In the short term, the depreciation of the Korean won boosts export growth, whereas interest rate fluctuations have a minimal impact. The CUSUM and CUSUMSQ tests confirm the structural stability of the VECM. Originality/value - This study contributes to the literature by providing an industry-specific analysis of the impact of the KORUS FTA on South Korean automotive exports. These findings offer policy implications for enhancing South Korean automakers’ competitiveness in the global market and formulating future trade agreements.