ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea: A Qualitative and Quantitative Analysis

Estrada, Gemma; Park, Donghyun; Park, Innwon; Park, Soonchan Working Paper ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea: A Qualitative and Quantitative Analysis ADB Working Paper Series on Regional Economic Integration, No. 75 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Estrada, Gemma; Park, Donghyun; Park, Innwon; Park, Soonchan (2011) : ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea: A Qualitative and Quantitative Analysis, ADB Working Paper Series on Regional Economic Integration, No. 75, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/2037 This Version is available at: https://hdl.handle.net/10419/109580 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea: A Qualitative and Quantitative Analysis Gemma Estrada, Donghyun Park, Innwon Park, and Soonchan Park No. 75 | March 2011 ADB Working Paper Series on Regional Economic Integration Gemma Estrada,+ Donghyun Park,++ Innwon Park,+++ and Soonchan Park++++ ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea: A Qualitative and Quantitative Analysis ADB Working Paper Series on Regional Economic Integration No. 75 March 2011 +Economics Offi cer, Economics and Research Department, Asian Development Bank. gestrada@ adb.org ++Principal Economist, Economics and Research Department, Asian Development Bank. dpark@adb. org +++Professor, Division of International Studies, Korea University. [email protected] ++++Associate Professor, Department of Economics and International Trade, Kongju National University. [email protected] The ADB Working Paper Series on Regional Economic Integration focuses on topics relating to regional cooperation and integration in the areas of infrastructure and software, trade and investment, money and finance, and regional public goods. The Series is a quick-disseminating, informal publication that seeks to provide information, generate discussion, and elicit comments. Working papers published under this Series may subsequently be published elsewhere. Disclaimer: The views expressed in this paper are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. Unless otherwise noted, $ refers to US dollars. © 2011 by Asian Development Bank March 2011 Publication Stock No. WPS113563 Contents . . . . . . . . . . . . . . . . Abstract v 1. Introduction 2 2. Global Financial Crisis and Intra-East Asian Integration 4 3. Qualitative Assessment of ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea 8 4. Quantitative Assessment of ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea—Computable General Equilibrium Model 16 4.1. Computable General Equilibrium Model and Analysis of the Impact of Free Trade Agreements—A Brief Overview 16 4.2. Empirical Framework and Results 17 5. Concluding Observations 20 References 23 ADB Working Paper Series on Regional Economic Integration 25 Figures 1. Exports as share of GDP—ASEAN-6, 2007 and 2008 2 2. GDP of ASEAN-9, the People’s Republic of China, Japan, and the Republic of Korea 3 3. Annual GDP Growth of ASEAN-6 and ASEAN, 2005–2011 6 4. Quarterly GDP Growth Rates, 2008Q1–2010Q1 6 5. Quarterly Export Volumes to the US and ASEAN-6, 2008Q1–2010Q1 7 6. GDP Growth in Developing East Asia versus the G3, 2007–2010 7 7. Quarterly Export Volumes to the People’s Republic of China and ASEAN-6, 2008Q1–2010Q1 8 Tables 1. Country and Free Trade Area Comparisons, 2008 9 2. Per Capita Income, 2008 10 3. Geographical Proximity (km) 11 4. Intra-Regional Exports, 2006–2008 12 5. Intra-Regional Imports, 2006–2008 13 6. Intra-Regional Trade, 2006–2008 13 7. Substitutability of Products—Revealed Comparative Advantage, 2006–2008 (Average) 15 8. Complementarity Index, 2006–2008 (% Average) 15 9. Applied Tariff Rate (Simple Mean of all Products, %) 16 10. Model Aggregations 18 11. Output and Welfare Effects of ACFTA, AJFTA, AKFTA and A+3FTA 19 Abstract Expanding trade with East Asia’s “Big Three” economic giants—the People’s Republic of China (PRC), Japan, and the Republic of Korea—offers a new potential source of growth for ASEAN in the post-global-crisis period. In fact, ASEAN has been actively pursuing trade liberalization with the Big Three. The central objective of this paper is to qualitatively and quantitatively assess the different