Analysis of the Japan-ASEAN Free Trade Agreement

By Thomas Hertel,Ken Itakura and Jeffrey ReimerCenter for Global Trade Analysis

Purdue University

General approach• Respond to study group’s concerns (February):

– Impacts on Unemployment– Linking trade and market structure to productivity– FDI linkages to productivity and growth– Model validation, trade elasticities/robustness of results

• Draw on outside econometric work relating:– Exports to firm-level productivity– Imports to pro-competitive effects on markups and

output per firm – FDI to productivity– Estimation of trade elasticities

Introduction• Japan-ASEAN FTA is most recent in a flurry of

regional trade initiatives• Japan-Singapore FTA is already underway, this

would add other ASEAN members• ASEAN is a heterogeneous region:

– range from less-developed to developed economies– patterns of specialization and trade are generally

complementary to Japan

Adding links to productivity: Impacts of increased imports

• Many different mechanisms for imports to affect productivity:– Technology spillovers: van Meijl et al.– New varieties: Romer– Procompetitive effects: Markusen

• Focus here on pro-competitive effects:– Theory is well developed– Some empirical work to draw upon– Seems appropriate in context of Japan-ASEAN FTA

Theory: Hertel, JIE, 1994

• Small, open economy• Imports differentiated goods which compete

with protected domestic sector exhibiting:– Scale economies– Potentially restricted entry– Oligopoly markups

• Exports undifferentiated product produced under PC/CRTS

• Contrast impacts of tariff cut on diff. product with outcome under PC/CRTS

Case III in Hertel (1994): Foreign varieties displace domestics (fully packed product space)

• Welfare depends on scale of domestic production• In GE, rationalization occurs

– Markups fall– Output per firm increases– Welfare increases

• Change in output per firm and size of welfare gain are directly proportional to the magnitude of the responsive of domestic markups to foreign price cuts

Exports and productivity

• Problem of causality: exporters are more productive because they export, or they are exporting because they are more productive.

• Bernard and Jensen (2001) control this by looking at the behavior of 50,000 individual plants in the US from 1983-92.– Firms always export during this period are 8 – 9%

productive than firms never export– Once start exporting, productivity converges on that

of exporting firms– Once stop exporting, productivity drops towards

that of firms that never exported

FDI and productivity

• Strong relationship between FDI and productivity (Rodrik 1999), but few empirical studies

• Chuang and Lin (1999) confirm the existence of beneficial spillovers from FDI

• 1% increase in FDI’s share of capital stock produces 1.40% increase in domestic firm productivity. This is only applied to ASEAN countries, where FDI impacts of the FTA may be significant

Comparative Static Analysis

• Based on:– 2005 data projections– Change in trade balance from dynamic model

• Include productivity effects:– Decompose to uncover relative importance– SR GDP impacts with addition of productivity – Welfare impacts– Sector Impacts:

• Output• Employment

GDP effects of FTA in presence of productivity shocks: 2005 in US$ million

-500

0

500

1,000

1,500

2,000

2,500

3,000

Japan Singapore Indonesia Malaysia Philippines Thailand Vietnam

Productivity increase from Trade Productivity increase from FDI Standard Model

Percent change in per capita welfare, 2005

0.02

-0.02

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Japan Singapore Indonesia Malaysia Philippines Thailand Vietnam ROW

Productivity increase from Trade Productivity increase from FDI Standard Model

The pro-competitive and FDI effects dampen decline in ASEAN hi-tech mnfcing

-5

-4

-3

-2

-1

0

1

2

3

chemicals metals autos machinery

totaltariffs onlyproductivity

Japanese employment impacts of FTA (number of jobs)

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

Food & Ag Resource LightMnfcs HighTech Services

Skilled Labor Unskilled Labor

Interactions of FTA with Unemployment in Japan and ASEAN:

Change in Aggregate Employment

Skilled Labor Unskilled Labor

Japan 0.4 0.4Indonesia -1.2 -0.5Malaysia 0.4 0.8Philippines -1.0 0.4Thailand -0.3 2.3Vietnam 7.8 7.9

Employment impacts in Japan in presence of unemployment

(number of jobs)

-50,000

0

50,000

100,000

150,000

200,000

Food & Ag Resource LightMnfcts HighTech Services

Skilled Labor Unskilled Labor

Comparing the impacts on Unskilled Labor between Full / Unemployment closures

(number of jobs)

-50,000

0

50,000

100,000

150,000

200,000

Food & Ag Resource LightMnfcts HighTech Services

Full employment closure Unemployment closure

Robustness of results

• Trade elasticities are key determinant of welfare changes following FTA

• Standard GTAP elasticities are:– Excessively aggregate– Based on literature review– Out of date

• We have estimated a new set of trade elasticities at the disaggregated GTAP commodity level using the methodology of Hummels

• Use estimated standard errors to guide SSA

Robustness of trade elasticities: Estimate divided by standard error

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Robustness of Japan-ASEAN FTA results with regard to trade elasticities

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-20.6-26.5

-32.7-28.0

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Summary and Next Steps• Impacts of Japan-ASEAN FTA:

– Hinge importantly on impacts of trade and investment on productivity

– Of particular importance are:• Pro-competitive effects of trade liberalization on import-competing,

high-tech industries in ASEAN• Impacts of increased FDI on productivity in ASEAN

• Evaluate and finalize trade-investment-productivity linkages

• Incorporate productivity linkages into dynamic analysis

Welfare Effects: Summary

• ASEAN gains dominated by trade and investment driven productivity increases– Largest proportional gains for Vietnam– Largest absolute gains for Thailand (45% ASEAN)– Singapore has small loss due to erosion of recent

preferences obtained in JP-SNG FTA• Welfare impacts are:

– robust to estimated uncertainty in trade elasticities– but sensitivity to productivity parameters needs

further investigation

Sector Effects: Summary

• Japan-ASEAN FTA reinforces current, complementary trade patterns:– ASEAN exports more food, resources and light

mnfcs to Japan– Japan exports more high-tech goods to ASEAN

• Pro-competitive effects dampen contraction in ASEAN high-tech sector

• Unemployment closure:– Reduces contraction in Japanese agriculture sector– Gives a large boost to services employment