Applied general equilibrium analysis of the Japan ASEAN free trade agreement

Ken Itakura, Purdue University

Abstract

There has been a surge of interest in free trade agreements (FTAs) in East Asian countries. One of the FTAs actively discussed is the Japan and ASEAN (the Association of South East Asian Nations) free trade agreement. The purpose of this study is to undertake quantitative analysis of the Japan-ASEAN FTA, aiming to identify its potential economic impacts. To investigate possible outcomes of the trade liberalization, this study employs multi-region, multi-sector applied general equilibrium (AGE) model and data base, such as the Global Trade Analysis Project (GTAP) data base and modeling framework (Hertel, 1997; Dimaranan and McDougall, 2002). One recurring criticism against AGE studies is that they underpredict the changes associated with FTA because they miss potentially important linkages which may interact with the FTA. A number of potentially significant linkages are suggested in the empirical trade literature. First, it is well known that more openness to imports may result in a reduction in firm's price-cost markups and a movement of firms down their average total cost curve. Second, exporting may also be associated with improvements in productivity. Third, foreign direct investment (FDI) is another important channel through which trade liberalization can lead to efficiency improvement. Drawing on empirical trade studies, this study investigates the productivity linkages arising from firms activities in exporting, importing, and foreign direct investment. The productivity linkages may have strong influence on outcomes of the Japan-ASEAN FTA. To identify the potential impact of the productivity linkages as much as possible, this study also attempts to neutralize the effect of lost tariff revenues associated with the FTA. In the tax replacement experiment in this study, consumption tax is used to recover the lost tariff revenues so that the indirect tax to income ratio can be maintained at the same level as in absence of the FTA. Results of the Japan-ASEAN FTA experiments reveal that potential interactions between productivity and the FTA are significant to the ASEAN countries. Among the three productivity linkages, the pro-competitive effect is especially important for the ASEAN manufacturing sectors to gain in their production efficiencies.

Degree

Ph.D.

Advisors

Hertel, Purdue University.

Subject Area

Business costs|Economics

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