permutations of ASEAN’s free trade agreements (FTAs) with the Big Three (e.g., ASEAN–PRC, ASEAN–Japan, ASEAN– Republic of Korea, and ASEAN+3). Our qualitative analysis is based on the theory of economic integration, and our quantitative analysis is based on a CGE model. The two types of analyses both suggest that an ASEAN+3 FTA would deliver the largest benefits for the region. Keywords: ASEAN, People’s Republic of China (PRC), Japan, Republic of Korea, trade, free trade agreement, free trade area, CGE model JEL Classification: F10, F14, F15 ASEAN’s Free Trade Agreements with the PRC, Japan, and the Republic of Korea | 7 Figure 5: Quarterly Export Volumes to the US and ASEAN-6, 2008Q1–2010Q1 40 60 80 100 120 140 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2008Q1 = 100 Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN = Association of Southeast Asian Nations, US = United States. Source: CEIC Data Company (accessed 6 September 2010). Figure 6: GDP Growth in Developing East Asia versus the G3, 2007–2010 GDP = gross domestic product. Note: G3 refers to the United States, eurozone, and Japan; figures for 2010 are ADB projections. Sources: Asian Development Outlook database; Oxford Economics. 8 | Working Paper Series on Regional Economic Integration No. 75 Figure 7: Quarterly Export Volumes to the People’s Republic of China and ASEAN-6, 2008Q1–2010Q1 40 60 80 100 120 140 160 180 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2008Q1 = 100 Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN = Association of Southeast Asian Nations. Source: CEIC Data Company (accessed 6 September 2010). 3. Qualitative Assessment of ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea The preceding two sections should have made it abundantly clear that ASEAN has a long-standing self-interest in pursuing trade liberalization with the PRC, Japan, and the Republic of Korea. Furthermore, the global crisis and the consequent acceleration of the shift of global economic power to developing East Asia has given further impetus to ASEAN’s efforts to expand trade with the Big Three. In this section, we draw upon the theory of economic integration to evaluate and compare the extent to which each of ASEAN’s potential FTAs with the Big Three would satisfy the theoretical criteria for successful integration. The theory of economic integration is anchored in the theory of customs union, formally developed by Viner (1950). The defining feature of regional economic integration is the progressive removal of barriers to the free movement of goods, services, capital, and labor among the economies of a region. The initial stage of ASEAN’s integration with the Big Three will revolve around the liberalization of the goods trade. Members of a customs union agree to phase-out tariffs and quantitative restrictions on imports from within the union, and impose a set of common external tariffs on imports from outside the union. In theory, a customs union has both positive and negative welfare effects. In the example of AKFTA, the positive effect—trade creation—arises from Malaysia’s replacement of higher cost domestic products with lower cost imports ASEAN’s Free Trade Agreements with the PRC, Japan, and the Republic of Korea | 9 from the Republic of Korea. The negative effect—trade diversion—occurs when the Republic of Korea replaces low cost imports from the US with higher cost imports from Thailand. Whether a customs union is beneficial on the whole depends on which effect is larger. Static factors are important in assessing the one-off change in welfare arising from the establishment of a customs union. These include the size of the free trade area, geographical proximity, levels of economic development, complementarity of economic structures, tariff structures, and the substitutability between products of members and products of non-members. We now apply the various static criteria to ASEAN’s potential FTAs with the Big Three. (a) Size of the FTA The larger the size of the FTA, the larger the potential gains from trade. Table 1 shows the size of the different permutations (actual and potential) of ASEAN’s FTAs with the Big Three. In terms of current US dollar GDP, the A+3FTA is almost twice as big as AJFTA, the next largest FTA. The next two biggest FTAs are ACFTA and AKFTA. In