Reforms of Korea’s Trade Adjustment Assistance Program

Reforms of Korea’s Trade Adjustment Assistance Program
Reforms of Korea’s Trade Adjustment Assistance Program

Reforms of Korea’s Trade Adjustment
Assistance Program for Its Bilateral
Free Trade Agreements with the
European Union and the United States*

Inkyo Cheong
Department of Economics
Inha University
253, Yonghyun-Dong, Nam-Gu,
Incheon, 402-751, Korea
inkyo@inha.ac.kr

Jungran Cho
JRI
Inha University
253, Yonghyun-Dong, Nam-Gu,
Incheon, 402-751, Korea
jungran@inha.ac.kr

Abstract
The Korean government introduced the trade adjustment assis-
tance (TAA) program to facilitate structural adjustment under the
implementation of its free trade agreements (FTAs). One big
problem with the TAA program is that its criterion for eligibility
for TAA support requires a 25 percent decrease in sales volume,
and this does not reflect firms’ business realities. The TAA pro-
gram should be reformed to reflect that the TAA is a quid pro
quo for the implementation of FTAs with large economies such as
the United States and the EU.

1. Introduction

In the course of Korea’s pursuit of a free trade agreement
(FTA) with the United States, there have been heated de-
bates on the pros and cons of the FTA. The opposition has
highlighted that the Korea–U.S. FTA (KORUS FTA) had
been promoted without measures to facilitate structural
adjustment and to compensate the harmed workers and
ªrms. To deal with this problem, the Korean government
accelerated the enactment of the trade adjustment assis-
tance (TAA) program proposed by industry and the aca-
demic community.

* The views expressed in this paper are of the authors’ alone, and
do not necessarily represent those of their afªliated institutions.
This work was supported by the National Research Foundation
of Korea Grant funded by the Korean Government (NRF-2010-
327-B00340). We thank Professor Wing Thye Woo for his valu-
able comments. The usual disclaimer applies.

Asian Economic Papers 10:1

Institute of Technology

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

When the United States adopted its TAA program in 1962, it was ªrst such program
in the world. Since then the U.S. TAA program has been revised to keep it in line
with the changing environment of politics, international trade, and economy. Al-
though similar industry assistance programs can also be found in the European
Union (EU), Japan, Mexico, and Australia, Korea has benchmarked its TAA program
with the U.S. TAA in its initial stage of legislation. However, the Korean TAA pro-
gram deviates from the U.S. TAA program in crucial areas such as the eligibility cri-
teria, coverage, and contents of TAA.

Korea’s TAA program has two purposes. The ªrst is to direct the industrial restruc-
turing caused by trade liberalization toward contributing to Korea’s industrial de-
velopment. The second is to build “social infrastructure” to persuade anti-FTA
groups to change their stand. Our analysis of the outcome of the implementation of
TAA for 2.5 years showed that the objective of industrial restructuring seemed not
to have been given much consideration. There has not been a single case in which
the restructuring duty was imposed on TAA-assisted ªrms. Six ªrms have applied
for TAA support since 2007. Five were designated TAA ªrms and have been receiv-
ing such support. This number is far smaller than was originally expected because
the criteria for receiving TAA support are too strictly deªned (e.g., a ªrm must have
experienced a 25 percent decrease in the volume of sales or production for a period
of six months).

In this paper, the details of support for TAA-designated ªrms will be analyzed in
depth, the FTA policy and the TAA program will be evaluated, and the problems
with them will be identiªed. To underline the problems with current TAA, this
paper tries to estimate the demand for TAA support under the EU–Korea FTA.
Finally, to prepare for the implementation of the FTAs with large economies such
as the United States and the EU, reforms of the TAA program in Korea will be sug-
gested.

2. The logic of TAA and the U.S. TAA program

Theoretically, the gains from international trade are based on the theory of compara-
tive advantage. Free trade expands the sectors that produce goods with higher
efªciency and contracts the sectors that produce with less efªciency in their home
country, hence raising the productivity of the country. Additional gains can be ob-
tained from scale economies and the enhancement of competition, learning, and in-
novations. Consumers can purchase goods at cheaper prices and are allowed to
choose a wider variety of goods, resulting in higher welfare gains.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

However, in reality, the story could be quite a painful one because the gains from in-
ternational trade are derived from the reallocation of resources which involves ªrm
closings and ªring of workers. Rosen (2006) argues that the ability of the U.S. econ-
omy to create jobs with trade liberalization is not enough for workers who lose their
jobs. He mentions three points to underline the necessity of TAA in the United
States: First, job creation does not always take place at the same location where the
jobs are lost. Second, the new jobs are in different industries than the jobs lost. Third,
the burden of adjustment does not end when the worker gets a new job, because the
jobs lost due to trade pay higher wages and provide better beneªts than the new
jobs being created.1

However, there are voices against the idea of TAA. Unemployment insurance pro-
vides beneªts for unexpected job losers and extra beneªts with TAA tend to discour-
age job search and extend the period of unemployment. Markheim and Sherk (2007,
3) explain why TAA is unnecessary in the United States, pointing out that “econ-
omy-wide, the estimated net number of jobs displaced each year by international
trade is a relatively small 3 percent of the workforce. Far more important to the
changing composition of America’s workforce have been improvements in technol-
ogy and shifts in consumer preferences.” They note that

the combined impact of innovation and reduced barriers to trade has served to
help the economy, not harm it. . . . Freer trade enables more goods and services to
reach American consumers at lower prices, giving families more income to save
or spend on other goods and services. . . . Any negative impact that freer trade
may have on job numbers is mitigated by the beneªts that trade brings to the
economy as a whole.

