OSIPP Discussion Paper: DP-2008-E-012

Regional Integration in Asia andIts Effects on the EU and North America
December 26, 2008
Hiro Lee
Professor, Osaka School of International Public Policy, Osaka University

Robert F. Owen
Professor, Institute of Economics and Management of Nantes, University of Nantes

Dominique van der Mensbrugghe
Senior Economist, The World Bank

[Keywords] Regional integration, FTA, East Asia, welfare effects, CGE model[JEL codes] C68, F15, F17[Abstract] Consequences of free trade agreements (FTAs) among the ASEAN+3 countries and ASEAN+6 countries are explored using a dynamic computable general equilibrium (CGE) model. Quantitative assessments of intra and extra-regional effects on
welfare, trade and output are offered. When both trade facilitation and endogenously
determined productivity are included in the FTA scenarios, Singapore, other ASEAN
countries and China would be able to realize relatively large welfare gains, while thewelfare effects on the EU and North America are negligible. The trade and output
effects on the latter two regions are also relatively small, with the notable exception ofcrops, other than rice, in North America.

Correspondence to: Hiro Lee, OSIPP, Osaka University, 1-31 Machikaneyama-cho, Toyonaka,
Osaka 560-0043, Japan. Email: hlee@osipp.osaka-u.ac.jp

Regional Integration in Asia andIts Effects on the EU and North America*
Hiro Lee
Osaka School of International Public Policy
Osaka University, Osaka 560-0043, Japan
E-mail: hlee@osipp.osaka-u.ac.jp

Robert F. Owen
Institute of Economics and Management of Nantes
University of Nantes, 44322 Nantes Cedex 03, France
E-mail: RobertOwen@compuserve.com

Dominique van der Mensbrugghe
The World Bank, Washington, DC 20433, USA
E-mail: dvandermensbrugg@worldbank.org

December 2008

Abstract
Consequences of free trade agreements (FTAs) among the ASEAN+3 countries and
ASEAN+6 countries are explored using a dynamic computable general equilibrium (CGE)model. Quantitative assessments of intra and extra-regional effects on welfare, trade andoutput are offered. When both trade facilitation and endogenously determined productivity
are included in the FTA scenarios, Singapore, other ASEAN countries and China would be
able to realize relatively large welfare gains, while the welfare effects on the EU andNorth America are negligible. The trade and output effects on the latter two regions arealso relatively small, with the notable exception of crops, other than rice, in North
America.
JEL classification codes: C68, F15, F17
Keywords: regional integration, FTA, East Asia, welfare effects, CGE model* We have benefitted from the helpful comments of Michael G. Plummer, David J. Green, Richard

Pomfret, and other participants at the Conference on “Asian Economic Integration in a Global
Context,” Rimini, Italy, August 29-31, 2008. Lee gratefully acknowledges financial support from theJapan Society for the Promotion of Science program, grants-in-aid for basic research (B-19330050).

11. Introduction
In the past decade a growing number of bilateral and plurilateral free trade
agreements (FTAs) involving Asian countries have been signed or ratified, while a large
number of FTAs are currently being negotiated (e.g. Australia-China, Australia-Japan andJapan-Korea). The ASEAN countries now have FTAs with the three major trading
partners in the region (i.e., China, Japan and Korea). In addition, alternative free trade
proposals encompassing ASEAN with either China, Japan and Korea (ASEAN+3 FTA) or
China, Japan, Korea, India, Australia and New Zealand (ASEAN+6 FTA) are actively
being considered. Furthermore, these envisaged FTAs entail a more ambitious policy
agenda, since they are of a more comprehensive scope and coverage than traditional FTAs.
Specifically, these international policy initiatives conceivably aim to cover trade facilitation (including customs procedures and harmonization of standards), investment liberalization, intellectual property protection, technical assistance and development cooperation.1
Yet, certain key sensitive commodities, such as rice and several other agricultural products,
remain excluded from these integration processes.2
A regional integration arrangement among either the ASEAN+3 countries or the
ASEAN+6 countries is expected to have non-negligible effects on countries outside of thepreferential trade zone, as the reduction in barriers across partners leads to a re-orientationof trade and investment, including not just trade and FDI creation, but also potential
diversion effects. This paper uses a dynamic computable general equilibrium (CGE)model to evaluate the extent of trade adjustments, as well as other economic effects, thatthe enlargement and redefinition of a free-trade agreement to encompassing either
ASEAN+3 or ASEAN+6 could have on the European Union (EU) and North America.
The model allows both for trade facilitation (e.g., streamlining customs procedures) andendogenously determined productivity, where the latter is assumed to be positively
correlated with economic openness. Indeed, in this regard it has often been argued that one
1 Owen (2001) has argued that there is a critical shortfall between the extent of economic integration inSoutheast Asia and, in this regard, the accomplishments of the European Union since the mid-1980s. A
number of the lessons from the EU experience are suggested to be of general applicability forunderstanding the political economy of the integration process elsewhere.
2 Plummer (2007) suggests that exclusions of individual products should be minimized on efficiency

grounds. He examines the extent to which eleven of the existing FTAs in Asia conform to best practicesof regionalism, including comprehensive product coverage, low and symmetric rules of origin,intellectual property protection and investment-related provisions.

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of the primary benefits of greater outward orientation is the internalization of factors,
practices and processes that embody and propagate productivity growth. Notably, there issubstantial evidence, for example in the case of the EU, that such productivity growth canbe generated by increased international competition following domestic market
liberalization.
The quantitative effects of various FTA proposals for East Asia have been assessedon the basis of different CGE models.3 In general, these studies find that: (1) real income
increases for most of the FTA members, while declining for at least some non-members;(2) the aggregate gain for FTA members is larger when the overall size of the integrating
region is larger; (3) if FTAs are confined to tariff liberalization for only merchandize trade,welfare gains are limited; (4) when FTAs also include both trade liberalization in services
and trade facilitation, the gain to each member increases, while the aggregate loss
experienced by non-members decreases; (5) the overall impact of FTAs becomes evengreater when the model incorporates increasing returns to scale and imperfect competition
in at least some sectors; and, finally, (6) more beneficial effects are suggested for model
simulations of FTAs, which also incorporate investment and growth effects. Furthermore,
Kawai and Wignaraja (2007) assert that consolidation of multiple and overlapping FTAs
into a single Asian FTA would help alleviate the negative effects of different rules oforigin associated with individual FTAs. In addition, their analysis suggests that it would bedesirable for Asia to strengthen economic ties, ultimately in the form of extended FTAs,
with not only North America and eventually other Pacific Rim countries, as under APEC,
but also with the European Union.4
The organization of the remainder of the paper is as follows. The next section
provides an overview of the basic CGE modeling framework, while a description of thebaseline and policy scenarios is then offered in section 3. In section 4 the computational
results are assessed and associated policy implications are deduced. The final section
summarizes the principal conclusions from this research, while identifying conceivable
extensions, along with certain limitations of the analysis. In an appendix a sensitivity

3 See, for example, Dee (2007), Kawai and Wignaraja (2007), Lee and van der Mensbrugghe (2008),

Park (2006), Scollay and Gilbert (2001), Urata and Kiyota (2005), and Zhai (2006).
4 Studies by the Asian Development Bank (2008a,b), as well as certain other recent research, arrive atsimilar policy assessments.

