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The Relative Significance of EPAs in Asia-Pacific

Kenichi Kawasaki
National Graduate Institute for Policy Studies
January 30, 2014

Photos

Progress in negotiating Economic Partnership Agreements (EPAs) involving the Asia-Pacific region has accelerated since the beginning of 2013.  Three notable EPAs are the Trans-Pacific Partnership (TPP), which involves 12 economies including the United States and Japan, which joined in July 2013; the Regional Comprehensive Economic Partnership (RCEP), which includes 16 Asian economies; and the Free Trade Area of the Asia-Pacific (FTAAP), which includes the TPP economies, eight other Asian economies, plus Russia. The countries involved in the EPA negotiations account for large percentages of world GDP.  The TPP economics accounted for approximately 40 percent of global GDP in 2010, the RCEP economies accounted for approximately 30 percent of global GDP, and the FTAAP economies accounted for over 50 percent of global GDP in 2010.

The economy-wide impacts of removing tariffs and non-tariff measures (NTMs) via these EPAs are estimated using a Computable General Equilibrium (CGE) model of global trade.  According to economic theory, there should be static impacts from trade liberalization such as expansion of exports and production of tradable goods, more efficient resource allocation, and real income and consumption gains. Dynamic impacts result from capital formation and productivity improvements.  It is also expected that some trade diversion will adversely affect the economies of non-member countries.  The model estimates the income gains from these potential EPAs. The model simulations assume 100% tariff reduction and 50% reduction in NTMs, with 50% of the reduction in NTMs also benefiting non-member economies. Model simulations use the Global Trade Analysis Project (GTAP) model version 8.1 with benchmark year 2007 and baseline updated in 2010.

The model simulations provide the sources of the income gains for the individual EPAs and key results for participating economies. Overall, the largest income gains to the member countries occur when NTMs are reduced in addition to the tariff removals. Some results for specific countries include:

Japan–

    Japan receives complementary income benefits by participating in both TPP and RCEP. Japan's income gains from the TPP and the RCEP may equally be important.

    Japan benefits from its own tariff removal and reductions in NTMs from the TPP; China is a source of benefits to Japan from the RCEP and the FTAAP.

United States–

    The United States is a member of the TPP and the FTAAP. The United States will be adversely affected through trade diversion from the RCEP.

    Japan's contribution to tariff removals will show a larger proportion in TPP. That said, income gains to the United States from the TPP stem largely from reduction of its own NTMs.

    However, the income gains from the FTAAP are much larger for the United States; firstly, they are influenced by Chinese policy measures including tariff elimination.

China–

    China experiences income losses from the TPP due to trade diversion as China is not a member of TPP.

    China receives large income gains from RCEP, and even larger income gains from the FTAAP due to the larger number of participants.

    Trade liberalization in China will drive the income gains for participating economies in both the RCEP and the FTAAP.

European Union–

    The EU will experience income losses from trade diversion from all three EPAs as it is not a participant.  The largest losses stem from the FTAAP. The spillover effect from removal of NTMs could offset some of these losses, though to a limited extent.

Other results–

    For China, India, the ASEAN countries, Mexico, Peru, and Russia, the significant gains from EPAs are achieved by these countries changing their own tariffs, NTMs, and domestic policies.
    The impacts of structural reforms measured and included in the EPAs will be achieved over the medium term and contribute to sustainable growth.

Kenichi Kawasaki is a senior fellow of the National Graduate Institute for Policy Studies. He is a consulting fellow at the Research Institute of Economy, Trade and Industry, and an adjunct fellow at the Japan Institute of International Affairs. Dr. Kawasaki spent more than two decades in the Japanese government, including the Department of Economics and Statistics of the Organization for Economic Cooperation and Development.  For more information on this topic see Dr. Kawasaki's paper, "The Relative Significance of EPAs in Asia-Pacific," RIETI Discussion Paper Series 14-E-009, January 2014. http://www.rieti.go.jp/en/publications/summary/14010014.html.

Rapporteur:  Cathy Jabara