Background of Research
At the time of the signing of the Korea-Chile FTA, there was much concern that the FTA would cause heavy damages to the overall domestic fruit industry. But unlike the concern, the domestic fruit industry was able to maintain a production level similar to the one before the FTA, although there were overall market price increases.
The purpose of this study is to conduct an ex post economic assessment of the domestic measures related to the Korea-Chile FTA as seven years have passed since the coming into effect of the free trade agreement in 2004.

Method of Research
An empirical analysis was carried out in three ways. First, a non-parametric equilibrium displacement model (DEA) and the Malmquist productivity index were used to evaluate productivity and efficiencies of the government policies for implementing the Korea-Chile FTA. Second, cost-reduction effects were calculated by constructing a regional and periodical panel model using the investment and financial results of the domestic FTA measures for the fruit industry. In addition, the effects of investment and financial measures on the farmers' selling prices of fruits were estimated using an inverse demand function. We calculated the effects of quality improvements and product diversification on increasing the added value. Finally, the effects of policy changes such as FTA　tariff　cuts, business closure subsidy, and increases in mid- and long-term investments and finances on the market equilibrium were evaluated using the EMD for the main items that are imported from Chile.

Research Results and Implications
The regional differences in productivity and efficiency have shown that the regions adopting the FTA subsidy retained higher productivity and efficiencies than the regions that did not receive the subsidy. The investment and financial support for the Korea-Chile FTA was shown to have partly contributed to production increases, production cost reductions, increases in the added values of final products, and distribution cost reductions.
The EDM showed that social welfare reduction from the tariff cut of Chilean grapes is estimated to have stood at 5.3~117.6 billion won and the increasing effect of investment and finance is estimated to have stood at 21.4~78.7 billion won. Producers' surplus and consumers' surplus were estimated to have decreased by 2.4 billion won and 4.9 billion won, respectively, as a result of the business closure subsidies. The reduction in the supply of grapes by the business closure was estimated to have the effect of increasing the sales amount of grapes by 2.4 billion won through the increase of domestic selling prices. As a result, the business closure subsidy policy seemed to have caused a decrease in consumers' surplus without producing any positive effect on the production side. Seen from a comprehensive perspective, the domestic measures in response to the Korea-Chile FTA can be evaluated to have the input-output ratio of almost 1. If the effect of welfare reduction caused by the tariff cut is reflected and the imperfect substitution relationship between domestic and imported grapes is considered, the domestic measures may be an inefficient one that would result in an input-output ratio of less than 1. Consequently, the assessment of the social efficiency of domestic FTA measures will vary depending on the severity of damages from the import.
As shown in the case of grapes, not only the supply curve of other fruits shifted downward, but the demand curve also shifted upward. If the width of fluctuations in the demand curve gets larger, the effect of investment and financial support on social welfare increase can be greater. In conclusion, it is necessary to expand investment and financial support to accelerate quality improvement and development of new varieties and eco-friendly agricultural products.


Researchers: Hanpil Moon, Myong-Keun Eor, Hanul Park, Seungho Oh, Iksu Jeon, Sang-Gon Jeon
Research period: 2012. 1. - 2012. 12.
E-mail address: hanpil@krei.re.kr