Proposed U.S.-South Korea Free Trade
Agreement and Potential Employment Effects:
Analysis of Studies

Mary Jane Bolle
Specialist in International Trade and Finance
James K. Jackson
Specialist in International Trade and Finance
April 11, 2011
Congressional Research Service
7-5700
www.crs.gov
R41660
CRS Report for Congress
P
repared for Members and Committees of Congress

Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

Summary
The Obama Administration finalized negotiations with South Korea in early December 2010 on a
bilateral free trade agreement. As a result, the administration is expected to submit implementing
legislation to the 112th Congress on the proposed agreement, but to date has not indicated a
timeline for doing so. The 112th Congress may also be asked to consider implementing legislation
for proposed free trade agreements with Columbia and Panama. Congress not only plays a direct
role in approving legislation that implements the provisions of free trade agreements, but also
authorizes and appropriates funding for programs that are meant to provide special assistance to
firms and workers that are dislocated as a result of lower barriers to trade. Since the proposed
agreement covers a wide range of trade and investment issues, it could have substantial economic
implications for both the United States and South Korea. South Korea is the seventh-largest
trading partner of the United States, and the United States is South Korea’s third-largest trading
partner.
Similar to other trade agreements, the proposed U.S.-South Korea Free Trade Agreement
(KORUS-FTA) has attracted both supporters and detractors, primarily over the impact the
agreement could have on employment in the economy. Supporters argue that the agreement could
create as many as 280,000 jobs in the economy. Others, however, argue that the agreement could
lead to an overall loss of up to 159,000 jobs in various sectors of the economy. Still others
contend that the United States stands to lose exports, employment, and extended economic
opportunities if it fails to sign a trade agreement, while the European Union and other nations are
lining up to finalize similar agreements with South Korea.
Estimating the economic impact of trade agreements, however, is a daunting task, due to a lack of
data and important theoretical and practical matters associated with generating results from
economic models. In addition, such estimates provide an incomplete accounting of the total
economic effects of trade agreements. This report assesses the results of a number of models that
are being used to generate estimates of the effect of the KORUS FTA on employment. These
studies were chosen specifically because they estimate (or can be used to estimate) data on
employment effects of the trade agreement. All economic models incorporate various
assumptions that are necessary in order for the model to generate results. Invariably, these
approaches determine, to some extent, the results that are generated and, therefore, limit their
representation of the real world economy. Currently, the various models produce widely disparate
estimates of the number of jobs affected by the trade agreement, reflecting the various
assumptions that are used in the models and differences in the approaches.
From the perspective of a large open economy such as the U.S. economy, international trade is
not a major determinate of total employment in the economy, real wages in the economy, or the
overall level of production. This is especially true for bilateral trade agreements with individual
countries where the impact on the economy as a whole is expected to be small. Nevertheless,
some sectors of the economy are likely to be affected more than others. Congress has
demonstrated an ongoing interest in assessing the economic impact of trade agreements and, at
times, has provided assistance to those workers and firms that are disproportionately affected.

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Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

Contents
Introduction ................................................................................................................................ 1
Estimating Employment Effects of Trade Agreements ................................................................. 2
Trade and Employment in the U.S. Economy .............................................................................. 6
Jobs Gained and Lost for the Economy as a Whole................................................................ 7
Benefits and Costs of International Trade .................................................................................... 8
Benefits of Trade................................................................................................................... 9
Impact of Trade on the Composition of Employment in the Economy.............................. 9
Adjustment Costs of Trade .................................................................................................. 10
Issues Involved in Quantifying the Employment Effects of Trade ........................................ 10
Estimates of Employment Effects of the KORUS FTA .............................................................. 11
The USITC Estimate........................................................................................................... 11
The University of Michigan Estimate .................................................................................. 12
Associated Estimates........................................................................................................... 13
Additional Estimates ........................................................................................................... 15
U.S.-Korea Business Council Estimate.......................................................................... 15
Economic Policy Institute Estimate ............................................................................... 16
Additional Problems Involved in Linking Changes in Production with Changes
in Employment ...................................................................................................................... 16
Conclusion................................................................................................................................ 18

Figures
Figure 1. Value of the Korean Won Relative to the Dollar and the Euro ...................................... 4

Tables
Table 1. Estimates on the Employment Effects of KORUS FTA .................................................. 5
Table 2. Jobs Gained and Lost Annually in the U.S. Economy
and Job Turnover Rate, 2006-2009........................................................................................... 8
Table 3. University of Michigan Estimate of Potential Sectoral Employment Effects of
the Korea-U.S. Free Trade Agreement .................................................................................... 12
Table B-1. Key Steps Involved in Converting Changes in Tariff Rates
into Changes in Employment ................................................................................................. 23

Appendixes
Appendix A. Employment Population and Shares of the Economy, by Major Industry and
Sector, 2010........................................................................................................................... 20
Appendix B. Standard Assumptions of Economic Models ......................................................... 21
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Contacts
Author Contact Information ...................................................................................................... 23

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Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

Introduction
Congress plays a major role in formulating and implementing U.S. trade policy through its
Constitutional role in regulating foreign commerce. This role includes providing authority to the
President to conclude trade agreements to eliminate and reduce tariff and non-tariff barriers to
U.S. trade with other countries. For Members of Congress, trade can be a difficult issue, because
decisions that liberalize trade flows have mixed effects on U.S. domestic and foreign interests,
both economic and political. Historically, Congress has supported policies to open international
markets to U.S. goods, services, and agriculture. It also has weighed carefully the economic
impact of trade agreements to asses their benefits and costs. Congress also has enacted targeted
adjustment assistance programs to provide training and other assistance to help workers and firms
that may be dislocated by greater market opening adjust to new economic opportunities.
With likely congressional consideration of a proposed free trade agreement between the United
States and South Korea (KORUS-FTA), a number of estimates are being offered to quantify
potential effects of the FTA on U.S. employment.1 This report will discuss the models that are
used to estimate the employment effects of the agreement and their various assumptions that are
necessary in order for the model to generate results. Invariably, these assumptions determine to
some extent the results that are generated and, therefore, limit their representation of the real
world economy. The models also are highly sensitive to the assumptions that are used to establish
the parameters of the models and are hampered by a lack of data in some areas.
In general, the various economic models provide differing estimates of the magnitude of changes
in U.S. employment that could arise from a trade agreement with South Korea, reflecting
different assumptions and conditions. Both advocates and opponents of the KORUS FTA cite
results of these studies to support their position. Each of these models has strengths and
weaknesses and varies in the degree to which it reflects economic reality. These models are
discussed at greater length in the analyses that follow. In addition, the potential job effects need to
be viewed in terms of their relative share of U.S. employment.
Estimates from the studies range from as many as 280,000 jobs potentially gained to 159,000 jobs
potentially lost over the ten-year implementation period of the KORUS-FTA. Middle-range
estimates include one often cited by the Obama Administration, which suggests that the KORUS
FTA would support 70,000 export jobs. At the other end of the spectrum, other estimates suggest
that the United States could lose 345,017 jobs over ten years if the United States does not approve
and implement the KORUS-FTA but the European Union (EU) and Canada implement their FTAs
with South Korea. None of these estimates, which represent gains or losses in employment over a
ten-year period, account for more than 1.4% of total goods-producing employment, or 0.26% of
total employment in the U.S. economy in 2009.
None of these studies, however, draws a direct link between any expected changes in trade from a
change in tariffs to changes in employment. These estimates reflect different methodologies and
assumptions, and a partial accounting of the total economic effects of such agreements. For
instance, the proposed agreement includes provisions on trade in goods, services, and investment.

