Assessing Quality and Impacts of Major Free Trade Agreements

In this session, a presentation was made concerning the quantitative assessment of FTAs using simulations undertaken in a computable general equilibrium (CGE) model.

The Abe Presentation used a CGE model to assess the economic impacts of Japan's FTAs and evaluated the impact of varying types of FTA frameworks to derive policy implications. Specifically, simulations were undertaken in a CGE model to analyze and compare Japan's bilateral and multilateral regional trade agreements.

The Global Trade Analysis Project (GTAP) database was used to derive import ratios and tariff rates in Japan's FTAs with Singapore, Mexico, and Malaysia. The results were applied to simulations undertaken in a CGE model to analyze the impact of FTAs on trade volumes (trade creation and trade diversion effects).

Using the GTAP database, the impact of tariff reduction in Japan's EPAs with Singapore, Mexico, and Malaysia was analyzed by simulation, focusing on the macroeconomic impact on GDP and equivalent variation (EV: an indicator of economic welfare). This yielded the following three results.

1. FTA member countries (Japan and its FTA partners) would experience improvements in GDP and EV. Non-members would experience a reduction in EV due to trade diversion effects.
2. Mexico and Malaysia would experience significant GDP improvements. Japan and Singapore would experience slight improvements in GDP. Larger tariff reductions would yield larger improvements in economic welfare. These results can be explained as follows. Mexico and Malaysia have ample room for tariff reduction, while Singapore has already reached effectively zero tariff levels. In the case of Japan, the scope of trade liberalization would be limited by the high probability that high tariffs will be maintained for agricultural goods.
3. FTAs contribute to improvement in global EV. Therefore, even small-scale FTAs can be expected to improve global economic welfare.

Simulations were undertaken concerning future scenarios for Japan's FTAs and EPAs. This was done under the following two separate frameworks: bilateral agreements (i. ASEAN-8, ii. China and Korea, iii. ASEAN-10 + China and Korea, iv. ASEAN-10 + 5 (China, Korea, Australia, India, New Zealand); and, East Asian multilateral regional agreements (i. ASEAN-10, ii. Japan, China, and Korea, iii. ASEAN-10 + Japan, China, and Korea, iv. ASEAN-10 + 6 (Japan, China, Korea, Australia, India, New Zealand). The simulations yielded the following results for bilateral agreements.

1. Japan would experience improvements in economic welfare from all bilateral FTAs.
2. The improvement in Japan's economic welfare would increase with the number of FTAs concluded.
3. The increase in Japan's economic welfare derived from its three existing FTAs (Singapore, Mexico, and Malaysia) is much smaller than the improvement in economic welfare that would be derived from FTAs with China, Korea, and ASEAN-10.
4. In particular, the economic welfare that Japan would derive from an ASEAN-10+5 FTA would be seven times greater than the economic welfare derived from its three existing FTAs.
5. Japan's bilateral FTAs reduce economic welfare in third countries due to trade diversion effects.

The simulations yielded the following results for multilateral regional agreements.

1. All countries joining a regional agreement would experience improvements in economic welfare.
2. Improvements in the economic welfare of members would be proportionate to the number of countries joining an agreement.
3. An ASEAN-10 + 6 FTA would generate the largest improvement in economic welfare, both for member countries and for the entire world.
4. However, non-members would experience a reduction in economic welfare due to trade diversion.

ASEAN + 6 would experience a reduction in economic welfare if Japan's agricultural sector were to be excluded from liberalization.

Professor Itakura responded to the Abe Presentation with the following comments.

The quantitative evaluation of FTAs is an important and necessary field of research for the following reasons. First, changes are taking place in international economic policies due to the increasing number of FTAs and EPAs, and due to developments in the WTO Doha Round negotiations for trade liberalization. Second, such research will show the impact of FTAs on the economy and industry and contribute to the designing of policy recommendations.

The CGE model is used to run computer simulations on how policy changes affect the entire economy. These simulations are based on economic theory and actual economic data. Although this method is basically used for comparative static analysis, it can also be used for dynamic analysis.

GTAP stands for "Global Trade Analysis Project." GTAP database version 6 (Dimaranan and McDougall, 2006), and GTAP Model version 6.2 (Hertel, 1997) are currently available. These data and tools were developed by the Center for Global Trade Analysis of Purdue University. (www.gtap.agecon.purdue.edu)

CGE model analysis is being used in quantitative evaluation of FTAs. It is widely recognized by policymakers and economists as highly transparent data and model.

Attention should also be paid to the details of rules of origin and division of production.

The following question was received from the floor.

When Japan experiences an improvement in economic welfare through an FTA, do its FTA partners, such as Korea and China, also experience a relative improvement in economic welfare? What impact would an FTA between Japan and the United States have?

The following response was given to the above question.

An FTA involving Japan, China, and Korea would generate benefits even if the agricultural sector were to be excluded from liberalization. However, for Japan, as the number of FTA partners increases, the exclusion of the agricultural sector would reduce trade creation effects and would lower the level of benefits generated. This means that Japan will have to seriously consider liberalization of its agricultural sector as its number of FTA partners increases. In an FTA between Japan and the United States, given the strength of its agricultural sector, the United States can be expected to reap greater benefits from the liberalization of Japanese agriculture and services.