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

Transcription

1 Workng Paper No March 6 rd, 2014 李春顶 :lchd@cass.org.cn; John Whalley: jwhalley@uwo.ca Chna and the TPP: A Numercal Smulaton Assessment of the Effects Involved Abstract The Trans-Pacfc Partnershp (TPP) s a new negotaton on cross border lberalzaton of goods and servce flows gong beyond WTO dscplnes and focused on ssues such as regulaton and border controls. Ths paper uses numercal smulaton methods to assess the potental effects of a TPP agreement on Chna and also Chna s ncluson or excluson on other countres. We use a numercal 11-country global general equlbrum model wth trade costs and nsde money. Trade costs are calculated usng a method based on gravty equatons. TPP barrers potentally removable are trade costs less tarffs. Smulaton results reveal that Chna wll be slghtly hurt by TPP ntatves n welfare when Chna s out, but the total producton and export wll be ncreased. Other non-tpp countres wll be mostly hurt n welfare but member countres wll mostly gan. If Chna takes part n TPP, she wll sgnfcantly gan and ncrease other TPP countres gan as well. The comparson of TPP effects and global free trade effects show that the postve effects of global free trade are stronger than TPP effects. Japan s jonng TPP would be benefcal to both herself and most of other TPP countres, but whch negatve effects on Chna s welfare when out of TPP wll ncrease further. Keywords: Trans-Pacfc Partnershp; General Equlbrum; Numercal Smulaton; Trade Cost JEL Classfcaton: F53, F47, C68 1 / 27

2 1. Introducton The Trans-Pacfc Partnershp (TPP) s orgnally a proposed nne-country Asa-Pacfc free trade arrangement now beng negotated among the Unted States (US), Australa, Brune, Chle, Malaysa, New Zealand, Peru, Sngapore and Vetnam. The am s to go beyond WTO lberalzaton and focus on ssues of regulaton and border controls. As such t dffers from tarff based lberalzaton n there beng no revenues nvolved wth the border measures. They also compound wth conventonal tarffs. The ntuton, therefore, s that larger gans may accrue to the mportng countres compared to prevously studed lberalzaton. The negotatng partners have agreed that ths proposed lvng agreement cover new trade topcs and nclude new members that are wllng to adopt the proposed agreement s hgher standards. To that end, Canada and Mexco entered the TPP n 2012, and Japan wll become a formal member n August As a bg country n the Asa-Pacfc area, Chna has not taken part n the TPP ntatve. Here we analyze how Chna s partcpaton or non-partcpaton n a TPP arrangement could potentally affect both Chna and some other man partcpatng and non-partcpatng countres f ths proposal resulted n a true free trade agreement (FTA) among partcpants. The answer to ths queston s mportant for polcy makng and related research, and depends crtcally both on the sze of barrers nvolved and ther negotablty. Present lterature on TPP s lmted and s mostly analytcal, such as Wllams (2012), James (2010), Lews (2011), and Ezell and Atknson (2011). Although a lot of earler researches has numercally explored the effects of regonal free trade agreement, see the survey by Lloyd and MacLaren (2004). Few numercal methods have been used to capture potental TPP effects for other countres and the whole world, except Petr et al (2011), Itakura and Lee (2012), Kawa and Wgnaraja (2008). Our pont of departure s to use numercal general equlbrum smulaton methods to explore TPP effects on both Chna and other countres. The analytcal novelty of the paper relatve to present lterature les n two ponts. The frst s we dvde trade costs nto tarff and non-tarff barrers and calculate trade costs between countres emprcally wth gravty model methodology. Ths can comprehensvely explore the FTA effects and s a better the TPP that emphasze on non-tarff lberalzaton, untl now nearly no lterature has pad attenton to ths approach. The second s we use an nsde money structure to form an endogenous trade mbalance model and whch s more consstent wth realty gven Chna s large mbalances n trade. We use an 11-country Armngton type global general equlbrum model. Each country produces two-goods (Tradable goods and Non-tradable goods) and has two-factors (captal and labor). The model captures trade costs and uses a monetary structure of nsde money both so as to also endogenously determne trade mbalance effects from the trade ntatve and also allow calbraton to a base case capturng Chna s large trade surplus. We use a trade cost calculaton method that recognzes lmtatons of data by usng an estmaton treatment that follows Wong (2012) and Novy (2008). We capture endogenously determned trade mbalances by ncorporatng both current consumpton and expected future ncremental consumpton from savng nto the model usng an analytcal structure attrbuted to Patnkn (1956), also adopted n Archbald and Lpsey (1960), and used more recently n Whalley et al (2011) and L and Whalley (2012). We 2

