# Table of Contents

|Structural Gravity, Market Structure and Deep Regional Integration in The Philippines: What are|
|---|
|the Differences between the Melitz, Krugman and Armington Models ......................................... 1|
|1. Introduction ................................................................................................................................. 1|
|2. Literature Review ........................................................................................................................ 4|
|2.1 Estimates of Goods Market Preferential Liberalization: Beyond Tariffs or Armington ....... 4|
|2.2 Estimates of Foreign Direct Investment Liberalization in Services ..................................... 6|
|2.3 Modern Assessment of the Welfare Gains from Trade Liberalization ................................. 8|
|3. Overview of the Model ............................................................................................................... 9<br>|
|3.1 Perfectly competitive goods and services sectors ............................................................... 11|
|3.2 Imperfectly competitive goods sectors (Krugman style model) ......................................... 11|
|3.3 Imperfectly competitive goods sectors (Melitz model) ....................................................... 12|
|3.4 Imperfectly competitive service sectors in which foreign direct investment occurs<br>|
|(Krugman style) ......................................................................................................................... 13<br>|
|3.5 Imperfectly competitive service sectors in which foreign direct investment occurs (Melitz<br>|
|style). ......................................................................................................................................... 15|
|3.6 Labor-Leisure Choice .......................................................................................................... 16|
|3.7 The Multi-sector Feenstra Ratio .......................................................................................... 17|
|3.8 Terms-of-trade Parameter ................................................................................................... 18|
|4. Data of the Model, Key Elasticities and the Trade and FDI Responses .................................. 19|
|4.1 Holding the Trade and FDI Responses Constant: Key Elasticities .................................... 19|
|4.1.1 The Trade Response. ................................................................................................... 19|
|4.1.2 Key Trade Response Elasticities. ................................................................................. 20|
|4.1.3 FDI Response. .............................................................................................................. 21|
|4.1.4 Elasticities of Supply. ................................................................................................... 21|
|4.2 Ad Valorem Equivalents (AVEs) of the Barriers Against Business Services. ................... 22|
|4.2.1 Estimates of the AVEs of Barriers Against FDI in Business Services. ........................ 22|
|4.2.2 Estimates of AVEs of Barriers to Cross-Border Trade in Services. ............................. 23|
|4.3 Estimates of the AVEs of the Costs of Time in Exporting and Importing. ......................... 23|
|4.4 Estimates of the AVEs for Non-Tariff Measures (NTMs) for the Regions of our Model .. 23|
|4.5 Tariff and Trade Data .......................................................................................................... 25|
|4.6 Social Accounting Matrices ................................................................................................ 25|
|4.7 Share of Market Captured by Foreign Direct Investors in Services ................................... 25|
|5. Results: RCEP and its Key Components: Comparing Market Structures ................................ 26|
|5.1 Scenario Definitions ............................................................................................................ 27|
|5.2 Effects of RCEP in the Krugman model ............................................................................. 28|
|5.3 Effects of RCEP--Armington compared with Krugman ..................................................... 30|
|5.4 Effects of RCEP: Melitz compared with Krugman ............................................................. 31|
|6. Sensitivity Analysis .................................................................................................................. 33|
|6.1 Sensitivity of Deep Integration to Spillovers or Liberalization to non-RCEP Regions. .... 33|
|<br>6.2 Welfare Sensitivity to the Trade Response and FDI responses.......................................... 35|
|6.3 Piecemeal Parameter Sensitivity of the Krugman Model Welfare Estimates in the RCEP<br>|
|Scenario ..................................................................................................................................... 37|
|7. Conclusions ............................................................................................................................... 38|
|References ..................................................................................................................................... 38|
|Table 1: Sectors, Factors of Production, Regions and Their Ownership Shares in Business|
|Services of The Philippines ....................................................................................................... 48|

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