Economic Impact of the Tariff Reform: A General Equilibrium Approach (Written in Korean)

• Main Author: 이, 원영
• Format: Article
• Language: English
• Published: Korea Development Institute 1990-05-01
• Series: KDI Journal of Economic Policy
• Online Access: https://doi.org/10.23895/kdijep.1990.12.1.69

A major change in tariff rates was made in January 1989 in Korea. The benchmark tariff rate, which applies to about two thirds of all commodity items, was lowered to 15 percent from 20 percent. In addition, the variation in tariff rates among different types of commodities was reduced. This paper examines the economic impact of the tariff reform using a multisectoral general equilibrium model of the Korean economy which was introduced by Lee and Chang(1988), and by Lee(1988). More specifically,, this paper attempts to find the changes in imports, exports, domestic production, consumption, prices, and employment in 31 different sectors of the economy induced by the reform in tariff rates. The policy simulations are made according to three different methods. First, tariff changes in industries are calculated strictly according to the change in legal tariff rates, which tend to over-estimate the size of the tariff reduction given the tariff-drawback system and tariff exemption applied to various import items. Second, tariff changes in industries are obtained by dividing the estimated tariff revenues of each industry by the estimated imports for that industry, which are often called actual tariff rates. Accor­ding to the first method, the import-weighted average tariff rate is lowered from 15.2% to 10.2%, while the second method changes the average tariff rate from G.2% to 4.2%. In the third method, the tariff-drawback system is internalized in the model. This paper reports the results of the policy simulation according to all three methods, comparing them with one another. It is argued that the second method yields the most realistic estimate of the changes in macro-economic variables, while the third method is useful in delineating the differences in impact across industries. The findings, according to the second method, show that the tariff reform induces more imports in most sectors. Garments, leather products, and wood products are those industries in which imports increase by more than 5 percent. On the other hand, imports in agricultural, mining and service sectors are least affected. Domestic production in­creases in all sectors except the following: leather products, non-metalic products, chemicals, paper and paper products, and wood-product industries. The increase in production and employment is largest in export industries. An impact on macroeconomic variables is also simulated. The tariff reform increases nominal GNP by 0.26 percent、lowers the consumer price index by 0.49 percent, increases employment by 0.24 percent、and worsens the trade balance by 480 million US dollars, through arise in exports of 540 million US dollars and a rise in imports of 1.02 billion US dollars.