3 calbrate the model to 2011 data and use counterfactual smulatons to explore TPP effects. Our smulaton results show, not surprsngly, that the TPP ntatve wll hurt Chna n welfare f Chna does not partcpate, but these effects are relatvely small under the present TPP proposal, and Chna s export and total producton wll ncrease because of ncreased outsde demand. Chna s welfare loss s because of a declne n consumpton nduced by ncreased exports and decreased mports. Chna wll gan sgnfcantly when she partcpates n TPP. Most TPP member countres wll gan n nearly all aspects ncludng welfare, producton and trade. Other non-tpp member countres wll be mostly hurt n welfare as well, but some of these countres producton wll ncrease. We also compare TPP effects to global free trade effects n the model, and fnd they are dfferent. Frstly, global free trade benefts nearly all countres n welfare wth trade cost evaluaton, but TPP benefts mostly member countres and some of other countres; second, global free trade postve effects are consderably hgher than TPP free trade effects. The comparson of TPP effects under trade cost barrer and tarff barrer reveals the same results whch ndcates that our smulaton results wth trade cost modelng are relable. We have also smulated the effects of Japan jonng the TPP n the near future, and fnd that ths would be benefcal for Japan, TPP member countres and some of the non-tpp countres, but the negatve effect on Chna s welfare would ncrease f Chna s out of TPP. At last, senstvty analyss to elastctes and upper bound money suggest that our smulaton results are robust. The research n ths paper s especally relevant on polcy sde. Frstly, the TPP effects on Chna and some other man countres are a promnent topc and have great polcy mportance. Secondly, these results gve estmates as to how bg the effects are, whch are valuable to research and polcy makng. The remanng parts of the paper are organzed as follows: Part 2 ntroduces the TPP ntatve and ts development; Part 3 s the global general equlbrum model specfcaton; Part 4 s our calculaton of trade costs and TPP barrers change; Part 5 presents data and reports parameters from calbraton; Part 6 reports smulaton results for sx dfferent scenaros. The last part offers conclusons and remarks. 2. The TPP Intatve and Its Development The Trans-Pacfc Partnershp (TPP), also known as the Trans-Pacfc Strategc Economc Partnershp Agreement (TPPA), s a multlateral free trade agreement (FTA) that ams to further lberalze the economes of the Asa-Pacfc regon. Current negotatng partners nclude Australa, Brune, Chle, Malaysa, New Zealand, Peru, Sngapore, the Unted States, Vetnam, Canada and Mexco, a total of eleven countres, and Japan could become a full negotatng partner n August Although all orgnal and negotatng partes are members of the Asa-Pacfc Economc Cooperaton (APEC), the TPP s not an APEC ntatve. However, t s consdered to be a step towards the proposed Free Trade Area of the Asa Pacfc (FTAAP), an APEC ntatve. The country member relatonshps between TPP and APEC are shown n Fgure 1. 3

4 Fg.1 Country Members of TPP and APEC APEC Members Not In TPP Chna Hong Kong, Chna Indonesa South Korea Papua New Gunea Phlppnes Russa Tawan, Chna Thaland Present TPP Countres In APEC Australa Sngapore Brune USA Chle Vetnam Malaysa Canada New Zealand Mexco Peru Japan (August, 2013) Source: Compled by authors. The hstory of TPP can be traced back to the Pacfc Three Closer Economc Partnershp (P3-CEP). Its negotaton was launched on the sdelnes of the 2002 APEC Leaders Meetng n Los Cabos, Mexco, by Chlean Presdent Rcardo Lagos and Prme Mnsters Goh Chok Tong of Sngapore and Helen Clark of New Zealand. Brune frst took part as a full negotatng party n the ffth round of talks n Aprl 2005, after whch the trade bloc became known as the Pacfc-4 (P4). The objectve of the orgnal agreement was to elmnate 90% of all tarffs between member countres by January 1, 2006, and reduce all trade tarffs to zero by It was also to be a comprehensve agreement coverng all the man components of a free trade agreement, ncludng trade n goods, rules of orgn, trade remedes, santary and phytosantary measures, techncal barrers to trade, trade n servces, ntellectual property, government procurement and competton polcy (Wkpeda, 2013). After the P4 negotatons fnshed n 2005, ts partes agreed to begn negotatng on fnancal servces and nvestment whch were not covered by the orgnal agreement wthn two years of ts entry nto force. When these negotatons began n March 2008, the US joned the group pendng a decson on whether to partcpate n a comprehensve negotaton for an expanded TPP agreement. In September 2008, the US announced t would partcpate fully n the negotatons, and Australa, Peru, and Vet Nam also joned (NZMFAT, 2012). In November 2009, US Presdent Obama affrmed that the US would engage wth TPP countres. Negotatons for an expanded agreement began n March Durng the thrd round n Brune n October 2010, Malaysa joned the negotatons. In June 2012, t was announced that Canada and Mexco would jon TPP negotatons. Mexco s nterest n jonng was ntally met wth concern among TPP negotators about ts customs polces. Canada and Mexco formally became TPP negotatng partcpants n October 2012, followng completon of the domestc consultaton perods of the other nne members (Fgure 2). 4

