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Study on the Impacts of China–ASEAN Free Trade Area

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Study on the Impacts of China–ASEAN Free Trade Area Study on the Impacts of China–ASEAN Free Trade Area ——Based on the Simulation of GTAP Model (1) Shudong ZHOU College of Economics and Management, Nanjing Agricultural University, China (2) Qifeng CUI Institute of Agricultural Economics and Development, China Academy of Agricultural Science, China (3) Bingchuan HU Institute of Rural Development, China Academy of Social Science, China (4)Qiang WU Financial Office of Jiangsu, China Abstract： This study applied GTAP model, upgraded database to 2010 with dynamic recursive approach, designed baseline projection and scenario analysis to simulate the long term impacts of China– ASEAN Free Trade Area on trade, import and export price, GDP, and resident’s income. Compared with baseline projection, implementation of CAFTA would bring significant impacts on trade, production, GDP and resident’s income to CAFTA members, bilateral trading partners and other countries. As the distortion of tariff on trade was removed, import prices of products with tariff reduction could decrease in China and most ASEAN members. CAFTA could promote internal trade in the free trade area, the domestic production structure of China and ASEAN members could be adjusted. Under the policy framework of CAFTA, China could give priority to increase products with comparative advantages. ASEAN members could shift resources from agricultural sector to industrial sector. CAFTA could bring positive impacts on GDP and resident’s income level in China and ASEAN members. But Korea, Japan, India, Hong Kong could receive some negative impacts on trade with CAFTA members, but there are less impacts on GDP and resident’s income. Key words: China, ASEAN, CAFTA, GTAP, trade 1 Introduction 1.1 Problem statement The Economic Ministers of ASEAN (Association of Southeast Asian Nations) and China signed the Agreement on Trade in Goods (TIG) under the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China in November 2004. This indicated that construction of China –ASEAN Free Trade Area (CAFTA) came into practice, it could be an important milestone of economic integration of east Asia. Economic cooperation between China and ASEAN became closer and closer, bilateral trade increased steady. China and ASEAN bilateral trade volume reached average increase rate of 22.50% since 1997 to 2007. Especially, the bilateral trade volume between China and ASEAN reached 202,432.55 million US dollars in 2007. Such a rapid growth is rare in current global trade. ASEAN became China's fourth largest trading partner in 2007. During this dynamic process of CAFTA, internal trade, domestic production structure, and GDP could be greatly affected by the Agreement. Based on the trade policy changes of CAFTA, A GTAP (Global Trade Analysis Project) model was applied to simulate the positive and negative impacts of tariff reduction under the agreement. 1.2 Literature review Since 1950, many economists have devoted themselves to theoretical research of regional economic integration (REI), especially in tariff union—a typical form of REI. Their research mainly focused on the welfare effects of union members and the rest of the world in two aspects: static effects and dynamic effects. In terms of static effects, Viner (1950) first developed “trade creating effects” and “trade diverting effects”, he pointed out that tariff union or free trade area promoted internal trade among union members, whereas they restrained international trade to the outside. Trade creating effects could increase the welfare of member countries, whereas trade diverting effects could reduce welfare of non-member countries and distort resource allocation. Several empirical studies have been made on static welfare of FTA on its member. In an empirical study, Albert (1992) showed that establishment of NAFTA increased trade between Mexico and NAFTA members, realized trade creation within NAFTA, but caused trade and investment diversion in non-member countries. Berkelmans et al. （2001）employed a G-Cubed model to simulate the economic effect of trade liberalization between Australia and USA. They showed that Australia-USA trade liberalization could increase GDP and trade volume, and that trade creating effects could be greater than trade diverting effects. Theoretical and empirical studies have been made on dynamic welfare in bilateral and multilateral trade. Lindert and Kindleberger (1985) concluded that tariff union would affect trade and welfare in two ways: welfare gain associated with trade creating effects and welfare loss associated with trade diverting effects. Dynamic gains of integration, however, would include economics of scale, greater competition, and stimulation of investment. Walmsley, Dimaranan, McDougall (2000) employed GTAP model to estimate the dynamic effect of Japan - Singapore FTA. Model results showed that the long-term return of the FTA could be higher for Japan and Singapore than for other regions in the world. Adams et al.