terms of purchasing power parity (PPP) GDP, ACFTA replaces AJFTA as the second largest FTA, while A+3FTA is more than 50% bigger than ACFTA. In terms of population, A+3FTA exceeds 2 billion people and ACFTA has close to 2 billion people. Table 1 indicates that A+3FTA is by far the biggest union, with AJFTA and ACFTA more or less the same size, and AKFTA by far the smallest union. However, it should be noted that even AKFTA has quite a sizable combined GDP. Table 1: Country and Free Trade Area Comparisons, 2008 Population (million) GDP (current US$, billion) GDP (PPP, billion) Brunei Darussalam 0.4 14.5 20.2 Cambodia 14.7 9.6 28.0 Indonesia 228.2 514.4 907.3 Lao PDR 6.2 5.2 13.2 Malaysia 27.0 194.9 383.7 Myanmar 49.2 – – Philippines 90.3 166.9 317.1 Singapore 4.8 181.9 238.5 Thailand 67.4 260.7 519.0 Viet Nam 86.2 90.7 240.1 A SEAN 574.5 1,438.9 2,667.2 PRC 1,325.6 4,326.2 7,903.2 Japan 127.7 4,909.3 4,354.6 Korea, Rep. of 48.6 929.1 1,358.0 A SEAN–PRC FTA 1,900.2 5,765.1 10,570.4 A SEAN–Japan FTA 702.2 6,348.1 7,021.7 A SEAN–Republic of Korea FTA 623.1 2,368.0 4,025.2 A SEAN+3 FTA 2,076.5 11,603.5 16,283.0 ASEAN = Association of Southeast Asian Nations, FTA = free trade agreement, GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, PPP = purchasing power parity, PRC = People’s Republic of China. Source: World Development Indicators Online database (accessed 22 January 2010). 10 | Working Paper Series on Regional Economic Integration No. 75 (b) Income and development level Similarity in income and development levels is conducive for integration. The basic intuition is that countries at similar income levels have similar consumption patterns, which means there is scope for intra-industry trade. This goes a long way toward explaining the robustness of intra-regional trade within the EU. Table 2 confirms there is considerable heterogeneity of income and development levels within ASEAN itself. Table 2 also shows that ASEAN as a whole has a similar income level to that of the PRC, but lags far behind Japan and the Republic of Korea. This suggests that the scope for intraindustry for ASEAN as a whole may be greater for ACFTA than either AJFTA or AKFTA. However, there is scope for intra-industry trade between more developed ASEAN countries (e.g., Singapore, Malaysia, and Thailand) and Japan and the Republic of Korea. If we view the Big Three as a single economy, it is considerably richer than ASEAN, but this reflects the influence of Japan and the Republic of Korea. Table 2: Per Capita Income, 2008 GDP per capita (current US$) GDP per capita (PPP) Brunei Darussalam 36,634.3 50,919.1 Cambodia 651.3 1,904.6 Indonesia 2,253.6 3,974.9 Lao PDR 837.3 2,134.1 Malaysia 7,221.5 14,215.4 Myanmar – – Philippines 1,847.4 3,509.9 Singapore 37,597.3 49,283.6 Thailand 3,868.6 7,702.6 Viet Nam 1,052.1 2,785.0 ASEAN 2,713.4 5,042.5 PRC 3,263.5 5,961.8 Japan 38,442.6 34,098.8 Korea, Republic.of 19,115.0 27,939.1 PRC–Japan–Republic of Korea 6,767.6 9,065.4 ASEAN = Association of Southeast Asian Nation, GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, PPP = purchasing power parity, PRC = People’s Republic of China. Note: The figures for ASEAN and PRC–Japan–Republic of Korea are weighted by population. Source: World Development Indicators Online database (accessed 22 January 2010). (c) Geographical proximity and transport infrastructure Geographical proximity promotes economic integration since it reduces transportation costs. For some goods, transportation costs can be a major component of total trade costs. Table 3 shows that the PRC, Japan, and the Republic of Korea are geographically much closer to ASEAN than the other two heavyweights of the world economy, the US and the EU. The southern parts of the PRC are closer to ASEAN than Japan or the ASEAN’s Free Trade Agreements with the PRC, Japan, and the Republic of Korea | 11 Republic of Korea, and they also have some land links to ASEAN. This gives ACFTA a competitive advantage over AJFTA and AKFTA. However, the dominant transport links between ASEAN and the Big Three are air and sea links, and these are relatively well developed in all of the Big Three countries. A large number of commercial flights and extensive commercial shipping routes connect ASEAN with the PRC, Japan, and the Republic of Korea, which bodes well