The ªrst TAA program was introduced by the Kennedy Administration in the Trade
Expansion Act of 1962, to compensate workers for tariff cuts under the Kennedy
Round of multilateral negotiations and other liberalizations. However, few workers
were able to receive the beneªts of TAA because the eligibility criteria were very
hard to meet. The Trade Act of 1974 loosened the criteria, and 62,000 workers were
covered by TAA at a cost of US$ 79 million in 1976. The TAA program was more generous in cash assistance than unemployment insurance by paying 5 percent more. However, when the Reagan Administration tightened the eligibility criteria, the number of workers receiving TAA aid dropped to 30,000 workers in 1982. 1 Kletzer (2001) reports that the average worker who lost his/her job from an import- competing industry experienced a 13-percent decline in average weekly earnings, and 25 percent of workers laid off from import-competing industries experienced earnings losses of 30 percent or more. 34 Asian Economic Papers l D o w n o a d e d f r o m h t t p : / / d i r e c t . m i t . / e d u a s e p a r t i c e – p d / l f / / / / / 1 0 1 3 2 1 6 8 2 6 9 0 a s e p _ a _ 0 0 0 5 0 p d . f b y g u e s t t o n 0 8 S e p e m b e r 2 0 2 3 Reforms of Korea’s Trade Adjustment Assistance Program Fundamental changes were made for the U.S. TAA program in 1993, in that Con- gress introduced the North American Free Trade Agreement–Transitional Adjust- ment Assistance (NAFTA-TAA) program as a part of countermeasures for the imple- mentation of NAFTA. Workers, ªrms, and communities could choose coverage from either traditional TAA or NAFTA-TAA. In 2001, a separate TAA program was legis- lated for farmers, which treated farmers as businessmen rather than as workers. TAA was extended to service workers and public sector employees in the Trade Act of 2002. TAA was incorporated into the American Recovery and Reinvestment Act of 2009 to cover workers, farmers, services, ªrms, and communities through the end of 2010. The Firm TAA has been managed by the Economic Development Administration (EDA) under the U.S. Department of Commerce since the outset of TAA in 1962. The initial program provided technical assistance for trade-injured ªrms in addition to ªnancial assistance in terms of loans and loan guarantees, but ªnancial support was removed in the reforms of TAA in 1986. Firms that were damaged by the inºow of imports could apply for TAA in one of 11 TAA centers. 3. Korea’s TAA: Enactment and current status 3.1 Overview In 2004, the Korean government decided to push for the conclusion of FTAs with large economic powers such as the United States and the EU. To cope with the strong objection against those FTAs, Korean industries and international trade scholars began to advocate the adoption of the TAA program. Unlike the United States’ TAA program, Korea’s TAA program does not require the restructuring obli- gation of the TAA ªrms. The U.S. TAA program focuses on the assistance for work- ers, whereas Korea’s TAA program is oriented for ªrm assistance within the permit- ted scope of WTO subsidy regulation. Although Korea’s TAA program benchmarked the U.S. system, there are substantial differences between them, and they are summarized in Table 1. Basically, the U.S. TAA program focuses on assistance to the workers, whereas the Korean TAA pro- gram aims for support to the ªrms.2 The U.S. TAA for ªrms provides only technical 2 The Korea TAA Law also deªnes the support for workers and has speciªc mechanisms, which is managed by the Ministry of Labor. But the issue of overlapping assistance with un- employment insurance was raised, and in the end similar contents of assistance for workers were adopted in the TAA Law. Workers can choose one of two programs, with no incentive favoring TAA, considering the burden for proving trade damage. But the U.S. TAA provides extra beneªts for TAA-assisted workers in terms of cash payment and duration of beneªts. 35 Asian Economic Papers l D o w n o a d e d f r o m h t t p : / / d i r e c t . m i t . / e d u a s e p a r t i c e – p d / l f / / / / / 1 0 1 3 2 1 6 8 2 6 9 0 a s e p _ a _ 0 0 0 5 0 p d . f b y g u e s t t o n 0 8 S e p e m b e r 2 0 2 3 Reforms of Korea’s Trade Adjustment Assistance Program Table 1. Summary of TAA in the United States and Korea Year of implementation Initial law Coverage Focus of TAA Agency of administration Managing agency for ªrms Eligibility criteria Korea 2007 United States 1962 Law for the TAA with the implementa- tion of FTAs (2006) The Trade Expansion Act of 1962 Manufacturing, Industry related Services Firms (cid:2)(cid:2) Workers Agriculture, Fishery, Manufacturing, Services Workers (cid:2) Firms Ministry of Knowledge Economy for Firms Ministry of Labor for workers Economic Development Administration for ªrms Department of Labor for workers Small & Medium Business Corporation (HQ, 22 regional center) 11 Trade Adjustment Assistance Centers (regional ofªces) 25% reduction of sale or production due to increase of imports from the FTA partner country for 6 months 5% reduction of sale or production due to imports during trade liberalization Contents of TAA Consulting services Loan 80% of costs with a cap of 24 million won (US$ 21,800)
0.7% discounted interest rates with a
cap of 4 billion won (with a cap of
0.5 billion won for operational fund)

Source: Summary based on the laws of the TAAs of the United States and Korea.

50% of US$ 75,000 for the excess of US$ 30,000 with a cap of US$ 75,000 No ªnancial support since 1986 assistance for trade-impacted ªrms, whereas Korea’s TAA program provides ªnan- cial support. The United States’ annual budget for its TAA program is US$ 1.16 bil-
lion, which consists of US$ 1.06 billion for workers, US$ 90 million for farmers, and
only US$ 16 million for ªrms. To minimize political opposition to the KORUS FTA, the National Assembly ex- panded the kind of support that was especially set up for the agricultural sector in the “Special Law for Assisting the Agricultural Sector in Implementing the Korea– Chile FTA” to also apply to manufacturing industries.3 At the time of this legisla- tion, there was consensus that (unlike the support for agriculture under the Korea– Chile FTA) TAA for the manufacturing industry should be in the form of support for industrial restructuring under strict eligibility criteria to minimize moral hazards. Although strict criteria for TAA beneªts were adopted in the law, the obligation of industrial restructuring was not enforced in the actual TAA law. TAA in Korea has thus degenerated into support for ªrms injured by FTAs. 3 Such assistance programs with the implementation of FTAs began with the Korea–Chile FTA, which was implemented in 2004. To supplement the Korea–Chile FTA, Korea enacted a special law for agricultural support, the Korea–Chile FTA Special Law, which stipulated that during the 8-year period following the implementation of the agreement, an agricultural support budget of about 200 billion won (equivalent to US$ 174 million) per year was to be
spent regardless of any damage from the FTA.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

3.2 Enactment and amendment of TAA
In August 2005, a public hearing on the enactment of a law related to TAA for work-
ers and ªrms was held under the initiative of industry and trade organizations, such
as the Korean Chamber of Commerce and Industry. The then Ministry of Com-
merce, Industry, and Energy (currently the Ministry of Knowledge Economy) took
the lead in submitting the bill to the National Assembly in November of the same
year, and the bill was passed in the plenary session of the National Assembly in
early 2006. This law, the ofªcial title of which is “The Law for Trade Adjustment As-
sistance with the Implementation of FTAs,” was promulgated on 28 April 2006, and,
after a one-year preparation period, was enforced on 29 April 2007.

This law has been amended twice. The ªrst amendment was proposed on 28 August
2007 and was passed in the plenary session of the National Assembly on 22 Novem-
ber 2007. The rationale for the amendment was to expand the coverage of TAA to
the service sector, which is a part of FTAs today. The coverage of TAA was loosened
to provide the consulting service needed for the trade adjustment in the event that
the urgent need is recognized even before a company is designated as eligible for
trade adjustment, and to address some operational problems with the existing pro-
gram.