1 For additional information on the KORUS FTA, see CRS Report RL34330, The Proposed U.S.-South Korea Free
Trade Agreement (KORUS FTA): Provisions and Implications
, coordinated by William H. Cooper and CRS Report
R41389, Pending U.S. and EU Free Trade Agreements with South Korea: Possible Implications for Automobile and
Other Manufacturing Industries
, by Michaela D. Platzer.
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Due to the complexities involved and a lack of data, nearly all estimates focus only on changes in
goods-producing employment. As a result, they do not serve well as an indicator of the overall
impact of the agreement on the economy. The estimates selected for analysis are the following.
• U.S. International Trade Commission (USITC): U.S-Korea Free Trade
Agreement Potential Economy-wide and Selected Sectoral Effects2
• The University of Michigan: Economic Effects of a Korea-U.S. Free Trade
Agreement3
• U.S.-Korea Business Council: Failure to Implement the U.S.-Korea Free Trade
Agreement: The Cost for American Workers and Companies4
• Economic Policy Institute (EPI): Trade Policy and Job Loss: U.S. Trade Deals
with Colombia and Korea Will be Costly5
In addition, two other estimates, derived by the USITC and released by the Obama
Administration and the Majority Staff of the Senate Finance Committee Trade Subcommittee, are
reported.
Congress has demonstrated an ongoing interest in concluding trade agreements to eliminate and
reduce barriers to U.S. trade in goods, services, and agriculture, and it has assumed a direct role in
assessing the impact of trade agreements on the U.S. economy. This report provides background
and context for the analyses of the various estimates. It summarizes congressional interest in the
issue and then examines the specific estimates—their findings, assumptions, methodologies, and
the limitations of those methodologies. Finally, it explains the broader macroeconomic and
microeconomic context in which the composition of employment within the economy is affected
by a new trade agreement.
Estimating Employment Effects of
Trade Agreements

Although discussions of trade agreements often focus on potential employment gains or losses,
most economists argue that such employment estimates represent a partial accounting of the total
economic effects of trade agreements and, therefore, do not perform well as an indicator of the
overall impact of the agreement on the economy. As this report attempts to explain, estimating
such employment effects is imprecise and highly sensitive to the assumptions that are used.6 In
addition, while trade agreements generally are comprehensive in nature and cover goods,
services, and investment, most employment estimates focus narrowly on the goods sector and do

2 USITC Publication 3949, September 2007. Seven chapters plus additional material.
3 Kozo Kiyota and Robert M. Stern, Research Seminar in International Economics, Discussion Paper No. 557, Gerald
R. Ford School of Public Policy, April, 2007.
4 Laura M. Baughman and Joseph F. Francois, November, 2009. The U.S.-Korea Business Council is affiliated with the
U.S. Chamber of Commerce, 4 p.
5 Robert E. Scott, February 25, 2010, 13 p.
6 Hertel, Thomas, David Hummels, Maros Ivanic, and Roman Keeney, How Confident Can We Be in CGE-Based
Assessments of Free Trade Agreements?
, GTAP Working Paper No. 26, March 2004; Brockmeier, Martina, A
Graphical Exposition of the GTAP Model, GTAP Technical Paper No. 8, March 2001.
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not adequately represent the total impact of the agreements. It is difficult to estimate precisely the
employment effects associated with liberalizing trade in services and reducing or eliminating
barriers to investment flows. Trade in services, in particular, is characterized by a broad array of
formal and informal barriers that challenge efforts to translate the barriers into tariff-equivalent
values. Negotiations to reduce barriers to trade in services, however, potentially could have a
very large and positive effect on the U.S. economy, since the United States is highly competitive
in a number of services sectors and U.S. direct investment abroad often spurs exports.
Finally, estimates of employment arising from FTAs, by themselves, do not account for a broad
range of benefits for the economy as a whole. For example, FTAs may provide individual
consumers and firms with broader economic benefits and yield broad productivity and efficiency
gains for the economy over the long run that may enhance employment. While most economic
trade models attempt to model consumer and corporate behavior associated with changes in
income, the results of the models depend on a number of factors, including the way changes in
prices are passed along to consumers. Most estimates generally assume that the changes in tariffs
and, therefore, changes in the prices of goods, will be adopted at the time the agreement is signed
and then the annual changes in traded goods are aggregated over ten years. In fact, in the
KORUS-FTA, some tariffs will drop to zero immediately, while others will be implemented in
tariff reduction stages over ten years, with the impact on prices accruing over time. In the models,
expected changes in the trade in services generally are treated as exogenous factors and must be
specified outside the model itself.
A key assumption used in generating a number of the estimates of the impact of the KORUS-FTA
is the level of employment in the U.S. economy during the ten-year period required to phase in
the agreement. None of these estimates, however, generate precise estimates of the exact number
of jobs to be gained or lost, but generate estimates that reflect the relative magnitude of changes
in employment that could be expected over ten years, provided that all other things remain
constant. One approach assumes that the U.S. economy operates at a level of full employment
over the next decade and holds the level of employment in the economy stable while wage rates
are allowed to adjust. A second approach, and one that has been used extensively to derive many
of the estimates evaluated in this report, assumes that the economy is marked by a rate of
unemployment that reflects current economic conditions, or an economy that is operating at less
than full employment. This assumption, more than any other, seems to be the most important
factor generating estimates of employment effects under the KORUS-FTA. While the U.S.
economy currently is operating at less than full employment, it seems reasonable to assume that
over the next ten years the economy will return to its long-term trend that is closer to full
employment as the economy recovers from the most severe economic recession in the post-World
War II period.
Trade models of the type used in the analysis of free trade agreements are part of a class of
economic models referred to as computable general equilibrium models (CGE) that incorporate
data on trade and a range of domestic economic variables on nearly 100 countries. As a result of
this large number of countries, and the vast amounts of data that are a part of the model, the
models can provide important insights into the mechanisms by which changes in tariffs or other
parameters can affect a range of countries. For practical reasons, however, the data in the models
must be limited, so the models necessarily must sacrifice some level of precision in their
estimating abilities. Since such trade models originally were developed with the intent of
analyzing the economic effects of multi-country trade agreements such as the Uruguay Round,
this lack of precision was not considered to be an important drawback. However, this lack of
precision may be an issue when the models are used to estimate the effects of bilateral trade
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agreements where the overall amount of trade and, therefore, the impact of the agreement, is
expected to be less than that of a comprehensive multilateral agreement. In addition, such models
do not account for changes in exchange rates, since such effects were considered to be neutral in a
large multi-country trade agreement. Movements in exchange rates, however, could have an
important impact on trade patterns that involve countries that are parties to a bilateral trade
agreement.
With floating exchange rates, movements in those rates can have an important effect on the prices
of internationally-traded goods. Figure 1 shows the movement of the internationally trade value
of the won relative to the dollar and the Euro and movements in the dollar-Euro relationship,
indexed to January 2005. In this presentation, a rise in the index indicates a depreciation in the
value of the won relative to the dollar and the euro and the depreciation of the dollar relative to
the euro between January 2006 and January 2011. Between January 2008 and January 2009, the
won depreciated about 44% against the dollar and 30% against the euro largely due to a flight to
the dollar during the financial crisis, a sharp drop in capital inflows to South Korea, and the
largest annual drop in South Korean exports on record. After recovering somewhat between
January 2009 and mid-2010, the won experienced another bout of depreciation relative to the
dollar and the euro as international markets became more cautious as a result of financial
problems in Greece, Ireland and other European countries and concerns over political
developments in neighboring North Korea. By February 2011, the won remained 19% and 10%
below its value in January 2008 relative to the dollar and the euro, respectively. Such changes in
the value of the won relative to the dollar and the euro would have a significant impact on the
prices of goods to and from South Korea and possibly eclipse the relatively small changes in tariff
rates proposed under the respective FTAs.
Figure 1. Value of the Korean Won Relative to the Dollar and the Euro