for intra-regional trade. Table 3: Geographical Proximity (km) PRC Japan Korea, Rep. of EU-27 NAFTA Brunei Darussalam 3,877 4,248 3,819 10,340 14,999 Cambodia 3,336 4,403 3,629 9,066 14,414 Indonesia 5,194 5,772 5,278 10,695 16,357 Lao PDR 2,757 4,125 3,208 8,379 13,706 Malaysia 4,335 5,318 4,609 9,549 15,350 Myanmar – – – – – Philippines 2,840 2,990 2,614 9,916 13,794 Singapore 4,457 5,313 4,667 9,845 15,547 Thailand 3,282 4,603 3,719 8,563 14,163 Viet Nam 2,321 3,670 2,744 8,346 13,367 ASEAN average 3,600 4,494 3,810 9,411 14,633 PRC 2,103 962 7,474 11,172 Japan 2,103 1,153 9,096 10,928 Korea, Rep. of 962 1,153 8,273 11,187 EU-27 7,474 9,096 8,273 6,917 NAFTA 11,172 10,928 11,187 6,917 ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic, NAFTA = North American Free Trade Association, PRC = People’s Republic of China. Note: The distance is the theoretical air distance (great circle distance) between the capital cities of countries/regions. For the European Union (EU), the reference city is Prague, Czech Republic, which lies near the geographical center of the EU. The reference city for NAFTA is Washington DC, United States. – = data not available/included. Source: timeanddate.com. http://www.timeanddate.com (accessed 22 April 2010). (d) Pre-FTA trade While the very purpose of an FTA is to stimulate trade among members, the level of preFTA trade among member countries has a significant effect on the incentives of countries to form an FTA. Intuitively, countries that trade heavily with each other—or have the potential to do so— stand to gain the most from removing barriers to trade. Table 4 shows that intra-regional exports are large for East Asian countries in both absolute and relative terms. Tables 5 and 6 show that this is also true for imports and total trade, respectively. The trade patterns resoundingly confirm the conventional wisdom that trade integration among East Asian countries has already reached fairly 12 | Working Paper Series on Regional Economic Integration No. 75 high levels. This suggests that ASEAN’s FTAs with the PRC, Japan, and the Republic of Korea will yield substantial dividends for both parties. In comparative terms, intra-FTA trade is by far the biggest for A+3FTA, followed by ACFTA and AKFTA, which are more or less equal. Even for AKFTA, intra-FTA trade is quite substantial. Intra-A+3FTA trade had reached almost US$2,600 billion, or more than 37% of the members’ total trade, by 2008. For ACFTA, AJFTA, and AKFTA, intra-FTA exceeded 20% in 2008. Overall, the amount of trade between ASEAN and the Big Three is large enough for substantial gains to be made from further liberalization. (e) Substitutability of products Substitutability is defined as the production of similar but differentiated products. The substitutability of products of FTA members for those of outsiders increases the chances of trade creation. For example, in A+3FTA, Malaysia can theoretically substitute cars from the US and the EU with similar but differentiated cars from Japan and the Republic of Korea. Table 7 shows the revealed comparative advantage of ASEAN, the PRC, Japan, the Republic of Korea, the US, the EU, and the rest of the world in nine sectors. The table suggests that there is substantial scope for ASEAN to substitute products from the Big Three for products from the rest of the world. This is especially true for Japan and the Republic of Korea, which are technologically at similar levels as the US and the EU, and thus produce many similar manufacturing goods. In addition, there is also significant potential for Japan and the Republic of Korea to substitute agricultural and food products from ASEAN for those from the rest of the world. Table 4: Intra-Regional Exports, 2006–2008 Level (US$ billion) Region 2006 2007 2008 2006–2008 ASEAN 191.4 216.7 251.4 219.8 ASEAN–PRC FTA 329.4 389.9 454.1 391.2 ASEAN–Japan FTA 350.5 392.2 461.5 401.4 ASEAN–Republic of Korea FTA 251.8 287.4 339.5 292.9 ASEAN+3 FTA 924.3 1,066.2 1,246.5 1,079.0 As share of total exports Region 2006 2007 2008 2006–2008 ASEAN 24.9 25.2 25.6 25.2 ASEAN–PRC FTA 19.0 18.8 18.8 18.8 ASEAN–Japan FTA 24.8 24.9 26.1 25.3 ASEAN–Republic of Korea FTA 23.0 23.3 24.1 23.5 ASEAN+3 FTA 34.1 33.7 34.4 34.1 ASEAN = Association of Southeast Asian Nations, FTA = free trade area, PRC = People’s