5 Fg. 2 The Hstory of TPP Pacfc-4 (P4) TPP Proposal TPP TPP Extenson Aprl , proposed by the US March 2010 October 2012 Chle+Sngapore + New Zealand + Brune P4+US+Australa +Peru+Vet Nam P4+US+Australa +Peru+Vet Nam +Malaysa TPP 9 +Mexco +Canada Source: Compled by authors. Japan joned as an observer n the TPP dscussons that took place November 2010, on the sdelnes of the APEC summt n Yokohama. Japan declared ts ntent to jon the TPP negotatons on 13 March 2013 and an offcal announcement was made on 15 March The TPP formally nvted Japan to enter negotatons n Aprl, and Japan could become a full negotatng partner n August 2013 (Wkpeda, 2013). After the formaton of TPP, snce formal rounds of negotatons have been held. We report nformaton on these rounds of negotaton n Table 1. The objectve of the TPP negotatons remans to develop an FTA agreement whch wll be able to adapt and ncorporate current ssues, concerns and nterests of members. Workng groups have been establshed n the followng areas: market access, techncal barrers to trade, santary and phytosantary measures, rules of orgn, customs cooperaton, nvestment, servces, fnancal servces, telecommuncatons, e-commerce, busness moblty, government procurement, competton polcy, ntellectual property, labor, envronment, capacty buldng, trade remedes, and legal and nsttutonal ssues. A unque departure from other FTAs s the group s addtonal focus on cross-cuttng horzontal ssues such as regonal ntegraton, regulatory coherence, compettveness, development and small and medum enterprses (SMEs). Table 1: 18 Rounds of TPP Negottons Round Round Tme Place No. No. Tme Place round 1 Mar , 2010 Melbourne, Australa round 10 Dec. 5-9, 2011 Kuala Lumpur, Malaysa round 2 June 14-18, 2010 San Francsco, US round 11 Mar. 1-9, 2012 Melbourne, Australa round 3 Oct. 4-9, 2010 Darussalam, Brune round 12 May 8-18, 2012 Dallas, USA round 4 Dec. 6-10, 2010 Auckland, round 13 July 2-10, 2012 San Dego, USA New Zealand round 5 Feb , 2011 Santago, Chle round 14 Sep.6-15, 2012 Leesburg, USA round 6 Mar. 24-Apr. 1, 2011 Sngapore round 15 Dec.3-12, 2012 Auckland, New Zealand round 7 June 20-24, 2011 Ho Ch Mnh, Vet round 16 March 4-13, 2013 Sngapore Nam round 8 Sep. 6-15, 2011 Chcago, US round 17 May 15-24, 2013 Lma, Peru round 9 Oct , 2011 Lma, Peru Round 18 July 15-24, 2013 Kota Knabalu, Malaysa Source: compled by authors. TPP member countres are home to more than 500 mllon people; one ffth of APEC s populaton. Wth Japan s entry, The 12 partcpatng economes, wll account for nearly 40 percent 5

6 of global GDP and about one-thrd of all world trade 1. Ths regonal FTA could have sgnfcant mpacts on the global economy. 3. Model Specfcaton To assess the potental mpacts of TPP both on Chna and other countres, we use a general equlbrum model wth both nternatonal trade n goods and trade costs. Our global general equlbrum model has 11 countres and each country produce two goods wth two factors. These 11 countres are Chna, the US, the EU, Japan, Korea, Canada, Mexco, AN (Australa plus New Zealand), CP (Chle plus Peru), BMSV (Brune, Malaysa, Sngapore plus Vetnam) and the rest of the world (ROW) 2. The two goods are tradable goods and non-tradable goods and are treated as heterogeneous across countres. The two factors n each country are labor and captal, whch are ntersectorally moble but nternatonally mmoble. To ths we add monetary structure usng nsde money followng Whalley et al (2011) and L and Whalley (2012). Ths allows for the endogenous determnaton of changes n trade mbalances for trade n goods followng a TPP ntatve, whch are offset through nter-temporal trade across countres n money; and also allows for a calbraton to a base case where Chna has a large trade surplus. Ths monetary structure bulds on Azarads (1993) where there s extensve dscusson of smple overlappng generaton models wth nsde money. Here, n addton, nteractons between monetary structure and commodty trade are needed, and hence motvates models wth smultaneous nter-temporal and nter-commodty structure. In our general equlbrum model wth monetary structure, we assume there are two goods n each perod and allow nter-commodty trade to co-exst wthn the perod along wth trade n debt n the form of nsde money. We use a sngle perod model where ether clams on future consumpton (money holdng) or future consumpton labltes (money ssuance) enter the utlty functon as ncremental future consumpton from current perod savngs. Ths s the formulaton of nsde money used by Patnkn (1956, 1971) and Archbald and Lpsey (1960). Ths can also be used n a mult-country model structure wth trade n both goods and nsde money. For the consumpton and producton functon, we take a CES form as L and Whalley (2012); the detaled structures are shown n Fgure 3. For the nsde money, we assume a representatve consumer n country consumpton s wth ncome as I. The budget constrant for ths consumer s P X pc X pc Y I (1) T T NT NT Y 1 These data are calculated by authors wth World Bank world development ndex (WDI) data. 2 These countres nclude all TPP member countres, potental member countres and some man non-member countres. 6

