FTA in International Finance: Impacts of Exchange Rates on FTA Utilization

Discussion Papers

No.494

by Kazunobu HAYAKAWA , Han-Sung KIM, and Taiyo YOSHIMI

February 2015

ABSTRACT

This paper investigates how exchange rates affect the utilization of a free trade agreement (FTA) scheme in trading. Changes in exchange rates affect FTA utilization by two ways. The first way is by changing the excess profits gained by utilizing the FTA scheme, and the second way is by promoting the compliance of rules of origin. Our theoretical models predict that the depreciation of exporters’ currency against that of importers enhances the likelihood of FTA utilization through those two channels. Furthermore, our empirical analysis, which is based on rich tariff-line-level data on the utilization of FTA schemes in Korea’s imports from ASEAN countries, supports the theoretical prediction. We also show that the effects are smaller for more differentiated products.

Keywords: Free trade agreement; Exchange rates; Exchange rate pass-through; Rules of origin
JEL classification: F13; F15; F31; F36

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