Intra-Industry Trade and tariff rates of Korea and China

Recently, FTA between Korea and China is an important issue, and many researchers try to estimate the effects of FTA to abolish or decrease the tariff rates on their trade. In order to understand the effects of the FTA, we analyze the relationships between the extent of Intra-Industry Trade (IIT) in Korea and China and their tariff rate variables. In detail, we use the Factional Logit Regression Model (FLRM) using QMLE as well as OLS with logistic transformation which has been used in the existing literatures. We show that the FLRM using QMLE is superior to OLS with logistic transformation. We also show that the tariff rates of Korea have a negative effect on the share of IIT between Korea and China. However, the estimation results of FLRM using QMLE do not suggest that the tariff rates of China have a negative effect on the share of IIT. This means that FTA to abolish or decrease their tariff rates might not increase their trade volumes.