The second amendment was passed in the plenary session of the National Assembly
on 1 April 2009. The concrete criterion for determining the nature of serious dam-
ages that will qualify ªrms for TAA was changed from 25 percent of the sales or pro-
duction volume to one that will be determined by a presidential decree, so as to
ºexibly cope with changes in the trade environment. The presidential decree has not
yet been promulgated, however, so the criterion of 25 percent of the sales or produc-
tion volume is still being applied.

3.3 Current status of TAA support for ªrms
Currently, ªve ªrms have been designated as recipients of TAA beneªts, as summa-
rized in Table 2. Four of them are food processing ªrms and one is a manufacturing
ªrm. The four food processing ªrms comprise one alcoholic beverage ªrm (a kind of
wine), two pork processing ªrms, and one marine products processing ªrm.

Two ªrms were designated as eligible for TAA support in 2008 and three were des-
ignated in 2009. Of these ªrms, three ªrms cited as their reason for applying for
TAA support a decrease in sales; one ªrm, a decrease in production; and one ªrm, a
decrease in sales and operating proªts. The FTAs that harmed Korean ªrms were
found to be the Korea–Chile FTA and the Korea–Europe Free Trade Association
(EFTA) FTA; and of the ªve TAA-assisted ªrms, three ªrms were found to have

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Table 2. Current conditions of the TAA program (as of February 2010)

Company A

Company B

Company C

Company D

Company E

Major products

Wild grape wine

Pork meat

Watches

Pork meat

Salted mackerel

Reason for application Sale reduction

(cid:3)45%

Production reduction Sale reduction
(cid:3)28%

(cid:3)49.50%

Sale reduction
(cid:3)31.60%

Sale reduction

(19.5%), proªt
reduction (51%)

Related FTA

Korea–Chile FTA

Korea–EFTA FTA Korea–Chile FTA Korea–EFTA FTA

Date of TAA decision

2008.10.31

2008.12.15

2009.4.7

2009.6.4

2009.11.4

Loan

200 million won

100 million won

Consulting

Cost

16 million won
(2009.1.22–4.30)

16 million won
(2009.3.2–12.12)

Field

Marketing strategy B2B Business

n/a

100 million won

n/a

Source: Various issues of documents by Korea’s Trade Commission.

received 100–200 million won (US$ 87,000–174,000) in working capital loans. Two of the ªrms received consulting service on business-to-business marketing strategies, and no TAA ªrm was known to have received any consulting service on the restruc- turing of their ªrms. Because only limited information could be obtained from the data published by TAA organizations, it was difªcult to conduct an analysis and evaluation of the cur- rent TAA program. To comprehensively investigate the backgrounds of the applica- tions for TAA and the opinions on the said program, interviews with four of the ªve ªrms approved for TAA support as of July 2010 were conducted.4 Based on the information obtained from the interviews, the following three conclu- sions were made: (1) The ªrms that had not been directly harmed by the implemen- tation of FTAs were designated as TAA ªrms; (2) Beneªts were being provided to the ªrms without bearing the obligation of restructuring, which was the original purpose of TAA; and (3) TAA provided fewer beneªts than were originally ex- pected. Even if a ªrm was designated as a TAA ªrm because its sales or production volume decreased to a degree greater than the predetermined standard, ªrms that could properly prove that they were harmed by the FTA or by trade liberalization could hardly be found. In the case of Company B in Table 2, they had been processing about 180 butchered pigs each day before 2007, but as of 13 September 2009, they processed only 63 pigs daily, implying that their production was reduced to one- third of its level before 2007, and subsequently, the number of the company’s em- 4 The company that was not interviewed was Company E of Table 2, which was designated in November 2009. 38 Asian Economic Papers l D o w n o a d e d f r o m h t t p : / / d i r e c t . m i t . / e d u a s e p a r t i c e – p d / l f / / / / / 1 0 1 3 2 1 6 8 2 6 9 0 a s e p _ a _ 0 0 0 5 0 p d . f b y g u e s t t o n 0 8 S e p e m b e r 2 0 2 3 Reforms of Korea’s Trade Adjustment Assistance Program ployees decreased from 32 in 2007 to 21. Such damage, however, was due to the rise in grain feed prices and various other expenses by about 26 percent and the conse- quently sharp deterioration in the production and proªtability of the hog-raising in- dustry. The decisive proof that the damage was not caused by trade liberalization is that the supply price of pork per kilo was 5,000 won in 2009, which was double the average pork price of 2,400 won per kilo in 2006. The sales of Company C’s self-manufactured low-priced watches decreased from 2 billion won in 2007 to 1.4 billion won in 2008. This company claimed that it was harmed by the implementation of Korea’s FTA with EFTA, of which Switzerland is a member country, but it is hard to say that Company C’s low-priced watches are competing with Swiss-made high-priced watches. A more reasonable explanation may be that as low-priced Chinese-made watches penetrated the domestic market, the company’s sales continued to decrease, although the low-priced Chinese watches had long been in the Korean market. Because no FTA with China is being implemented, this ªrm cannot qualify for TAA. Moreover, components of Swiss- made movements are imported and loaded in Korean-made watches. When the tar- iff on those parts and machinery was lowered or removed with the implementation of the Korea-EFTA FTA, it helped reduce the watches’ manufacturing cost. Thus, it is hard to say that the company’s decrease in sales was due to the FTA. Second, none of the four interviewed ªrms were making plans for the restructuring. None of the ªrms applied for TAA beneªts with restructuring as a precondition or applied for consulting for restructuring. Directors of some of the TAA ªrms won- dered if restructuring was really a precondition of their TAA designation and they said that if they had known that restructuring was a precondition, they would not have applied for TAA support. Some of the ªrms were receiving management con- sulting, but it was more general business management consulting than business re- structuring consulting in connection with the implementation of FTAs. Moreover, the ªrms’ degree of satisfaction with the consulting was not high. Third, the amount of ªnancial support from TAA was less than originally expected. A working capital loan of 200 million won was extended to Company A, but the ac- tual beneªt was a 0.7 percent reduction of the interest rate on the loan. In other words, the actual beneªt was only 1.4 million won (US$ 1,200) per year. The average
amount of the restructuring support loan that was extended independently from
TAA was 800 million won (US$ 695,600), but the TAA loan amounted to only one-fourth of this fund. KIET (2007) projected that an average 600 million won (US$ 521,740) support loan would be required for one TAA ªrm. The actual support
amount and related beneªts were smaller than similar programs for industrial

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

support. This has happened to minimize the moral hazard problem that may arise
when the proof of damage is not clear.