Republic of China. Source: Authors’ calculations based on data from International Monetary Fund, Direction of Trade Statistics, January 2010. ASEAN’s Free Trade Agreements with the PRC, Japan, and the Republic of Korea | 13 Table 5: Intra-Regional Imports, 2006–2008 Level (US$ billion) Region 2006 2007 2008 2006–2008 ASEAN 165.3 188.5 231.3 195.0 ASEAN-PRC FTA 331.6 392.4 461.3 395.1 ASEAN-Japan FTA 326.4 364.5 440.8 377.2 ASEAN-Republic of Korea FTA 228.1 259.5 322.1 269.9 ASEAN+3 FTA 1,007.5 1,151.8 1,335.6 1,165.0 As share of total imports Region 2006 2007 2008 2006 – 2008 ASEAN 24.7 24.7 24.4 24.6 ASEAN-PRC FTA 22.7 22.8 22.2 22.6 ASEAN-Japan FTA 26.2 26.3 25.8 26.1 ASEAN-Republic of Korea FTA 23.3 23.2 23.3 23.3 ASEAN+3 FTA 42.9 42.7 40.8 42.1 ASEAN = Association of Southeast Asian Nations, FTA = free trade area, PRC = People’s Republic of China. Source: Authors’ calculations based on data from International Monetary Fund, Direction of Trade Statistics, January 2010. Table 6: Intra-Regional Trade, 2006–2008 Level (US$ billion) Region 2006 2007 2008 2006–2008 ASEAN 356.7 405.2 482.6 414.8 ASEAN–PRC FTA 661.0 782.4 915.4 786.3 ASEAN–Japan FTA 676.8 756.7 902.3 778.6 ASEAN–Republic of Korea FTA 479.9 546.9 661.6 562.8 ASEAN+3 FTA 1,931.8 2,218.0 2,582.2 2,244.0 As share of total trade Region 2006 2007 2008 2006–2008 ASEAN 24.8 25.0 25.0 24.9 ASEAN–PRC FTA 20.7 20.6 20.4 20.6 ASEAN–Japan FTA 25.4 25.6 26.0 25.7 ASEAN–Republic of Korea FTA 23.2 23.2 23.7 23.4 ASEAN+3 FTA 38.2 37.8 37.4 37.8 ASEAN = Association of Southeast Asian Nations, FTA = free trade area, PRC = People’s Republic of China. Source: Authors’ calculations based on data from International Monetary Fund, Direction of Trade Statistics, January 2010. 14 | Working Paper Series on Regional Economic Integration No. 75 (f) Complementary economic structures According to Meade (1955), there will be greater trade creation if pre-FTA economic structures are competitive but post-FTA economic structures are complementary. Due to high trade barriers, FTA members may produce similar goods before the FTA. After the FTA, more efficient producers replace less efficient ones and the number of similar goods produced falls. This leads to welfare gains associated with specialization and economies of scale. Table 8 shows the degree to which one country’s exports are complementary with another country’s structure of imports. The table indicates that ASEAN’s exports are highly complementary with the PRC’s import pattern and vice versa. Furthermore, the PRC’s exports are significantly more complementary with ASEAN’s import pattern than with other countries. Therefore, economic structure favors ACFTA over AJFTA and AKFTA. However, both Japan and the Republic of Korea also have economic structures that are relatively complementary with those of ASEAN, although still less so than the economic structure of the PRC. (g) Pre-FTA tariff rates The level of tariffs against non-members suggests some scope for trade diversion. According to theory, the net welfare gains from an FTA will be larger the higher the preFTA tariff rates among members and the lower and less disparate the tariff rates against non-members. Table 9 shows the applied tariff rate, as a simple mean of all products, for ASEAN countries, the PRC, Japan, and the Republic of Korea. The tariff rates of the PRC and the Republic of Korea are higher than those of Indonesia, Malaysia, Philippines, and Singapore, but lower than the rates of Thailand and Viet Nam. On the other hand, the tariff rate of Japan is lower than all of the ASEAN countries except freetrading Singapore. The overall pattern of tariff rates does not clearly favor ACFTA, AJFTA, or AKFTA. This is because there are two opposing effects. Whereas the higher tariff rates of the PRC and the Republic of Korea bode well for trade creation under ACFTA and AKFTA, the lower tariff rate of Japan reduces the scope for trade diversion. ASEAN’s Free Trade Agreements with the PRC, Japan, and the Republic of Korea | 15 Table 7: Substitutability of Products—Revealed Comparative Advantage, 2006–2008 (Average) Sectors ASEAN PRC Japan Korea, Rep. of NAFTA EU-27 ROW 1 Agriculture 0.84 0.49 0.10 0.15 1.50 1.06 1.10 2 Beverage and food products 1.51 0.41 0.08 0.15 0.69 1.28 1.08 3 Textile and apparel 1.05 3.27 0.25 0.74 