۱- Introduction

۲- Data

۳- Econometric model

۴- Results

۵- Conclusion and policy implications

References

Abstract

We use a flexible estimation and simulation platform built on the standard structural gravity model to analyze the trade and welfare implications of mega-regional trade agreements for Asian countries. Our counterfactuals suggest that all current mega-regional scenarios have the potential to generate significant export gains for Asian economies, but that welfare improvements are much lower relative to baseline. This finding suggests a political economy problem, as trade-related reallocations of labor and capital would have to be justified politically on the basis of relatively small improvements in real GDP. Second, our simulations show that market size matters for mega-regionals: FTAAP has larger trade and welfare effects than other agreements. Finally, we show that mega-regionals have significant potential to deepen value chain trade in the Asia-Pacific: FTAAP could see Japan and China increase their shares of intermediates in total goods and services exports at a rate equivalent to around five years of value chain deepening, taking the average rate of change observed worldwide.

Introduction

With the signature of the hastily renamed Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) in March 2018, megaregional trade deals are again near the top of the trade policy agenda in Asia. In the presence of an unpredictable US trade regime, efforts to promote further integration within Asia over the medium term gain greater political attractiveness. From an economic point of view, megaregionals also have the potential virtue of harmonizing and simplifying rules across a range of fragmented agreements, thus reducing the famous “noodle bowl” effect (e.g., Kawai and Wignaraja, 2009). Within Asia, four initiatives are of particular interest. The first is the CPTPP itself. The second relates to the hope—still alive in some quarters—that the USA might be induced at some point to rejoin the agreement it itself pushed for before abandoning. We term that scenario CPTPP12. Whereas the CPTPP’s predecessor, TPP, was led by the US until its decision to withdraw under the Trump administration, the other two mega-regional initiatives in Asia involve China in a strong leadership role. The first is the Regional Comprehensive Economic Partnership (RCEP), centered on ASEAN, but designed to consolidate and unify the network of agreements that has grown up around that organization, and which currently involves China, India, Australia, New Zealand, Korea, and Japan. The final initiative is the Free Trade Area of the Asia Pacific (FTAAP), which would potentially involve all members of the Asia Pacific Economic Cooperation (APEC). Although an FTAAPlike initiative has long been floated in policy circles, China was the motivating force behind the decision taken by APEC members in 2014—China’s host year— to launch a strategic study on issues related to FTAAP. A final initiative that should be of interest to Asian countries, even though it does not involve them, is the Trans-Atlantic Trade and Investment Partnership (TTIP). Although progress has been limited to date, the possibility of concluding such an agreement in the medium term cannot be excluded. Of interest to Asian countries is the prospect that their firms will have to compete on differential terms with European rivals in the large US market, and similarly with US firms in the European market. These two large markets are important destinations of Asian exports, and as such there is the potential for substantial trade effects if they decide to integrate.