The Asian Journal of Shipping and Logistics 33(4) (2017) 229-235

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The Asian Journal of Shipping and Logistics

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The Effect of the Korea-Australia Free Trade Agreement (KAFTA) on the Korea-Australia
Trade Structure

Kwesi Atuaful QUANSAHa , Woo Chul AHNb

a
Master Student, Gangneung-Wonju National University, Korea, E-mail:kwesiatuaful@gwnu.ac.kr (First Author)
b
Professor, Gangneung-Wonju National University, Korea, E-mail:logistics_gwnu@gwnu.ac.kr (Corresponding Author)

ARTICLE INFO ABSTRACT

Article history: This study analyses the effect of the Korea-Australia Free Trade Agreement (KAFTA) on the trade
Received 31 July 2017
structure between Korea and Australia (2012-2015). The TSI, GL/IIT and CTB indexes were
Received in revised form 30 November 2017
Accepted 1 December 2017 employed to analyse the items traded between Korea and Australia during the period. The results
showed a positive effect of the KAFTA, taking into consideration increasing trade between the two
Keywords: countries and Australia securing a competitive position in Korea. An existence of trade
Korea-Australia Free Trade Agreement interdependence between the two countries is ascertained, looking at the changing trade structure of
(KAFTA) both countries before and after the agreement. The implementation of the KAFTA is aiding
Trade Specialization Index (TSI)
industries and traded items to contribute positively to the trade balance of Korea and Australia,
Grubel-Lloyd (GL)/ Inter-Industry Trade
Index (IIT) thereby boosting trade between the two countries and with the rest of the world.
Contribution to Trade Balance Index (CTB)
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1. Introduction

The Korea-Australia Free Trade Agreement (KAFTA) is a world-class,
comprehensive bilateral agreement that substantially liberalizes
Australia's trade with Korea, its fourth-largest trading partner. The
KAFTA eliminates or reduces barriers to investments and trade between
Korea and Australia. This benefits Australian businesses that seek to
export Australian goods to Korea or want to import Korean goods for sale
in Australia. Also, it protects and enhances the competitive position of
Australia’s goods and services businesses in South Korea, while
protecting and promoting investment in both directions. According to the
Australian Department of Foreign Affairs and Trade, its objective in the
negotiations was to put Australian exporters on an equal footing with
United States and European Union competitors, which had obtained
improved access to the South Korean market through their own free trade
agreements. As such, its helping level the playing field for Australian
exporters competing with those from the United States, the European
Union, Chile and the Association of South East Asian Nations (ASEAN),
who benefit from existing trade deals with Korea. It is in agricultural
exports that Australia might do well in Korea, and be able to compete with
the U.S. in terms of beef sales since there exist United States-Korea Free
Trade Agreement (KORUS) already. Without the KAFTA, Australian

http://dx.doi.org/10.1016/j.ajsl.2017.12.006

2092-5212/© 2017 The Korean Association of Shipping and Logistics, Inc. Production and hosting by Elsevier B.V.
Peer review under responsibility of the Korean Association of Shipping and Logistics, Inc.
230 The Effect of the Korea-Australia Free Trade Agreement(KAFTA) on the Korea-Australia Trade Structure