Currently, ªve FTAs are being implemented, and the TAA program is being imple-
mented as a supplementary measure for trade damage, but few ªrms are using this
support system and only a minimal part of the budget that the government put
aside as the TAA support fund is being used. The budget appropriated 30 billion
won (US$ 26,000,000) for the TAA support fund for 2009, but only 500 million won (US$ 435,000) was spent on TAA assistance.

4. Background on poor performance of TAA support

The Korean government’s policymaking authorities concerned with TAA are won-
dering why fewer ªrms are applying for TAA support than was originally expected.
According to unpublished government documents, the Knowledge Economy Com-
mittee of the National Assembly asked the government about this, and it is feared
that the TAA support budget will be reduced in the course of the budget delibera-
tion at the National Assembly, since only an extremely small portion of the TAA
budget that the government appropriated was used.

There are several reasons for so few TAA support ªrms despite the implementation
of ªve FTAs. Two reasons may be given in a broad sense: (1) the problems with the
FTA policy itself, and (2) the problems inherent in TAA. Despite the active promo-
tion of the FTA so far, an FTA in which many small- and medium-sized enterprises
(SMEs) may be interested has not yet been implemented. The problems with TAA it-
self are the lofty criteria for applying for TAA support and the ªrms’ lack of under-
standing of TAA. The criterion for eligibility of “a decrease in sales/production
volume of more than 25 percent” has been the barrier in ªrms’ use of TAA, as hap-
pened in the United States under TAA of the Trade Expansion Act of 1962.

4.1 Problems with Korea’s FTA policy
Under the Roh Moo-hyun Administration, Korea recorded high FTA promotion per-
formance for a short period of time with a “multi-track FTA promotion strategy”
and an “FTA Roadmap.” Despite the country’s unfavorable political environment
for the promotion of FTAs, many FTAs were concluded in the past six to seven
years, and Korea was freed from a state of having an FTA wasteland. A total of ªve
FTAs—with Chile, Singapore, EFTA, ASEAN, and India—have been effective in Ko-
rea and the Korea–U.S. FTA is waiting for ratiªcation at the National Assembly.
Korea’s FTA with the EU is expected to become effective late 2010 and Korea is now
negotiating bilateral FTAs with Australia, New Zealand, Peru, Canada, Mexico, and
the Gulf Corporation Council.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Many economists have evaluated Korea’s FTA promotion strategy to cope with the
sluggish Doha Development Agenda negotiations and the global spread of FTAs as
a positive move, but there is much room for improving FTA policies from the view-
point of business utilization of currently effective FTAs.

Because Korea’s FTA policy has focused on numeric expansion until recently, the con-
tent of trade liberalization has been evaluated as less than expected.5 Despite the
many concluded FTAs, the survey showed that the ªrms’ interest in using the FTAs
and their degree of actual use of the FTAs are low. The low interest of SMEs about
FTAs is due to the low quality of the FTAs, namely, the strict criteria of the rules of ori-
gin and the low preferential tariff beneªts. In the FTAs that were concluded with Chile
and ASEAN, the low early liberalization ratio, the allowance of exceptions to tariff lib-
eralization to many items, and the excessive cost of meeting the criteria of the rules of
origin are why Korean SMEs have little incentive to use FTAs. In the case of the
ASEAN–Korea FTA, only ªve of the ten ASEAN countries were implementing the
FTA at the time of its ofªcial enforcement. Even in some ASEAN countries where the
FTA was legally effective, it was not applied in actual customs clearance.

The criteria of the rules of origin in Korea’s FTAs are more restrictive and compli-
cated than those in other countries’ FTAs, and an additional cost is required to meet
the criteria of the rules of origin, which has resulted in ªrms’ low ratio of FTA utili-
zation. Cho (2006) found that in Korea’s FTAs, the change in the Harmonized Sys-
tem two-digit system (Change of Chapter: CC), which is the hardest requirement, is
given for many items that Korean ªrms are concerned with. It was also found that
Korean ªrms are having difªculties meeting the requirement for value-added con-
tent because they are heavily dependent on imported parts.

In a survey of general business ªrms (Figure 1), more than half of the ªrms said that
the criteria of the rules of origin should be eased so that exports can be vitalized,
and 30.8 percent of the ªrms said that a neutral form was desirable. Most of the
ªrms that responded to the survey questionnaire answered that it was difªcult to
apply for preferential tariffs provided in FTAs because of the difªculty of complying
with the details of the rules of origin.

Poor tariff concession works against the use of FTAs. The tariff concession in the
currently implemented Korean FTAs is narrowly deªned, and takes a long time for
the elimination of tariffs. Government reports mention that 90 percent of the items
that are classiªed as normal-track in the ASEAN–Korea FTA are liberalized gradu-
ally, but a tariff reduction of 0–5 percent, rather than tariff abolishment, is stipulated

5 Refer to Cheong (2009) for detailed analysis.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Figure 1. Companies’ opinion on the speciªcation of ROO (unit: %)

Source: KOTRA (2008).

Note: ROO rules of origin.

for many items. Also, sensitive items are classiªed as goods of sensitive-track or ex-
ceptions to trade liberalization, but these items are those that can be traded more
among the participating countries if fully liberalized.

The KOTRA (2008, 15) survey also revealed that the FTA preferential tariff margin is
not being used because “there is no tariff anymore (zero tariff before FTA) or it has
no actual beneªt on the whole” (39.0 percent), and because of the “lack of informa-
tion on the circumstances of FTA conclusions and the methods of using the FTAs”
(37.3 percent).

The unfavorable tariff concessions in Korean FTAs, compared with those in China’s
and Japan’s FTAs, discourage ªrms from using them. The scope of the Korean FTAs’
tariff concessions is so narrow that their economic effects are sometimes weakened.
Since the recent Chile–China FTA became effective in September 2006, Korea has
been lagging behind China in terms of its exports of products that both countries
domestically produce, such as automatic washing machines, vacuum cleaners,
valves, plastic products, and polyester ªlament fabrics, as seen in Table 3.

