Scenario for Free Trade in APEC -From the viewpoint of Japan & NAFTA- Theo Jonker & Minoru...

Global Trade Analysis Project

Scenario for Free Trade in APEC-From the viewpoint of Japan & NAFTA-

Theo Jonker & Minoru Ono

Aug. 1, 1998

Global Trade Analysis Project

Goal in APEC

• In 1994, APEC members agreed Free Trade

by 2010 for industrialized countries

by 2020 for developing countries

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Problem

• In Chapter 9 of GTAP BOOK……..

Free Trade in all sectors

• But………

Tough trade negotiation in food sector

Easier in manufacturing sector

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Possible scenarios

Step 1 Free Trade only in Manufacturing Sector in APEC

Step2 Free Trade in Manufacturing Sector in APEC & Free Trade in Food Sector in only ASEAN

Step3 Free Trade in Food & Manufacturing Sector

in APEC

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Closure & Solution Method, etc.

• Closure - Standard Multi-regional GE closure (MRGE)• Solution Method - Gragg 2-4-6

• Aggregation - 10 Regions x 3 Sectors 1 NAFTA

2 Japan 1 Food

3 Australia-New Zealand 2 Manufacturing

4 China-Hong Kong 3 Services

5 South Korea

6 Taiwan

7 Malaysia-Singapore

8 Thailand-Philippines

9 Indonesia

10 Rest of the World

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GDP Quantity Index (change)

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

% change

Japan Nafta ROW

APEC manuf.

APEC manuf. & ASEAN food

APEC FTA

Global Trade Analysis Project

Quantity of output (change)

-20

-15

-10

-5

0

5

10

15

% change

Jap

an

- F

oo

d

Jap

an

-

Man

ufa

ctu

rin

g

Jap

an

- S

erv

ices

Naft

a -

Fo

od

Naft

a -

Man

ufa

ctu

rin

g

Naft

a -

Serv

ices

RO

W -

Fo

od

RO

W -

Man

ufa

ctu

rin

g

RO

W -

Serv

ices

APEC manuf.

APEC manuf. & ASEAN food

APEC FTA

Global Trade Analysis Project

Quantity of import (change)

-20

0

20

40

60

80

100

120

140

160

% change

Jap

an

- F

oo

d

Jap

an

-

Man

ufa

ctu

rin

g

Jap

an

- S

erv

ices

Naft

a -

Fo

od

Naft

a -

Man

ufa

ctu

rin

g

Naft

a -

Serv

ices

RO

W -

Fo

od

RO

W -

Man

ufa

ctu

rin

g

RO

W -

Serv

ices

APEC manuf.

APEC manuf. & ASEAN food

APEC FTA

Global Trade Analysis Project

Market price (change)

-8

-6

-4

-2

0

2

4

6

% change

Jap

an

- F

oo

d

Jap

an

-

Man

ufa

ctu

rin

g

Jap

an

- S

erv

ices

Naft

a -

Fo

od

Naft

a -

Man

ufa

ctu

rin

g

Naft

a -

Serv

ices

RO

W -

Fo

od

RO

W -

Man

ufa

ctu

rin

g

RO

W -

Serv

ices

APEC manuf.

APEC manuf. & ASEAN food

APEC FTA

Global Trade Analysis Project

Composition of Japanese private households’ consumption

Domestic food96%

Imported food4%

Domestic food92%

Imported food8%

Domestic manuf.90%

Imported manuf.10%

Domestic manuf.89%

Imported manuf.11%

Base data $278 bln.

APEC FTA$294 bln.

Food Manufacturing

Base data $334 bln.

APEC FTA$316 bln.

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Demand of labor in Japan

-25

-20

-15

-10

-5

0

5

% change

APEC Manuf. APEC FTA

food

manuf.

services

Global Trade Analysis Project

Conclusions

• APEC Free Trade Area for manufacturing products has positive effect to Japan and NAFTA. However, the impact is small.

• APEC Free Trade Area for manufacturing products has a negative effect to ROW.

• ASEAN Free Trade Area for food products has hardly any effect to Japan and NAFTA.

• APEC Free Trade Area has a big impact on the Japanese economy in the GTAP model,

but - politically - there is a very strong opposition to a tariff reduction in the food sector.

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Free Trade in the Pacific Rim

Chapter 9

GTAP Short Course 1998

Extensions

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Overview of the Talk

With special help from:

The Extensions:

Old versus new Closing Rule

PE versus GE

Impact of APEC food tariff elimination on Japan

Melting down Asia

Christianand Rob

????