exporters would continue to face a disadvantage in the Korean market whether such an agreement is going a long way to bring about a trade
(Australian Government Department of Foreign Affairs and Trade, 2013) . balance or imbalance as barriers to trade such as tariffs are removed. The
According to the Australian Trade and Investment Commission, the comparative advantage that one country enjoys over the other is known
agreement was signed on 8th April, 2014 in Seoul and actually entered into before and after the KAFTA as the paper advances. Finally, the paper
force on 12th December, 2014. Also, the Australian Government shows a great deal of trade interdependency between the two countries
Department of Foreign Affairs and Trade stipulates that the KAFTA is and whether the KAFTA is helping to boost trade between Korea and
one of three recent Asian FTAs for Australia, the others being Japan and Australia and the rest of the world.
China. KAFTA supports one of the strongest and most complementary This paper is structured as follows. First and foremost, section 2
economic relationships in the Asia-Pacific region. There is great potential reviews previous domestic and international studies related to Korea and
of the KAFTA but relatively little attention has been paid to it. The Australia trade relationship and the FTA of both Korea and Australia.
KAFTA sets Korean tariffs at zero for 84 per cent (by 2013 import value) Secondly, the third section looks at the past and present trends in trade
of Australian exports on day one of KAFTA’s operation, rising to 95.7 per between Korea and Australia, and their individual trade with the rest of
cent within 10 years and 99.8 per cent once the KAFTA is fully the world. The next section deals with the empirical analysis of the data
implemented. The KAFTA sets Australian tariffs at zero on 86 per cent of considering the trade between Korea and Australia using trade indexes
Korean exports from day one, rising to 100 per cent in eight years. such as the Trade Specialization Index(TSI), Grubel-Lloyd/Inter-Industry
According to the Australia-Korea Business Council (AKBC), some tariffs Trade Index (IIT) and Contribution to Trade Balance (Index). The final
will be removed immediately while others will be phased out over time. It section summarizes the results and conclusion which presents a possible
has achieved significant improvements in bi-directional tariff reduction on direction for future research.
goods between Australia and Korea. By 2033, 99.7% of Australian
exports will be tariff free, and by 2021, 100% of Korean exports will be
tariff free. To help some market segments adjust to this new regulatory 2. Literature Review
framework, certain tariffs will be eliminated progressively, including
2.1. Review of Previous Domestic/International Studies Related to
some on motor vehicles and parts, steel, chemicals, plastics and textiles,
Korea-Australia FTA
and clothing and footwear products.
Australian exporters gain significantly improved market access in goods,
Currently, there are few studies on the KAFTA. However, scholars
with tariff elimination on nearly all Australia’s current exports by value
have conducted a great deal of research about trade between Australia and
based on the agreement. Under KAFTA, Australian services providers
Korea and their individual trade competitiveness. This paper is unique as
receive the best treatment Korea has agreed with any trade partner. Based
it touches a new area where most research and academic studies haven’t
on the agreement there is removal of tariffs on Australia’s major exports
focused much on.
to South Korea, including beef, wheat, dairy, sugar, wine, seafood, oil
Sharma (1999) investigated and identified the determinants of the
seeds, grapes, cherries, mangoes and manufactured goods. As a result of
inter-industry variation in IIT in the pre and post-liberalization period in
signing the KAFTA, some sectors are facing increased competition of
Australia. They showed that industries which experienced a sharp fall in
imports from South Korean products and services, such as motor vehicles
protection are the industries with the higher levels of IIT. In their work
and parts, steel products and textiles, clothing and footwear. However, this
they used econometric evidence to suggest that intra-industry trade is
is in line with the progressive liberalization already under way in the
negatively related to the level of protection and foreign ownership in the
Australian economy. As said by Barnaby Joyce, the Minister of
pre-liberalization period. In the post-liberalization period, they however,
Agriculture, modelling by the Centre for International Economics reveals
suggested that industries which are able to exploit economies of scale are
that the agreement would double Australia’s beef exports to Korea by
the industries with the higher levels of IIT.
2030 and expected to be worth an extra $846m a year as reported by the
Zhuang et al. (2007), used the general equilibrium model (a multi-
guardian on 5th December, 2013. This reveals a great prospect of the
region GTAP model) to examine the effects of the Korea-United States
KAFTA.
FTA (KORUS) on various sectors of the economy under two different
The purpose of this paper is to empirically analyse the effect of the
scenarios in the two countries. They discovered that the KORUS FTA, a
KAFTA on the trade structure between Korea and Australia during 2012-
bilateral trade between the United States and South Korea could increase
2015. Thus ascertaining the impact of the agreement on trade between the
through both inter-industry and intra-industry trade.
two countries. The study reveals the changing nature of the trade structure
Ji et al. (2014) assessed Sino-Australian trade interdependence with the
of both countries with regards to the import and export structural factors
indexes of trade intensity, revealed comparative advantage and trade
of all items. In free trade agreements such as this, it quite a great deal to
complementarities to measure and analyze the interdependence of Sino-
know which items contribute to the trade balance of the countries
Australian trade. China and Australia enjoyed different export advantages
involved. The study seeks to throw more light on the items that contribute
which reflected the comparative advantage of each country, a rising trade
to the trade balance of the respective countries under the KAFTA. This
dependence (degree of dependence of the Australian products on the
can either be a positive or a negative contribution on the trade balance of
Chinese market is much higher than that of the Chinese products on the
Korea or Australia. Considering the items spelt out under the KAFTA,
Australian market) and good complementarities of the bilateral trade.
this study helps to determine which items/products are either specialized
Park et al. (2008) did a quantitative and qualitative assessment of the
for export or imports, thus an indication of comparative advantages that
ASEAN-Korea Free Trade Area (AKFTA). In their study, Computable
one country enjoys over the other. Despite, an indication of import or
General Equilibrium (CGE) model was employed to investigate the East
export specialization of items from both countries in either markets, the
Asian miracle as a result of the AKFTA based on export-oriented
paper provides the degree (high/low) import and export specialization
industrialization. They provided all compelling evidences of the enormous
indexes of the various items. Under the KAFTA, it’s good to know
 The Effect of the Korea-Australia Free Trade Agreement(KAFTA) on the Korea-Australia Trade Structure 231