Due to these factors, the market share of Korean products in the Chilean market,
which increased after the conclusion of the Korea–Chile FTA, decreased from

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

r
e
t
f
a
r
a
e
y
1

e
r
o
f
e
b
r
a
e
y
1

e
r
o
f
e
b
s
r
a
e
y
2

f
f
i
r
a
t

t
n
e
r
r
u
C

n
o
i
s
s
e
c
n
o
c
A
T
F

f
f
i
r
a
t
e
s
a
B

e
l
i
h
C
n
i
e
r
a
h
s

t
e
k
r
a

) M
%

:
t
i
n
u
(

t
e
k
r
a
m
n
a
e
l
i
h
C
e
h
t
n
i

s
e
n
o
e
s
e
n
i
h
C
n
a
h
t

s
s
e
n
e
v
i
t
i
t
e
p
m
o
c

s
s
e
l
h
t
i

w
s
t
c
u
d
o
r
p
n
a
e
r
o
K

.
3

e
l
b
a
T

A
T
F

7
9
3

7
2

4
2

3
5
2

1
3

3
5
2

1
9

1
7
7

7
6
2

8
3

3
0
7

1
3

6
7
1

6
9
1

1
1
1

4
5

9
1

6
1
1

9
1

0
1

6
6
7

5
1

2
3
2

7
2
1

8
5

8
.
6
5

2
.
4
1

4
.
1
1

9
.
2
1

2
.
1

9
.
8
1

3
.
6
1

9
.
8
1

6
.
8
1

7
.
8
5

6
.
1

5
.
0
2

8
.
9
1

2
.
1
5

8
.
4
/
6
.
3
/
0

6
/
8
.
4
/
0

e
t
a
r

6
/
0

8
.
3

2
/
0

8
.
4
/
6
.
3
/
0

6
.
3
/
0

)
r
a
e
y
(

y
r
t
n
u
o
C

e
t
a
r

e
d
o
c
S
H

)
x
E
(
n
o
i
t
p
e
c
x
E

x
E
/
0
1
/
0

0
0
0
2
/
0
1
/
5

x
E
/
0

3
1

0
1

5
/
0

0
0
0
2
/
0
1
/
5

a
e
r
o
K

a
n
h
C

a
e
r
o
K

a
n
h
C

a
e
r
o
K

a
n
h
C

a
e
r
o
K

a
n
h
C

a
e
r
o
K

a
n
h
C

a
e
r
o
K

a
n
h
C

a
e
r
o
K

a
n
h
C

1
1
0
5
4
8

0
2
4
4
5
8

0
8
1
8
4
8

0
1
9
0
5
8

0
1
5
1
4
8

0
9
6
2
9
3

e
n
i
h
c
a
m
g
n
i
h
s
a
W

e
l
b
a
c

r
e
p
p
o
C

e
v
l
a
V

r
e
n
a
e
l
c
m
u
u
c
a
V

r
e
n
o
i
t
i
d
n
o
c

r
i
A

s
t
c
u
d
o
r
p
c
i
t
s
a
l
P

1
6
7
0
4
5

c
i
r
b
a
f

t
n
e
m
a
l
ª

,
r
e
t
s
e
y
l
o
P

.
s
c
i
t
s
i
t
a
t
s

e
d
a
r
t

d
n
a

s
A
T
F
t
n
a
v
e
l
e
r
n
o

d
e
s
a
b

d
e
l
b
m
e
s
s
A

:
e
c
r
u
o
S

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Figure 2. Changes in Chilean market shares of China, Japan, and Korea

Source: Korea International Trade Association Trade Statistics.

7.2 percent in 2007 to 5.6 percent in 2008, whereas shares of Japanese and Chinese
goods increased from 3.7 percent and 11.4 percent in 2007 to 4.7 percent and
12.0 percent, respectively (Figure 2).

According to the international survey in Figure 3, in general, East Asian countries’
FTA utilization rates are low (ranging from 16 percent to 29 percent), which con-
trasts with the 60–80 percent utilization rates in Western FTAs such as NAFTA.
Moreover, the rate of FTA use by business ªrms in Korea is lower than that in Japan,
the Philippines, and Singapore. Of the ªrms that responded to the survey, however,
54 percent said they are planning to use FTAs henceforth, which shows that they are
interested in the implementation of FTAs with big economic blocs such as the
United States and the EU.

It is known that Korea and the EU will implement the bilateral FTA between the two
regions in late 2010, and governments of Korea and the United States agreed to try
to get the ratiªcation on the KORUS FTA at the April Summit between two coun-
tries. Based on the survey result and the possibilities of FTA implementation in the
near future, it can be inferred that high pressure for structural adjustment will be
present in a few years, and the TAA program should be rationalized for the facilita-
tion of structural adjustment.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Figure 3. International comparison of FTA utilization ratio (unit: %)

Source: Kawai and Wignaraja (2009) and survey by authors.

4.2 Problems with the TAA program
In addition to problems related with FTA policies, there are several hindrance fac-
tors against the use of TAA. First of all, Korean ªrms’ understanding of the TAA
program is low. More than half (64.5 percent) of the surveyed business ªrms said
they “have never known about the TAA program”; 34.4 percent said they “know a
little”; and only 1.1 percent said they “know it well” (Figure 4).6 Without improving
ªrms’ understanding of the TAA program, it is not likely the number of TAA appli-
cations will be increased.

In the same survey, questions on the eligibility for TAA support were asked, and it
was found that the 25 percent decrease in sales volume is too high for them. Sixty-
four percent of the ªrms that were asked about the appropriateness of the 25 percent
decrease in sales/production volume as one of the criteria for eligibility for TAA
beneªts said “the criterion is too high.”

As to what is a more appropriate criterion for eligibility for TAA support, 54.4 per-
cent of the respondents said a 15 percent decrease in sales volume; 30.3 percent se-
lected a 10 percent decrease in sales volume; 10.2 percent selected a 20 percent

6 This survey, which is a part of this paper, was done by a professional research institute in
May–August 2009. About 2,000 questionnaires were sent and 495 ªrms responded to the
survey.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Figure 4. Korean companies’ recognition of the TAA program

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Source: Survey by authors.

decrease in sales volume; and 5.1 percent selected a 5 percent decrease in sales vol-
ume. Firms with more employees selected more often a 15 percent decrease in sales
volume as the appropriate criterion (Figure 5).

The results of the survey of general business ªrms and the TAA designated ªrms,
through questionnaires and ªeld investigations about TAA implementation, showed
that the criterion for eligibility for TAA support of a 25 percent decrease in sales vol-
ume is too high and does not reºect the ªrms’ business realities. The United States,
which was the ªrst country to adopt the TAA program, requires only a 5 percent de-
crease in sales or production volume for a ªrm to be designated as eligible for TAA.
The reason for the 5 percent decrease in sales/production volume requirement is
that if the criterion for TAA is too strict, policy intervention in the ªrms that are
about to go bankrupt may no longer be justiªed. This shows that the key to an effec-
tive TAA policy is the provision of prompt, easy, and effective support while mini-
mizing the ªrms’ administrative burden.

In connection with the problems of the criterion of a 25 percent decrease in sales,
Cheong and Cho’s (2009) analysis of SMEs, whose ªnancial data are available at the
Small & Medium Business Corporation,7 showed that ªrms with a 25 percent de-

7 The Small & Medium Business Corporation is a professional and ofªcial organization that

provides ªnancial and managerial support for small- and medium-sized industries in Korea.