2005 Jan = 100
140
Won/Euro
130
US$/Euro
Won/US$
120
110
100
90
80
Jan
Jan
Jan
Jan
Jan
Jan
Jan
2005
2006
2007
2008
2009
2010
2011
Source: Developed by CRS from data published by the Federal Reserve and the European Central Bank.
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Since the KORUS FTA was signed in 2007, a number of estimates of the potential effects of the
KORUS FTA have been released that attempt to estimate the effect of the proposed trade
agreement on U.S. employment. The estimates range from 280,000 jobs gained to a loss of
159,000 jobs if the United States does adopt the agreement. Two of the estimates are based on
standard economic modeling, two others were developed by the USITC, and two represent
estimates derived from unique approaches. Table 1 below summarizes all six estimates. These
estimates will be discussed in greater detail below. The two standard model estimates were
undertaken by the USITC and the University of Michigan. Neither of these efforts estimated the
total number of U.S. jobs created or lost by the KORUS FTA.7 but focused instead on potential
economy-wide trade effects and sectoral shares of those effects. In contrast, two other approaches
by the U.S.-Korea Business Council and the Economic Policy Institute, attempted to estimate
employment effects of the KORUS FTA indirectly.
Table 1. Estimates on the Employment Effects of KORUS FTA
Estimated Trade or Employment
Gain or Loss over Total
Implementation Period
Employment Estimate in
Study/Estimate
(about 10 years)
Perspective
USITC: U.S.-Korea Free Trade
No estimate. Study assumed ful
No employment estimates were
Agreement Potential Economy-Wide and
employment, so it projected only share
made.
Selected Sectoral Effects, 2007 (for the
shifts among goods-producing industries.
goods sector only).
Study estimates net export gains of
$3.3-$4.0 billion in the goods-producing
sectors.
University of Michigan: Economic
Like the USITC study, this study
85% of the projected job gains
Effects of a Korea-U.S. Free Trade
assumes full employment and therefore
are in agricultural industries;
Agreement, 2007 (for the goods and
estimates share shifts among industries.
90% of the projected job losses
services sector).
However, it also includes jobs data by
are in six industry sectors:
industry for 2006, so it applies estimated government services, trade and
share changes to actual jobs data, to
transportation services, and
estimate job gains and losses by industry. manufacturing production for
In addition, this study covers services as
textiles, apparel, transportation
well as goods.
equipment, and metal products.
The White House: Remarks by the
Estimates, based on USITC projections
This estimate is equal to 0.4% of
President at the Announcement of a U.S.-
of goods trade, that the agreement
total manufactured goods
Korea Free Trade Agreement, 2011 (for could support at least 70,000 U.S.
employment in 2010.
the goods sector only).
export jobs.
Majority Staff of the Senate Trade
Estimates reflect recalculations using the This estimate is equal to 1.4% of
Subcommittee of the Finance
USITC model, at the request of the
total manufactured goods-
Committee: Updated Assessment of the Subcommittee, to reflect 2009 trade and producing jobs in the United
U.S.-Korea Free Trade Agreement (FTA),
economic conditions. From this
States in 2010.
2011 (for the goods sector only).
recalculation, the Subcommittee
estimates that the agreement has the
potential to create 280,000 U.S. goods-
producing jobs.

7 This result arises from a standard assumption in economic modeling that employment is held constant in order to
estimate the sectoral effects of changes in tariff rates. The model also assumes that prices and wages will adjust to
determine changes in demand for various goods as a result of changes in tariff rates.
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U.S.-Korea Business Council: Failure to Estimates that if European Union and
Estimated jobs lost are equal to
Implement the U.S.-Korea Free Trade
Canada implement their FTAs with
0.3% of total goods and services
Agreement: The Cost for American
Korea and the United States does not,
jobs supporting exports for
Workers and Companies, 2009 (for the the United States could lose 345,017
2010.
goods and services sector).
goods and services jobs from U.S. trade
diversion to other countries.
Economic Policy Institute (EPI): Trade
Projects that 159,000 U.S. goods-
Estimate represents 0.8% of al
Policy and Jobs Loss: U.S. Trade Deals
producing jobs could be lost as a result
goods producing jobs in 2010.
with Colombia and Korea Will be Costly,
of increased trade deficits with South
2010 (for the goods sector only).
Korea.
Source: Various studies listed above.
Trade and Employment in the U.S. Economy
In a dynamic economy such as the United States, jobs are constantly being created and replaced
as some economic activities expand, while others contract, reflecting broad macroeconomic
developments. In this process, various industries and sectors evolve over time at different speeds,
reflecting differences in technological advancement, productivity, and efficiency. Those sectors
that are the most successful in developing or incorporating new technological advancements
generate greater economic rewards and are capable of attracting greater amounts of capital and
labor. In contrast, those sectors or individual firms that lag behind are less capable of attracting
capital and labor and confront ever-increasing competitive challenges. Indeed, depending on the
overall state of the economy, some sectors may need to relinquish some capital and labor in order
for others sectors to grow to avoid economic stagnation. Also, advances in communications and
technology have facilitated a global transformation of economic production into sophisticated
supply chains that span national borders and defy traditional concepts of trade that potentially
could involve a greater share of the labor force in trade-related activities.8 How firms respond to
these challenges likely will determine their long-term viability in the market place.
At the plant level, job openings may come from new business openings or from expansions at
existing facilities, including those that are used to support increased exports. Job losses may come
from voluntary departures, involuntary discharges, or from business closures for any reason,
including bankruptcy, personal choice, inability to compete in the domestic market, import
competition, or production shifts. The Bureau of Labor Statistics, Business Employment
Dynamics (BED) Report tracks gross jobs gained and lost in the economy as a whole and in
specific sectors and reveals the dynamics underlying gross changes in employment. As Appendix
A
shows, 15% of total U.S. employment in 2010 was in the goods-producing industries, while the
services-producing industries accounted for 68% of the employed population. The remaining 17%
of employment was in the government sector, with employment at the State and Local
government level accounting for 15% and the federal government sector accounting for 2%

8 See CRS Report R40167, Globalized Supply Chains and U.S. Policy, by Dick K. Nanto.
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Jobs Gained and Lost for the Economy as a Whole
Table 2 shows the gross number of jobs gained and lost for the economy as a whole for the
goods- and services-producing sectors, and for the number of jobs related to exports, during the
period 2006-2009. This process of job turn-over typically affects 18-20% of the jobs in the total
economy each year (when percentages of gross jobs gained and gross jobs lost are combined).
This process is stronger in the goods-producing sector of the economy, where a number
equivalent to 24%-27% of the jobs are typically gained or lost each year, compared with the
services sector, where the comparable share is 17%-18%. Such job turn-over is amplified by
economic expansions or recessions, as was the case in 2008-2009, when the economy
experienced the most severe recession in the post-World War II period.9
The data in Table 2 also indicate that
1. Jobs supported by exports represent a small share of the total number of jobs in
the economy and are equivalent to about one-third of the total number of jobs
gained or lost in the economy as a whole during a year. Jobs supported by exports
were equivalent to a small share of the annual turn-over in jobs, ranging from 6%
to 8% of the annual turnover of jobs in the economy between 2006 and 2009.
2. Within the goods-producing sector, however, such export-related jobs were
equivalent to 29% to 35% of total jobs, and within the services sector they
averaged about 2%. Similar to overall job gains and losses for the total economy,
jobs supporting exports are sensitive to the business cycle.
3. Business cycle effects were particularly apparent between 2008 and 2009, when
the global economic recession and financial crisis sharply reduced global trade.
As a result, jobs in the economy supported by trade fell by about 1.8 million jobs,
or from 8% of total employment to 6% of total employment, or by about one-
fourth of its share of total employment.
Some would argue that the data on jobs gained and lost throughout the whole economy do not
adequately reflect the concern of workers about job losses. According to data published by the
Bureau of Labor Statistics, during the last two years of the most recent economic expansion
(2005-2007), 3.6 million workers were displaced from jobs they had held for at least three years.
Of those workers, by the end of January, 2008, only 67% had been re-employed in full-time jobs
and only 22% were in jobs where their salaries matched their previous income level.10

