9 sectors and 35 countries/ regions (see Table A1) and simulates the impacts of policy changes up to 2030, including reduction of tariffs, Non-Tariff Measures (NTMs) in goods and services trade.

The effects of trade agreements are estimated by constructing one baseline and four alternative scenarios that simulate reductions of multilateral tariffs and NTMs under CPTPP, TPP12, RCEP, and FTAAP. The net effects of tariff and non-tariff reduction intervention under each scenario are measured as deviations with respect to baseline scenario. The baseline simulation depicts a continuation of usual conditions – without signing new trade agreements, but with the implementation of commitments on tariff reductions under the existing FTAs.

Standard simulation results of the model represent a lower-bound estimate for the gains from trade openness, as many features of the FTAs are not captured by the model e.g. impact on foreign direct investment, endogenous productivity gains, development of new products. The modeling framework also does not cover the impacts of measures such as government procurement, harmonization of labor or environmental standards, which tend to have important impacts on productivity and welfare gains.

Under standard simulations, gains from the FTA scenarios will only capture the effect of international reallocation of production to the most cost-efficient sectors, they do not account for additional gains in productivity associated with trade liberalization and increased openness. To account for possible productivity gains from trade liberalization we follow the findings of Topalova & Khandelwal, (2011) assuming that a 10% decrease in trade protection leads to a 0.5 percentage point productivity gain. As such, each of the four FTA scenarios has an alternative version constituting a potential upper bound of welfare gains including higher productivity, or productivity kick, based on trade-weighted average reduction of multilateral tariffs (simulations with productivity kick).

Annex 1 includes full details of the methodology and scenarios.

# **Assumptions for reductions in tariffs and NTMs**

Changes in tariff and NTMs assumptions for each scenario are outlined below:

- **Baseline scenario:** key macro indicators such as GDP and current account follow projections from the World Bank (2016a) until 2018, then the productivity growth remains fixed to be consistent with historical trends. The baseline includes the future reduction of tariffs as a result of existing FTA commitments up to 2030. For TPP members, tariff cuts follow the database of the International Trade Centre (2015). The rest of the FTA commitments for the baseline (e.g., NAFTA, AFTA, the ASEAN-Japan FTA, the ASEAN-Australia-New Zealand FTA and the P4 Agreement among Brunei Darussalam, Chile, Singapore and New Zealand) come from Petri and Plummer (2016).

- **CPTPP and TPP12:** implementation of the TPP agreement among its members with and without the United States begins in 2017.<sup>6</sup> Tariff reductions in CPTPP and TPP12 are based on the actual TPP tariff commitment schedules compiled by ITC  (2015) and NTMs reductions in goods and services follow estimates from Petri et al., (2016). As such, the CPTPP scenario assumes the same level of ambition as the original TPP12, simply excluding the United States.

> 6 2017 is not a realistic date for the start of implementation of commitments of FTAs, but the results would not be much affected if we selected date 2-3 years in the future due to long period of implementation, backloading of commitments and assuming that the economy would not undergo dramatic changes over the next few years. As such the results in 2030 should be interpreted as the impacts 12 years after the beginning of the implementation period.