Asian Economic Papers

Reforms of Korea’s Trade Adjustment Assistance Program

Figure 5. Opinions on TAA eligibility (unit: %)

Source: Survey by authors.

crease in sales during 2005–07 recorded a 36.6 percent decrease in operating proªts.
Their analysis of the 2-year sales of ªrms before they went out of business in 2008
indicated that trade adjustment support criteria must be eased, with the ªnding that
the sales of 2,201 bankrupt ªrms decreased by 26 percent on average, implying that
a 26 percent decrease in sales bankrupts most ªrms. Samil Accounting Consulting
(2008) provides a similar ªnding that a 25 percent reduction of sale means “very
high possibility of bankruptcy,” based on the survey of 1,008 ªrms of ªve industries
such as chemicals, machinery, electronics, automobile parts, and textiles. Thus, with
regard to the possibility of damages occurring, ªrms should be allowed to apply for
TAA support in advance.

The criterion for eligibility for TAA beneªts of a 25 percent decrease in sales for
6 months that is stipulated in the TAA Law was set for ªrms that are facing a serious
managerial crisis due to a FTA, but the 25 percent decrease in sales would virtually
mean bankruptcy. Bankrupt ªrms are not eligible for TAA. To enhance the effective-
ness of TAA, which is the only way to remedy damages caused by FTAs, the crite-
rion for eligibility for TAA support must be urgently rationalized. Even if the crite-
ria are loosened, a system for strict “trade damage judgment” should be established
based on the presentation of proof of a causal relationship and the requirement of
“mandatory restructuring” to prevent moral hazards.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

5. Estimation of the demand for TAA support

Six years have passed since the Korea–Chile FTA (the ªrst of its kind in Korea) was
implemented and four other FTAs are now being implemented in Korea. The sur-
prise is that no credible damage due to FTAs has been reported yet. So far, only six
ªrms have applied for TAA. Five of them have been given TAA status after their
claims of a 25 percent decrease in sales or production were taken without serious
deliberation of that the decreases were directly due to the FTAs damage, as stipu-
lated in the related laws and regulations.

The Korean government has recorded high performance in “FTA conclusion” but
poor performance in the implementation of FTA and the utilization of agreements.
A similar phenomenon can be seen with TAA. The application of TAA is linked with
the utilization of FTAs, which might increase trade damage. The beneªts of FTAs
have not yet widely spread throughout the national economy. Particularly, the de-
gree of utilization of FTAs by ªrms is lower than originally expected, so the priority
of the Korean government in its FTA policies should be the enhancement of the de-
gree of FTA use by ªrms rather than the conclusion of additional FTAs. FTAs with
large economic blocs such as the EU and the United States should be implemented
soon so that many SMEs can utilize them.

In 2005, when the negotiations on the ASEAN–Korea FTA were underway, Cheong
(2005) estimated that TAA would support an average of 192 ªrms annually for the
next 10 years of the FTA’s implementation. Only six ªrms applied for TAA support
from 2007 to July 2010, however, and none of these ªrms proved that they suffered
trade damages from the implementation of the FTA with the ASEAN. The reason for
this difference can be explained by poor market access under the FTA. Cheong
(2005) assumed that in the ASEAN–Korea FTA, all tariffs are abolished immediately
after their implementation, but in the actual agreement, an exception to liberaliza-
tion or long-term tariff abolition is allowed for many items.

According to Cheong and Cho (2009), the actual difference between the preferential
tariff in the ASEAN–Korea FTA and the Most Favored Nation tariff is only 1 percent.
Under these circumstances, when the cost of meeting the criteria of the rules of ori-
gin is considered, it can be said that ªrms can expect hardly any beneªts from the
FTA. Regarding poor utilization of the ASEAN FTA (AFTA), Baldwin (2006, 10)
states that “given that the margins of preference are razor thin—between zero and
1.5 percent—it is no surprise that AFTA was almost never used.”

The KORUS FTA and the EU–Korea FTA widely differ from Korea’s existing FTAs in
terms of the scope and width of market access. In the two FTAs, the tariffs on virtu-

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

ally all items are abolished within 7 years, and upon implementing the FTA, the rate
of tariff abolishment is over 80 percent. These FTAs are evaluated to have the most
comprehensive market access, even better than NAFTA in many respects. And the
United States and the EU have the world’s highest levels of manufacturing bases, so
trade damages to Korean ªrms, the international competitiveness of which is rela-
tively weak, are expected to be considerable.

Table 4 shows the estimated number of ªrms that would apply for TAA in the EU–
Korea FTA, which will be implemented in late 2010. The decrease in the tariff rate by
period was calculated by classifying all the contents of the tariff concession for man-
ufacturing goods in the EU–Korea FTA by industry, and changes in producer sur-
plus by industry were estimated using the modiªed Global Trade Application Pro-
gram (GTAP) computational general equilibrium (CGE) model.8 The expected
number of ªrms that would apply for TAA was derived from the average sales sta-
tistics of Korean business ªrms by industry. When the 10 percent decrease in sales
criterion was applied, the expected number of ªrms that would apply for TAA be-
came 2,992. In the early period (0–3 years) of the implementation of the agreement,
1,805 ªrms are expected to apply for TAA; in the third to fourth years of the FTA’s
implementation, 583 ªrms; in the ªfth to sixth years, 454 ªrms; and in the seventh
year, 150 ªrms.

As shown in Table 4, when Korea’s FTA with the EU is implemented, trade damages
and pressure for restructuring are expected to concentrate on a few industries (such
as machinery) and to be mitigated over time. The TAA program should therefore be
reorganized to support smooth restructuring adjustments so as to reduce the dam-
age of the harmed ªrms and to mitigate opposition.

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

The number of TAA ªrms might be regarded to be too many, considering current
application of TAA supports in Korea. For reference, let’s look at the performance of
the U.S. TAA program for ªrms. According to Congressional Research Service
(2009), 126–177 ªrms were assisted under the TAA program for ªscal years 2003–08.
On average, 146 ªrms were assisted each year for this period. Most assisted ªrms
were SMEs, averaging US$ 10.7 million in annual sales and 81 employees. The EDA provided 52 percent of consulting fees for structural adjustment with the mean value of US$ 50,816 per ªrm, which is higher than Korea’s TAA program.

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

8 Controversy can arise over the method of estimating the number of ªrms designated for

TAA, as expected from the implementation of the FTA. For the method that was used in this
research, refer to the Technical Note at the end of this paper.