9 Job effects of recessions are a lagging indicator, in that job losses typically begin well after the recession is underway,
as employers are slow to let go of workers, hoping the economy will recover quickly. Similarly, job gains typically
accelerate when the economy is well into its recovery and employers are convinced that the recovery will continue into
an expansion phase.
10 Bureau of Labor Statistics. Worker Displacement, 2005-2007, August 20, 2008. “Displacement” is defined as the
loss of jobs held for at least three years for reasons of plant closure, plant relocation, insufficient work, or abolition of
the position or shift. For the period of the recession of December 2007-June 2009, the data indicate that 1) by January
of 2010, 6.9 million workers had been displaced from jobs they had held at least three years; 2) by January of 2010,
only 49% had been re-employed full-time; and 3) only 12% of the displaced workers had found jobs paying wages
equal to their previous level. Bureau of Labor Statistics, Worker Displacement 2007-2009, August 26, 2010.
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Table 2. Jobs Gained and Lost Annually in the U.S. Economy
and Job Turnover Rate, 2006-2009
(Percentages refer to shares of total jobs in that respective sector)

2006 2007 2008 2009
% of
% of
% of
% of
No. of
Total
No. of
Total
No. of
Total
No. of
Total
Jobs
Jobs
Jobs in Jobs
Jobs in Jobs
Jobs in Jobs
Jobs in
Sector
Measure
(000)
Sector (000)
Sector (000)
Sector (000)
Sector
Total
total jobs
136,086 100%
137,598 100%
137,066 100%
131,997 100%
Economy
gross jobs
gained
14,019 10%
13,441 10%
12,704 9%
10,048 8%
gross jobs
lost
11,438 8%
11,941 9%
12,609 9%
15,912 12%
jobs
supported
by exports
8,950 7%
9,540 7%
10,293 8%
8,500 6%
Goods-
total goods-
Producing
producing
Sector
jobs
22,531 100% 22,233 100% 21,419 100% 18,938 100%
gross jobs
gained
2,961 13% 2,677 12% 2,049 11% 1,618 9%
gross jobs
lost
2,512 11% 2,891 13% 3,041 14% 4,238 22%
jobs
supported
by exports
6,576 29% 6,920 31% 7,525 35% 6,000 32%
Services-
total
Producing
service-
Sector
producing
jobs
113,556 100%
115,366 100%
115,646 100%
113,059 100%
gross jobs
gained
11,059 10%
10,763 9%
10,296 9%
8,430 7%
gross jobs
lost
8,928 8%
9,048 8%
9,571 8%
11,672 10%
jobs
supported
by exports
2,374 2%
2,619 2%
2,768 2%
2,500 2%
Source: BLS Business Employment Dynamics (BED) Reports, various years for job gains and losses, and Bureau
of Labor Statistics (BLS): Employment and Earnings Table B-3 for total jobs in the U.S. economy, by sector.
Note: The “% of total jobs” column in shows the “churning” rate, or total employee turnover rate.
Benefits and Costs of International Trade
In the current highly globalized economy, international trade has come to represent a complex set
of transactions. Nations not only trade goods and services, but they also trade a broad range of
financial products. In addition, liberalized capital flows and floating exchange rates have greatly
expanded the amount of capital that flows between countries. Basically, trade represents an
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exchange of goods or services between two or more willing parties. Such trade allows nations to
use their resources more efficiently in order to maximize the total amount of goods and services
that are available to their citizens, a common definition of a nation’s standard of living. As a
result of this maximization process, nations trade because it serves their national interests. In the
same way that individuals gain by specializing in activities that use their strongest skills and then
trade with others, nations specialize in the production of certain goods and then trade with other
nations for the goods they do not produce. Essentially, nations export in order to import goods
and services they do not produce, or cannot produce efficiently.
Benefits of Trade
Both the benefits and the costs of trade have become well-publicized. These benefits are
categorized as one-time, or static, benefits, which include gains for consumers and gains for
producers, and dynamic benefits that accrue over time and can positively affect the long-term rate
of growth of a country. While it is not always possible to measure these effects precisely, most
economists believe that the net effect of international trade on the national economy as a whole is
positive, that is, that the total gains exceed the total costs. By reducing foreign barriers to U.S.
exports and services and by removing U.S. barriers to foreign goods and services, trade
liberalization helps to strengthen those industries that are the most competitive and productive
and to reinforce shifts in labor and capital from less productive endeavors to more productive
economic activities.
Impact of Trade on the Composition of Employment in the Economy
An important issue in estimating employment effects from increased trade and trade agreements
is the difference between the microeconomic viewpoint and the macroeconomic viewpoint. In a
dynamic economy such as the U.S. economy, the composition of jobs is constantly changing as
some sectors grow and other sectors decline. This constant churning would continue even in the
complete absence of international trade. International trade adds to the myriad of factors that
determine the composition of output and jobs within the economy. From the microeconomic
perspective, or the viewpoint of the individual firm, competitive pressures from international
trade, as well as a broad range of other factors, determine the viability of individual plants or
firms. Given these competitive pressures, firms face a number of choices. How such firms choose
to respond to the competitive pressures likely determines the overall viability of the firm in the
marketplace. As a result of these actions, some firms expand, while others contract.
In contrast, the macroeconomic viewpoint focuses on the net overall direct and indirect economic
effects of trade. Direct effects include changes in the composition of employment and production
for the economy as a whole. Indirect effects can include secondary and tertiary effects in
industrial sectors that may be more difficult to estimate. It is assumed that trade agreements affect
production and consumption as a result of the impact of the agreements on the prices of goods.
Presumably, trade agreements lower the tariffs on imported goods, which result in lower prices on
imported goods and shift domestic production in ways that make the economy more efficient.
Consumers benefit directly from the lower prices of imported goods to the extent that they shift
their consumption in favor of the lower-priced imported goods. They also benefit from an
increase in their real incomes as a result of the lower prices of imported goods. Consumers may
benefit further from lower domestic prices to the extent that domestic producers lower their prices
in response to the competition from imports.
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Throughout this process, however, the total number of jobs in the U.S. economy is not

affected, that is, trade agreements do not affect the total number of jobs in a large open
economy such as the U.S. economy, but can affect the composition of employment. This result
becomes more binding as the economy approaches full employment. Since the KORUS-FTA is
expected to be implemented over a ten-year period, it seems reasonable to assume that the U.S.
economy will revert to its long-term trend toward full employment, rather than remain at the
current level with underutilized resources that reflect the 2008-2009 recession. The total number
of jobs in the U.S. economy is determined by such macroeconomic factors as productivity
growth, the growth rate of the population, and the pace of technological innovation. Changes in
any of these “structural” factors, together with short-term fluctuations in the business cycle and
shifts in the relative value of the dollar against other currencies, may overwhelm effects of any
industry-wide job “gains” or “losses”11 from trade and trade agreements.
As the U.S. economy shifts the composition of production from labor-intensive, import-
competing products to capital-intensive, export-oriented products, more labor than capital is
released. Because those displaced from labor intensive jobs may not have the skills to
immediately become employed in more capital intensive jobs, labor dislocations in the economy
may result.
Adjustment Costs of Trade
Economists have long recognized, however, that the long-term production gains associated with
greater specialization in the economy create a wide range of adjustment costs as labor and capital
are shifted from less efficient industries and activities into more efficient industries and activities.
These adjustment costs are difficult to measure, but they are potentially large over the short run
and can entail significant dislocations for some segments of the labor force, for some companies,
and for some communities.12 In negotiating trade agreements, governments are most mindful of
the adjustment costs involved and, at times, are constrained in their ability to fashion such
agreements because of opposition by groups within the economy that would bear heavy costs
from trade liberalization. These costs are especially acute for labor groups within the economy
that lack advanced education and training skills that provide them with the means necessary to be
redeployed in other sectors of the economy.
Issues Involved in Quantifying the Employment Effects of Trade
Quantifying the relationship between international trade and the composition of employment in
the economy is problematical and complex. For the United States, international trade is not the
primary force creating employment in the economy. While trade agreements with specific
countries may well benefit certain sectors of the economy, their effect is dubious as an
employment program for the economy as a whole. In addition, changes in exchange rates and in
the business cycle can affect the overall state of the economy in ways that can outweigh the
effects of trade agreements, given the already highly open state of the U.S. economy. In addition,
significant gaps in data, particularly relative to the services sector, hinder the ability to model the

