Korea's Trade Liberalization and Consumer Welfare

Trade liberalization benefits consumers, according to trade theories, because it gives them access to a wider variety of products at lower prices than what their home country could supply. Despite Korea’s continuous trade liberalization over the years, however, it is criticized that Korean consumers have rarely realized welfare enhancement due to trade liberalization, pointing to no change or even an increase in consumer prices of imported goods for which tariff was reduced or eliminated through trade liberalization or effectuation of free trade agreements with other countries. While it is generally believed that trade liberalization benefits consumers, there is only a handful of direct evidence on the gains from trade that particularly focuses on consumers’ welfare. In this report, we examine and estimate the welfare impacts of trade liberalization and increased trade on consumers. First, we investigate the trend of prices of imported consumer goods over time and then identify factors that might affect those prices. Second, we examine changes in product variety available in Korea due to trade liberalization and estimate how these changes in product variety affect Korean consumers’ welfare. In particular, within a constant elasticity of substitution (CES) framework, we develop a price index for import that is corrected for new and disappearing varieties by following Feenstra’s (1994) approach and using Korea’s trade data. New varieties lower unit costs, depending on their substitutability with other varieties and their expenditure shares. Third, we investigate the marketing margins of imported consumer goods from the border to final consumers and estimate the margin on every stage for each marketing channel