A dynamic analysis of the korea–japan free trade area: Simulations with the G-cubed asia–pacific model

This paper explores the effects of the proposed free trade agreement between Japan and Korea. Our experiments are based on a new dynamic simulation model, called the Asia-Pacific G-cubed Model, which incorporates the rational expectations and intertemporal optimizing behaviour of agents. The simulations show that both Korea and Japan benefit from the bilateral FTA although other countries lose. The output gains from the FTA are estimated to be larger when trade liberalization is undertaken by a tariff reduction that is more gradually phased-in than rapid. Correspondence Address: Warwick J. McKibbin, Economics Division, Research School of Pacific & Asian Studies, Australian National University, ACT 0200, Australia. Tel: +61 2 612 50301; Fax: +61 2 612 53700; Email: [email protected] JEL Classification: F15.