11 The words “gain” and “loss” are in quotes because, when an economy is functioning at full employment, total jobs
are neither gained nor lost for the economy as a whole, but rather shifted among industries.
12 For an overview of this issue, see Globalization, Worker Insecurity, and Policy Approaches, by Raymond J. Ahearn,
CRS Report RL 34091.
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effects of trade agreements that lower barriers to trade in services. These gaps are important,
because the services sector accounts for 69% of output and 68% of full- and part-time
employment in the U.S. economy and increased trade in services offer potentially large gains for
the U.S. economy.
In addition, concerns over the impact of a trade agreement on employment often focus on a
comparison of labor compensation rates between countries. For instance, some groups in the
United States are concerned that U.S. employment could be negatively affected because labor
compensation rates, in general, are lower in South Korea. Measures of competitiveness, however,
reflect not only the rate of labor compensation, but the rate of compensation relative to the level
of productivity. Rates of labor compensation in the United States could be many multiples of that
in South Korea, but as long as U.S. workers remain more productive than workers elsewhere,
U.S. goods would continue to be competitive in the global marketplace. In general, most
estimates of employment effects do not incorporate measures of productivity in their analysis.
Various approaches typically have been used to estimate the employment effects of trade
agreements, including the KORUS FTA. In most cases, these approaches share some common
features. Similar to other free trade agreements, the KORUS FTA is a comprehensive agreement
that includes provisions to: (1) lower tariffs and non-tariff barriers on trade in goods and
agriculture; (2) reduce barriers to trade in services; and (3) encourage increased flows of
investment. Formal and informal barriers to trade in services, however, are extremely difficult to
quantify in monetary terms, and it is equally difficult to estimate the impact of an agreement on
potential flows of investment. As a result, most approaches derive their estimate of changes in
employment almost exclusively from estimated changes in the value of exports and imports of
goods under the agreement. Even these estimates, however, are imprecise and sensitive to the
assumptions that are used. Appendix B explains some of the most common assumptions used in
economic models.
Estimates of Employment Effects of the
KORUS FTA

The USITC Estimate
The USITC13 used a standard approach and analysis by addressing the issue of how U.S. exports
to and imports from South Korea would be affected by a FTA with South Korea that lowered
tariffs on a set of traded goods. This approach attempted to measure the long-term trade (but not
employment) effects of a one-time full implementation of the KORUS FTA after the full
implementation period of 10 years on U.S. exports and imports. The ITC used an economic
model known as the Global Trade Atlas Project (GTAP), located at Purdue University14 to
estimate changes in trade (exports and imports) from changes in tariff rates and tariff rate quotas.
The results are expressed as proportional effects (percentage increases or decreases in trade) for
various sectors, relative to the projected 2008 economy. According to this estimate, if the KORUS

13 See complete titles and authors of this study on page 2 of this report.
14 The databases are cooperatively produced and maintained by researchers and scholars. The model includes many
sectors and all countries in the world.
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FTA were to go into effect, U.S. merchandise exports to South Korea likely would increase by an
estimated $9.7 billion to $10.9 billion over the first decade after enactment, while merchandise
imports from South Korea likely would increase by an estimated $6.4 billion to $6.9 billion over
the first decade. This would result in an estimated net increase in U.S. exports of $3.3 billion to
$4.0 billion during the first decade after enactment.
The University of Michigan Estimate
In a slightly different approach, economists at the University of Michigan used a similar world
trade model to estimate the effect of a negotiated reduction in tariff rates on export and import
prices and then estimated changes in the volumes of goods exported and imported arising from
those change in prices, as indicated in Table 3. They estimated, using 2006 data, that U.S.
bilateral exports to Korea would increase by $9.2 billion and that U.S. imports from Korea would
increase by $6.9 billion during the first ten years after implementation of the agreement.15 The
total number of jobs gained or lost in the economy is assumed to be zero, because the model
begins with the assumption of full employment. Given this constraint of no changes in the overall
number of jobs gained or lost, the estimates represent expected changes in the composition of
employment
among sectors in the economy. As a result, the estimates should not be viewed as
projections of the exact number of jobs gained or lost by sector, but as estimates of the magnitude
of the changes that could occur. Given this caveat, the estimates indicate that 85% of the
projected job gains would be in the agricultural sector, and 90% of projected job losses would be
in six industrial sectors: government services, trade and transportation services, manufactured
textiles and apparel, transportation equipment, metal products, and machinery equipment.
Standard economic theory provides some insight into which sectors may be expected to gain, and
which sectors may be expected to lose employment as a result of increased trade. Accordingly,
those sectors that represent areas of greatest comparative advantage16 based on the economy’s
endowment of the factors of production (land, labor, capital, technology, and entrepreneurial
ability), are the ones most likely to gain employment. Compared with other countries, the United
States has a comparative advantage in capital-intensive products, many services, and agricultural
products that characterize U.S. exports. This is in contrast to most developing countries, that have
a comparative advantage in more labor-intensive products that characterize U.S. imports.
Table 3. University of Michigan Estimate of Potential Sectoral Employment Effects
of the Korea-U.S. Free Trade Agreement
Projected Change in Employment
Relative to 2006 level
Change in Share of
Change in Number
Total Industry
Industry
of Workers
Employment (%)
Rice 460
1.1
Wheat 388
0.2

15 University of Michigan, op. cit., p. 44.
16 A country is said to have a comparative advantage if it can produce goods more efficiently than a competitor based
on their respective endowments of the factors of production: land, labor, capital, and managerial ability. A country is
said to have a competitive advantage if it can produce a product at a lower cost than a competitor.
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Projected Change in Employment
Relative to 2006 level
Change in Share of
Change in Number
Total Industry
Industry
of Workers
Employment (%)
Other grains
7,446
1.6
Vegetables and fruits
1,064
0.2
Oil seeds
7,151
1.7
Sugar 67
0.1
Plant-based fibers
63
0.0
Other crops
3,390
0.3
Livestock 1,092
0.1
Mining
-363 -0.0
Food, beverages, and tobacco
1,880
0.1
Textiles
-4,426 -0.5
Wearing Apparel
-3,482 -0.6
Leather products and footwear
-171 -0.2
Wood and wood products
-483 -0.0
Chemicals 119
0.0
Nonmetallic mineral products
289
0.0
Metal products
-1,077 -0.0
Transportation equipment
-2,287 -0.1
Machinery and equipment
1,438
0.0
Other manufactures
-186 -0.0
Construction
-68 -0.0
Electricity, gas, and wager
-639 -0.0
Trade and transport
-5,379 -0.0
Other private services
-569 -0.0
Government services
-5,714 -0.0
TOTAL
0 -0.0
Source: Economic Effects of a Korea-U.S. Free Trade Agreement, by Kozo Kiyota and Robert M. Stern,
University of Michigan, April 2007. Source of data for table is ILO (2006), UNIDO (2006) and World Bank
(2006).
Note: Numbers of workers result from estimated share changes in trade projected onto 2006
employment data.
Associated Estimates
Two additional estimates of the employment effects of the KORUS FTA are based on the data
developed by the ITC on the number of U.S. jobs supported by exports.
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In one estimate, the White House apparently used the ITC data to estimate that an additional
70,000 U.S. workers would be supported by new exports under the proposed KORUS FTA. This
estimate appears to be based on data developed by the ITC regarding the amount of additional
exports that would be created by lowering tariff rates, combined with the data on the number of
U.S. jobs supported by exports. As indicated below, the ITA has stated that the data developed on
the average number of jobs in the economy that are supported by exports should “not be used to
estimate the net change in employment that might be supported by increases or decreases in total
exports, in the exports of selected products, or in the exports to selected countries or regions.”
Some could argue, however, that the White House estimate honored this caution by stating only
that the proposed KORUS FTA “would support” (not create) 70,000 U.S. jobs.17
Another estimate developed at the request of the Majority Staff of the Senate Trade
Subcommittee by the ITC using the GTAP model indicated that the KORUS FTA has the
potential to create about 280,000 American jobs. The Subcommittee asked the USITC staff to
“examine the agreement based on current data and economic conditions.” The Trade
Subcommittee staff modeled two scenarios with differing assumptions. In the first scenario, the
staff assumed that labor and capital in the economy were held fixed, representing an economy
close to full employment and full capacity utilization. Since the scenario assumes that labor is
fixed, there would be no net change in employment, but labor and capital from other industries
would need to be reallocated from other sectors as a result of the KORUS-FTA. This scenario
estimates slightly lower percentage increases in output and employment as a result of the FTA,
since it assumes that the economy is fully employed.
In the second scenario, it is assumed that wages and capital rentals are held constant, but that
there is underutilized labor and capital, similar to an economy that is operating at less than full
employment and that it has excess capacity. The results of this scenario indicated that, “in an
economy with substantial unemployment and underused capital, the agreement has the potential
to expand employment by 0.16%, or approximately 280,000 American jobs.”18 In this scenario,
labor and capital would be drawn from sectors with unemployed labor and capital and from other
sectors. In both scenarios, U.S. exports to South Korea would increase by 4.4% and imports from
South Korea would increase by 1.3%.
The differences between the two scenarios offer a clear example of the importance of the
assumptions that are used to generate estimates of the KORUS-FTA from the economic models.
In this case, the importance of the assumption that the U.S. economy will operate at less than full
employment during the ten-year period of full implementation drives the estimate of employment
gains. It seems reasonable to assume, however, that during the next ten years the U.S. economy
will return to its long-term trend of operating closer to full employment than to remain at the
current levels of underutilization as the economy recovers from the most severe recession in the
post-World War II period.