7 Here, Y represents both nsde money (debt) held by country, and also country s ' trade mbalance. Y 0 mples a trade surplus (or postve clams on future consumpton); Y 0 mples a trade defct or future consumpton labltes (effectvely money ssuance), and Y 0 mples trade balance. In the above equaton, NT X denotes the consumpton of non-tradable goods n country, T X denotes the consumpton of composte Armngton tradable goods n country. T P, NT pc and Y pc are separately consumpton prces of composte tradable goods, non-tradable goods and nsde money n country. Fg. 3 Structure of Producton and Consumpton Functons Producton Functon (CES) Consumpton Functon (Nested CES) Tradable and Non -tradable Goods Consumpton Level 1 Non-tradable Goods Tradable Goods Insde Money Labor Captal Level 2 Chna US EU 1 ROW 1 denotes other countres n model Source: Compled by authors. For trade defct countres, utlty wll decrease n nsde money snce they are ssuers. In order to capture ths, gven that Y 0 for these countres, we use an upper bound 0 Y n the 0 utlty functon n a term [ Y Y ] followng Whalley et al (2011) and assume that 0 Y s large enough to ensure that optmzaton problem. 0 Y Y 0. We use the transformaton 0 y Y Y to solve the Equlbrum n the model then characterzed by market clearng prces for goods and factors, a zero proft condton must also be satsfed n each ndustry n each country, and global trade (or money) clearance. We ntroduce trade costs for trade between countres. Trade costs nclude not only mport tarffs but also other non-tarff barrers such as transportaton costs, language barrers, nsttutonal barrers and etc. We dvde trade costs nto two parts n our model; mport tarffs and non-tarff 7

8 trade costs. We denote the mport tarff n country as t, and non-tarff trade costs as volume tarff-equvalent non-tarff trade costs for country N j (ad mported from country j ). Ths yelds the followng relaton of consumpton prces and producton prces n country for country jsexports. ' T T pc (1 t N ) p (2) j j j where T p j denotes producton prce of tradable goods n country j, T pc j s country s ' consumpton prce of tradable goods produced n country j. Import tarffs wll generate revenues R, whch are gven by R p x t (3) T T j j j, j where T x j s country s ' consumpton of country js ' tradable goods. For non-tarff trade costs, they are dfferent from the mport tarff: they cannot collect revenue, and mporters need to use actual resources to cover the costs nvolved. In the numercal model, we assume that the resource costs nvolved n overcomng all other non-tarff barrers are denomnated n terms of domestc non-tradable goods. We ncorporate ths resource usng feature through use of non-tradable goods equal n value terms to the cost of the barrer. We thus assume reduced non-tarff trade costs (ncludng transportaton cost) wll thus occur under trade lberalzaton as an ncrease n non-tradable goods consumpton countres. The representatve consumer s ncome n country NR by the representatve consumer n mportng s thus gven by w K w L R I (4) K L Where K and L are separately captal and labor endowment n country, k w and L w are factor prces of captal and labor. Then the demand-supply equalty nvolvng non-tradable goods becomes Q NT NR NT X (5) p NT Where NT Q s the total producton of non-tradable goods by country, NT p denotes producton prce of non-tradable goods, and NR p x N (6) T T j j j j, j 8