potential benefit of such an FTA. In their paper, the AKFTA initiative was have been increasing steadily but just after the signing of the KAFTA,
one of concrete example of East Asia's effort to boost intra-regional trade both decreased in amounts and percentages.
in the post-financial crisis period by signing a free trade agreement in May
Table 2
2006 to create a free trade area by 2016. The feasibility and desirability of
Korea’s trade Unit: $million
the AKFTA was examined based on such an analysis. The qualitative Year Export Import Rate of % Increase
analysis was based on the theory of economic integration and quantitative Amount Amount Export Import
2011 555,214 524,413
analysis, based on application of a CGE model which complemented the
2012 547,870 519,584 -1.3 -0.9
qualitative analysis. Both the costs and benefits of AKFTA were 2013 559,632 515,586 2.1 -0.8
presented on Korea, individual ASEAN economies and ASEAN as a 2014 572,665 525,515 2.3 1.9
2015 526,757 436,499 -8.0 -16.9
whole. Their paper suggested AKFTA had improved the international
2016 495,426 406,193 -5.9 -6.9
competitiveness of ASEAN and Korea by promoting competition and CAGR -2.25% -4.98%
efficiency. Finally, they examined the net trade impacts, trade expansions Source: www.kita.net
as well as the relative trade positions of ASEAN and Korea with each
other. ASEAN countries were likely to increase their trade balance with 2.2.3. Australia’s Trade
Korea, they predicted. Australia’s export fell from 2014 to 2015 but increased in 2016 by 1.5%.
The vice versa was true for imports increasing by 5.7% from 2014 to 2015
2.2. Review of Trade Trends between Korea and Australia’s Before and but decreased by 4.7% in 2016. After the KAFTA, Australia experienced
After the KAFTA a trade deficit in 2015 but started enjoying trade surplus in 2016. This a
great prospect for Australia’s trade with the world and pinpoints the
2.2.1. Korea-Australia Trade effectiveness of the KAFTA with regards to Australian trade.
Before the KAFTA, Korea’s exports to Australia kept increasing
steadily but gets to a maximum in 2015 and started to decline in 2016. On Table 3
the other hand, imports from Australia has been constantly decreasing Australia’s trade Unit: $million
before and after the KAFTA. The imports and exports curves converges to Year Export Import Rate of % Increase
Amount Amount Export Import
a point in 2015 but after shows a little divergence. However, the rate of
2014 266,501 252,403
percentage change of exports keeps reducing as the year increases but 2015 251,166 266,670 -5.8 5.7
drops to a minimum in 2015 when the KAFTA was in operation. Hence, 2016 254,932 254,251 1.5 -4.7
CAGR -2% 0%
a trade deficit can be depicted from the graph below since imports from Source: www.kita.net
Australia are far above the Korea’s to Australia.
2.2.4 Korea’s Top 10 Exporters
Table 1 Below are the 10 countries that house exports from Korea from 2014-
Korea-Australia trade Unit: $million
2016 and its quite fascinating to note Australia maintaining its spot on the
Year Export Import Rate of % Increase
Amount Amount Export Import 10th position. In 2014, 2015 and 2016 Australia was ranked 10th among
2011 8,163 26,323 Korea’s Top 10 Exporters. However, there was an increase in the export
2012 9,250 22,988 13.32 -12.7 amounts from 2014 to 2015 but decreased more than 30 percent from
2013 9,563 20,785 3.38 -9.6
2015 to 2016. However, countries such as Japan, Hong Kong, Vietnam
2014 10,283 20,413 7.53 -1.8
2015 10,831 16,438 5.33 -19.5 and Singapore changed spots while other countries such as Taiwan, India
2016 7,501 15,176 -30.75 -7.7 and Mexico maintained their spots on the list similar to Australia’s case. It
CAGR -1.68% -10.43% is worth noting that all the top 10 countries have trade agreements with
Source: www.kita.net Korea. FTAs help countries to emerge as competitive trade partners,
hence in the same vein, the KAFTA has helped Australia maintain its spot
30,000 as one of the competitive trading partners of Korea. Notwithstanding
Australia’s maintained spots from 2014 to 2016, in the future there are
Export/Import