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analysis of the robustness of the welfare effects is scrutinized by altering the values ofcertain key model parameters.
2. Overview of the CGE Modeling Framework
The numerical simulations undertaken for this paper are derived from the WorldBank’s LINKAGE model, described in detail by van der Mensbrugghe (2005). This model
has been extensively used for the comparative analysis of alternative trade integration
scenarios, including most recently an assessment of various Doha Round proposals byAnderson et al. (2006), as well as the evaluation of the costs and benefits of different
regional trade agreements presented by the World Bank (2005). In a number of respects
the structure of the LINKAGE model is similar to two other widely used and cited global
trade models, specifically, the Purdue-based GTAP, as elaborated in Hertel (1997) andMIRAGE, sponsored by CEPII in Paris and discussed by Bchir et al. (2002).5 The core of
all three frameworks is a comparative static CGE model, although all three incorporate
specific variations. For example, LINKAGE and MIRAGE are typically used forundertaking a recursive dynamic analysis, where specific assumptions regarding
population and labor growth, capital accumulation and productivity are invoked in order todevelop a baseline scenario from which different policy shocks are then examined.6
The LINKAGE model entails a standard CGE paradigm, built around the circularflow of the economy, where on the supply side, goods and services are produced by
combining intermediate inputs and factors (e.g., labor, capital and land). A nested constantelasticity of substitution (CES) structure captures the substitution and complementarity
effects across intermediate goods and factors, where in most sectors, the degree ofsubstitution between capital and labor constitutes the core relation, while intermediate
goods are taken to be a fixed proportion of output.7 A second node of the circular flow,
5 van der Mensbrugghe (2006) offers a discussion of representative numerical results based on the

LINKAGE model, along with a summary comparison to those using GTAP.
6 Although a dynamic version of GTAP has been developed by Ianchovichina and McDougall (2000), a

majority of GTAP applications involve a static version of that model.
7 One strength of the LINKAGE model is a rather detailed formulation for agricultural production, in

which land use plays a key role, as, for example, in the choice between intensive versus extensive crop
production, or range-fed, as compared to other smaller livestock undertakings. The energy sector also
constitutes a separate activity, which is assumed to be a near-complement to capital in the short run, but
a substitute for capital in the long run.

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relating to economic agents’ supply of the needed factors of production and their factor
earnings, is specified in the LINKAGE framework by a single representative household thatreceives all factor income. Finally, a third node, characterizing agents’ demand for final
goods and services, uses the extended linear expenditure system (ELES), as set forth by
Lluch (1973), whereby purchases of goods and services are simultaneously determinedwith savings. As in the conventional CGE model, such as those developed by Dervis et al.
(1982) and Löfgren et al. (2002), constant returns to scale and perfect competition are
assumed in the goods and services market, and product and factor prices are determined byequilibrium in their respective markets.
An open-economy CGE model entails a somewhat more complicated structure,since domestic production needs to be allocated between domestic and multiple foreign
markets, while, analogously, domestic demand can be met by goods produced either
domestically or from abroad. In this regard, the standard LINKAGE model assumes thatdomestic output is supplied homogeneously from all markets, with the law of one priceholding, so that producers can switch their sales across market destinations costlessly.8 On
the demand side, products are differentiated for both producers and final consumers on thebasis of their origin, in keeping with the so-called Armington assumption. 9 Morespecifically, the LINKAGE framework relies on a nested CES structure, where at the top
nested level, each agent chooses to allocate aggregate demand between locally produced
goods and an aggregate import bundle, while minimizing the overall cost of the aggregate
demand bundle. At the second level, aggregate import demand is allocated across different
trading partners, again using a CES specification, wherein the aggregate costs of imports
are minimized. This open-economy formulation generates a much broader set of market
equilibria, whereby the supply and demand for each traded good is required to be equal.
Hence, if the closed economy model had n equilibria for n goods, the global model has r x
n equilibria for non-traded goods and r x r x n equilibria for traded goods, where r is thenumber of modeled countries/regions.

8 The model also allows for a finite constant elasticity of transformation (CET) function, which applies

across market destinations, and uses a two-level nested CET specification. At the top nested level,
production is allocated between the domestic market and aggregate exports, so as to maximize revenue.
At the second level, a CET function is used to allocate aggregate exports across foreign markets, while
maximizing total export revenue.
9 See Armington (1969).

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The model distinguishes between four interrelated price categories for traded
goods, which entail four separate instruments. The initial price producers receive for theirexported goods is designated as PE, while the FOB price, denoted as WPE, reflects
domestic export taxes or subsidies. The CIF price, WPM, includes the trade and transport
margin, represented by the ad valorem wedge ζ, as well as frictional trade costs,
corresponding to an iceberg parameter λ.10. Thus, the relationship between the FOB andCIF prices is given by
WPM r ,r ',i = (1 + ζ r ,r ',i ) WPE r ,r ',i λ r ,r ',i(1)

for the different r and r' combinations of exporting and importing regions/countries and icommodities. Finally, the domestic price of imports, PM, equals the CIF price, WPM, plus
tariffs and/or the tariff-equivalent effects of a range of possible commercial policies. In thesubsequent analysis, an increase in λr ,r ',i corresponds to a reduction in trade-related risks,
lower administrative barriers to trade (e.g., customs procedures), and/or a fall in technicalbarriers (e.g., mutual recognition of product standards). In sum, trade facilitating policy
initiatives imply an increase in the value of λr ,r ',i .
Foreign capital flows, including notably foreign direct investment (FDI), are taken
to be exogenous in the current research. Nonetheless, it is fully recognized that it would be
worthwhile to expand this feature of the analysis to allow for endogenous determination of
FDI in light not only of the process of regional integration in Asia per se, but also
associated policy initiatives aimed at promoting a more favorable investment environment
with reduced restrictions facing multinational enterprises (MNEs). In Asia, where many
countries are characterized by relatively high growth rates and/or low efficiency wages,
trade and FDI are closely interlinked. In this regard, there is also an essential distinction
between the determinants and impact of market seeking, as compared with cost efficiency,
oriented FDI. Indeed, a number of countries in Asia have experienced extensive
outsourcing and delocalization by MNEs, not only from the EU, Japan, the United Statesand other industrialized countries, but also involving intra-regional Asian flows from othersource countries. There is typically a significant degree of specificity in these flows,
10 Such an iceberg specification for transportation costs, was formulated by Samuelson (1952), basedon a concept developed earlier by von Thünen.

6

depending on sectors, as well as host and home countries. Allowing for such capital flows,
stimulated by heightened rates of return arising from expanded market access, could
significantly raise the gains from regional trade reform.11 In a preliminary investigation on
the impact of further trade and investment liberalization for APEC, Lee and van der
Mensbrugghe (2005) find that considering the effects of dismantling obstacles to FDI, in
addition to those of trade liberalization, would significantly boost the welfare gains formost APEC economies.
Final demand in the model is split into three categories, involving a representative
household, the public sector and the investment account. Public expenditure is specified as
fixed as a share of GDP and investment is determined by the total savings of the economy,
thereby leading to a different pattern of demand expenditures relative to that of households.
There are three closure rules relating to final goods expenditures in each country. First, thegovernment deficit is assumed fixed, while a lump sum tax borne by the representative
household is endogenously determined, so as to meet the public deficit target. Thus, tradereform can generate an increase in the direct taxation of consumers, as a result of reduced
tariff revenues. Second, investment equals the sum of private, public and foreign savings.
Thirdly, the level of foreign saving is fixed; i.e., the current account balance is taken as
exogenously given. The latter implies that an ex ante change in import demand generates
an offsetting adjustment in the real exchange rate.
The model was calibrated to a 2001 base year using version 6 of the GTAP
database.12 Although the LINKAGE model can be analyzed for 87 countries/regions and 57
sectors, this more detailed database has been aggregated in the current analysis, and relates
to 12 countries/regions and 22 sectors as shown in Table 1. More specifically, thecountry/region breakdown includes six individual Asian economies, an aggregation of theASEAN economies other than Singapore, as well as regional country groupings forAustralia/New Zealand, North America, the EU-15, new EU member states and the rest of
the world. The values of key parameters, such as demand, supply and substitution
elasticities, are based upon the previous empirical estimates. The model calibration
11 Following the Single European Act and the 1992 Program, there was a remarkable upsurge with theEuropean Community in both intra-regional FDI flows and those from outside the EC. More recently,
and while of a more unidirectional nature, the expansion to the EU from 15 to 27 countries has
generated substantial investment by MNEs in Eastern Europe, often aimed at reducing wage costs.
12 A detailed description of version 6 of the GTAP database is offered by Dimaranan (2006).