17 The White House. Remarks by the President at the Announcement of a U.S.-Korea Free Trade Agreement, op. cit.
18 Majority Staff of the Senate Trade Subcommittee, Updated Assessment of the U.S.-Korea Free Trade Agreement
(FTA), op. cit.
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Additional Estimates
U.S.-Korea Business Council Estimate19
The U.S.-Korea Business Council estimated the employment effects of the KORUS-FTA using a
slightly different approach. This approach does not attempt to model the impact of the KORUS-
FTA on the U.S. economy, but addresses a different, but related issue: What would be the impact
on U.S. trade with South Korea if the proposed FTAs between South Korea and the Europe Union
and Canada were implemented, but the South Korea-U.S. FTA were not implemented?
According to the Council, they also used the GTAP model to derive their result. The Council’s
approach involved a number of steps and assumptions. Most importantly, the Council’s approach
assumed that there were underutilized capital and labor in the economy. This assumption is
consistent with an assumption that the U.S. economy operates at less than full employment during
the duration of the ten-year phase-in period. The Council also assumed that the Canadian and EU
FTAs with South Korea would result in a 5% reduction in barriers to trade in services and that
there would be a reduction in trade facilitation costs.
The Council’s first scenario modeled the impact on U.S. output and trade if the three FTAs
involving Canada, the EU, and the United States with South Korea were fully implemented. Next,
the second scenario modeled the impact on U.S. output and trade if the Canadian and EU FTAs
with South Korea were fully implemented, but the U.S.-South Korea FTA were not implemented.
Next, the council derived the difference in the impact on U.S. output and trade by subtracting the
data from the first scenario from the second scenario. As a result of this process, the Council
estimated that the United States would experience a potential loss of 345,000 goods and services
export jobs if the KORUS FTA is not implemented, but the EU and Canadian FTAs with South
Korea are implemented. The estimate assumes that exports to South Korea primarily from Canada
and the EU would be substituted for a certain share of U.S. exports of goods and services, in an
amount equal to $35.1 billion.
This scenario has a number of strengths and weaknesses, although the final estimate appears to be
within the same general level of reliability as the other estimates that are analyzed in this report.
The attempt to model the impact of not implementing the KORUS-FTA is a departure from the
other approaches and highlights the fact that a large number of FTAs are being negotiated by a
broad range of countries with potentially far-reaching impact on the patterns of international
trade. Since the approach used by the Council does not estimate directly the negative impact on
U.S. output and employment of not implementing the KORUS-FTA, this approach can introduce
potential distortions into the estimates. For instance, trade agreements involve both trade
diversion, or shifting trade among competing countries, and trade creation, or new trade
possibilities as a result of changes in trading relationships. Although the model does not capture
the possible trade-creating effects of the FTAs, which would offset some of the trade diversion
effects, the trade-creating effects likely would be small relative to the trade diversion effects. This
estimate is the only one of the current estimates that imposes an assumption of the net impact of a
change in the trade in services.

19 See complete title and authors of this study on p. 2 of this report.
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Economic Policy Institute Estimate
The Economic Policy Institute estimated that the KORUS FTA would result in a loss of 159,000
U.S. goods-producing jobs stemming from a projected increase in the trade deficit with South
Korea. This estimate was derived using an unconventional approach. The EPI did not derive its
estimate directly from estimated changes in trade or the potential employment effects from a free
trade agreement between South Korea and the United States. Instead, the EPI derived its estimate
by averaging the changes that occurred in U.S. trade with Mexico between two different periods:
the two seven-year periods immediately before and after the North American Free Trade
Agreement (NAFTA) went into effect in 1993; and the two seven-year periods immediately
before and after China joined the World Trade Organization in 2001. It then used the average rate
of growth in exports and imports between these periods to estimate percentage changes in U.S.
trade with South Korea under the proposed KORUS FTA. This estimate suggested that the
KORUS FTA would result in a net increase in imports (a trade deficit) rather than net increase in
exports. Next, the EPI study used an estimate of jobs associated with trade to estimate the number
of jobs that would be lost in the United States as a result of a projected increase in the U.S. trade
deficit with Mexico. The EPI approach made a number of assumptions, including
1. Trade proxies. This approach uses a non-trade-weighted average of U.S. trade
with Mexico and China as a proxy for estimated U.S. trade with South Korea
with no clear explanation of why these two cases match the Korea case. Data on
U.S. trade with South Korea are readily available, so it is not clear why these data
are not used to estimate potential changes. Also, U.S. trade with South Korea is
about one-fourth that of U.S. trade with Mexico, and the United States and South
Korea do not share a common border as is the case between the United States and
Mexico.
2. Exchange rates. There are numerous differences between the movement in
exchange rates among the three countries considered in this analysis: China,
Mexico, and South Korea. For Mexico, the second seven-year period following
adoption of NAFTA coincided with the devaluation of the peso. This boosted
U.S. imports from Mexico and likely contributed to a decline in U.S. exports
there. Unlike the peso, China’s currency is linked primarily to the value of the
U.S. dollar. The South Korean won is determined mainly by market forces.
3. Trade and jobs. The EPI estimate also uses some form of an estimate of jobs
related to trade similar to that developed by the ITA on exports supporting U.S.
jobs to estimate the number of U.S. jobs that would be lost as a result of a
projected increase in the U.S. trade deficit with South Korea. As previously
indicated, the ITA has warned that this approach to estimating jobs gained or lost
from trade is not reliable.
Additional Problems Involved in Linking Changes
in Production with Changes in Employment