20,000 grounds for both optimism and pessimism with regards to trends of trade
between the two countries. However, considering boosting trading trends
10,000 and patterns between Korea and Australia, a positive forecast can be
drawn about trade in the future and it is likely Australia can maintain its
0
position or fall.
2010 2011 2012 2013 2014 2015 2016 2017
Year
Table 4
Korea’s top 10 exporters Unit: $million
Export Import
Rank Country Export Amount Country Export
Amount
Fig. 1. Korea- Australia Trade (Unit: $million)
2014 2015 2016
Source: Author’s graph using data from Table 1.
1 China 145,288 137,124 China 124,433

2.2.2. Korea-Australia Trade 2 USA 70,285 69,832 USA 66,462

Korea is enjoying an overall trade surplus since exports are over and 3 Japan 32,184 30,418 Hong 32,782
above the imports during the given period. However, exports and imports Kong
4 Hong 27,256 27,771 Vietnam 32,630
232 The Effect of the Korea-Australia Free Trade Agreement(KAFTA) on the Korea-Australia Trade Structure

Kong trade balance of industry and the total trade of this same industry. In order
5 Singapore 23,750 25,577 Japan 24,355 to make the comparison easier between industries or countries, the index
6 Vietnam 22,352 15,011 Singapore 12,459 is presented as a ratio in which the denominator is total trade (Leitão and
7 Taiwan 15,077 12,030 Taiwan 12,220 Faustino, 2008) . The GL index is now used to measure the degree of
8 India 12,782 12,004 India 11,596 intra-industry trade among countries. The intra-industry trade index of
9 Mexico 10,846 10,892 Mexico 9,721 industry i between two countries is defined as:
10 Australia 10,283 10,831 Australia 7,501
‫ۈ‬ଡ଼୧ି୑୧‫ۈ‬
Source: www.kita.net IITi=1- (Equation 2)
ଡ଼୧ା୑୧
Where;
IITi represents the Intra-Industry Trade Index of Industry i
3. Methodology and Data Xi represents the exports of industry i
MI represents the imports of industry i
In the next section, this paper will analyse the implications of the
KAFTA based on three methodologies: Trade Specialization Index (TSI), The IIT Index has a value always greater or equal to zero and less or
Grubel Lloyd/Inter-Industry Trade Index (IIT) and Contribution to Trade equal to one (0≤IIT≤1). The IIT index is equal to 1 if all the trade is of an
Balance Index (CTB). The definitions of these methodologies are intra-industry trade type and if IIT is equal to 0, all trade is of an inter-
described below. industry trade type. The closer the value of the index to 1 the greater is the
degree of intra-industry trade. However, it should be noted that the GL
3.1. Trade Specialization Index (TSI)
index is influenced by the size of the trade imbalance. Sharma (1999)
stipulates that the index is symmetric between the countries and according
The TSI evaluates the comparative advantage of industry or product
to (Yoon, 2007), the index lies between 0 and +1.
exports and their competitiveness (Sujová et al., 2015). In other words, the
trade specialization index is a value that indicates the comparative
advantage of a product, using the product’s export and import amount of a 3.3. Contribution to Trade Balance (CTB) Index
country (Kang, 2016). The TSI is calculated using the following equation:

ଡ଼୧୨ି୑୧୨
TSIij= (Equation 1)
ଡ଼୧୨ା୑୧୨
Where:
TSIij represents the trade specialization index for a product/an item j of
country i
Xij represents the export of a product j by country i
Mij represents the import of a product/item j by country i
The TSI is always between a minimum value of -1 and a maximum
value of +1. For a country and a specific product, the TSI would be -1 if
there is import only and no export (Perfect Import Specialization). TSI
would be +1 if there is export only and no imports (Perfect Export
Specialization). TSI would be 0 for a balanced trade. It is used as an index
to measure the export competitiveness. If it is greater than 0, it means that
the product group has a trade surplus and export competitiveness exists.
The closer TSI value goes to -1, the weaker the product’s export
competitiveness grows in the global commodity market. Alternatively, if
the TSI index is larger it means it has a strong competitiveness and if its
value is 0 it means the export amount equals the import translating to the
reality of activeness of the intra-industry trade. However, if it comes
between -1 and 0, it means import specialization degree is high. The TSI
can also be an indicator of the relative comparative advantage in export
and serves as an indicator to evaluate designed countries for a specialized
zone.
3.2. Grubel-Lloyd (GL)/Intra-Industry Trade (IIT) Index
The GL index measures intra-industry trade of an individual product or
item showing the export potential at the macroeconomic level. It was
modified for the evaluation at industry level and its calculation indicates
the level of commodity representation in the intra-sectoral international
trade of a country. The level of IIT is generally measured by the so-called
Grubel and Lloyd (1975) index. The IIT is the difference between the
The CTB index measures the contribution to the national trade balance
made by the industry (Sujová et al., 2015). The formula for calculating the
CTB is as follows;
CTB=
ଵ଴଴
[(Xi-Mi)-(X-M)
ሺଡ଼୧ା୑୧ሻ
] (Equation 3)
௑ିெ ሺ௑ାெሻ
X: Total exports in a given year
M: Total imports in a given year.
Xi: Export of product i
Mi: Import of product i
When, CTB > 0 means that the actual surplus is higher than expected
or the relative trade deficit is lower than expected, and the industry or the
commodity group makes a positive contribution to the overall trade
balance. Alternatively, this in actual sense means that is comparative
advantage in trade. On the other hand, when CTB < 0 means that the
industry and the commodity group makes a negative contribution to the
total trade balance because the actual results in comparison with the
expected results are negative or lower than expected. This in actual sense
shows that there is comparative disadvantage to trade.
4. Analysis and Findings
4.1. TSI
The table below shows the TSI of various items traded between Korea
and Australia before and after the signing of the KAFTA, during 2012-
2015. It can be seen that rail has a perfect import specialization in 2014
whilst tobacco and cement had perfect export specialization during 2013
to 2014 and 2012 respectively. This perfect import specialization of rail
can be seen as a result of the TSI equal to -1 and the perfect export
specialization of tobacco and cement is noted in the value of the TSI being
 The Effect of the Korea-Australia Free Trade Agreement(KAFTA) on the Korea-Australia Trade Structure 233