Asian Economic Papers

Reforms of Korea’s Trade Adjustment Assistance Program

Table 4. Estimated number of TAA applications by industry

1st–2nd year

3rd–4th year

5th–6th year

7th year

Subtotal

Processed food
Clothing
Textile
Chemicals
Steel
Electronics
Transportation
Machinery
Other manufacturing

Subtotal

0
16
0
0
153
0
0
1,635
0

1,805

Source: Authors’ estimations.

0
0
37
0
0
0
0
546
0

583

240
0
0
4
0
0
0
175
36

454

0
0
66
0
3
0
0
77
4

150

240
16
103
4
156
0
0
2,433
40

2,992

Table 5. Trade adjustment assistance, FY2003–08

Number of ªrms assisted
Avg. ªrm sales (US$ millions) Avg. ªrm employees Govt. share (US$ millions)
Firm share (US$ millions) Total TAA (US$ millions)
Avg. TAA per ªrm (US$)

Source: CRS (2009, 4).

2003

162
7
68
8
7
16
50,000

2004

177
12
88
9
8
17
48,023

2005

132
8
64
6
5
11
44,697

2006

137
11
91
7
6
13
48,905

2007

126
11
68
7
6
13
56,449

2008

139
15
81
8
8
15
56,827

Average

146
11
77
7
7
14
50,816

Note: Government share of TAA Firm program divided by the number of accepted adjustment proposals.

Estimated numbers of TAA ªrms in Korea (Table 4) seem to be much larger than the
United States’ TAA ªrms (Table 5). This can be understood in that the United States
has not implemented massive trade liberalization measures since 2000, and those
numbers of TAA cases were ªrms that were affected during the natural course of in-
dustrial development. Korea has high trade dependence and the EU is its second
largest trade partner. When Korea eliminates its trade barrier for a large economy
for the ªrst time via the FTA with the EU, the structural reform pressure may be
substantially large, as seen in Table 4.

6. Conclusion and policy implications

Korea’s TAA program should be a quid pro quo for the implementation of FTAs by
ending political patronage and lowering the threshold of TAA application, so that
smooth industrial restructuring, which is the original purpose of TAA, can be at-
tained. With the implementation of the FTAs with the EU and the United States in
the near future, Korea’s TAA program should be reformed to cope with the rising
pressure of structural adjustment. It is difªcult to set up the quantitative criterion
for applying TAA. What is clear is that we have two extreme cases; 5 percent in the

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

United States’ TAA program and 25 percent in Korea’s current TAA program. Con-
sidering the opinion of ªrms shown in Figure 5 and the purpose of TAA, 10 percent
of sales/production reduction seems to be reasonable.

The reason why the authorities do not loosen the precondition for TAA application
can be summarized in two points. First, they may not recognize the high pressure
for structural adjustment under FTAs with large economies, as no substantial trade
damage was brought under the implementation of current four FTAs. However, Sec-
tion 5 of this paper shows substantial expected damage, especially machinery, when
the EU–Korea FTA is implemented. If the criterion of 25 percent decrease of sales is
kept, many of the trade-damaged ªrms may go bankrupt under the implementation
of the EU–Korea FTA and the KORUS FTA, and TAA will be a “prescription after
death.”

Second, TAA has been used as an instrument of political patronage in some sense.
From the political–economic point of view, TAA contributed greatly to reducing the
social conºicts over FTAs in Korea, especially during the negotiation period for the
KORUS FTA. This is because the government came up with the TAA law to per-
suade people to support FTAs by emphasizing the preparation of supplementary
measures for damaged industries. In fact, the Korean government pushed ahead
with FTA negotiations with the United States after agreeing with the National As-
sembly for the introduction of the TAA law.

Now it is time for the government to prepare for the rising pressure of structural ad-
justment from the FTAs with the EU and the United States, and policymakers
should change how the TAA program works. Otherwise, TAA will remain only as
political patronage for long time. A similar case was seen in the U.S. Trade Expan-
sion Act of 1962. To weaken political objection against trade liberalization, TAA was
introduced for the ªrst time and serious injury from trade was a precondition for
applying TAA. As a result, TAA certiªcates could be given to only few ªrms for the
ªrst 12 years. It took 12 years for the country to make the ªrst change to its TAA
program, and in the Trade Act of 2002 the U.S. Congress loosened the TAA program
to allow trade promotion authority under the Bush Administration.

The reform of TAA is not limited to the downward adjustment of the application cri-
teria. The core of TAA is facilitating industrial restructuring, so the current
ªnancing-oriented support system should be corrected. In the case of the United
States’ TAA program, direct ªnancial support has not been allowed since 1986, and
consulting services are focused on the structural adjustment for TAA ªrms. The

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Urban Institute (1998) reports higher survival rates of TAA-assisted ªrms than non-
assisted ªrms.9

The industries in which trade damages occurred regardless of FTAs must be ex-
cluded from the application for TAA. In other words, it should be stipulated that the
ªrms with products in industries in which imported goods account for more than
50 percent of the market cannot apply for TAA. Firms complain about the heavy
burden of documentation and other procedures in applying for TAA. A system of
determining whether to offer TAA beneªts or not after examining the circumstances
and conditions, as the United States does, rather than emphasizing proof of damage,
should be adopted.10

References

Baldwin, Richard. 2006. Managing the Noodle Bowl: The Fragility of East Asian Regionalism.
CEPR Discussion Paper No. 5561. London: CEPR.

Cheong, Inkyo. 2005. Estimates of Number of Firm TAA Applications for Korea with the Im-
plementation of the ASEAN-Korea FTA. Paper presented at the public symposium on Korea’s
TAA organized by Korea’s Chamber of Commerce, 16 August, Seoul: Korea’s Chamber of
Commerce.

Cheong, Inkyo. 2009. Recent Development of World Trade Environment and Implications for
Korea. Paper presented at the annual conference by the Korea’s Trade Economists Association,
6 June, Seoul: Korea’s Trade Economists Association.

Cheong, Inkyo, and Jungran Cho. 2009. The Impact of Free Trade Agreements (FTAs) on Busi-
ness in the Republic of Korea. ADBI Working Paper No. 156. Tokyo: ADBI.

Cho, Jungran. 2006. Analysis of Korea’s FTA Rules of Origin: Based on the Study of Restrictive-
ness Index. Journal of International and Area Studies 10(1):201–221.

Congressional Research Service (CRS). 2009. Trade Adjustment Assistance for Firms: Eco-
nomic, Program, and Policy Issues. CRS Report No. RS20210. 6 March. Washington, DC: CRS.

Kawai, Masahiro, and Ganeshan Wignaraja. 2009. The Asian Noodle Bowl: Is It Serious for
Business? ADBI Working Paper Series No. 136. Tokyo: ADBI.