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primarily consists of calculating share and shift parameters to fit the model specifications
to the observed data, so as to be able to reproduce a solution for the base year.13

3. The Baseline and Policy Scenarios
3.1

The Baseline Scenario
In order to evaluate the effects of regional integration in Asia, the baseline scenario

is first established, showing the path of each of the 12 economies/regions in the absence ofregion-wide FTAs in Asia over the period 2001-2015. Population and labor force growth
are assumed exogenous, in line with assumptions made by the UN, such that the growth ofthe labor force growth equals the growth of the working age population (ages 15-64). RealGDP growth rates are also exogenous in the baseline in order to be consistent with theactual growth rates for 2001-2007 and the World Bank’s growth forecast for 2008-2015.
The basic capital accumulation function equates the current capital stock to thedepreciated stock inherited from the previous period plus gross investment. For the tradeliberalization policy scenarios under consideration, capital accumulation can be an
important transmission of growth, since reduced taxes on imports of capital goods cangenerate an investment boost. In the baseline the trade and transport margin is assumed to
decline by 1 percent per annum in every country/region, which is consistent with therecent trends.
Several assumptions are critical for the calibration of productivity levels. Notably,
whereas agricultural productivity is fixed in the baseline using results from empiricalstudies, including those proposed by Martin and Mitra (2001), sectoral productivity in
non-agricultural sectors is determined by three components. These include a uniform
economy-wide factor that is calibrated to achieve the given GDP target, a sector-specificfactor related to the degree of openness, and a shift term that permits constant deviations
across sectors beyond the differences in openness. More specifically, the sector-specificfactor intended to capture the sensitivity of changes in productivity to an economy’s
openness, χi,t, is given by the formula:

13 Some of the calibrated parameters are adjusted in the dynamic scenario, as explained by van der

Mensbrugghe (2006).

8η⎛ Ei ,t ⎞ i⎟
χ i ,t = φ i ,t ⎜⎜
⎟
X
i
,
t
⎝
⎠

(2)

where Ei,t is exports of commodity i, Xi,t is the output of commodity i, φi,t is a shiftparameter, and ηi is the elasticity of productivity with respect to openness. The parameter

φi,t is calibrated in the baseline scenario so that the trade-sensitive portion of sectoral
productivity is a constant share of total productivity.14
The four types of taxes included in the model consist of commodity, production,
income and trade taxes, where the latter include both tariffs and export taxes. Whereas
commodity and production taxes are held constant throughout the simulation period, themarginal income tax rate adjusts continuously to maintain a given government budget
surplus or deficit.
In keeping with the final implementation of the Uruguay Round, tariff and export
tax rates are lowered during the 2001-2005 period. Since the Agreement on Textiles andClothing (ATC) provides for a phasing out of import quotas on textiles and apparel, thesechanges are also incorporated in the baseline. In addition, the analysis incorporates thetariff rates called for under the terms for the accession of China and Taiwan to the WTO.
Finally, the effects of ASEAN FTA (AFTA) are also incorporated in the baseline scenario,
such that bilateral tariffs and export taxes/subsidies among the ASEAN member states arecompletely removed by 2015.
Initial sectoral tariff rates for China, Japan, Korea, Singapore, other ASEAN
countries, India and Australia/New Zealand in 2001 are summarized in Table 2. There are
striking differences in the tariff structures across countries/regions. In Japan and Korea theextraordinarily high tariff rates on rice (825% and 929%, respectively) particularly standout. The tariff rates in a number of other agricultural products, including wheat
14 Openness has been linked to increased productivity via three main channels. These consist of theimports of technology-intensive intermediate inputs (for example fertilizers in agriculture), imports ofcapital goods, and export market penetration. The latter effect can arise because of the higher standards
required to access and penetrate foreign markets, relative to those prevailing at home. The expansion ofsales to foreign markets can also create scale economies. There is considerable empirical work aimed at
ascertaining the extent to which each one of these different channels operates. For example, Das et al.
(2007) have explored some firm-level characteristics of export supply responses. The analysis of thelinks between productivity and trade openness, formulated by de Melo and Robinson (1992), as well as
by Dessus et al. (1999), is in many respects similar to that proposed here.

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(aggregated to other crops), beef, dairy products and sugar (all of which are aggregatedinto food products), are also very high in these two countries. In manufacturing the tariff
rates on textiles and apparel are relatively high. However, for the other products, tariff
rates in Japan are very low, while those in Korea are under 10%.
Singapore is duty free with the exception of alcohol and tobacco, both of which are
aggregated into food products. In contrast, India is highly protected with 30% or higher
tariff rates on many product categories. For food products the rate of 76.2% dwarfs thosefor Japan and Korea, which initially stand at 24.5% and 24.7%, respectively. In China andother ASEAN countries, a number of products, including some agricultural products andmotor vehicles, are highly protected. Finally, Australia and New Zealand’s tariff rates are
generally low with the exception of textiles, apparel and motor vehicles.

3.2

Policy Scenarios
The economic implications of two proposed free-trade initiatives are to be

examined here. Specifically, these two integration cases consist of (1) ASEAN+3 FTA(entailing free trade among ASEAN, China, Japan and Korea) and (2) ASEAN+6 FTA(involving free trade among ASEAN, China, Japan, Korea, India, Australia and New
Zealand), for the following four interrelated and nested scenarios:
Scenario 1: The FTA members remove bilateral tariffs and export taxes/subsidies (exceptrice) over the period 2008-2015. The sector-specific productivity factors
capturing the impact of openness, χi,t, are fixed at the baseline levels.
Scenario 2: A 2.5% reduction in frictional trade costs among the FTA members over theperiod 2008-2015 is introduced under Scenario 1, while the sector-specificproductivity factors related to the degree of openness, χi,t, are, again, fixed at
the baseline levels.
Scenario 3: The sector-specific productivity factors related to the degree of openness (χi,t)
are now endogenously determined, in keeping with equation (2), while
maintaining the other assumptions of scenario 2.
Scenario 4: A 10% reduction in the trade and transport margin over the period 2008-2015
for the FTA members is incorporated in scenario 3.

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In both of the policy experiments, bilateral tariffs and export taxes/subsidies in all
the sectors except rice are gradually removed among the FTA member countries over the
2008-2015 period. Rice is excluded from this tariff liberalization process, because Japanand Korea have strongly resisted liberalization of this politically sensitive sector in all the
FTAs that they have signed so far. Hence, it is considered here to be extremely unlikelythat these two countries would concede to a region-wide FTA involving free trade in thishistorically protected sector.15 For both FTA experiments it is assumed that frictional trade
costs, such as administrative barriers and trade-related risks would be reduced by 2.5%.16
Finally, in scenarios 3 and 4, the elasticities of productivity in relation to the degree of
openness, ηi, are set equal to values of 1.5 and 2.0 in, respectively, agriculture and allother sectors.
Clearly, there are certain uncertainties regarding the values of the elasticities of
productivity with respect to openness, the extent of reductions in frictional trade costs, aswell as concerning the trade and transport margin resulting from regional integration.
Accordingly, a sensitivity analysis on the welfare effects is conducted in an appendix. This
investigation indicates that, even though certain results are sensitive to the key parametervalues, the range of changes in welfare is within a reasonable bound.

4. Empirical Findings
4.1

Welfare Effects of FTAs
For the two FTA experiments and under the four policy scenarios, the welfare

implications will be assessed here in terms of deviations in equivalent variations (EV)from the baseline in 2015. Certain key results are summarized in Tables 3 and 4. Under
the ASEAN+3 FTA policy experiment, economic welfare of China, Japan, Korea,
15 In a preliminary study, Lee (2008) estimates the costs of excluding rice, as well as those of

excluding all agricultural products, from various FTA scenarios involving Japan. Under the ASEAN+6
FTA, for example, the costs of excluding rice, in terms of percent reductions in welfare gains, are foundto be highest in Japan (28%), followed by Korea (19%), China (10%) and ASEAN (9%). The effects on
Australia, India and New Zealand are found to be negligible.
16 Keuschnigg and Kohler (2002) and Madsen and Sorensen (2002) consider a 5% reduction in realcosts of trade between the EU-15 and Central and East European countries. However, a smaller
reduction in these costs is invoked here, since the reductions in technical barriers are expected to be
negligible for FTAs in East Asia, as compared with those under EU enlargement.