The Origins

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Model structure and model

GAMS/MPSGE

Countries: APEC (all Asean Countries, Australia, NZ, NAFTA, Chile) and ROW

Sectors: Food, Manuf. and services

3 ScenariosAPEC Preferential Free Trade AreaAPEC Trade Reform on a MFN basis, ROW does not reciprocatesAPEC Trade Reform on an MFN basis, ROW reciprocates

Oooppss!!!

GTAP

Global Trade Analysis Project

Results

• Overall welfare effects as expected: MFN-Re>MFN>PR

• Liwayway and Michael, “Playing Games with GTAP”, paper to published at the coming conference in Denmark (please do not quote)

• No incentive for ROW to reciprocate: MFN better

• MFN: but NAM and ANZ are the big loosers

• PR will be the solution

• Once again Nam is a big looser

• No Trade Reform!

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Results of the Simulations

1 alloc_A1 5 tot_E 6 cgds_F Total Total-New Delta1 nam 5522 -4054 -3727 -2259 1654 39132 jpn 32879 28547 34155 95581 59666 -359153 anz 1164 228 -654 738 1708 9704 chn_hkg 4654 3005 -259 7400 7966 5665 twn 4987 1040 565 6592 5774 -8186 skor 13889 -2623 125 11391 11615 2247 mys_sgp 433 1978 438 2849 2501 -3488 tha_phl 4048 -1973 -3601 -1526 1736 32629 idn 1200 -57 -571 572 1439 86710 row 7417 -27059 -27439 -47081 -19151 27930Total 76192 -968 -968 74256 74909 0

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Tracing Back Japan’s CGDS Utility Increase in GTAP

Variable Change Remark

•CGDS $US34,155 Mil Increase in Utility from sale of capital goods

•pcgds 5.4% Increase in price of capital sold•pgdp 4.86% Increase in general price level•qxs 25.65% Increase total exports - especially e.g. nam - 70% exports of manufacuters where row - 37% Japan accounts for 14% of world exports of manufactures

•tms fall due to liberalization drop in import tariffs on Japanese e.g. nam - 17.5%goods row - 14%

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Closure Rules

CGDS(“JAP”) CGDS(“ROW”)

SAVE(“JAP”) SAVE(“ROW”)

Global Bank

psave(“JAP”)

pcgds(“JAP”) pcgds(“ROW”)

psave(“ROW”)

pcgdswld

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Results under both closures

New Closure

1 alloc_A1 5 tot_E 6 cgds_F Total1 nam 5523 -4055 186 16542 jpn 32715 28385 -1434 596663 anz 1165 228 315 17084 chn_hkg 4657 3008 301 79665 twn 4979 1039 -244 57746 skor 13893 -2624 346 116157 mys_sgp 432 1975 94 25018 tha_phl 4086 -1996 -354 17369 idn 1203 -58 294 143910 row 7423 -27103 529 -19151Total 76076 -1201 34 74909

1 alloc_A1 5 tot_E 6 cgds_F Total1 nam 5522 -4054 -3727 -22592 jpn 32879 28547 34155 955813 anz 1164 228 -654 7384 chn_hkg 4654 3005 -259 74005 twn 4987 1040 565 65926 skor 13889 -2623 125 113917 mys_sgp 433 1978 438 28498 tha_phl 4048 -1973 -3601 -15269 idn 1200 -57 -571 57210 row 7417 -27059 -27439 -47081Total 76192 -968 -968 74256

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Old versus new closure

Old closure

Change in pcgds: ~ +5% Change in Psave: 0%

New closure

Change in pcgds: ~ +5% Change in Psave: ~ +5%

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Sumio Ishikawa and Jianbang Gan

Impact of Asian Financial Crisis

Global Trade Analysis Project

MOTIVATION

• To estimate the potential impact of increased risks in the Asian financial market; and

• To analyze the role of the regional free trade agreement in the economic recovery in Asia.

Global Trade Analysis Project

Nominal Exchange Rate

100

200

300

400

500Ju

ne

July

Au

g.

Sep

t.

Oct

.

Nov

.

Dec

.

Jan

.

Feb

.

