Upload
nirmala-last
View
226
Download
1
Tags:
Embed Size (px)
DESCRIPTION
Citation preview
COST/BENEFIT ANALYSIS OF ASEAN-EU FTA
Edmund W. Sim
Hunton & Williams
adapted from a previous presentation by Dr. Andrew Szamosszegi, Capital Trade Incorporated
COST/BENEFIT ANALYSIS OF ASEAN-EU FTA
Edmund W. Sim
Hunton & Williams
adapted from a previous presentation by Dr. Andrew Szamosszegi, Capital Trade Incorporated
Thai Ministry of Commerce, Bangkok
30 October 2007
2C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Qualitative assessment—economic perspective
Anticipated FTA benefits
Increase in exports
Lower priced imports
Increased competition, leading to lower prices in general
Reallocation of resources toward export industries, where countries have comparative advantage
Increased economic welfare and growth
3C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Qualitative assessment—economic perspective (ctd.)
Anticipated FTA costs
Lost industry sales and output due to higher import levels
Lost pricing flexibility in import-competing industries
Adjustment costs in import competing sectors:
Lower rates of return on industry assets
Potential lost jobs/wage pressures
4C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Qualitative assessment—economic perspective (ctd.)
Benefits typically outweigh the costs
That is why governments continue to pursue agreements that reduce duties
EU has signed 21 agreements and is currently pursuing other agreements with Asian countries.
The EU is renewing its focus on FTAs as a tool for increasing competitiveness.
Many other countries and regions, including ASEAN, are pursuing FTAs.
5C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Qualitative assessment—economic perspective (ctd.)
Potential for trade diversion among ASEAN countries
Trade structures of ASEAN countries are “substitutable.”
Keep eye on the ball.
Losses to other ASEAN countries dwarfed by FTA gains.
6C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisAssessment of comparative advantage
Compared competitiveness by 6-digit HS codes for Thailand and EU in 2005.
5,223 6-digit codes
Trade between the Thailand and the EU is complementary.
Thailand’s comparative advantage is more concentrated.
Thailand has fewer codes in which it has a comparative advantage, but more codes with high comparative advantage values.
7C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisAssessment of comparative advantage (ctd.)
In virtually every HS section (22 in all), there are codes for which Thailand has a comparative advantage and the EU does not, and vice versa.
This pattern suggests there will be export and import growth in most sectors.
The Thai sectors that score well in the comparative advantage analysis are live animal and animal products, textile and textile articles, footwear, vegetable products, prepared food, jewelry, and miscellaneous manufactured products.
The EU scored well in chemicals, machinery & appliances, industrial instruments, pulp & paper, and base metals.
8C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisAssessment of comparative advantage (ctd.)
Number of HS Codes with EU Comparative Disadvantage and ASEAN Comparative Advantage
458507
627
685
0
100
200
300
400
500
600
700
800
Malaysia Vietnam Indonesia Thailand
Nu
mb
er
Source: Based on data from United Nations Statistics Division, COMTRADE database.
9C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisMethodology and Analysis (ctd.)
This study’s approach: Applied general equilibrium analysis using the GTAP database and model.
Incorporates actual tariff information, sector-specific data on trade flows and production levels, and macroeconomic data in a unified framework.
Global exports equal imports (less transportation and tariffs) Global production equals global consumption. Allows for a detailed assessment of macroeconomic as well as
industry-specific performance.
Simply put, the use of GTAP allows for the most detailed analysis of multiple sector and country effects potentially resulting from an FTA.
10C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisMethodology and Analysis (ctd.)
Changes in:Relative pricesDemand for domestic goods
Economy inequilibrium
FTA reducestariffs
Demand for importsDemand for exportsDemand for labor, capital, etc.Production levels by sectors
Private consumptionEconomy inequilibrium
GDP = Government consumptionInvestmentTrade balance
Simplified Schematic Diagram of GTAP FTA Analaysis
11C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisMethodology and Analysis (ctd.)
The GTAP base year is 2001. Updated every two years—next database is expected to be
released in Fall 2007
Changes made to the database to reflect Thailand’s current conditions and needs.
Tariff rates in database were updated using 2006 trade flows and duty rates.
EU-enlargement and the ASEAN FTA were incorporated. GTAP sector “chemicals, rubber, and plastics” split into two
sectors, “chemicals” and “rubber and plastic,” using actual trade and production data.
12C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisMethodology and Analysis (ctd.)
2 simulations of the envisioned FTA
Full liberalization of goods trade – the perfect world
SIM1 = short-to-medium run results
1-3 years
SIM2 = long run results
4-10 years
13C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisChange in Thai Exports to EU with FTA
Services
Paper products
Mining
Forestry & Lumber
Iron & steel
Vegetable oil
Fisheries
Dairy
Fruits & vegetables
Chemicals
Rubber & plastic
Other crops
Machinery & equipment
Electrical equipment
Other goods
Motor vehicles
Processed food
Textiles
Footwear
Apparel
MeatRice
-500 0 500 1,000 1,500 2,000
Million dollarsSource: Revised GTAP database and model.
14C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisChange in EU Exports to Thailand with FTA
Mining
Fisheries
Rice
Electrical equipment
Vegetable oil
Fruits & vegetables
Other crops
Iron & steel
Meat
Paper products
Forestry & lumber
Dairy
Rubber & plastic
Textiles
Footwear
Apparel
Services
Other goods
Processed food
Chemicals
Machinery & equipmentMotor vehicles
-500 0 500 1,000 1,500 2,000
Million dollarsSource: Revised GTAP database and model.
