What drives South Korea's trade volume? Gravity, migration and beyond

Abstract

Purpose: This study aims to analyze South Korea's trade patterns to derive any meaningful policy implications. Design/methodology/approach: Using an augmented gravity model with panel data from 186 countries over 2 decades (2000–2023), this paper applies various approaches, including pooled ordinary least squares, panel random effects, instrumental variables and so on. Findings: This study finds that traditional variables, including gross domestic product (GDP) and distance, follow expected patterns, while migration emerges as a significant trade-promoting factor, especially among lower-income countries. Interaction terms confirm that migration and trade are more closely linked when partner countries have lower per capita incomes. Originality/value: These findings contribute to the literature by suggesting that migration can complement Korea's trade strategy, particularly during periods of demographic decline. Additionally, while Asia-Pacific Economic Cooperation's role has strengthened, free trade agreements (FTAs) are showing a declining influence. A comparison of predicted and actual trade flows reveals under-traded partners, indicating unrealized trade potential. This study calls for better alignment between immigration and trade policy and a reassessment of Korea's FTA strategy.