Issues in Trade Liberalization: Timing, Sequencing, Speed and Credibility - Theory and Practice in Korea

Abstract

The thesis discusses the dynamic effects of trade liberalization on welfare, current account and other macroeconomic variables. It highlights on 1:1e potential intertemporal costs of temporary reform during the transition, and hence focuses on the examination of the main issues raised by these costs: timing (duration), sequencing, speed and credibility of reform. We examine these dynamic issues using intertemporal optimizing frameworks. We first show that both the long-run and the transitional effects of trade reform depend largely upon different assumptions on its timing and duration. We demonstrate that temporary reform can not only bring about a current account deficit but generate welfare costs, and is thus suboptimal to consumers. We also show that the resource reallocation objective of trade reform is to be dampened if the reform ends prematurely. Second, we discuss how the effects of trad reform under capital controls differ from the effects under a free capital mobility regime, and show that if trade reform is temporary (or incredible) maintaining capital controls may alleviate the intertemporal costs arisen from the temporariness. This provides some arguments for the conventional view that trade account should be liberalized before the capital account. Third, the credibility issue in trade reform is examined. We argue that if the reform is perceived to be incredible to the public, free trade would no longer be optimal since incredibility can act to create an intertemporal distortion. In line with this credibility issue, optimal speed of trade reform is also discussed. We demonstrate that grndualism may be preferred and be optimal when there is a credibility problem in the current reform. Finally, a simulation model of Korea is established to re-examine the issues of timing, sequencing, speed and credibility in an integrated framework. By and large, the results obtained from the simulation analysis conform to our theoretical predictions. The simulation results also predict that Korea's pre-announced tariff reform program announced in 1988 for the period of 1989-1993 would generate a substantial welfare gain, if it is implemented as announced.