0.40 0.84 0.96 4 Chemical products 0.67 0.45 0.80 0.90 0.97 1.33 0.89 5 Metal and steel products 0.56 1.00 0.91 1.01 0.81 1.03 1.14 6 Vehicle and other transport equipment 0.33 0.40 2.23 1.87 1.42 1.22 0.62 7 Electronic products 2.17 2.28 1.33 1.84 0.99 0.77 0.60 8 Machinery 0.49 0.65 1.65 0.73 1.09 1.22 0.83 9 Other manufacturing 1.00 0.63 0.58 0.60 0.99 0.82 1.39 ASEAN = Association of Southeast Asian Nations, EU = European Union, NAFTA = North American Free Trade Agreement, PRC = People’s Republic of China, ROW = rest of the world. Note: The Revealed Comparative Advantage (RCA) index is defined as the ratio of the share of a country’s total exports of a commodity in its total exports to the share of world exports of the same commodity in total world exports. Source: Authors’ calculations based on data from the United Nations ComTrade Database (accessed 6 April 2010). Table 8: Complementarity Index, 2006–2008 (% Average) Exporting region/country Importing region/ country ASEAN PRC Japan Korea, Rep. of EU-27 NAFTA ROW ASEAN 79.5 72.1 81.1 77.2 82.8 79.5 PRC 83.9 70.8 82.1 75.9 78.8 75.2 Japan 77.3 65.1 62.9 73.4 76.9 89.3 Korea, Rep. of 75.4 66.2 65.5 74.3 80.1 87.0 EU-27 76.9 66.1 69.9 74.6 89.4 88.0 NAFTA 79.2 68.3 73.5 75.8 83.2 85.8 ROW 78.8 68.9 69.4 73.4 83.8 87.8 ASEAN = Association of Southeast Asian Nations, EU = European Union, NAFTA = North American Free Trade Agreement, PRC = People’s Republic of China, ROW = rest of the world. Note: The index measures the degree to which the export pattern of one country matches the import pattern of another. It is derived by getting the sum of the absolute value of the difference between the import shares and the export shares for each product category of two countries, then dividing by two and multiplying by 100. Source: Authors’ calculations based on data from the United Nations ComTrade Database (accessed 6 April 2010). 16 | Working Paper Series on Regional Economic Integration No. 75 Table 9: Applied Tariff Rate (Simple Mean of all Products, %) Country 2004 2005 2006 2007 Brunei Darussalam 3.4 3.2 3.1 3.1 Cambodia – 14.1 – 12.5 Indonesia 6.1 6.0 6.0 5.8 Lao PDR 8.7 7.1 6.5 5.8 Malaysia – 7.5 6.3 5.9 Myanmar 4.5 4.5 4.4 4.1 Philippines 5.3 5.4 5.4 5.0 Singapore 0.0 0.1 0.0 0.0 Thailand – 10.5 10.8 – Viet Nam 13.9 13.0 11.9 11.7 PRC 9.8 9.2 8.9 8.8 Japan 3.3 3.3 3.5 4.1 Korea, Rep. of 9.1 – 9.1 8.3 Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China. Source: World Bank, World Databank. http://databank.worldbank.org/ddp/home.do?Step=3&id=4 (accessed 29 April 2010). 4. Quantitative Assessment of ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea—Computable General Equilibrium Model In this section, we apply the CGE model to the various permutations (actual and potential) of ASEAN’s FTAs with the Big Three in order to estimate their quantitative effects on welfare and output. In addition to looking at static, one-time effects, we also examine dynamic effects based on the ramifications of FTAs for capital accumulation. Before we delve into the CGE analysis, we provide a brief overview of the CGE model and studies that use the model to evaluate intra-East Asian FTAs. 4.1. Computable General Equilibrium Model and Analysis of the Impact of Free Trade Agreements—A Brief Overview A large and growing literature uses the CGE model and database of the Global Trade Analysis Project (GTAP) to quantify the economic impact of FTAs. 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London: Stevens. | 25 ADB Working Paper Series on Regional Economic Integration* 1. “The ASEAN Economic Community and the European Experience” by Michael G. Plummer 2. “Economic Integration in East Asia: Trends, Prospects, and a Possible Roadmap” by Pradumna B. Rana 3. “Central Asia after Fifteen Years of Transition: Growth, Regional Cooperation, and Policy Choices” by Malcolm Dowling and Ganeshan Wignaraja 4. “Global Imbalances and the Asian Economies: Implications for Regional Cooperation” by Barry Eichengreen 5. “Toward Win-Win Regionalism in Asia: Issues and Challenges in Forming Efficient Trade Agreements” by Michael G. Plummer 6. “Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia” by Alfred Steinherr, Alessandro Cisotta, Erik Klär, and Kenan Šehović 7. “Managing the Noodle Bowl: The Fragility of East Asian