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Singapore and other ASEAN countries increases only slightly under scenario 1. While
trade between these member countries would increase significantly, the trade flows
between the integrating countries and the rest of the world decline. Indeed, there are
extremely small welfare losses, which would be incurred either by the recently expanded
EU area of 27 countries, comprising then EU-15 and 12 new EU member states, or North
America. These overall findings are compatible with the suggestion that trade creation
effects dominate those of trade diversion.
In terms of percentage deviations from the baseline, Singapore’s welfare gain of
0.29% exceeds that of the other ASEAN countries, which experience an increase of 0.07%.
This finding may initially appear surprising, since consumers in countries with higher
initial tariff rates generally are expected to benefit more from regional integration.
Nonetheless, this result is clearly driven by the Armington assumption of nationallydifferentiated products, which implies that each country has a monopoly in the market for
its exports.17 Indeed, following regional integration Singapore’s terms of trade improve,
while those for other ASEAN economies deteriorate, dominating other welfare effects for
Singapore.
When a 2.5% reduction in trade costs among the ASEAN+3 countries is added,
under scenario 2, the magnitudes of welfare gains for the FTA members are amplified
considerably. Principally, this is a trade creating policy initiative, since lower
administrative and technical barriers facilitate trade by generating greater intra-regional
market access. Furthermore, while there are slight welfare losses for the EU and North
America, the net consequences for world welfare are an increase to 0.13% from the 0.03%
gain in the previous policy simulation.
In the next two scenarios, the sector-specific productivity levels actually respond tochanges in the sectoral export-output ratios. While a comparison between the results for
scenarios 3 and 2 points to welfare gains for all four member regions, as a result ofendogenizing χi,t, there are substantial variations across regions. Notably, the relatively
small gains for Japan, Korea, Singapore and other ASEAN are dwarfed by those for China,
where the welfare gain increases more than threefold, rising from 0.77% to 2.61%. A
17 Brown (1987) shows that monopoly power implicit in national product differentiation is the sourceof strong terms of trade effects resulting from tariff changes in Armington-type models.

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plausible explanation might be that increases in export-output ratios for many products are
far greater for China than for the other envisaged FTA members, but further investigation
is called for in order to better understand the specific mechanisms characterizing thenature of the linkages between openness and productivity.
For the EU and North America the welfare loss decreases in scenario 3, incomparison with scenario 2, since export-output ratios increase slightly in several sectors,
which are principally driven by heightened EU and U.S. exports to China. These
asymmetric implications appear directly linked to the unique welfare and real GDP gains
for China, which, as previously noted, are significantly larger when productivity is treatedas endogenous. Overall, the global welfare gain doubles from 0.13% to 0.26%, whencomparing scenarios 2 and 3.
Under scenario 4, it is hypothesized that increased competition within the
integrating region leads to a significant reduction in the trade and transport margin,
specifically by 10% over the period 2008-2015, as compared with the baseline. The
associated welfare gains for the FTA partners are striking, almost uniformly doubling for
China, Japan, Korea and Singapore, while more than tripling for other ASEAN countries.
The welfare for the EU and North America is only marginally affected between scenarios
3 and 4, changing by 0.01-0.02 percentage point.
As shown in Table 4, with the ASEAN+6 FTA policy experiment, where India,
Australia and New Zealand join in the integrating process, economic welfare of all
member countries, except India, increases under scenario 1. India’s welfare loss largely
stems from a sharp decline in its terms of trade after the elimination of tariffs. In thisregard, as already noted, India’s ex ante tariff rates in 2001 are substantially higher thanfor the other envisaged FTA members. Another explanation for India’s unique welfare loss
is that the ex ante value of the country’s imports from other FTA countries is much lower,
accounted for only 28% in 2001. In contrast, imports from the integrating region represent
53% for China, Singapore and other ASEAN, 42% for Korea and Australia/New Zealand,and 39% for Japan. Moreover, India’s trade has been historically much more oriented to
the EU and North America, as reflected by export shares of the two regions, which

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constituted, respectively, 30% and 23% in 2001.18 Thus, the initially smaller trade shareswith the other ASEAN+6 economies limits the country’s potential gains, since the positive
impact of the predicted increases in intra-FTA trade do not offset the terms of trade loss. A
generic insight is that the welfare implications of regional integration for specific countries
entail potentially significant hysteresis effects, where the path dependency is criticallydefined by initial configurations of trade costs and associated flows. Nonetheless, India
would experience only minor losses when frictional trade costs are reduced. Furthermore,
India actually experiences significant welfare gains when sectoral productivity levels areendogenized and, then, the trade and transport margin is lowered. Indeed, India’s welfare
increases under scenarios 3 and 4 to respectively 0.75% and 1.4% in 2015, as comparedwith the baseline.
The relative welfare consequences of the two FTA policy exercises can now becompared. Under scenario 1 an expanded FTA agreement generates amplified welfarechanges for the participating countries. These principally constitute gains except for India,
where, for the reasons stated above, the welfare loss becomes more pronounced.19 Under
scenarios 2 through 4, the differences in the welfare changes between the ASEAN+3 and+6 FTAs are generally less pronounced for the initial set of countries participating in thesmaller FTA. Accordingly, China, Japan, Korea and Singapore all experience either
relatively small reductions in welfare gains or are hardly affected by the expansion to
include Australia, India and New Zealand. More specifically, with India’s entry into theregional trading bloc, China’s exports of light manufactures (such as textiles, apparel andother manufactures) to ASEAN, Japan and Korea, as well as to the world, fall, thereby
offering an explanation for a slightly lower welfare gains for China under the ASEAN+6
FTA proposal. In the case of the more restricted integration proposal, there is a large
growth in the exports of both Japan and Korea to China, thereby greatly benefiting theformer two countries. With expanded integration inclusive of India, Australia and New
Zealand, some of Chinese imports from Japan, Korea and Singapore are projected to be
replaced by the three additional member countries. This can explain why the welfare gains

18 In the same year India’s imports from the EU and North America accounted for 28% and 14% of its

total imports.
19 For Australia/New Zealand there is a reversal of the welfare effects, with positive results under the

ASEAN+6 FTA, instead of a loss in the more restricted membership case.

14

for these three countries appear to be more limited under scenarios 2 through 4, when the
integration club also encompasses Australia, India and New Zealand. Finally, instead ofencountering welfare losses, as suggested by the first policy experiment, the welfare
enhancing effects for Australia and New Zealand of membership in an expanded FTA are
relatively large, ranging from 1.07% in the initial scenario to 2.96% for the final one.
Presumably, this is in line with the idea that relatively productive, but small, economies
can particularly gain from access to substantially expanded markets, through regional
integration, particularly when such an area includes certain less efficient competing
industries abroad.
4.2

Trade Flow Effects for Selected Products
In this sub-section, the trade flow effects of regional integration involving ASEAN+6

countries are assessed for eight selected products under the assumptions invoked under the
fourth scenario.20 Accordingly, sectoral productivity levels are endogenously determined,
while it is assumed that there are reductions of 2.5% in frictional trade costs and a 10%
decrease in the trade and transport margin among the member states over the period 20082015. Table 5 reports findings for three aggregate regions (the ASEAN+6 countries, EU27, and North America), along with the world as a whole, again expressed in terms ofpercent deviations from the baseline in 2015.
For four products, specifically other crops (excluding rice), processed food, textiles
and apparel, exports to the ASEAN+6 FTA area from the EU and North America decline
substantially, as a result of the regional economic integration. It should be noted that East
Asia constitutes a relatively important international market for North American farmers
and food producers, particularly those in the United States. 21 Consequently, there isalso a substantial reduction in overall North American exports to the world as a whole. A
similar finding applies in the case of processed food. For the other crop sector, there
appears to be considerable scope for trade diversion. Specifically, exports to the Japaneseand Korean markets from North America are predicted to be replaced by intra-regional
20 Regional trade integration among the ASEAN+3 countries yields qualitatively similar results and are,accordingly, not reported separately.
21 More specifically, according to the GTAP database used in this study, in 2001, 34% of North

American exports of other crops were shipped to East Asia, while 30% of food products were exported
there. In contrast, only 2.5% of EU exports of other crops were destined for East Asia in that same year.

