Sectoral FTA Gains, Conflicts and the Role of Inter-Industry Factor Mobility: Evidence from Korea’s free trade agreement

Free trade agreements (FTA) can ignite domestic conflicts between the export and the import-competing industries over trade gains. However, if the factors of production such as capital and labour move freely across industries, the returns to factor owners will quickly converge. Then, sectoral conflicts over FTAs will be less likely to arise. We analyse the case of South Korea’s FTAs to measure 1) sectoral FTA gains and 2) inter-industry factor mobility and to examine 3) the role of inter-industry factor mobility in mitigating sectoral conflicts over trade policies. South Korea is ideal due to low barriers to domestic geographic mobility and high trade dependence. Based on its trade data with 252 countries and factor returns between 2002 and 2017, we find that export industries did not gain much from the FTAs while the import-competing agricultural sector was the winner. Sectoral conflicts greatly decreased over 2008-2010. Inter-industry capital mobility plays a significant role in weakening the sectoral conflicts while the impact of inter-industry labour mobility is limited.