Regionalism” by Richard E. Baldwin 8. “Measuring Regional Market Integration in Developing Asia: a Dynamic Factor Error Correction Model (DF-ECM) Approach” by Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, and Pilipinas F. Quising 9. “The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future” by Michael G. Plummer and Ganeshan Wignaraja 10. “Trade Intensity and Business Cycle Synchronization: The Case of East Asia” by Pradumna B. Rana 11. “Inequality and Growth Revisited” by Robert J. Barro 12. “Securitization in East Asia” by Paul Lejot, Douglas Arner, and Lotte SchouZibell 13. “Patterns and Determinants of Cross-border Financial Asset Holdings in East Asia” by Jong-Wha Lee 14. “Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA” by Masahiro Kawai and Ganeshan Wignaraja 26 | 15. “The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?” by Soyoung Kim and Doo Yong Yang 16. “Emerging East Asian Banking Systems Ten Years after the 1997/98 Crisis” by Charles Adams 17. “Real and Financial Integration in East Asia” by Soyoung Kim and Jong-Wha Lee 18. “Global Financial Turmoil: Impact and Challenges for Asia’s Financial Systems” by Jong-Wha Lee and Cyn-Young Park 19. “Cambodia’s Persistent Dollarization: Causes and Policy Options” by Jayant Menon 20. “Welfare Implications of International Financial Integration” by Jong-Wha Lee and Kwanho Shin 21. “Is the ASEAN-Korea Free Trade Area (AKFTA) an Optimal Free Trade Area?” by Donghyun Park, Innwon Park, and Gemma Esther B. Estrada 22. “India’s Bond Market—Developments and Challenges Ahead” by Stephen Wells and Lotte SchouZibell 23. “Commodity Prices and Monetary Policy in Emerging East Asia” by Hsiao Chink Tang 24. “Does Trade Integration Contribute to Peace?” by Jong-Wha Lee and Ju Hyun Pyun 25. “Aging in Asia: Trends, Impacts, and Responses” by Jayant Menon and Anna Melendez-Nakamura 26. “Re-considering Asian Financial Regionalism in the 1990s” by Shintaro Hamanaka 27. “Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools” by Jayant Menon 28. “The Building Block versus Stumbling Block Debate of Regionalism: From the Perspective of Service Trade Liberalization in Asia” by Shintaro Hamanaka 29. “East Asian and European Economic Integration: A Comparative Analysis” by Giovanni Capannelli and Carlo Filippini 30. “Promoting Trade and Investment in India’s Northeastern Region” by M. Govinda Rao | 27 31. “Emerging Asia: Decoupling or Recoupling” by Soyoung Kim, Jong-Wha Lee, and Cyn-Young Park 32. “India’s Role in South Asia Trade and Investment Integration” by Rajiv Kumar and Manjeeta Singh 33. “Developing Indicators for Regional Economic Integration and Cooperation” by Giovanni Capannelli, Jong-Wha Lee, and Peter Petri 34. “Beyond the Crisis: Financial Regulatory Reform in Emerging Asia” by Chee Sung Lee and Cyn-Young Park 35. “Regional Economic Impacts of Cross-Border Infrastructure: A General Equilibrium Application to Thailand and Lao PDR” by Peter Warr, Jayant Menon, and Arief Anshory Yusuf 36. “Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis” by Warwick J. McKibbin and Waranya Pim Chanthapun 37. “Roads for Asian Integration: Measuring ADB's Contribution to the Asian Highway Network” by Srinivasa Madhur, Ganeshan Wignaraja, and Peter Darjes 38. “The Financial Crisis and Money Markets in Emerging Asia” by Robert Rigg and Lotte Schou-Zibell 39. “Complements or Substitutes? Preferential and Multilateral Trade Liberalization at the Sectoral Level” by Mitsuyo Ando, Antoni Estevadeordal, and Christian Volpe Martincus 40. “Regulatory Reforms for Improving the Business Environment in Selected Asian Economies—How Monitoring and Comparative Benchmarking can Provide Incentive for Reform” by Lotte Schou-Zibell and Srinivasa Madhur 41. “Global Production Sharing, Trade Patterns, and Determinants of Trade Flows in East Asia” by Prema-chandra Athukorala and Jayant Menon 42. “Regionalism Cycle in Asia (-Pacific): A Game Theory Approach to the Rise and Fall of Asian Regional Institutions” by Shintaro Hamanaka 43. “A Macroprudential Framework for Monitoring and Examining Financial Soundness” by Lotte Schou-Zibell, Jose Ramon Albert, and Lei Lei Song 44. “A Macroprudential Framework for the Early Detection of Banking Problems in Emerging Economies” by Claudio Loser, Miguel Kiguel, and David Mermelstein 