equal to 1. Most of the trade items had a high degree of export metal, petrochemical, fibre, rubber, plastic, cement, other metals, semi-
competiveness since the TSI value ranged from 0 to 1. However other conductor, display and other electronic components. However, before the
items had a high degree of import specialization since the TSI had a value signing of the KAFTA there was more of an imbalance to trade between
between -1 and 0 and this can be seen in items such as rail, food and the two countries. The values from the table shows that there is no perfect
beverage, non-ferrous metals, casting, medicine and wood. Precision intra-industry trade type since there is no IIT equal to 1. However, some
equipment had a balanced trade as the TSI value approaches zero from of the IIT values are 0 which show an inter-industry trade type items such
2012 to 2014 and with TSI value of 0.14 in 2015. On the other hand, rail (2014), tobacco (2013 and 2014), cement (2012) and battery (2014).
cement had a high degree of export specialization before and after the
enactment of the KAFTA. Finally, trade surplus exists for all TSI values Table 6
greater than zero while export competiveness exists for such items as well. Grubel-Lloyd/Intra-Industry trade index (IIT)
Items 2012 2013 2014 2015
Car 0.12 0.11 0.08 0.03
Table 5
Ship 0.23 0.01 0.47 0.43
Trade specialization index (TSI)
Rail 0.13 0.05 0.00 0.01
Items 2012 2013 2014 2015
Airline 0.05 0.25 0.05 0.10
Car 0.88 0.89 0.92 0.97
Other transport equipment 0.08 0.14 0.08 0.34
Ship -0.77 -0.99 0.53 0.57
General Machines 0.23 0.23 0.22 0.34
Rail -0.87 -0.95 -1.00 -0.99
Special Purpose Machine 0.31 0.39 0.26 0.36
Airline 0.95 0.75 0.95 0.90
Precision Equipment 0.95 0.95 0.98 0.86
Other transport equipment 0.92 0.86 0.92 0.66
Electrical equipment 0.31 0.40 0.38 0.46
General Machines 0.77 0.77 0.78 0.66
Food and beverages 0.10 0.10 0.10 0.09
Special Purpose Machine 0.69 0.61 0.74 0.64
Tobacco 0.31 0.00 0.00 0.01
Precision Equipment -0.05 -0.05 -0.02 0.14
Clothing 0.11 0.13 0.19 0.22
Electrical equipment 0.69 0.60 0.62 0.54
Leather and Shoes 0.90 0.42 0.71 0.35
Food and beverages -0.90 -0.90 -0.90 -0.91
Print 0.36 0.38 0.36 0.36
Tobacco 0.69 1.00 1.00 0.99
Furniture 0.45 0.47 0.69 0.76
Clothing 0.89 0.87 0.81 0.78
Other Manufacturing 0.82 0.90 0.66 0.90
Leather and Shoes 0.10 0.58 0.29 0.65
Home Appliances 0.13 0.13 0.19 0.09
Print 0.64 0.62 0.64 0.64
Communication Device 0.05 0.13 0.17 0.18
Furniture 0.55 0.53 0.31 0.24
Computer 0.05 0.07 0.37 0.17
Other Manufacturing 0.18 -0.10 -0.34 -0.10
Steel 0.20 0.13 0.10 0.11
Home Appliances 0.87 0.87 0.81 0.91
Non-ferrous metal 0.14 0.16 0.27 0.30
Communication Device 0.95 0.87 0.83 0.82
Casting 0.02 0.09 0.04 0.02
Computer 0.95 0.93 0.63 0.83
Assembled Metal 0.12 0.04 0.03 0.02
Steel 0.80 0.87 0.90 0.89
Petrochemical 0.84 0.98 0.91 0.94
Non-ferrous metal -0.86 -0.84 -0.73 -0.70
Fine Chemical 0.55 0.57 0.41 0.39
Casting -0.98 -0.91 -0.96 -0.98
Medicine 0.28 0.36 0.37 0.13
Assembled Metal 0.88 0.96 0.97 0.98
Fibre 0.16 0.14 0.13 0.14
Petrochemical 0.16 -0.02 0.09 -0.06
Rubber 0.04 0.06 0.06 0.08
Fine Chemical 0.45 0.43 0.59 0.61
Plastic 0.14 0.14 0.07 0.27
Medicine -0.72 -0.64 -0.63 -0.87
Petroleum refining 0.42 0.37 0.40 0.40
Fibre 0.84 0.86 0.87 0.86
Paper 0.13 0.13 0.10 0.09
Rubber 0.96 0.94 0.94 0.92
Wood 0.12 0.14 0.08 0.07
Plastic 0.86 0.86 0.93 0.73
Ceramic 0.61 0.25 0.59 0.21
Petroleum refining 0.58 0.63 0.60 0.60
Cement 0.00 0.11 0.10 0.56
Paper 0.87 0.87 0.90 0.91
Glass 0.32 0.38 0.31 0.30
Wood -0.88 -0.86 -0.92 -0.93
Other Non-metals 0.04 0.06 0.12 0.19
Ceramic 0.39 0.75 0.41 0.79
Semi-conductor 0.82 0.34 0.19 0.34
Cement 1.00 0.89 0.90 -0.44
Display 0.94 0.83 0.68 0.75
Glass 0.68 0.62 0.69 0.70
Battery 0.01 0.01 0.00 0.00
Other Non-metals 0.96 0.94 0.88 0.81
Other Electronic Components 0.94 0.83 0.68 0.75
Semi-conductor 0.18 0.66 0.81 0.66
Display -0.06 0.17 0.32 0.25
Battery 0.99 0.99 1.00 1.00 4.3. CTB
Other Electronic Components -0.06 0.17 0.32 0.25
The table below shows the CTB by item of the export and import of
4.2. GL/IIT Index Korea to Australia during 2012-2015 (before and after the signing of the
KAFTA). It can be seen from the table below that there is a comparative
The table below shows the calculated GL/IIT Index for various traded
advantage with regards to trade of most items between Korea and
items before and after signing the KAFTA between Korea and Australia
Australia both before and after the signing of the KAFTA. The negative
during 2012-2015. It shows that few traded items had high degree of
values of the CTB (CTB<0) is spotted with items like ship, general
import specialization during 2012-2015 (GL index approaches 0). This
machines, food and beverages, other manufacturing items, non-ferrous
can be seen in items like rail, food and beverages, non-ferrous metal,
metals, casting, wood, semi-conductors and display throughout the period
casting, medicine, wood and other electronic equipment. Although few
from 2012 to 2015 which means there was comparative disadvantages in
items had a high degree of import specialization, there is more balance in
trade with respect to these items. However, ship assumes a positive value
trade after signing the KAFTA since the IIT value assumes a greater
(CTB>0) after 2013 to 2015 (after the signing of the KAFTA) which
positive value in 2015 as compared to the former year in 2014. This is
means as years go by its trade is gaining comparative advantage in the
noted in items such as airline, other transport equipment, general machine,
market. The item with the greatest comparative advantage is car but the
special purpose machine, electrical equipment, tobacco, clothing, furniture,
CTB value kept decreasing from 2012 (37.57) to 2014 (22.13) but just
other manufacturing equipment, communication device, steel, non-ferrous
after the signing of the KAFTA it has assumed a 1-unit increment in value
234 The Effect of the Korea-Australia Free Trade Agreement(KAFTA) on the Korea-Australia Trade Structure