9 The TPP FTA wll thus reduce both mport tarffs and non-tarff trade costs between member countres whch wll nfluence the whole world. Usng the general equlbrum model above, we can calbrate t to a base case data set and then smulate and explore TPP effects. 4. Trade Cost Calculatons We report our calculatons of trade costs n ths part whch provde trade cost estmates for use n our general equlbrum model. The methodology we use s from Novy (2008) and Wong (2012). We calculate and report ad valorem tarff-equvalent trade costs between countres for Chna, the US, the EU, Chna, Japan, Korea, Canada, Mexco, AN, CP, BMSV, and ROW n Trade Costs Defnton A broad defnton of trade costs ncludes polcy barrers (Tarffs and Non-tarff barrers), transportaton costs (freght and tme costs) as well as communcaton and other nformaton costs, enforcement costs, foregn exchange costs, legal and regulatory costs and local dstrbuton costs. Fgure 4 reports the structure of representatve trade costs used by Anderson and Wncoop (2004) to llustrate conceptually what s nvolved. Trade costs are reported n terms of ther ad valorem tax equvalent. They are large, even asde from trade polcy barrers and even between apparently hghly ntegrated economes. The tax equvalent of representatve trade costs for rch countres s about 170% and ths ncludes all transport, border-related and local dstrbuton costs from foregn producer to fnal user n the domestc country (Anderson and Wncoop, 2004). Trade costs also have large welfare mplcatons. Current polcy related costs are often more than 10% of natonal ncome (Anderson and Wncoop, 2002). Obstfeld and Rogoff (2000) commented that all the major puzzles of nternatonal macroeconomcs hnge on trade costs. Other studes estmate that for each 1% reducton of trade transacton costs world ncome could ncrease by 30 to 40 bllon USD (APEC, 2002; OECD, 2003; De, 2006). 9

10 Fg. 4 Representatve Trade Costs Structure Trade Costs Transport Costs Border Related Trade Barrers Retal and Wholesale Dstrbuton Costs Freght Costs Transt Costs Polcy Barrers Language Barrer Currency Barrer Informaton Costs Securty Barrer Tarffs Non-tarff Barrers Source: Anderson and Wncoop (2004) and De (2006). 4.2 Methodology Here, we have calculated trade costs for prospectve TPP partcpants, Chna, the EU and other non-partcpants followng the approaches n Novy (2008) and Wong (2012). Ther method s to take the rato of blateral trade flows over local trade, scaled to some parameter values, and then use a measure that capture all barrers. Some papers have argued that ths measure s consstent wth the gravty equaton and robust across a varety of trade models (Novy, 2008; Wong, 2012). The gravty equaton s one of the most robust emprcal relatonshps n economcs whch relates trade between two country to ther economc sze, blateral trade barrers, costs of producton n exporter countres, and how remote the mporter s from the rest of the world (Wong, 2012). Some recent studes have provded the mcro foundatons for the gravty equaton, for example Anderson and Wncoop (2003), Eaton and Kortum (2002) and Chaney (2008). The measure of trade barrers used here s based on the gravty equaton derved from Chaney s (2008) model of heterogeneous frms wth blateral fxed costs of exportng. Trade barrers can take two forms n the model, a varable trade barrer r and a fxed cost of exportng F r. The varable trade barrer from r, 1 s: r r s an ceberg cost. In order to delver one unt of good to unt of good has to be delvered. The gravty equaton supported by ths model X r Y ( 1) Yr wr r 1 ( ) F (7) r Y 10

11 Where X r s mport of country from country r. Y, Y r and Y are the economc szes of both countres and the total world, w r s labor costs, r s varable trade costs and F r s the fxed cost of exportng. The Pareto parameter governs the dstrbuton of frm productvtes. s the elastcty of substtuton n preferences. s a remoteness measure for the mportng country whch captures trade dverson effects. The mechansm s that the further away s from the rest of the world, the more lkely that r could export more to due to less competton from thrd party countres n the mporter country. Ths has a smlar nterpretaton to the multlateral resstance term n Anderson and Wncoop (2003). We can relate data on trade flows to unobservable trade barrers by takng ratos of blateral trade flows of two regons over local purchases of each of two countres: X X X X F F ( 1) 1 ( ) ( ) (8) F F r r r r r r rr rr rr Ths equaton reveals the relatonshp between observable trade data and unobservable trade barrers and elmnates the need to worry about the omsson of unspecfed or unobserved trade barrers. If the fxed costs of exportng are not blaterally dfferentated ( Fr Fr ) or s they are constant across locatons ( F r F ), the fxed costs drop out of ths measure and the measured trade costs would smply be nterpreted as varable trade costs, as n models wthout fxed export costs such as Eaton and Kortum (2002) and Anderson and Wncoop (2003). For smplcty of exposton, we normalze own trade costs to 1,.e. 1 and F 1. Defnng the geometrc average of trade costs between the country par and r as t r 1 2 Xr Xr ( ) (9) X X rr we then get a measure of the average blateral trade barrer between country and r : X ( ) X rr r ( ) ( r r ) ( Fr Fr ) Xr Xr t (10) Data for ths equaton s relatvely easy to obtan, and so we have a comprehensve measure of trade barrers, and the ad valorem tarff-equvalent blateral average trade cost between country and r can be wrtten as t r 1 2 X Xrr tr 1 ( ) 1 (11) X X r r 11

