INSIDE GLOBAL ISSUES

Working Paper No. 201413,  March 6rd , 2014                   

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China and the TPP: A Numerical Simulation Assessment of the Effects Involved

Li Chunding

Abstract

The Trans-Pacific Partnership (TPP) is a new negotiation on cross border liberalization of goods and service flows going beyond WTO disciplines and focused on issues such as regulation and border controls. This paper uses numerical simulation methods to assess the potential effects of a TPP agreement on China and also China’s inclusion or exclusion on other countries. We use a numerical 11-country global general equilibrium model with trade costs and inside money. Trade costs are calculated using a method based on gravity equations. TPP barriers potentially removable are trade costs less tariffs. Simulation results reveal that China will be slightly hurt by TPP initiatives in welfare when China is out, but the total production and export will be increased. Other non-TPP countries will be mostly hurt in welfare but member countries will mostly gain. If China takes part in TPP, she will significantly gain and increase other TPP countries’ gain as well. The comparison of TPP effects and global free trade effects show that the positive effects of global free trade are stronger than TPP effects. Japan’s joining TPP would be beneficial to both herself and most of other TPP countries, but which negative effects on China’s welfare when out of TPP will increase further. 

Keywords: Trans-Pacific Partnership; General Equilibrium; Numerical Simulation; Trade Cost 

1. Introduction

The Trans-Pacific Partnership (TPP) is originally a proposed nine-country Asia-Pacific free trade arrangement now being negotiated among the United States (US), Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. The aim is to go beyond WTO liberalization and focus on issues of regulation and border controls. As such it differs from tariff based liberalization in there being no revenues involved with the border measures. They also compound with conventional tariffs. The intuition, therefore, is that larger gains may accrue to the importing countries compared to previously studied liberalization. The negotiating partners have agreed that this proposed “living agreement” cover new trade topics and include new members that are willing to adopt the proposed agreement’s higher standards. To that end, Canada and Mexico entered the TPP in 2012, and Japan will become a formal member in August 2013. 

As a big country in the Asia-Pacific area, China has not taken part in the TPP initiative. Here we analyze how China’s participation or non-participation in a TPP arrangement could potentially affect both China and some other main participating and non-participating countries if this proposal resulted in a true free trade agreement (FTA) among participants. The answer to this question is important for policy making and related research, and depends critically both on the size of barriers involved and their negotiability. 

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2. The TPP Initiative and Its Development 

The Trans-Pacific Partnership (TPP), also known as the Trans-Pacific Strategic Economic Partnership Agreement (TPPA), is a multilateral free trade agreement (FTA) that aims to further liberalize the economies of the Asia-Pacific region. Current negotiating partners include Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the United States, Vietnam, Canada and Mexico, a total of eleven countries, and Japan could become a full negotiating partner in August 2013. Although all original and negotiating parties are members of the Asia-Pacific Economic Cooperation (APEC), the TPP is not an APEC initiative. However, it is considered to be a step towards the proposed Free Trade Area of the Asia Pacific (FTAAP), an APEC initiative. The country member relationships between TPP and APEC are shown in Figure 1. 

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3. Model Specification 

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4. Trade Cost Calculations 

We report our calculations of trade costs in this part which provide trade cost estimates for use in our general equilibrium model. The methodology we use is from Novy (2008) and Wong (2012). We calculate and report ad valorem tariff-equivalent trade costs between countries for China, the US, the EU, China, Japan, Korea, Canada, Mexico, AN, CP, BMSV, and ROW in 2011. 

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5. Data and Parameter Calibration 

We use 2011 as our base year in building a benchmark general equilibrium dataset for use in calibration and simulation following the method set out in Shoven and Whalley (1992). There are eleven countries in our model, and ROW data is obtained from total world values minus values for the other twenty-one countries. For the two goods, we assume secondary industry (manufacturing) reflects tradable goods, and primary and tertiary industries (agriculture, extractive industries, and services) yield non-tradable goods. For the two factor inputs, capital and labor, we use total labor income (wage) to denote labor values for inputs by sector. All data are in billion US dollars. We adjust some of the data values for mutual consistency for calibration purposes. 

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6. Simulation Results

We report counterfactual simulation results in this part to assess the potential effects of TPP on China and other countries under different scenarios. We divide trade costs into two parts, import tariffs and other all non-tariff barriers. According to the TPP negotiation targets, the aim is to set up a free trade area, and for import tariffs to be completely eliminated among participants after the negotiation of the TPP. In the meanwhile, TPP negotiations will focus on institutional areas, technical and standard barriers, investment, services and other impediments, which imply other all non-tariff barriers will be reduced and, in the long run, even completely removed. 

We do not know how much of the trade cost can be reduced by TPP. Therefore, in our simulation analysis, we first assume that the TPP will completely eliminate tariff barriers (free trade), and then either partially (with weights denoting the percentage by which non-tariff barriers will be reduced) or completely eliminate other all non-tariff barriers. Specifically, we show three different cases of results for each scenario. The first is whole trade cost elimination case, the second is whole tariff elimination and 50% non-tariff barrier elimination case, and the third is only tariff elimination case. We think that the second case will be the situation nearest to the reality. 

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7. Conclusions and Remarks

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