In a joint project, the Department of Commerce (DOC), Bureau of Economic Analysis (BEA),
and the Bureau of Labor Statistics (BLS), estimated the average number of jobs supported by
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exports in the U.S. economy based on the dollar value of output relative to the average number of
jobs required to produce that output for each industry.20 As a result of this joint effort, the
Commerce Department determined in its 2010 update that on average $166,000 in goods exports,
$216,000 in services exports, or a weighted average of $180,000, supported one job in each
respective sector.21
At times, some estimates of the employment effects of FTAs have been derived from this DOC
report on employment in the economy supported by exports. In some cases, the data have been
used in reverse to argue that if a certain number of jobs were supported by a billion dollars of
exports, then that same number could be used to argue that a certain number of jobs would be
“lost” by a billion dollars of imports, so that any net increase in imports associated with a trade
agreement would necessarily result in a loss of employment for the economy. The composition of
U.S. imports, however, is fundamentally different from U.S. exports. While some imports and
exports represent clearly substitutable items, other imports represent inputs to further processing,
or are items that are not available in the economy. The ITA has issued various statements
indicating that using the data in this manner is not appropriate. As the ITA has indicated, the
employment estimate is not a multiplier and should not be used to estimate jobs that are
associated with exports or imports in a multiplier fashion. In addition, the ITA estimates relate to
the average number of jobs supported by exports across a broad section of the economy and
should not be used in conjunction with trade agreements where the approach should more
appropriately focus on estimating the change in the composition of employment that are
associated with a change in trade as a result of a trade agreement.
The International Trade Administration (ITA) argues, however, that the job estimates should not
be used with projected changes in trade to estimate potential employment effects from trade
agreements. It says:22
Averages derived from IO [input-output]23 analysis should not be used as proxies for
change. They should not be used to estimate the net change in employment that might
be supported by increases or decreases in total exports, in the exports of selected
products, or in the exports to selected countries or regions.
(Emphasis added.)
The averages are not proxies because the number of jobs supported by exports usually does
not change at the same rate as export value. The rate is not the same because other factors,
such as prices, resource utilization, business practices, and productivity, do not usually
change at the same rate. In addition, the material and service inputs and the labor and capital
inputs differ significantly across types of exports. For example the labor requirements for an
exported aircraft are significantly different from those of an exported agricultural product or
an educational service.

20 The Department of Commerce published results of an earlier version of this model in 1996 and published its first
major update of that data in 2010 (14 years later), reflecting updated employment/output relationships for the years
1993-2008. U.S. Department of Commerce, Economics and Statistics Administration, U.S. Jobs Supported by Goods
and Services Exports, 1983-1994
, by Lester A. Davis, Research Series OMA-1-96, November, 1996. This report was
the sixth in a series published since 1983 to measure the contribution of exports to the U.S. economy and employment.
21 U.S. Department of Commerce, International Trade Administration. Exports Support American Jobs: Updated
Measure Will Quantify Progress as Global Economy Recovers
, International Trade Research Report no. 1, 2010, p. 2-3,
updated by unpublished regression-related estimates by the author.
22 U.S. Department of Commerce, International Trade Administration; Exports Support American Jobs, by John
Tschetter (no published date, but the report was released in 2010), p. 3.
23 Input-output analysis takes into consideration the outputs of one industry as inputs in another.
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Ideally, estimates of trade changes from tariff reductions would be multiplied by figures which
reflect actual changes in employment (based on the mix of goods traded) that would occur at the
margin
as a result of changes in the volume of goods traded. According to the ITA, though, such
data do not exist. The only data that are available reflect the estimated average number of jobs
supported across the U.S. economy by a given level of exports. According to the ITA, “As a
result, multiplying trade estimates from the computable general equilibrium (CGE) models
by employment averages would tend to overestimate the actual number of jobs potentially
lost to trade changes.”
(Emphasis added.)
The ITA also indicated that
In addition, estimates of the average number of jobs associated with exports cannot be
adjusted for fluctuations in manufacturing capacity over the course of the business cycle. As
explained by the USITC, the more slack there is in the U.S. economy, the more potential
there would be for job creation:24
During periods of slack business activity, increased output, such as exports, would tend to
increase employment, to lower unemployment, and to increase labor force participation.
Conversely, during periods of high business activity, when industry operates at or near full
capacity and employment, increased output, including output for exports, tends to raise
employment less—if at all—and instead mainly shifts employment to industries that pay
higher wages.

Conclusion
The 112th Congress likely will consider legislation to implement the KORUS FTA. Part of the
debate surrounding the agreement has focused on the potential impact the agreement could have
on U.S. employment, particularly employment in certain sectors of the economy. Given the
current high rate of unemployment, it is not uncommon for communities or workers to raise
concerns over the impact of a new FTA. Indeed, for some communities that already are affected
by high rates of unemployment or have experienced plant closings due to foreign competition, the
KORUS FTA could pose additional challenges.
An analysis of the available estimates of the potential effects of the KORUS FTA on U.S.
employment, however, raises a number of questions concerning the usefulness of the estimates.
Economic modeling naturally incorporates various assumptions and entails differing
methodologies that can have a profound effect on the estimates that are generated, even when the
estimates are derived from the same economic model. Standard models incorporate standard
assumptions and approaches that generally are well explained. The mark of a good economic
model often is one that uses assumptions and methodologies that seem reasonable and are not
geared toward generating any particular result. In contrast, some models use non-standard
assumptions and approaches that may be difficult to justify and seem to have been chosen in
order to generate pre-determined results. Given the current state of economic modeling and data
availability, the most accurate models likely can provide only rough estimates of the magnitude of

24 ITA, Exports Support American Jobs, p. 3-4.
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the potential changes in employment in certain sectors, but cannot offer estimates of the precise
size of the shifts in employment.
As this reports indicates, the most important assumption involved in generating estimates of the
impact of the KORUS-FTA on employment appears to be the expected level of utilization in the
U.S. economy over the ten-year phase-in period expected to be required to fully implement the
KORUS-FTA. The existence of unutilized labor and capital make it possible for the models to
generate estimates of output and employment gains, in the case the KORUS-FTA is fully
implemented and losses, in the case where the agreement is not adopted. It seems reasonable to
assume, however, that the U.S. economy will return to its long-term trend approaching full
employment during the ten years following the adoption of the KORUS-FTA. Another major
qualification for the estimates may be that they do not account for changes in exchange rates,
which can have a wide-ranging effect on the prices of internationally traded goods and may
overwhelm changes in prices of goods that arise from changes in tariff rates.
Estimates of employment effects of new FTAs often tend to be highly subjective and can be
misleading, because they represent a partial accounting of the total economic effects of new
FTAs. In most cases, FTAs are comprehensive agreements that include provisions for goods,
services, and investment. With few exceptions, estimates of employment effects of the KORUS
FTA focus narrowly on employment effects in the goods sectors and neglect the potential effects
in the services and investment areas.25 In addition, the estimates neglect a broad range of benefits
for the economy as a whole that potentially can provide consumers with large economic benefits
and that can yield broad productivity and efficiency gains for the economy and may enhance
employment. As a result, estimates of the employment effects of new FTAs may serve poorly as
an indicator of the total impact of a new FTA on the economy as a whole.
As policymakers consider the KORUS FTA and other FTAs, they likely will weigh the results of
a range of estimates of the employment effects of the FTAs to gauge the impact of the
agreements. In this process, policymakers likely would be aided by estimates that clearly state the
assumptions that are used and that inform policymakers about the broad implications of such
agreements for the economy as a whole. In addition, policymakers likely would benefit from
more reliable data on the potential magnitude of such agreements on specific sectors that would
allow policymakers to craft programs that could assist those most directly affected by the
agreements. As a result, policymakers may benefit from a number of initiatives to improve
information and data on the impact of international trade on the economy. These might include
• increased information and data on services in the economy, including the shifting
of in-house services from the manufacturing sector to the services sector and the
formal and informal barriers to U.S. services posed by major trading partners;
• better data on worker dislocations including the reasons for those closings;
• better understanding of the development of global supply chains and the role they
are playing in the U.S. economy.