12 Usng the trade costs equaton above, we can calculate actual trade costs between countres n our general equlbrum model, whch are needed n buldng a benchmark data set for use n calbraton and smulaton. 4.3 Data and Results of Calculatons We need to calculate trade costs between each country par for Chna, the US, the EU, Japan, Korea, Canada, Mexco, AN, CP, BMSV and ROW. AN, CP, BMSV denotes the summaton of some countres. For the ROW, we use world total mnus other countres n model to yeld the data we use n calculatons. Table 2: Ad Valorem Tarff-Equvalent Trade Costs Between Countres n 2011 (Unt: %) Country US EU Chna Japan Korea Canada Mexco AN CP BMSV ROW US EU Chna Japan Korea Canada Mexco AN CP BMSV ROW Notes: (1) BMSV denotes Brune+Malaysa+Sngapore+Vetnam, AN denotes Australa+New Zealand, CP denotes Chle+Peru. (2) We see group countres as a whole to calculate trade costs. Source: Calculated by authors. For trade costs, n equaton (11), X r and X r are separately exports and mports between countres and r. Ths trade data s from the UN comtrade database, and total world trade data s from WTO Internatonal Trade Statstcs Due to market clearng, ntranatonal trade X or X rr can be rewrtten as total ncome mnus total exports (see equaton (8) n Anderson and Wncoop(2003)), X y X (12) Where X s the total exports, defned as the sum of all exports from country, whch s X X (13) r, r r Ths data s from the UN Comtrade database also. For y, GDP data are not sutable because they 12

13 are based on value added, whereas the trade data are reported as gross shpments. In addton, GDP data nclude servces that are not covered by the trade data (Novy, 2008). It s hard to get ths ncome data accordng to such a defnton, so here we use GDP data mnus total servce value added. We get GDP data from World Bank database, and the servce share of GDP data from World Development Indcators (WDI) of World Bank database, we then calculate results for GDP mnus servces. We take the value of to be 8.3 as n Eaton and Kortum (2002). Results are shown n Table Data and Parameter Calbraton We use 2011 as our base year n buldng a benchmark general equlbrum dataset for use n calbraton and smulaton followng the method set out n Shoven and Whalley (1992). There are eleven countres n our model, and ROW data s obtaned from total world values mnus values for the other twenty-one countres. For the two goods, we assume secondary ndustry (manufacturng) reflects tradable goods, and prmary and tertary ndustres (agrculture, extractve ndustres, and servces) yeld non-tradable goods. For the two factor nputs, captal and labor, we use total labor ncome (wage) to denote labor values for nputs by sector. All data are n bllon US dollars. We adjust some of the data values for mutual consstency for calbraton purposes. All data are from World Bank database (World Development Indcate). We use agrculture and servce share of GDP data and GDP data to yeld producton data of tradable goods and non-tradable goods, and use captal/gdp rato to yeld captal and labor nput n producton. We set the upper bound n our monetary structure, 0 Y, to equal 1000 n all countres; and change ths value n later senstvty analyss to check ts nfluence on smulaton results. These data are lsted n Table 3. Table 3 Base Year Data Used For Calbraton and Smulaton (2011 Data n Bllon US$) Country GDP T-G NT-G Y Y 0 y 13 Captal Labor T-G NT-G T-G NT-G USA EU Chna Japan Korea Canada Mexco AN CP BMSV ROW Note: (1) Unts for producton, captal, labor, nsde money and endowments are all bllon US$, and labor here denotes factor ncome (wage). (2) AN denotes Australa+New Zealand, CP denotes Chle+Peru, BMSV denotes Brune+Malaysa+Sngapore+Vetnam. (3) We add countres together to generate AN, CP, BMSV values. (4) We use world values mnus all ndvdual countres to generate ROW values. Sources: EU data from EU statstcs, and the currency unt s Euro, we use annual average exchange rate to change them nto US dollar currency unt; Other countres data are all calculated from WDI of World Bank database.

