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GTAP Resource #1503

"The Impact of Free Trade Agreements in Asia"
by Kawasaki, Kenichi

Regionalism coexists with the principles of multilateral trade in the process of globalization of the world economy, as symbolized by recent worldwide liberalization of trade and investment. In particular, it is noteworthy that Japan, that had not joined any regional agreement until recently, started the negotiations for a bilateral and/or regional Free Trade Agreement (FTA).

The purpose of this paper is to discuss a quantitative simulation analysis on the economic impact of trade liberalization with an economic model. The relative significance of bilateral and regional trade liberalization will be investigated in comparison with multilateralism employing a Computable General Equilibrium (CGE) model of global trade. The goal is to compare and consider the impact of Japanese trade policy measures in a quantitative manner.

Moreover, one objective of this paper is to discuss a possible range of the impacts of trade liberalization using several versions of model simulations rather than to draw a conclusion from a single estimate, while also clarifying the key source of an economic impact which differentiates those simulation outcomes. It is intended to look at the detailed contents of the impact of trade liberalization in light of the theoretical expectation.

Among others, the Version 5 database and the standard version of a model by the Global Trade Analysis Project (GTAP) are utilized as a basis of simulation experiments in this paper. However, certain dynamic aspects are studied in the model simulations. One deals with the dynamic aspects of capital formation by modifying the standard version of the GTAP model. In addition, pro-competitive productivity growth effects are also investigated in the model simulation.

According to the conventional simulations by a CGE model of global trade, several stylized features have been pointed out analyzing the impact of trade liberalization. First, gfree riderh gains may be limited. In order to enjoy the benefits from trade liberalization, it is essential for an economy to liberalize its own markets rather than wait for those in other economies. Second, wider trade liberalization in terms of coverage of both regions and sectors would be much more beneficial. A regional FTA would be a step toward global trade liberalization rather than a final goal. Third, successful structural adjustments would be required to realize possible gains from trade liberalization. Useful information will be given by model simulation experiments for the required changes in the industry structures.

It is expected from comparative advantage theory that the developed economies, including Japan, would gain in capital- and technology-intensive trade and production, while the developing economies, including ASEAN countries, would gain in labor-intensive sectors from global trade liberalization. However, the impact of a regional FTA may more likely be determined by trade structures and the degree of import liberalization by sectors. In fact, estimating the impact of bilateral FTAs between Japan and Asian countries, it is shown that changes in sectoral trade balance and production would vary according to the partners of Japanfs FTAs in Asia deviating from those expected in the case of global trade liberalization.

There may be no economies that absolutely satisfy the condition of a gsmallh country assumption in a standard trade model. The terms of trade effects are relatively significant for determining the overall welfare improvements in partial trade liberalization like that from a bilateral FTA. It may be noted that the effects would be pronounced, not just in larger economies like Japan, but also in smaller economies, like the Asian countries, where trade barriers are relatively high compared with other developed economies.

The macroeconomic impact of trade liberalization including a regional FTA is subject to several key economic mechanisms, in particular the dynamic aspects of economic activities. In Japan, productivity improvements would be a significant factor for generating larger macroeconomic gains. On the other hand, capital formation mechanisms, one from dynamic capital accumulation and another from international capital movement, are shown to be particularly important in several ASEAN countries. It is suggested that liberalization and facilitation of not just the trade of goods, but also investment, would be essential in economic partnerships in Asia.

All in all, as far as the economic impact of trade liberalization is concerned, it must be noted that the estimated impacts of Japanfs FTAs in Asia vary in terms of both the size of macroeconomic gains and the direction of structural change according to the partners in the agreement. It is not certain that regional and preferential trade liberalization would realize welfare improvements with more efficient resource allocation given by global and non-discriminatory trade liberalization.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Kawasaki, K. (5/1/2004)
Updated: Kawasaki, K. (5/1/2004)
Visits: 1,899
- Preferential trading arrangements
- Asia (East)

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