25 The exception, as noted in this report, is the study completed by the U.S.-Korea Business Council.
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Appendix A. Employment Population and Shares of
the Economy, by Major Industry and Sector, 2010

Share of total private
Sector
Employment (in thousands)
employment (%)
Total private including
agriculture
132,414 100%
Total goods producing including
agriculture 19,971
15
Mining and logging
731
1
Construction 5,487 4
Manufacturing 11,568 9
Agriculture 2,185
2
Services 90,194
68
Trade, Transportation, and
Utilities
24,742 19
Information 2,699
2
Financial Activities
7,616
6
Professional and Business
Services 16,898
13
Education and Health Services
19,755
15
Leisure and Hospitality
13,065
10
Other Services
5,419
4
Government 22,249
17
Federal 2,852
2
State 5,142
4
Local 14,255
11
Source: U.S. Department of Labor, Bureau of Labor Statistics, Economic News Release, Table B-1 (employees
on nonfarm payrolls) and Table A-8 (for agriculture, January 2011.

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Appendix B. Standard Assumptions of
Economic Models

In order to assess the validity of the various estimates of the employment effects of the KORUS
FTA, it is first necessary to understand how the economic models work and the assumptions that
are made. The standard approach to estimating the effects on U.S. employment associated with
trade agreements follows a number of steps, although most of these steps are not included in the
discussion of the estimates. In general, these steps include the following:
1. Estimating the impact a change in the tariff rate would have on a change in the
prices of goods. For instance, if tariff rates are lowered by 10%, would goods
prices also fall by 10%? Are the changes in tariff rates accomplished at once, or
are they reduced slowly, according to a set schedule? If tariff rates are adjusted
over time according to a set schedule how does that affect the rate at which goods
prices adjust?
2. Estimating the impact a change in goods prices would have on a change in sales
of those goods. This estimate attempts to quantify the responsiveness of
consumers to changes in prices. In markets with a number of close substitutes,
the consumer response could be strong with consumers buying less of a particular
product as its price rose relative to those of similar products. For goods with few
substitutes, consumers would be less responsive to changes in prices.
3. Estimating the impact a change in sales would have on a change in output or a
change in employment. A change in employment associated with a change in
sales would depend, at the very least, on the level of plant utilization, the level of
productivity, and the availability of labor.
In attempting to estimate these intermediary steps, most models incorporate a number of
assumptions to reduce the high level of variability that is intrinsic in such estimates. Often these
additional assumptions are not well explained. In general, these basic assumptions are:
1. Changes in Tariff Rates Will Translate Directly into Price Changes. Most
models assume that any change in the tariff rate will be passed along completely
to the change in the prices of traded goods. In most cases, however, tariff rates
are not adjusted completely at the time of implementation, but are adjusted over a
set schedule that can encompass a decade or longer. Also, there is no guarantee
that the prices of traded goods would adjust at exactly the same rate as tariff rates
are adjusted. They may be passed along at a differential rate or simply absorbed
by the exporter.
2. Exchange Rates Will Remain As They Are. In most cases, the estimates do not
make any assumptions concerning potential changes in the exchange rate of the
dollar as a result of a trade agreement. In addition, the exchange value of
currencies of competitors could affect the expected change in exports or imports
associated with a trade agreement.
3. Consumer Purchases Will Follow Tariff Reductions. Most of the estimates on
changes in employment are based on the assumption that reductions in the prices
of goods associated with a drop in the rate of tariffs would result in a complete
substitution of goods toward the FTA countries and away from other foreign
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suppliers. In general, there may be some goods within the total basket of traded
goods that consumers consider easily substitutable (such as steel and fasteners),
but consumer choices often are predicated on more than relative prices (such as
brand names and quality) and, therefore, the rate of substitution overall may be
quite low. To the extent that consumers do not shift their purchases based on
changes in prices, the change in employment would be blunted. In addition,
standard economic theory argues that trade agreements generally entail both trade
diversion, or the substitution of lower-priced goods among the parties to the
agreement for the now higher-priced goods from other suppliers, and trade
creation. Trade agreements can create trade by increasing efficiency in
production and by increasing the real incomes of consumers that, in turn, leads to
a greater level of consumption of both domestic and imported goods. To the
extent that a trade agreement creates additional trade, it could have a positive
effect on employment.
4. Employment or Wages Will Not Change. Another assumption that often is
made is whether employment or wages should be held constant. Such an
assumption often is necessary in order to generate results from the economic
models. By holding employment constant, the model is attempting to estimate the
change in the composition of employment that would be associated with a trade
agreement. This assumption would allow wages to change, although most models
do not attempt to estimate changes in wages. As a result, these models generally
attempt to highlight the magnitude of the impact of an agreement on various
sectors in the economy, rather than attempting to generate precise estimates of
the actual number of jobs that may be gained or lost by individual sectors. In
contrast to these assumptions, models that hold wages constant allow
employment to change in an effort to estimate changes in the number of jobs in
various economic sectors. Since changes in wages often lead to changes in
employment, this assumption is questionable. In either case, the estimates usually
attempt to aggregate the total cumulative effects over a number of years, often a
decade, in order to derive an estimate of the overall change in employment.
While such an assumption is a necessary condition for generating results, the
assumptions compromise the validity of the results, since the composition of
employment in the economy over a decade can change quite noticeably, even in
the complete absence of international trade, due to business cycle effects and the
constant churning that occurs. Currently none of the estimates of the employment
effects of trade agreements incorporate either business cycle or other
transformational effects into the estimates.
Key Steps in Converting Changes in Tariffs to Changes in Employment
In general, there are a number of steps involved in converting changes in tariffs into changes
in employment. In most cases, these steps are not explicitly explained. The chart below
summarizes these three steps.

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Table B-1. Key Steps Involved in Converting Changes in Tariff Rates
into Changes in Employment
Step 1
Estimate changes in trade (exports and imports) arising from a change in tariff rates.a
Step 2
Link changes in trade (exports or imports) to changes in the industrial sectors that
produce those goods.b
Step 3
Link changes in industrial production to changes in employment.c
a. This step assumes that a reduction in the applied rate of tariffs would lead to a similar reduction in the
prices of imported goods. As a result of the reduction in prices, it is assumed that consumer demand would
shift from other goods in favor of the lower-priced goods, so that there is a one-for-one substitution of
goods, or that the process of tariff reduction is a zero-sum game, with gains by the FTA partner comparable
to losses by domestic or non-FTA suppliers.
b. Linking traded goods with their respective industries is complicated, because the data collected on exports
and imports are entirely different from those collected on the industrial composition of the economy.
Whereas exports are recorded as the number of specific goods exported at a certain price, the industrial
composition of the economy is organized not by individual commodity, but by productive processes, so that
it requires considerable effort to link together the goods produced for export with the industry that
produced those goods. However, in recent years, classification “dictionaries” have been developed that can
make these translations easier.26
c. In a joint project, the Department of Commerce (DOC), Bureau of Economic Analysis (BEA), and the
Bureau of Labor Statistics (BLS), estimated the average number of jobs supported by exports in the U.S.
economy based on the dol ar value of output relative to the average number of jobs required to produce
that output for each industry.27 As a result of this joint effort, the Commerce Department determined in its
2010 update that on average $166,000 in goods exports, $216,000 in services exports, or a weighted
average of $180,000, supported one job in each respective sector. As indicated previously, this estimate
should not be used to estimate the number of jobs lost as a result of imports, or a trade deficit.

Author Contact Information

Mary Jane Bolle
James K. Jackson
Specialist in International Trade and Finance
Specialist in International Trade and Finance
mjbolle@crs.loc.gov, 7-7753
jjackson@crs.loc.gov, 7-7751



26 U.S. Department of Commerce, International Trade Administration, Exports Support American Jobs: Updated
Measure Will Quantify Progress as Global Economy Recovers
, International Trade Research Report no. 1, 2010, p. 2-
3; updated by unpublished regression-related estimates by the author.
27 The Department of Commerce published results of an earlier version of this model in 1996 and published its first
major update of that data in 2010 (14 years later), reflecting updated employment/output relationships for the years
1993-2008. U.S. Department of Commerce, Economics and Statistics Administration, U.S. Jobs Supported by Goods
and Services Exports, 1983-1994
, by Lester A. Davis, Research Series OMA-1-96, November, 1996. This report was
the sixth in a series published since 1983 to measure the contribution of exports to the U.S. economy and employment.
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