15

suppliers from not only Australia/New Zealand, but also China and other ASEAN, where
the latter country and region are currently net importers. While there are comparable sharp
falls in the exports from the EU of other crops and processed food to ASEAN+6, total
European exports are much less affected than in the case of North America, given the much
lower exports shares that the integrating region represents for EU suppliers.
The scenario for exports of textiles and apparel from the EU and North America
differ from those just discussed for crops and processed food. Although the envisaged FTA
for the ASEAN+6 countries generates a significant fall in their exports in the former sectors,
the negative impact on overall exports to the world is relatively limited, given that European
and North American exports to the FTA zone are initially less than 10% of both regions’
global exports in textiles and apparel. Furthermore, in light of the high degree of global
competitiveness of producers from China, India and other ASEAN countries, trade diversion,
if any, would likely be quite minimal.
For iron and steel, machinery, electronic equipment and motor vehicles, thereductions in EU and North American exports to Asia are projected to be more moderate.
This is principally because the initial tariff rates in ASEAN+6 countries are relatively low,with the exception of the motor vehicle sector, where European and North American
producers face substantial tariff barriers in the Chinese, Indian, and other ASEAN markets.
Although not shown in Table 5, EU and North American exports to ASEAN+6 are
predicted to decrease by less than 2% in livestock, natural resources, nonferrous metal,
metal products and other manufactures, while increasing somewhat in services. Overall,
the trade implications of regional integration, comprising ASEAN+6, appear rather minimal
for a large number of products.
4.3

Sectoral Output Effects
Estimates of the impact of regional integration, following an ASEAN+6 FTA

initiative, are provided for the 22 sectors under scenario 4. The expected changes are again
expressed in percent deviations from the baseline in 2015. Since frictional trade costs andthe trade and transport margin is reduced by the same rates in all the sectors, thedifferences in the initial tariff rates across sectors play a critical role in determining thedirection of the adjustments in sectoral output. Other key factors, determining themagnitude and direction of output adjustments for each product category, include the16

import-demand ratio, the export-output ratio, the share of each imported intermediate input
in total costs, and the elasticity of substitution between domestic and imported products.22
In every country/region, the change in rice output is rather small because the tariff
rate on this commodity is assumed to be fixed for all of the scenarios. By contrast, output
adjustments in other crops are considerable in a number of countries. Specifically, output
of other crops in Korea and Japan is predicted to contract by 68.3% and 13.3%,
respectively, whereas it would increase by 33.3% in Australia/New Zealand, 15.1% in
China, and 3.5% in other ASEAN. Although the effect on the EU is very small, North
America’s output of other crop is expected to fall by 4.1%. Furthermore, since North
America is the largest producer of other crops among the 12 countries/regions, it is thearea the most impacted by regional integration in Asia.
Among manufacturing sectors, output adjustments are the largest for food products,
textiles and apparel, and, to a lesser extent, motor vehicles. This is to be expected, since,
aside from Singapore, the initial tariff rates for these product groups are generally higher
than for most other products. The contraction of processed food output in Japan and India
is largely caused by a sharp increase in imports from other FTA members, following theremoval of relatively high tariffs. Yet, even though the initial tariff rates for Korea and theother ASEAN countries in processed food are also high, output in these countries actually
expands. An explanation for Korea is that the removal of the 188% tariff rate on othercrops would substantially reduce the cost of intermediate inputs (notably for wheat, oilseeds and sugar), which are used to produce processed food, thereby reducing domestic
price and increasing demand. Accordingly, the associated expansion of output dominates
other contractionary effects. To a lesser extent, similar mechanisms also apply for other
ASEAN. For both Korea and other ASEAN, imports from non-ASEAN+6 countries
contract, because the ratio of domestic to import prices falls. In addition, sincecomputations based on the GTAP database reveal that roughly 50% of India’s imports of
22 A sector with a larger import-demand ratio generally suffers from proportionately larger output

contraction through greater import penetration, when initial tariff levels are relatively high. In contrast,
a sector with a higher export-output ratio typically experiences a larger extent of output expansion, as aresult of the removal of tariffs in the partner countries. The share of imported intermediate inputs in the
total cost of a downstream industry (e.g., the share of imported textiles in the cost of the apparelindustry) would evidently affect the magnitude and direction of output adjustments in the latter sector.
Finally, the greater the values of substitution elasticities between domestic and imported products, thegreater the sensitivity of the import-domestic demand ratio to changes in the relative price of imports,
thereby magnifying the effects of regional integration.

17

food products come from the ASEAN countries other than Singapore, the removal ofIndia’s 76% tariff rate on food products would substantially expand imports from thosecountries. Finally, output of processed food in Australia/New Zealand would expand
sharply, due to large increases in these two countries’ exports to Asia.
The initial tariff rates on textiles and apparel are relatively high in the ASEAN+6
countries, except for Singapore. While China is not only the largest exporter and importerof textiles in Asia, it is also the largest exporter of apparel in the world, while Japan is thelargest importer of apparel in Asia. At the same time, Japan and Korea’s textile exports to
China constitute, respectively, over 50% and 30% of their textile exports to the world.
Following integration, textile exports from both Japan and Korea to other parts of theregion, particularly to China, increase dramatically.23 Consequently, textile output in theformer two countries increases. However, the percent increase is more substantial for
Korea, due to a much higher export-output ratio of 0.62, in contrast to the 0.30 value forJapan. While apparel output expands in China, Korea and India, reverse tendencies apply
for the other member countries including ASEAN.24 Indeed, particularly large reductions
are anticipated for Australia/New Zealand and Japan.
The output changes in machinery and electronic equipment appear to be somewhat
counter-intuitive in light of the comparative advantage of Japan and Korea for theseproducts in relation to the other FTA members. However, as noted by Ando and Kimura(2005a) and Kimura (2006), international fragmentation has dramatically developed in themachinery sector in East Asia since the 1990s. 25 Paralleling this development is asignificant rise, across East Asia, in the shares of parts and components in both exports
and imports of machinery. More specifically, over the 1990-2003 period, intra-East Asian
exports of machinery parts and components increased by 452%, which accounted forabout a half of intraregional export growth, as recognized by Ando and Kimura (2005b).

23 The substantial increase in China’s textile imports principally arises from a significant expansion of

apparel production.
24 This result is consistent with Lee and Mensbrugghe’s (2008) finding that for ASEAN the revealed

comparative advantage (RCA) index of apparel is near the top of the ranking under global tradeliberalization. Nonetheless, the RCA raking of apparel falls significantly under the FTAs that include
China and/or Korea.
25 In these studies, the machinery sector includes electric machinery, which comprises electronicequipment.

18

Since machinery, including electronic equipment, is the largest export product category inmost East Asian countries, even though they are at different development stages, theresults shown in Table 6 are quite plausible.
While the significant reduction in output of other crops in North America has
already been noted, the only other products that experience more than 1% reductions in
output in either the EU or North America occur in the case of textiles and apparel for the
EU-15. In contrast, the latter sectors are hardly affected in the new EU member states,
given that only about one percent of their exports of textiles and apparel is shipped to Asia,
while fully 73% of textile and 85% of apparel exports are destined for EU-15.26 When
productivity is positively correlated with economic openness, while the trade and transport
margin is assumed to fall, a number of manufacturing sectors in the EU and North
America potentially experience relatively limited output expansions, as a result of
postulated regional integration in Asia. Furthermore, the overall sectoral effects in the EU
and North America are essentially somewhat favorable, with the notable exception ofcrops other than rice in North America, principally impacting the United States.

5. Conclusion
A dynamic CGE model, based on the LINKAGE model developed at the World
Bank, has been used to quantify the effects of regional integration in Asia on economic
welfare, trade flows and sectoral output of FTA member and non-member
countries/regions. An initial regional policy integration experiment, comprising ASEAN
countries, China, Korea and Japan, designated as ASEAN+3 FTA, has been expanded toconsider an ASEAN+6 FTA paradigm, which also includes Australia/New Zealand andIndia. Each experiment has assessed the effects of the FTA formations over a 2008-2015
time horizon under alternative hypotheses regarding the extent of integration. Novelfeatures of the analysis include allowing for both trade facilitation and endogenously
determined productivity levels, which are assumed to be positively correlated witheconomic openness. More specifically, for each experiment four different nested scenarios
have been considered, starting with the removal of bilateral tariffs and export
26 In sharp contrast, Lee and van der Mensbrugghe (2004) found that EU enlargement would result in

4.5% and 2.2% reductions in apparel output in, respectively, ASEAN and China, along with 2.6% and1.6% declines in textile output in ASEAN and Asian NIEs, as compared with the baseline in 2015.