during 2015(23.30). On the other hand, there was great comparative First and foremost, with regards to the TSI it was discovered that before
disadvantage in trade with regards to items like food and beverages and the KAFTA items such as rail, food and beverages, non-ferrous metal,
non-ferrous metals among the products in trade from Korea to Australia. casting, precision equipment, medicine and wood were specialized for
These 2 items assumed negative values from 2012 and got to the imports while most of the other items were specialized for exports with
minimum in 2014 but just after the KAFTA, assumed greater negative tobacco and cement having a high degree of export specialization. This
values in 2015. implies a comparative advantage of exports for most Korean products in
the Australian market. This means the KAFTA changed the trade structure
Table 7
of both countries in a small magnitude.
Contribution to trade balance index (CTB)
Items 2012 2013 2014 2015 Secondly, the GL Index shows that products such as cars, rail, food and
Car 37.57 29.23 22.13 23.30 beverages, battery and other electronic equipment had a high degree of
Ship -0.06 -1.67 0.75 6.36
import specialization during 2012-2015. Generally, it was seen from the
Rail 0.13 0.12 0.16 0.10
Airline 0.11 0.07 0.12 0.07 table that trade is balancing with time and became more balanced after the
Other transport equipment 0.12 0.06 0.05 0.02 operation of the KAFTA. This trade balancing was seen in items such as
General Machines -2.77 -2.17 -2.28 -1.82
airline, other transport equipment, general machine, special purpose
Special Purpose Machine 2.70 1.48 1.48 0.90
Precision Equipment -0.71 -0.65 -0.63 -0.28 machine, electrical equipment, tobacco, clothing, furniture, other
Electrical equipment 2.34 1.13 0.71 0.37 manufacturing equipment, communication device, steel, petrochemical,
Food and beverages -50.64 -45.19 -43.20 -45.80
fibre, rubber, plastic, cement, other metals, semi-conductor, display and
Tobacco 0.03 0.07 0.16 0.67
Clothing 0.19 0.16 0.09 0.07 other electronic components. However, before the signing of the KAFTA
Leather and Shoes 0.03 0.25 0.04 0.06 there was more of an imbalance of trade between the two countries. The
Print 0.06 0.04 0.04 0.04
values from the table show that there is no perfect intra-industry trade type
Furniture 0.23 0.16 0.07 0.05
Other Manufacturing -0.06 -0.41 -0.88 -0.45 since there is no IIT equal to 1. However, some of the IIT values were 0
Home Appliances 3.76 2.88 1.76 1.70 which showed inter-industry trade type items such rail (2014), tobacco
Communication Device 4.05 1.66 0.82 0.45
Computer 0.97 0.56 0.15 0.44
(2013 and 2014), cement (2012) and battery (2014).
Steel 3.90 3.03 2.55 1.75 Lastly, the positive CTB values showed a comparative advantage of
Non-ferrous metal -38.90 -33.84 -23.64 -26.15 Korean items in the Australian market before and after the implementation
Casting -2.07 -0.55 -1.04 -1.03
Assembled Metal 3.56 11.28 11.78 12.86 of the KAFTA. There was comparative disadvantage (CTB<0) with
Petrochemical -8.60 -10.08 -6.67 -8.09 respect to items such as ship, general machines, food and beverages, other
Fine Chemical 0.35 0.21 0.45 0.57 manufacturing items, non-ferrous metals, casting, wood, semi-conductors
Medicine -0.95 -0.49 -0.80 -1.44
Fibre 1.11 0.92 0.82 0.70 and display throughout the period from 2012 to 2015. However, the
Rubber 2.47 1.65 1.20 0.95 trading of ship assumed comparative advantage (CTB>0) after 2013 (after
Plastic 1.19 1.08 1.08 0.78 the signing of the KAFTA) to 2015. The export of cars from Korea to
Petroleum refining 24.28 27.20 22.66 22.91
Paper 2.47 1.95 1.81 1.63 Australia had the greatest comparative advantage, however the CTB value
Wood -0.85 -0.82 -1.08 -0.76 kept decreasing from 2012 (37.57) to 2014 (22.13) but with just after the
Ceramic 0.01 0.03 0.00 0.02 signing of the KAFTA it has assumed a 1-unit increment in value during
Cement 0.00 0.00 0.00 0.00
Glass 0.14 0.11 0.16 0.20 2015 (23.30). On the other hand, there was great comparative
Other Non-metals 0.15 0.11 0.08 0.06 disadvantage of items such as food and beverages and non-ferrous metals
Semi-conductor -0.06 0.22 0.33 0.18 among the products in trade from Korea to Australia. These 2 items
Display -0.08 -0.02 0.00 -0.02
Battery 1.35 1.21 1.02 1.09 assumed negative values from 2012 and get to the minimum in 2014 but