15C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisChanges to Thai Trade and Balances Due to FTA
$Mil. Percent $Mil. PercentExport value 910 1.1 2,860 3.5Import value 1,002 1.5 2,202 3.4
Goods & services trade balanceMerchandise trade balanceSource: Revised GTAP database and model.
-92661
6591,240
Short Run Long Run
$Mil. $Mil.
16C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisChanges to Thai Exports & Imports Due to FTA
0.91
2.86
1.00
2.20
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
SIM1 SIM2
Bil
lion
dol
lars
Increase in total exports
Increase in total imports
Source: Revised GTAP database and model.
17C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisTrade Diversion Due to FTA
Long-run diversion = $0.1 billion
Long run increase in Thai exports to EU due to FTA = $5.4 billion
The increase in Thai exports exceeds estimated trade diversion by a factor of 40!
Keep your eye on the ball.
18C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisPrice effects of FTA
Import prices decline, as predicted by theory.
Import prices fall in virtually very sector.
Lower import prices, however, do not drag down Thai prices.
Summary of FTA Price and Cost Effects
SIM1 SIM2
GDP deflator 2.4 1.7Import price range by sector -7.9 to 0.1 -7.9 to 0.3Consumption price range by sector -2.1 to 14.0 -2.1 to 14.4Factor cost index 3.1 2.3
Item/SectorPercent Change
Source: Revised GTAP database and model.
19C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisCost effects of FTA
The FTA would increase demand in labor intensive industries, resulting in higher wages.
Thus, businesses pay less for imports but more for domestic factors of production.
Returns on capital increase as well, especially in the short run.
SIM1 SIM2
Unskilled labor 3.3 4.1Skilled labor 1.9 2.4Capital 1.9 0.1
Source: Revised GTAP database and model.
SectorPercent
Cost Estimates for Mobile Factors
20C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisEmployment effects
The GTAP model assumes full employment.
Employment can grow in certain industries, but only if other industries in the model experience employment losses.
If the economy in fact has unemployed or underutilized labor resources, then industries predicted to lose employees might not lose any at all.
The rice, meat, footwear, apparel, textiles, fisheries, vehicles, and processed food industries add employees.
21C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisInvestment effects
Fixed investment increases disproportionately in Thailand.
Real output of the capital goods sector increases by 3.3 percent in Thailand compared to lower amounts for ASEAN and the EU.
Investment Performance By Region
0
500
1,000
1,500
2,000
2,500
3,000
Thailand ASEAN EU
$m
illio
n
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Value of fixed investment (left) Real output of capital goods sector (right)
22C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisWelfare effects of FTA
Increase in Welfare Due to the FTA
1.3
3.3
0.1
2.8
7.8
1.9
0
1
2
3
4
5
6
7
8
9
Thailand ASEAN EU
Bil
lions
of
dolla
rs
SIM1 SIM2
Source: Revised GTAP database and model.
23C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisGDP effects of FTA
INDONESIA, 1,693.4
MALAYSIA, 1,142.9
THAILAND,2,309.7
THAILAND,65.1
INDONESIA, 224.8
MALAYSIA,84.8
VIETNAM,990.3VIETNAM,
183.3
ROASEAN,1,238.0
ROASEAN,82.7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SIM1 SIM2Source: Revised GTAP database and model.
Distribution of GDP Gains within ASEAN ($million and percent)
24C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisWelfare vs. GDP effects
Welfare and GDP are not the same thing.
GDP measures output.
Welfare also measures the improvement in the “terms of trade,” improvements in resource allocation, and other measures.
In the short run (SIM1), Thailand benefits because its exports “command” more imports than in the pre-FTA period.
Thus, the gain in SIM1 welfare exceeds SIM1 GDP.
25C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisWelfare vs. GDP effects (ctd.)
SIM2 (long run)
Thailand’s GDP gains are quite large.
Welfare gains are even larger.
For both measures, Thailand’s gains are proportionately large within ASEAN.
Thailand accounts for 20 percent of ASEAN GDP, but accounts for …
30 percent of ASEAN long-run GDP increase.
40 percent of ASEAN long-run welfare increase.
26C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisChange in producer revenues due to FTA
SIM2 (long run) In the long run, 14 of the 22 specified sectors experience increased
revenue. Only 4 of the 22 sectors experience revenue losses in excess of 2
percent: Other crops, dairy, rubber & plastic, forestry & lumber.However of the 4 sectors, losses in 2 (other crops and dairy) probably reflect a
shift of resources to other agricultural and food sectors where demand increases.
In the two remaining sectors, the comparative advantage analysis indicates that these sectors are likely to benefit from an FTA.
27C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Quantitative AnalysisPreliminary conclusions
Why an ASEAN-Thai FTA?An FTA would benefit Thai and ASEAN tradeTrade diversion losses to Thailand are minimal!Thai and ASEAN welfare and GDP grow
Thai gains are disproportionately large.Only a handful of sectors experience losses.Most losses that due occur are not due to increasing imports, but to resource
shifts to high demand industries.The bottom line: the benefits of this agreement would significantly exceed its
economic costs.
28C A PC A P I T A L T R I T A L T R A D EA D EI N C O R P O R A T E D
Presentation to Thai Ministry of Commerce, October 30, 2007
Conclusion
THANK YOUTHANK YOU
EDMUND SIM
Hunton & WilliamsHunton & Williams
SINGAPORE
65-6876-6708
Special Thanks to Dr. Andrew Szamosszegi, Capital Trade Incorporated