19

taxes/subsidies, except for the rice sector. Subsequently, reductions in frictional trade costs
have then been examined, while again assuming that sector-specific productivity factors
related to degrees of openness are fixed. In two final scenarios, these productivity factors
are first endogenized to depend on the degree of openness, while the incremental effects oflowering trade and transport margins are also assessed.
The empirical research findings suggest that, in the absence of trade facilitation
and a linkage between productivity and openness, the welfare effects of the initial tariff
removal among the FTA members are actually quite small. In sharp contrast, once theselatter effects are incorporated into the CGE analysis, the welfare gains of the member
countries become significantly larger, ranging from 0.7% in Japan to 5.9% in Singapore
under the ASEAN+6 FTA experiment. Yet, the welfare effects on the EU and North
America are found to be negligible. Nonetheless, in the case of the more extensive of the
two Asian FTAs, the welfare of India actually declines under some scenarios. The latter,rather distinctive outcomes appear to reflect hysteresis effects, linked to very high existing
tariff levels in a number of key sectors in India, as well as traditionally limited trade flows
with East Asia, relative to those with industrialized and developing countries elsewhere.
Exports of other crops and processed food from the EU and North America to the
ASEAN+6 FTA area have been projected to decline substantially, as a result of regional
integration. Since East Asia constitutes a relatively important international market for
North American farmers and food producers, overall North American exports of theseproducts to the world as a whole are also subject to substantial reductions. In particular,
the predicted output of other crops in North America decreases by 4.1%, as compared withthe baseline in 2015. Nonetheless, for the rest of product categories in the EU and North
America, changes in output caused by Asian regional integration are all less than 1.5%.
A valuable but challenging extension of the paper would be to endogenize FDI
flows involving Asian countries. Such an analysis would need to consider how theinterrelation between alternative categories of cost-enhancing and market-seeking FDI
potentially impact not only trade flows, but also rates of technological diffusion and,
thereby, the structure and international competitiveness of Asian industry. As previously
noted, many Asian countries are characterized by relatively high growth rates and/or low
efficiency wages, while a surge in FDI inflows, notably in China, over the past two
decades also appears closely interlinked with changes in intra and extra-regional trade20

patterns. Indeed, not only have MNEs from the EU, Japan, the United States and otherindustrialized countries undertaken extensive outsourcing and delocalization in many
Asian economies, but also there has been a remarkable upswing of intra-regional Asian
FDI flows, involving other source countries. Further regional economic integration in Asia,
particularly if accompanied by investment liberalization, could induce significant
additional build-ups of FDI flows involving FTA members as source and host countries.
Yet, a significant impediment to undertaking such an extension of the analysis to allow
more explicitly for the role of FDI is that the data on bilateral FDI flows by sector are notreadily available for many Asian countries. However, it remains a worthwhile long-term
project to estimate such data and extend the model to allow for the impact ofendogenously determined FDI on the FTA members and outside economies.
A final methodological issue points to certain generic limitations to investigations,
aimed at assessing the effects of regional integration, which, as in the present research, areinherently based on relatively aggregate existing data and economic relations. As
witnessed by the European integration process, notably following the Single European Act
and Treaty of Maastricht, profound economic integration is inherently multidimensional.
Notably, regional integration can entail substantial transformations in national and pannational governance and market structures, reflecting redefined legal, political andeconomic environments. Such changes can potentially alter a wide range of
microeconomic incentive mechanisms, along with the determinants of individual agents’performance. As such, ex post model simulations that do not explicitly capture suchphenomena risk generating biased economic projections, given that aggregate model
simulations are calibrated on ex ante statistics and economic relations, which, to varying
degrees, may no longer apply.

21

Appendix: Sensitivity Analysis
Simulation results can be sensitive to chosen model parameter values. In thissection, we conduct a sensitivity analysis on the welfare effects by varying the extent towhich frictional trade costs are reduced (λ), the elasticity of productivity with respect toopenness (η), and the magnitude of reduction in the trade and transport margin (ζ ).
Specifically, we conduct the following ten sets of sensitivity tests:1)

λ = 2.5%, η = 0, ζ = 02)

λ = 5%, η = 0, ζ = 03)

λ = 2.5%, η = (0.75, 1.0), ζ = 0, where the first value of η (0.75) is η foragricultural sectors and the second value of η (1.0) is η for all other sectors.

4)

λ = 2.5%, η = (1.5, 2.0), ζ = 05)

λ = 5%, η = (0.75, 1.0), ζ = 06)

λ = 5%, η = (1.5, 2.0), ζ = 0

7)

λ = 2.5%, η = (0.75, 1.0), ζ = 10%8)

λ = 2.5%, η = (0.75, 1.0), ζ = 20%

9)

λ = 5%, η = (1.5, 2.0), ζ = 10%

10) λ = 5%, η = (1.5, 2.0), ζ = 20%
The results of the sensitivity analysis on the welfare effects under the ASEAN+3
FTA are summarized in Table A.1. When the value of λ (the extent to which frictional
trade costs are reduced) doubles while the values of η and ζ are held fixed at zero, thewelfare level of many member countries (e.g., China, Singapore and other ASEAN)
roughly doubles, while that of Japan and Korea increases by 50-60 percent [columns (1)and (2)]. However, if the value of λ doubles when elasticity values of productivity inrelation to openness of η = 1.5 in agricultural sectors and η = 2.0 in all other sectors are
assumed, the welfare level of all member countries less than doubles [columns (4) and (6)].
Thus, while an increase in the value of λ has similar effects as reductions in the tariff rates

22

on all commodities by the same percentage points, the welfare results are also affected by
the initial values of η, particularly for China.
In (1), (3) and (4), as well as in (5) and (6), only the value of η is changed whilethe values of λ and ζ are held constant. The results suggest that China’s welfare is greatly
affected by the changes in the value of η. By contrast, other regions’ welfare is rather
insensitive to the changes in this parameter. This implies that the export/output ratio islittle affected by the ASEAN+3 FTA with the exception of China.
Finally, the rate of reduction in the trade and transport margin, represented by theparameter value of ζ , is doubled between (7) and (8), as well as between (9) and (10). A
further reduction in the trade and transport margin benefits every member country.
Specifically, if ζ doubles from 10% to 20%, when parameter values of λ = 2.5% and η =0.75 are assumed in agricultural sectors and η = 1.0 in all other sectors, the welfare gainsof the member countries increase by roughly 30% in all member countries. When λ = 5%and η = 1.5 in agricultural sectors and η = 2.0 in all other sectors, the welfare gains of themember countries increase by 20-25%.
Considering relatively large differences in the values of λ, η and ζ between (1) and(10), the sensitivity of the welfare results is within a reasonable range. However, the setsof the parameter values (8)-(10) might be rather unrealistic because the welfare gains for
Singapore in excess of 8% under the ASEAN+3 FTA are extremely unlikely.