Mar

ch

Dev

alu

atio

n In

dex

SingporeTaiwanPhilippinesMalaysiaThailandS. KoreaIndonesia

Global Trade Analysis Project

METHODOLOGY

Modeling country risk and capital flows in GTAP (Gerard Malcolm, 1998):

RORE(r)/RSK(r) = RORG

rore(r) = rorg + risk(r)

rore(r) = rorg + cgdslack(r), when RORDELTA = 1

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SCENARIOS

• Risk

• Risk + Free Trade Agreement (FTA)

• Risk + Capital Outflow

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SHOCKS

Region Rore (r) (%) qo(C, r) (%)

Japan 17 - 5

China & H.K. 17 - 5

Taiwan 17 - 5

S. Korea 42 - 15

Mal. & Sgp. 33 - 10

Thai. & Phl. 42 - 15

Indonesia 58 - 20

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Impact on Welfare (US$ billion)

Region Risk Risk + FTA Risk +

Capital

North America 39.2 22.4 31.4

Japan -68.2 20.4 -131.9

Australia & N.Z. 2.1 3.1 1.3

China & H.K. -1.2 6.5 - 11.2

Taiwan -0.1 5.1 -4.6

S. Korea -6.6 4.8 - 25.1

Mal. & Sgp. -0.4 1.4 -5.6

Thai. & Phl. -3.0 -4.1 -17.8

Indonesia -3.4 -2.9 -19.1

ROW 65.1 11.3 53

Total 23.4 67.4 -129.8

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Impact on Trade Balance (US$ billion)

Region Risk Risk + FTA Risk + Capital

North America -101 -108 - 86

Japan 189 175 160

Australia & N.Z. -6 -13 -5

China & H.K. 23 8 20

Taiwan 6 4 5

S. Korea 26 16 23

Mal. & Sgp. 9 8 8

Thai. & Phl. 15 8 13

Indonesia 12 11 9

ROW -174 -109 -149

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Impact on GDP (% change)

Region Risk Risk + FTA Risk +Capital

North America 0.21 0.19 0.17

Japan - 0.02 0.78 - 2.05

Australia & N.Z. 0.18 0.38 0.13

China & H.K. 0.20 0.58 -1.85

Taiwan - 0.04 1.74 - 2.05

S. Korea - 0.13 4.31 -7.17

Mal. & Sgp. 0.29 0.45 - 5.72

Thai. & Phl. - 0.49 1.33 - 10.57

Indonesia - 0.23 0.30 -13.50

ROW 0.11 0.02 0.09

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Impact on Investment (US$ billion)

Region Risk Risk + FTA Risk + Capital

North America 129 116 110

Japan - 267 - 184 - 260

Australia & N.Z. 8 14 6

China & H.K. - 25 - 5 - 26

Taiwan - 7 - 4 - 8

S. Korea - 31 - 20 - 36

Mal. & Sgp. - 10 - 7 - 11

Thai. & Phl. - 17 - 12 - 20

Indonesia - 15 - 13 - 18

ROW 247 127 210

Total 13 12 - 52

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Impact on Structural Change due to Risk (% change in output)

Region Food R-Mnfc Service

North America - 0.58 - 2.46 0.79

Japan 1.61 5.67 - 2.20

Australia & N.Z. - 0.96 - 3.38 0.89

China & H.K. 1.22 2.35 - 3.02

Taiwan 1.10 1.78 - 1.20

S. Korea 1.60 7.84 - 3.96

Mal. & Sgp. 2.75 4.54 - 3.75

Thai. & Phl. 4.94 7.76 - 4.98

Indonesia 3.65 12.66 - 9.61

ROW - 0.36 - 2.19 0.88

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Impact on Structural Change due to Risk & FTA (% change in output)

Region Food R-Mnfc Service

North America 11.26 - 4.99 0.78

Japan - 16.81 8.63 - 1.77

Australia & N.Z. 5.15 - 9.62 1.54

China & H.K. 1.09 0.70 - 1.57

Taiwan - 18.59 7.58 - 1.55

S. Korea -19.64 16.40 - 3.13

Mal. & Sgp. - 2.86 7.61 - 4.72

Thai. & Phl. - 5.54 15.08 - 3.11

Indonesia - 1.43 14.96 - 8.49

ROW - 0.88 - 1.76 0.80

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Impact on Structural Change due to Risk & Capital (% change in output)

Region Food R-Mnfc Service

North America - 0.65 - 1.99 0.65

Japan - 0.12 2.57 - 3.90

Australia & N.Z. - 0.91 - 2.50 0.68

China & H.K. 0.11 - 0.59 - 4.93

Taiwan - 0.08 - 0.55 - 3.21

S. Korea - 1.66 - 1.23 - 10.91

Mal. & Sgp. -2.24 - 3.20 - 8.67

Thai. & Phl. - 2.67 - 6.83 - 14.76

Indonesia - 3.99 - 7.07 - 21.87

ROW - 0.37 - 1.78 0.73

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CONCLUSIONS

• Asian financial crisis has global impacts.

• Regional trade liberalization will help economic recovery in Asia.

• Additional capital outflows will intensify the impact of financial market risks.