45. “The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications” by Cyn-Young Park, Ruperto Majuca, and Josef Yap 28 | 46. “Do Hub-and-Spoke Free Trade Agreements Increase Trade? A Panel Data Analysis” by Jung Hur, Joseph Alba, and Donghyun Park 47. “Does a Leapfrogging Growth Strategy Raise Growth Rate? Some International Evidence” by Zhi Wang, Shang-Jin Wei, and Anna Wong 48. “Crises in Asia: Recovery and Policy Responses” by Kiseok Hong and Hsiao Chink Tang 49. “A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration Evaluation (RIE) Methodology” by Donghyun Park and Mario Arturo Ruiz Estrada 50. “Regional Surveillance for East Asia: How Can It Be Designed to Complement Global Surveillance?” by Shinji Takagi 51. “Poverty Impacts of Government Expenditure from Natural Resource Revenues” by Peter Warr, Jayant Menon, and Arief Anshory Yusuf 52. “Methods for Ex Ante Economic Evaluation of Free Trade Agreements” by David Cheong 53. “The Role of Membership Rules in Regional Organizations” by Judith Kelley 54. “The Political Economy of Regional Cooperation in South Asia” by V.V. Desai 55. “Trade Facilitation Measures under Free Trade Agreements: Are They Discriminatory against Non-Members?” by Shintaro Hamanaka, Aiken Tafgar, and Dorothea Lazaro 56. “Production Networks and Trade Patterns in East Asia: Regionalization or Globalization?” by Prema-chandra Athukorala 57. “Global Financial Regulatory Reforms: Implications for Developing Asia” by Douglas W. Arner and Cyn-Young Park 58. “Asia’s Contribution to Global Rebalancing” by Charles Adams, Hoe Yun Jeong, and Cyn-Young Park 59. “Methods for Ex Post Economic Evaluation of Free Trade Agreements” by David Cheong 60. “Responding to the Global Financial and Economic Crisis: Meeting the Challenges in Asia” by Douglas W. Arner and Lotte Schou-Zibell 61. “Shaping New Regionalism in the Pacific Islands: Back to the Future?” by Satish Chand 62. “Organizing the Wider East Asia Region” by Christopher M. Dent | 29 63. “Labour and Grassroots Civic Interests In Regional Institutions” by Helen E.S. Nesadurai 64. “Institutional Design of Regional Integration: Balancing Delegation and Representation” by Simon Hix 65. “Regional Judicial Institutions and Economic Cooperation: Lessons for Asia?” by Erik Voeten 66. “The Awakening Chinese Economy: Macro and Terms of. Trade Impacts on 10 Major Asia-Pacific Countries” by Yin Hua Mai, Philip Adams, Peter Dixon, and Jayant Menon 67. “Institutional Parameters of a Region-Wide Economic Agreement in Asia: Examination of Trans-Pacific Partnership and ASEAN+α Free Trade Agreement Approaches” by Shintaro Hamanaka 68. “Evolving Asian Power Balances and Alternate Conceptions for Building Regional Institutions” by Yong Wang 69. “ASEAN Economic Integration: Features, Fulfillments, Failures, and the Future” by Hal Hill and Jayant Menon 70. “Changing Impact of Fiscal Policy on Selected ASEAN Countries” by Hsiao Chink Tang, Philip Liu, and Eddie C. Cheung 71. “The Organizational Architecture of the Asia-Pacific: Insights from the New Institutionalism” by Stephan Haggard 72. “The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis?” by Steven Pennings, Arief Ramayandi, and Hsiao Chink Tang 73. “What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia” by Yoon Je Cho 74. “Asia’s Strategic Participation in the Group of 20 for Global Economic Governance Reform: From the Perspective of International Trade” by Taeho Bark and Moonsung Kang * These papers can be downloaded from: (ARIC) http://aric.adb.org/reipapers/ or (ADB) http://adb.org/Economics/publications.asp?fs=fm_9:999 ASEAN’s Free Trade Agreements with the People’s Republic of China, Japan, and the Republic of Korea: A Qualitative and Quantitative Analysis Expanding trade with East Asia’s “Big Three” economic giants—the People’s Republic of China, Japan, and the Republic of Korea—offers a new potential source of growth for ASEAN. The central objective of this paper is to qualitatively and quantitatively assess the different permutations of ASEAN’s free trade agreements (FTAs) with the Big Three. The two types of analyses both suggest that an ASEAN+3 FTA would deliver the largest economic benefits for the region. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/poverty Publication Stock No. WPS113563 Printed in the Philippines