23

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26

Table 1: Regional and sectoral aggregation
A. Regional aggregation
Country/region

Corresponding economies/regions in the GTAP database

China
Japan
Korea
TaiwanSingapore
Other ASEAN
India
Australia/New Zealand
North America
EU-15

China, Hong Kong
Japan
Korea
TaiwanSingapore
Indonesia, Malaysia, Philippines, Thailand, Vietnam, rest of Southeast Asia
India
Australia, New ZealandUnited States, Canada, Mexico
Austria, Belgium, Denmark, Finland, France, Germany, Great Britain,
Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden
12 new EU member states since 2004
All the other economies/regions

New EU members
Rest of world
B. Sectoral aggregation
SectorCorresponding commodities/sectors in the GTAP database

Rice
Other crops

Paddy rice, processed rice
Wheat, cereal grains nec, vegetables and fruits, oil seeds, sugar cane andsugar beet, plant-based fibers, crops nec
Bovine cattle, sheep and goats, animal products nec
forestry, minerals, mineral products
Coal, oil, gas
Fishing, meat products, dairy products, other food products, beverages andtobacco products
TextilesWearing apparel and leather
Wood products, paper products and publishing
Petroleum and coal products
Chemical, rubber and plastic products
Iron and steel
Nonferrous metal
Fabricated metal products
Machinery and equipment
Electronic equipment
Motor vehicles and parts
Other transportation equipment
Manufactures nec
Construction, public utilities
Trade, sea transport, air transport, transport nec
Communication, financial services, other services

Livestock
Natural resources
Fossil fuelFood products
TextilesApparelWood and paper
Petroleum products
Chemical products
Iron and steel
Nonferrous metal
Metal products
Machinery
Electronic equipment
Motor vehicles
Other transport equip.
Other manufactures
Construction and utilities
Trade and transport
Services

Source: GTAP database, version 6.
Note: nec = not elsewhere classified.

27

Table 2: Initial sectoral tariff rates, 2001 (%)

China

Japan

Korea

Singapore

Other
ASEAN

India

Australia/
New Zealand

0.4
54.5
4.3
4.2
0.0
9.8
15.0
4.0
6.9
6.2
11.2
6.1
5.1
8.4
10.7
6.9
28.9
3.6
6.2

825.1
27.2
4.0
0.3
0.0
24.5
7.1
10.9
1.1
1.6
1.0
1.0
0.4
0.5
0.1
0.0
0.0
0.0
1.2

929.0
188.1
3.7
4.4
4.0
24.7
9.2
9.9
4.0
5.6
6.7
2.8
3.9
7.5
6.1
1.1
7.8
1.2
9.5

0.0
0.0
0.0
0.0
0.0
0.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0

23.6
12.9
3.6
7.7
1.0
20.4
13.5
14.1
7.3
4.7
6.8
8.0
3.8
11.7
5.0
1.5
32.2
11.0
8.0

52.2
28.0
14.2
16.8
16.8
76.2
26.2
27.6
22.0
16.6
31.0
34.6
33.1
33.8
25.4
15.1
40.3
18.9
34.2

0.0
0.4
0.0
3.5
4.4
3.2
11.1
16.2
3.1
0.1
2.8
3.9
0.9
5.5
3.3
0.8
15.2
0.6
3.1

Rice
Other crops
Livestock
Natural resources
Fossil fuelFood products
TextilesApparelWood and paper
Petroleum products
Chemical products
Iron and steel
Nonferrous metal
Metal products
Machinery
Electronic equipment
Motor vehicles
Other transport equip.
Other manufactures
Source: GTAP database, version 6.

28

Table 3: Effects on welfare resulting from the ASEAN+3 FTA(Deviations in equivalent variations from the baseline in 2015)
Scenario 3

Scenario 4

A. Absolute deviations (US$ billion in 2001 prices)
China
2.32
17.42
Japan
5.42
12.48
Korea
4.81
9.09
Taiwan-0.93-1.40
Singapore
0.32
3.21
Other ASEAN
0.52
9.77
India
-0.38
-0.61
Australia/New Zealand
-0.28
-0.37
North America
-1.21
-2.22
EU-15
-0.73
-1.56
New EU members
-0.02
-0.03
Rest of world
-0.77
-1.45

58.95
13.50
10.58
-1.08
3.38
9.88
-0.55
-0.36
-1.59
-0.25
0.01
-3.83

102.23
28.66
19.17
-1.74
7.00
32.01
-0.91
-0.72
-2.39
-1.08
0.08
-5.61

ASEAN+3 countries
World

13.39
9.07

51.97
44.32

96.29
88.64

189.07
176.71

B. Percent deviations
China
Japan
Korea
TaiwanSingapore
Other ASEAN
India
Australia/New Zealand
North America
EU-15
New EU members
Rest of world

0.10
0.14
0.75
-0.24
0.29
0.07
-0.05
-0.06
-0.01
-0.01
0.00
-0.02

0.77
0.33
1.41
-0.36
2.96
1.21
-0.08
-0.08
-0.02
-0.02
-0.01
-0.03

2.61
0.36
1.65
-0.27
3.10
1.23
-0.07
-0.08
-0.01
0.00
0.00
-0.09

4.53
0.76
2.99
-0.44
6.45
3.97
-0.12
-0.15
-0.02
-0.02
0.02
-0.13

ASEAN+3 countries
World

0.18
0.03

0.69
0.13

1.27
0.26

2.50
0.52

RegionScenario 1

Scenario 2

Definitions of scenarios:
Scenario 1: The FTA members remove bilateral tariffs (except rice) over the period
2008-2015 The sector-specific productivity factors related to openness (χi i,t) are fixedat the baseline levels.
Scenario 2: Scenario 1 plus a 2.5% reduction in administrative and technical barriers
among the FTA members over the period 2008-2015. χi i,t are fixed at the baseline
levels.
Scenario 3: Same as scenario 2 except that χi i,t are endogenous and determined byequation (2).
Scenario 4: Scenario 3 plus a 10% reduction in the trade and transport margin over theperiod 2008-2015 for the FTA members.

29

Table 4: Effects on welfare resulting from the ASEAN+6 FTA(Deviations in equivalent variations from the baseline in 2015)
Scenario 3

Scenario 4

A. Absolute deviations (US$ billion in 2001 prices)
China
6.77
16.02
Japan
6.77
11.66
Korea
5.96
8.55
Taiwan-1.33-1.67
Singapore
1.29
3.19
Other ASEAN
7.07
12.35
India
-2.72
-0.03
Australia/New Zealand
4.96
9.55
North America
-2.34
-3.48
EU-15
-1.23
-2.10
New EU members
-0.05
-0.06
Rest of world
-2.23
-3.55

55.27
12.24
9.97
-1.43
3.30
12.55
5.66
8.26
-3.22
-0.87
-0.03
-5.73

92.73
26.70
17.51
-2.09
6.38
33.16
10.61
13.79
-3.26
-1.26
0.11
-7.98

ASEAN+6 countries
World

30.10
22.93

61.29
50.43

107.2495.96

200.88186.40

B. Percent deviations
China
Japan
Korea
TaiwanSingapore
Other ASEAN
India
Australia/New Zealand
North America
EU-15
New EU members
Rest of world

0.30
0.18
0.93
-0.34
1.18
0.88
-0.36
1.07
-0.02
-0.02
-0.01
-0.05

0.71
0.31
1.33
-0.42
2.94
1.53
0.00
2.05
-0.03
-0.03
-0.01
-0.08

2.45
0.33
1.55
-0.36
3.06
1.56
0.75
1.77
-0.03
-0.01
-0.01
-0.13

4.11
0.71
2.73
-0.53
5.88
4.11
1.40
2.96
-0.03
-0.02
0.02
-0.18

ASEAN+6 countries
World

0.34
0.07

0.70
0.15

1.22
0.28

2.28
0.55

RegionScenario 1

Scenario 2

30

Table 5: Trade flow adjustments for selected products resulting from the ASEAN+6 FTA(Scenario 4, percent deviations from the baseline for the year 2015)
Importing region and sector
Other crops
ExportingregionASEAN+6
EU-27
North America
World

Processed food

ASEAN+6

EU-27

North
AmericaWorld

ASEAN+6

EU-27

North
America

World

103.8
-15.6
-17.8
3.0

-8.6
-0.1
0.2
0.1

-6.4
1.1
1.4
1.1

59.4
-0.6
-9.1
1.4

66.0
-8.3
-10.4
30.2

-8.8
0.2
0.4
-0.2

-9.0
0.9
1.1
-1.0

36.6
-0.5
-3.0
7.3

Importing region and sector
TextilesExportingregionASEAN+6
EU-27
North America
World

ApparelASEAN+6

EU-27

North
AmericaWorld

ASEAN+6

EU-27

North
America

World

29.9
-11.6
-10.7
18.4

0.0
-0.6
-0.5
-0.2

0.2
-0.2
0.0
0.2

13.7
-1.5
-1.5
5.5

28.3
-13.1
-11.0
22.0

0.6
-0.4
-0.4
0.2

0.0
-0.2
0.0
0.2

9.7
-1.8
-1.5
5.4

Importing region and sector
Iron and steel
ExportingregionASEAN+6
EU-27
North America
World

