Thai Ministry of Commerce,
Bangkok
30 October 2007
COST/BENEFIT ANALYSIS
OF ASEAN-EU FTA
Edmund W. Sim
Hunton & Williams
adapted from a previous presentation
by Dr. Andrew Szamosszegi, Capital Trade Incorporated
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
Presentation to Thai Ministry of Commerce, October 30, 2007
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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
Presentation to Thai Ministry of Commerce, October 30, 2007
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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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Assessment 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Assessment 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Assessment of comparative advantage (ctd.)
Number of HS Codes with EU Comparative
Disadvantage and ASEAN Comparative Advantage
800
685
700
627
600
507
500 458
Number
400
300
200
100
0
Malaysia Vietnam Indonesia Thailand
Source: Based on data from United Nations Statistics Division, COMTRADE database.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Methodology 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Methodology and Analysis (ctd.)
Simplified Schematic Diagram of GTAP FTA Analaysis
Changes in:
Relative prices
Demand for domestic goods
Economy in FTA reduces Demand for imports
equilibrium tariffs Demand for exports
Demand for labor, capital, etc.
Production levels by sectors
Private consumption
Economy in Government consumption
equilibrium
GDP = Investment
Trade balance
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Methodology 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.
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Quantitative Analysis
Methodology 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
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Quantitative Analysis
Change in Thai Exports to EU with FTA
Rice
Meat
Apparel
Footwear
Textiles
Processed food
Motor vehicles
Other goods
Electrical equipment
Machinery & equipment
Other crops
Rubber & plastic
Chemicals
Fruits & vegetables
Dairy
Fisheries
Vegetable oil
Iron & steel
Forestry & Lumber
Mining
Paper products
Services
-500 0 500 1,000 1,500 2,000
Million dollars
Presentation to Thai Ministry of Commerce, October 30, 2007
Source: Revised GTAP database and model.
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Quantitative Analysis
Change in EU Exports to Thailand with FTA
Motor vehicles
Machinery & equipment
Chemicals
Processed food
Other goods
Services
Apparel
Footwear
Textiles
Rubber & plastic
Dairy
Forestry & lumber
Paper products
Meat
Iron & steel
Other crops
Fruits & vegetables
Vegetable oil
Electrical equipment
Rice
Fisheries
Mining
-500 0 500 1,000 1,500 2,000
Million dollars
of Commerce, October 30, 2007
Presentation to Thai Ministry model.
Source: Revised GTAP database and
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Quantitative Analysis
Changes to Thai Trade and Balances Due to FTA
Short Run Long Run
$Mil. Percent $Mil. Percent
Export value 910 1.1 2,860 3.5
Import value 1,002 1.5 2,202 3.4
$Mil. $Mil.
Goods & services trade balance -92 659
Merchandise trade balance 661 1,240
Source: Revised GTAP database and model.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Changes to Thai Exports & Imports Due to FTA
3.5
3.0 2.86
Increase in total exports
2.5
Increase in total imports 2.20
Billion dollars
2.0
1.5
1.00
1.0 0.91
0.5
-
SIM1 SIM2
Presentation to Thai Ministry of Commerce, October 30, 2007
Source: Revised GTAP database and model.
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Quantitative Analysis
Trade 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Price 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
Item/Sector
Percent Change
GDP deflator 2.4 1.7
Import price range by sector -7.9 to 0.1 -7.9 to 0.3
Consumption price range by sector -2.1 to 14.0 -2.1 to 14.4
Factor cost index 3.1 2.3
Source: Revised GTAP database and model.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Cost 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.
Cost Estimates for Mobile Factors
SIM1 SIM2
Sector
Percent
Unskilled labor 3.3 4.1
Skilled labor 1.9 2.4
Capital 1.9 0.1
Presentation to Thai Ministry of Commerce, October 30, 2007
Source: Revised GTAP database and model.
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Quantitative Analysis
Employment 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Investment 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
3,000 3.5%
2,500 3.0%
2.5%
2,000
$million
2.0%
1,500
1.5%
1,000
1.0%
500 0.5%
0 0.0%
Thailand ASEAN EU
Value of Ministry of Commerce, Real 30, 2007
Presentation to Thaifixed investment (left) October output of capital goods sector (right)
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Quantitative Analysis
Welfare effects of FTA
Increase in Welfare Due to the FTA
9
7.8
8
7
SIM1 SIM2
Billions of dollars
6
5
4
3.3
2.8
3
1.9
2 1.3
1
0.1
0
Thailand ASEAN EU
Presentation to Thai Ministry of Commerce, October 30, 2007
Source: Revised GTAP database and model.
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Quantitative Analysis
GDP effects of FTA
Distribution of GDP Gains within ASEAN ($million and percent)
100%
ROASEAN, ROASEAN,
90% 82.7 1,238.0
80% VIETNAM,
VIETNAM, 990.3
70% 183.3
MALAYSIA,
60% 1,142.9
MALAYSIA,
50% 84.8
INDONESIA,
40% 1,693.4
30% INDONESIA,
224.8
20% THAILAND,
2,309.7
10% THAILAND,
65.1
0%
SIM1
Presentation to Thai Ministry of Commerce, October 30, 2007 SIM2
Source: Revised GTAP database and model.
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Quantitative Analysis
Welfare 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Welfare 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Change 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Quantitative Analysis
Preliminary conclusions
Why an ASEAN-Thai FTA?
An FTA would benefit Thai and ASEAN trade
Trade 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.
Presentation to Thai Ministry of Commerce, October 30, 2007
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Conclusion
THANK YOU
EDMUND SIM
Hunton & Williams
SINGAPORE
65-6876-6708
esim@hunton.com
Special Thanks to Dr. Andrew Szamosszegi, Capital
Trade Incorporated
Presentation to Thai Ministry of Commerce, October 30, 2007
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