Kletzer, Lori G. 2001. Job Loss from Imports: Measuring the Costs. Washington, DC: Institute for
International Economics.

9 The study by the Urban Institute (1998) shows TAA ªrms had a higher survival rate (84 per-
cent), a higher employment rate (4.2 percent), and a higher sale growth (16 percent) than
controlled groups.

10 Whereas the EDA of the United States has an internal analysis program for TAA application,
Korea depends entirely on the documents provided by applying ªrms. Thus, no TAA can be
designated without data from ªrms.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

Korea Institute for Energy and Technology (KIET). 2007. The EU–Korea FTA and Major Issues
for Manufacturing Sector. January. Seoul: KIET.

Korea Trade Investment Promotion Agency (KOTRA). 2008. Survey on Companies’ Recogni-
tion on the Utilization of FTAs. Seoul: KOTRA.

Markheim, Daniella, and James Sherk. 2007. Trade Adjustment Assistance: Getting Reform
Right. The Heritage Foundation WebMemo #1682. Available at www.heritage.org/Research/
Reports/2007/07/TAA-Reform-Is-Not-Enough

Rosen, Howard. 2002. Reforming Trade Adjustment Assistance: Keeping a 40-Year Promise.
Paper presented at the Conference on Trade Policy organized by the Peterson Institute for In-
ternational Economics, 26 February. Washington, DC: Peterson Institute for International Eco-
nomics.

Rosen, Howard F. 2006. Trade Adjustment Assistance: The More We Change the More It Stays
the Same. In C. Fred Bergsten and the World Economy, edited by Michael Mussa, pp. 79–113.
Washington, DC: Peterson Institute for International Economics.

Samil Accounting Consulting. 2008. A Survey on Companies Which Are Applicable for TAA.
Unpublished research paper. Seoul: Samil Accounting Consulting.

Topoleski, John J. 2008. Extending Trade Adjustment Assistance (TAA) to Services Workers:
How Many Workers Could Potentially Be Covered? CRS Report for Congress, 30 January.
Washington, DC: CRS.

Urban Institute. 1998. Effective Aid to Trade-Impacted Manufacturers. Economic Development
Administration, U.S. Department of Commerce. Washington, DC: Urban Institute.

Appendix: Technical note

At present, much research has been done on trade adjustment assistance; however,
there are hardly any studies done on ex ante estimating the number of ªrms or
workers applying for TAA. According to the research of authors, Topoleski (2008), a
U.S. Congressional Research Service (CRS) analyst, appears to be the only person
who has estimated the number of workers in the service sector who could apply for
TAA as the United States expanded the TAA support area to the service sector in
2009. Working on ex ante estimation is a difªcult task, and lack of TAA information
is also a serious hindrance.11

Therefore, simple methodology was used in Topoleski (2008), who approximated
the number of workers who apply for TAA. Topoleski hypothesized that the
number of jobs transferred to foreign countries will be almost the same as the num-
ber of unemployed workers who apply for TAA based on the fact that 489,000

11 Rosen (2002) pointed out that it is difªcult to make researches on TAA since the U.S. Depart-
ment of Labor or EDA, which is the main organization that deals with TAA, neither collects
nor issues data or statistics with which to evaluate TAA.

Asian Economic Papers

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

manufacturing jobs in the United States were transferred to foreign countries from
2003 to 2005, and 450,000 people were allowed to receive TAA support in that peri-
od. During the same period, there were 840,000 jobs in the service sector that were
transferred to foreign countries, so if TAA support was expanded to the service sec-
tor, Topoleski estimated that the workers who would apply for TAA support would
increase by 187 percent, or 840,000/450,000. These are the research results the CRS
reported to the U.S. Congress and widely utilized as data for devising policies such
as the appropriation of budget for TAA.

Our paper uses a simulation method to estimate of the number of TAA-eligible
ªrms. The general forms of the CGE model such as GTAP, which are widely used in
the analysis of trade policies, can estimate the volumes of changes in exports and
imports, but it does not include the variables or indices necessary for TAA research.
Because such positive and negative inºuences were reºected on the production
changes by industry calculated in the CGE model, the trade damage by industry
caused solely by the increase in imports can hardly be identiªed. For the estimation
to work, ªrm-speciªc microscopic data and industrial level macroscopic statistics on
the industries competing with imports are needed, but it is difªcult to obtain such
statistics.

Thus, in this research, changes in sales by industry caused by the implementation of
FTAs were calculated, and the structural equations to estimate the number of ªrms
that apply for TAA are added to the GTAP CGE model. Equation (1) calculates the
changes in sales of the domestic ªrms, and equation (2) calculates the number of
ªrms that apply for TAA. Equation (2) is computed by dividing the value from
equation (1) by the changes in sales that enables a ªrm to apply for TAA. Only when
the change in sales is negative will the conditional equation be calculated and a TAA
ªrm comes into being. In other words, if there is no trade damage, the number of
ªrms applying for TAA is zero. The minimum reduction in sales that enables a ªrm
to apply for TAA is calculated in equation (3). It is calculated by a certain rate (poli-
cy variable) times the average sales per ªrm, which is then computed by dividing
the sales by industry available in Statistics Korea by the number of ªrms for each re-
spective industry.

Equations for TAA Calculation

i
V
r

(cid:2)

(cid:4) S
(cid:3)

i
djr

(cid:3)

i
djr

(cid:2)

i
V
r

i
r

i
V
r

(cid:5)

i
n
r

(cid:2)

i
V
r

(cid:6)

i
r

i(cid:2)
S
r

(cid:3) f

Asian Economic Papers

(1)

(2)

(3)

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Reforms of Korea’s Trade Adjustment Assistance Program

where

i : Change of sales of domestic industry i in region r

i : Sales of domestic industry i in region r to industry j

Vdjr

i
qdjr

: Percent change of sales of domestic industry i in region r to industry j

i : Number of TAA applying ªrms of industry i in region r

i : Minimum reduction of sales for qualifying TAA in industry i in region r

i : Total sales of industry i in region r

(cid:4)

r: Parameter for welfare changes

(cid:5): Policy variable for TAA

D
o
w
n
o
a
d
e
d

f
r
o
m
h

t
t

:
/
/

d
i
r
e
c
t
.

i
t
.

e
d
u
a
s
e
p
a
r
t
i
c
e
–
p
d

f
/

1
0
1
3
2
1
6
8
2
6
9
0
a
s
e
p
_
a
_
0
0
0
5
0
p
d

b
y
g
u
e
s
t

o
n
0
8
S
e
p
e
m
b
e
r
2
0
2
3

Asian Economic Papers
Download pdf