Machinery

ASEAN+6

EU-27

North
AmericaWorld

ASEAN+6

EU-27

North
America

World

25.4
-6.1
-2.7
12.5

-7.0
0.3
0.1
0.2

-6.3
0.8
0.7
-0.4

13.7
-0.1
0.1
3.3

16.0
-1.5
-1.1
8.0

-5.1
0.6
0.3
-0.2

-5.0
1.1
0.8
-0.8

4.2
0.4
0.2
1.6

Importing region and sector
Electronic equipment
ExportingregionASEAN+6
EU-27
North America
World

Motor vehicles

ASEAN+6

EU-27

North
AmericaWorld

ASEAN+6

EU-27

North
America

World

5.7
-1.8
-1.6
3.3

-3.3
1.1
0.7
-0.3

-2.6
1.9
1.5
-0.7

1.6
0.6
0.3
1.0

61.8
-4.1
-4.5
27.4

-5.4
0.2
-0.1
-0.1

-4.1
0.8
0.5
-0.5

9.6
0.1
0.2
2.0

31

Table 6: Sectoral output adjustments resulting from the ASEAN+6 FTA under scenario 4(Percent deviations from the baseline for the year 2015)
Sector

China

Japan

Korea

Rice
Other crops
Livestock
Natural resources
Fossil fuelFood products
TextilesApparelWood and paper
Petroleum products
Chemical products
Iron and steel
Nonferrous metal
Metal products
Machinery
Electronic equipment
Motor vehicles
Other transport equip.
Other manufactures
Const and utilities
Trade and transport
Services

2.0
15.1
3.7
0.0
3.4
5.8
0.4
5.6
-0.3
1.1
-2.4
-1.8
-2.2
0.3
-1.0
0.9
-3.8
5.2
-0.4
1.8
0.2
0.3

-0.7
-13.3
-4.2
-0.2
-6.3
4.5
-12.7
-2.6
-0.3
1.3
5.0
2.1
0.6
3.0
-1.2
6.0
-2.0
-1.7
0.5
-0.2
0.2

5.2
-68.3
18.4
-4.8
12.6
26.6
14.9
-0.9
14.1
6.7
2.5
3.6
1.3
-3.8
-1.5
6.7
-9.0
6.5
2.4
-0.5
-0.1

Taiwan Singapore
3.5
0.2
-8.7
-2.0
2.3
-2.4
-1.6
1.1
5.0
1.7
1.3
0.5
0.4
1.1
2.7
-0.9
-0.2
-0.1

Other
ASEAN

India

Australia/
NZ

North
America

EU-15

New EUmembers

Rest of
world

0.1
3.5
5.4
0.1
7.5
10.3
-10.5
-3.1
7.5
0.3
8.5
-12.9
-4.2
-2.1
4.9
0.0
-17.9
-13.8
-2.7
4.4
0.2
-0.5

0.4
-0.4
1.8
4.6
-7.6
-11.5
7.1
24.0
0.3
4.4
2.3
1.1
1.6
1.1
-0.2
4.7
-4.1
0.7
11.9
0.6
0.7
0.4

33.3
8.4
-0.3
9.8
14.3
-32.1
-29.2
-3.9
-0.6
-12.3
-15.0
-7.4
-7.4
-16.6
-19.4
-25.0
-14.5
-12.7
2.0
0.0
0.3

1.8
-4.1
-0.2
0.4
-0.7
-0.2
-0.4
-0.4
0.1
-0.2
0.0
0.4
0.5
0.3
0.4
0.6
0.3
0.2
0.9
0.0
0.0
0.0

0.9
-0.3
0.1
0.4
-0.4
-0.1
-1.2
-1.4
0.1
-0.3
0.0
0.0
0.1
0.2
0.4
0.6
0.1
0.9
0.1
0.0
-0.4
0.1

0.0
0.1
0.3
-0.3
0.0
0.0
-0.1
0.2
-0.1
0.1
0.3
0.4
0.3
0.5
1.0
0.2
0.8
0.6
0.1
-0.5
0.2

0.5
-1.7
-0.2
0.5
0.0
-0.2
-0.1
0.1
0.4
-0.4
0.1
0.7
1.1
0.7
1.3
1.0
0.9
1.8
0.6
-0.1
-0.3
0.1

34.1
15.2
-3.9
-9.9
-2.5
22.0
6.6
9.9
28.2
-1.7
3.4
3.7
-18.3
-16.1
-7.9
4.6
-3.0
-1.4

Note: “-” indicates that changes are less than US$10,000.

32

Table A.1: Sensitivity Analysis on the Welfare Effects: ASEAN+3 FTA(Percent deviations in equivalent variations from the baseline in 2015 unless otherwise indicated)
Region

(1)

(2)

(3)

(4)

(5)

(6)

China
Japan
Korea
TaiwanSingapore
Other ASEAN
India
Australia/New Zealand
North America
EU-15
New EU members
Rest of world

0.77
0.33
1.41
-0.36
2.96
1.21
-0.08
-0.08
-0.02
-0.02
-0.01
-0.03

1.45
0.52
2.09
-0.47
5.62
2.41
-0.11
-0.10
-0.02
-0.03
-0.01
-0.05

1.43
0.35
1.49
-0.32
3.03
1.23
-0.08
-0.07
-0.01
-0.01
0.00
-0.05

2.61
0.36
1.65
-0.27
3.10
1.23
-0.07
-0.08
-0.01
0.00
0.00
-0.09

2.17
0.55
2.16
-0.42
5.78
2.40
-0.10
-0.09
-0.02
-0.02
0.00
-0.06

3.45
0.58
2.33
-0.36
5.64
2.38
-0.10
-0.09
-0.01
-0.01
0.01
-0.10

ASEAN+3 countries
World
percent
US$ billion in 2001 prices

0.69

1.21

0.90

1.27

1.44

1.85

0.13
44.32

0.24
80.42

0.18
60.89

0.26
88.64

0.30
100.190.39
131.58

Region

(7)

(8)

(9)

(10)

China
Japan
Korea
TaiwanSingapore
Other ASEAN
India
Australia/New Zealand
North America
EU-15
New EU members
Rest of world

2.84
0.71
2.75
-0.51
6.60
3.98
-0.13
-0.16
-0.03
-0.05
-0.01
-0.09

3.67
0.91
3.50
-0.64
8.33
5.21
-0.17
-0.20
-0.03
-0.05
-0.01
-0.11

5.45
1.00
3.72
-0.53
9.19
5.25
-0.14
-0.17
-0.02
-0.02
0.02
-0.14

6.77
1.23
4.54
-0.63
11.10
6.54
-0.17
-0.19
-0.01
-0.01
0.04
-0.17

ASEAN+3 countries
World
percent
US$ billion in 2001 prices

1.95

2.52

3.13

3.87

0.39
133.160.51
173.270.66
223.780.82
279.08

Note: Ten sets of sensitivity tests are conducted as follows: (1) λ = 2.5%, η = 0, ζ = 0, (2) λ = 5%, η = 0, ζ
= 0, (3) λ = 2.5%, η = (0.75, 1.0), ζ = 0, (4) λ = 2.5%, η = (1.5, 2.0), ζ = 0, (5) λ = 5%, η = (0.75, 1.0), ζ =0, (6) λ = 5%, η = (1.5, 2.0), ζ = 0, (7) λ = 2.5%, η = (0.75, 1.0), ζ = 10%, (8) λ = 2.5%, η = (0.75, 1.0), ζ= 20%, (9) λ = 5%, η = (1.5, 2.0), ζ = 10%, and (10) λ = 5%, η = (1.5, 2.0), ζ = 20%. λ is the extent towhich frictional trade costs are reduced, η is the elasticity of productivity with respect to openness (where
the first value is for agricultural sectors and the second value is for all other sectors), and ζ is the magnitude
of reduction in the trade and transport margin. (1) and (4) are same as scenario 2 and scenario 3, respectively,
in Table 3.

33