14 Trade data between each par of countres are from the UN Comtrade database. We use ndvdual country total export and mport values to ndrectly yeld exports to and mports from the ROW. Usng producton and trade data, we can then calculate each country s consumpton values. All trade data are lsted n Table 4. Country Exporter Table 4:Trade between Countres n 2011 (Unt: Bllon USD) Importer USA EU Chna Japan Korea Canada Mexco AN CP BMSV ROW USA EU Chna Japan Korea Canada Mexco AN CP BMSV ROW Notes: (1) BMSV denotes Brune+Malaysa+Sngapore+Vetnam, AN denotes Australa+New Zealand, CP denotes Chle+Peru. (2) We get trade data of AN, CP, and BMSV by addng separate country s trade together, and these do not nclude nner trade between these group countres. (3)We get the ROW trade data by deductng from each country s total export, total mport and total world trade value. Sources: Unted Natons (UN) Comtrade database and WTO Statstcs. We dvde trade costs nto two parts, mport tarffs and all other non-tarff barrers. We obtan each country s mport tarff data from WTO Statstcs Database. For ROW, we use world average tarff rate to denote these values. We calculate all other non-tarff barrers by usng trade costs mnus mport tarffs. All mport tarffs are lsted n Table 5. Table 5: Import Tarffs for Countres n 2011 (Unt: %) Country USA EU Chna Japan Korea Canada Tarff Country Mexco AN CP BMSV ROW / Tarff / Notes: (1) Import tarffs here are smple average MFN appled tarff rates. (2) We use the average ndvdual country s mport tarff to get country groups mport tarff. (3) We use mport tarff of the world to denote the tarff for the ROW. Source: WTO Statstcs Database. There are no avalable estmates of elastctes for ndvdual countres on the demand and producton sdes of the model. Many of the estmates of domestc and mport goods substtuton elastcty are around 2 (Betna et al, 2006), so we set all these elastctes n our model to 2 (Whalley and Wang, 2010). Wth these data, we calbrate the model parameters. When used n model soluton these wll regenerate the benchmark data as an equlbrum for the model. Then, usng these parameters we can smulate the effects of TPP changes under dfferent scenaros. 14

15 6. Smulaton Results We report counterfactual smulaton results n ths part to assess the potental effects of TPP on Chna and other countres under dfferent scenaros. We dvde trade costs nto two parts, mport tarffs and other all non-tarff barrers. Accordng to the TPP negotaton targets, the am s to set up a free trade area, and for mport tarffs to be completely elmnated among partcpants after the negotaton of the TPP. In the meanwhle, TPP negotatons wll focus on nsttutonal areas, techncal and standard barrers, nvestment, servces and other mpedments, whch mply other all non-tarff barrers wll be reduced and, n the long run, even completely removed. We do not know how much of the trade cost can be reduced by TPP. Therefore, n our smulaton analyss, we frst assume that the TPP wll completely elmnate tarff barrers (free trade), and then ether partally (wth weghts denotng the percentage by whch non-tarff barrers wll be reduced) or completely elmnate other all non-tarff barrers. Specfcally, we show three dfferent cases of results for each scenaro. The frst s whole trade cost elmnaton case, the second s whole tarff elmnaton and 50% non-tarff barrer elmnaton case, and the thrd s only tarff elmnaton case. We thnk that the second case wll be the stuaton nearest to the realty. We focus on effects on welfare (utlty), producton, export, mport and mbalance (equals export mnus mport), and use percentage changes compared to benchmark 2011 data to show these effects. Ths paper explores the TPP effects on Chna, so we manly analyze the smulaton results for Chna, and n ths meanwhle some other large countres ncludng the US, the EU, Japan, Korea, Canada, Mexco and the ROW. 6.1 Impacts on Chna of Beng n or Out of TPP We ntally use three dfferent scenaros to capture TPP effects, the frst assumes TPP elmnates all trade costs (ncludng tarff and other all non-tarff barrers) between members; the second assumes TPP elmnates tarff and half (50%) non-tarff barrers between members; the thrd assumes TPP only elmnates tarff between member countres. Table 6 shows the results for Chna beng ether out of or n TPP. Table 6: TPP Effects of Chna Beng In or Out TPP (% Change) Items ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Chna Out of TPP Trade Cost Elmnaton % NTB Elmnaton Only Tarff Elmnaton Chna In TPP Trade Cost Elmnaton % NTB Elmnaton Only Tarff Elmnaton Notes: (1) Unts for all results are %. (2) The change n welfare (ΔWelfare) equals the change n total utlty. (3) NTB denotes non-tarff barrers (NTB). (4) ΔImbalance denotes percent change of mbalances, some countres ntal trade mbalances are relatvely small so ther mbalance percent changes may large. 15