(2000) employed GTAP_3 to simulate terms of trade effects of full APEC liberalisation. They pointed out that China could have a large decrease in output of transport equipment, but have a large increase in output of clothing; APEC had a positive welfare effect on China. Feng and Huang (1997) simulated a unilateral 33% tariff reduction and 43% reduction in APEC member tariffs using GTAP_3, they found a positive welfare effect on China and on Rest of World. Li and Lejour(2000) made baseline growth scenarios for 50% tariff reduction, cuts in Non Tariff Barrier with China SAM(base=1997). They found that China could expect not only a large increase in agricultural import volumes, but also increases in exports of textiles and wearing apparel. Mai et al.(1998) simulated unilateral tariff reduction (33% cuts) of APEC with GTAP_3, their research showed that China could benefit from all forms of trade liberalisation. Yang and Huang (1999) also simulated full APEC liberalisation with GTAP_3, they found that there was welfare effect on China, concerted liberalisation in APEC region could offset terms of trade declines, APEC and WTO would mutually reinforce. Gilbert and Wahl (2002) applied GTAP model to estimate welfare effects and output effects of trade liberalization among Bangkok agreement members. Their research pointed out that China and India could suffer declines in the terms-of-trade in the static state but offset the declines in the dynamic effects. 2 The framework of agricultural trade in ASEAN–China FTA 2.1 Early Harvest Program Early Harvest Program was the first tariff reduction program under the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China，which has been implemented by January 2004. The products included live animals, meat and edible meat offal, fish, dairy products, other animal products, live trees, edible vegetables, edible fruits and nuts. On the one hand, some countries had difficulty to remove or reduce tariff of some products, which were defined as Excluded Products. On the other hand, some countries suggested to add some non-agricultural products, which were defined as Specific Products. 2.2 Agreement on Trade in Goods The agreement on comprehensive economic co-operation between ASEAN and China aimed to: minimize barriers and deepen economic linkages between the Parties, lower costs, increase intra-regional trade and investment, increase economic efficiency, and create a larger market with greater opportunities and larger economies of scale for the businesses of the Parties; and enhance the attractiveness of the Parties to capital and talent.① Under the Agreement on Trade in Goods (TIG), the tariff reduction or elimination programme of the parties shall require tariffs on listed products to be gradually reduced and eliminated. Products shall be categorized into two tracks: the Normal Track and the Sensitive Track. The tariff reduction program under the Normal Track would be implemented by 2010 for ASEAN 6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) and China, and by 2015 for the newer ASEAN Member States (Cambodia, Laos, Myanmar and Viet Nam). Table 1 Weighted average tariff levels for key products by countries (%) Products China Indonesia Malaysia Philippines Singapore Thailand Viet Nam rice 0.99 25.35 0 49.97 0 0.61 14.18 other grains 1.02 0.03 0 20.79 0 56.29 4.61 vegetables 23.12 4.90 2.95 13.08 0 34.51 29.55 and fruit oil seeds 11.86 1.75 2.54 8.69 0 46.92 6.66 sugar 18.38 20.13 0.00 38.25 0 34.27 23.00 vegetable 12.52 0.82 0.29 5.72 0 20.42 24.00 oil and fats Other food 20.89 5.36 3.98 5.12 0 43.89 26.81 products beverages 47.73 10.08 229.06 5.09 0.57 59.92 83.75 and tobacco Source: Author’s calculation based on GTAP 6 database ① Framework agreement on comprehensive economic co-operation between the Association of South East Asian Nations and the people’s republic of China. http://www.aseansec.org/13196.htm According to the Agreement on Trade in Goods, except products listed in the Early Harvest Programme and products listed in Sensitive Track, goods listed in Normal Track would be subject to tariff reduction based on the tariff rate of 2003. Table 1 lists the weighted average tariff levels of some key products. The tariff rate distribution of China and ASEAN in 2003 is listed in Table 2. Except for Brunei and Singapore, the rest of ASEAN members and China should reduce their tariff rates of products in normal track to 0 according to the timeframes. Table 2 The tariff rate distribution of China and ASEAN in 2003 (%) Tariff China Brunei Myanmar Cambodia
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