Other Electronic Components 0.15 0.09 0.06 0.10 just after the KAFTA assumed greater negative values in 2015. Finally, all
the products/items with CTB>0 showed they make positive contributions
to the trade balance of Korea and vice versa.
5. Conclusion
An economic or trade interdependence is depicted between the two
country based on the analysis of the results. Items and products
The study empirically analyses the effect of the KAFTA on the Korea-
considered under the KAFTA are contributing positively to the trade
Australia trade structure using TSI, GL/IIT, and CTB index. It evaluates
balance of both countries, especially in Australia’s case as it records a
the comparative advantage of industry or product exports and their
trade surplus since July 1971. During the operation of the KAFTA in 2016
competitiveness by TSI, measures the intra-industry trade of an individual
is where Australia makes a trade surplus record as export boom.
product or item showing the export potential at the macroeconomic level
According to the Australian Bureau of Statistics, Australia had a $3.51
and the difference between the trade balance of industry and the total trade
billion trade surplus in December, 2016 above a forecast of $2.2 billion
of this same industry by GL and IIT and measures the contribution to the
and it’s the largest trade surplus Australia has recorded since July 1971.
national trade balance made by the industry by CTB. Through this the
This illustrates the export competitiveness of Australia just after a free
impact of the KAFTA on the trade structure between the two countries
trade agreement is made, aiding exports of the country aside items or
(Korea and Australia) were ascertained. A review of the trade structure of
products considered under the KAFTA. The KAFTA is therefore an
both countries was possible by considering import and export structural
effective tool helping boost trade between the two countries and the rest of
factors of all items in both countries. Furthermore, the paper examines
the world.
which product/industry contributes to the trade balance of both countries
The KAFTA has helped secure Australia’s position in the Korean
in such an agreement. A broad and a deeper meaning of the results are
market because the competitors of Australia such as United States, Europe
discussed as follows.
and ASEAN countries are already enjoying access to FTA’s with Korea.
 The Effect of the Korea-Australia Free Trade Agreement(KAFTA) on the Korea-Australia Trade Structure
Since Korea’s importers preferred beef, dairy products and sugar from
these market other than Australia, without the KAFTA, Korea’s import of
Australian agricultural goods would fall drastically by 2030 because by
that time there would be a full implementation with the US and Europe.
The KAFTA has created positive net trade for Korea and Australia and the
Asia-Pacific region as a whole. This can be seen in the trade expansions as
well as the relative trade positions of both countries and trade with other
countries thereby increasing the trade balance of the respective countries.
The KAFTA is improving economic efficiency by exposing various firms
and industries in Australia and Korea to greater competition and can bring
significant benefits in the future. The agreement will thus improve the
international competitiveness of Australia and Korea by promoting
competition and efficiency. As Australia position is secured in Korea and
the world market by such an agreement, it will be a great deal for other
countries to boost export and secure a good position with a developed
country by entering into agreements such as the KAFTA. A free trade
agreement can therefore be seen as a good growth tool for boosting trade
between the signing countries and the rest of world.
There may be several ways to further extend the scope of this paper
by considering a study that analyses the impacts of trade values such as
Korea-Australia trade creation and diversion effects using commonly used
models like Global Trade Analysis Project (GTAP), CGE model and
Gravity model as employed by Baier and Bergstrand (2007). Therefore,
in subsequent studies quantitative analysis can be used to identify changes
in the trade value or structure between the two countries.
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