16 Source: Calculated and compled by authors. When Chna s out of TPP, her welfare and mports wll decrease, producton, export and mbalance wll ncrease under the present TPP agreement. Chna s exports wll ncrease, mports wll decrease, then trade mbalance ncrease and total GDP wll ncrease but consumpton wll decrease and so welfare decreases. TPP wll decrease consumpton prces wthn member countres, then TPP member countres wll have more ncome and wll consume more whch wll ncrease Chna s export. Chna wll have a slght lose by TPP due to the excluson lberalzaton. If we take a 50% non-tarff barrer elmnaton as an example, we fnd that Chna s welfare wll decrease %, producton wll ncrease %, export wll ncrease %, mport wll decrease % and mbalance wll ncrease %. When Chna s n TPP, her welfare, producton, export, mport and mbalance all wll ncrease. Comparatvely, trade and trade mbalance ncrease the most. These means Chna wll gan from partcpatng n TPP. In the 50% non-tarff barrer elmnaton case, Chna s welfare wll ncrease %, producton wll ncrease %, export and mport wll separately ncrease % and %, and mbalance wll ncrease %. In general, a TPP wll slghtly hurt Chna on welfare, but total producton, export and mbalance wll gan. If Chna takes part n the TPP, she wll gan n all aspects. Therefore t s good for Chna to partcpate n TPP negotatons. Only a tarff reducton free trade agreement s harmful to Chna due to terms of trade effects. Involve n non-tarff barrer negotaton s however good for Chna. 6.2 Impacts on TPP Countres When Chna Is In or Out For the TPP member countres, all of them wll gan, and smaller countres wll gan more than larger countres. These TPP member countres welfare, producton, export and mport all wll ncrease under TPP agreement. On the welfare sde, and n a 50% non-tarff barrer elmnaton case when Chna s out of TPP, the US wll ncrease %, Canada wll ncrease %, Mexco wll ncrease %, AN (Australa and New Zealand) wll ncrease %, CP (Chle and Peru) wll ncrease %, and BMSV (Brune, Malaysa, Sngapore and Vetnam) wll ncrease % (See Table 7). When Chna s n TPP, all member countres wll gan, and the gans of these member countres are bgger than the stuaton of Chna beng out of TPP. In the meanwhle, small countres wll gan more than large countres. Specfcally, all member countres welfare, producton, export and mport wll ncrease and the percentage changes are larger than the stuaton of Chna beng out of TPP. We take the 50% NTB elmnaton stuaton as an example, the welfare of the US, Canada, Mexco, AN, CP and BMSV wll separately ncrease %, %, %, %, % and % (See Table 8). In summary, TPP ntaton wll beneft all member countres on welfare, producton, export and mport. Comparatvely, small countres may gan more than large countres, and benefts to present TPP members wll be larger when Chna engaged n the TPP. Table 7: Effects on TPP Countres of Chna Beng Out of TPP (%) 16

17 Items Country ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Only Tarff Elmnaton 50% NTB Elmnaton Trade Cost Elmnaton Notes: The same as n Table 6. US Canada Mexco AN CP BMSV US Canada Mexco AN CP BMSV US Canada Mexco AN CP BMSV Source: Calculated and compled by authors. Table 8: Effects on TPP Countres of Chna Beng In TPP (%) Items Country ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Only Tarff Elmnaton 50% NTB Elmnaton Trade Cost Elmnaton Notes: The same as n Table 6. US Canada Mexco AN CP BMSV US Canada Mexco AN CP BMSV US Canada Mexco AN CP BMSV Source: Calculated and compled by authors. 6.3 Impacts on Other Non-TPP Countres 17

18 Smulaton results n Table 9 reveal that most non-tpp countres welfare decrease, export ncrease and mport decrease. Ths may be because exports ncrease and mports decrease makng the consumpton of these non-tpp countres decreases and the welfare to decrease. For producton, the EU wll lose n all stuatons, but Japan, Korea and ROW wll gan under only tarff elmnaton and 50% NTB elmnaton stuatons. Import and mbalance results are changng n dfferent scenaros. Table 9: Effects on Other Non-TPP Countres (%) Items Country ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Only Tarff Elmnaton 50% NTB Elmnaton Trade Cost Elmnaton Only Tarff Elmnaton 50% NTB Elmnaton Trade Cost Elmnaton Chna Out of TPP EU Japan Korea ROW EU Japan Korea ROW EU Japan Korea ROW Chna In TPP EU Japan Korea ROW EU Japan Korea ROW EU Japan Korea ROW Notes: The same as n Table 6. Source: Calculated and compled by authors. When Chna partcpates n TPP, non-tpp countres mpacts are dfferent. For the EU and Japan, ther welfare wll be hurt under only tarff elmnaton and 50% non-tarff barrer elmnaton stuaton, but ncrease under trade cost elmnaton. For Korea, ts welfare wll decrease under only tarff elmnaton, but wll ncrease n a 50% NTB elmnaton case and trade cost elmnaton case. All of these countres producton wll decrease under a trade cost elmnaton stuaton. Accordng to these results we can say that TPP effects on non-tpp countres when Chna took part n the TPP are not clear, some countres wll gan but some countres wll lose. 18

19 In summary, TPP effects on non-tpp countres are not just negatve or postve; they depend on dfferent countres and dfferent scenaros. But they are mostly negatve effects on welfare. Therefore, we can see that TPP does not just hurt non-member countres; n some crcumstances t wll beneft non-member countres. 6.4 Comparng the Effects of TPP Free Trade and Global Free Trade In ths part, we compare the effects of TPP free trade and global free trade and report smulaton results n Table 10 and Table 11 whch shows changes under global free trade relatve to the benchmark stuaton. Table 10: Effects on Chna of TPP and Global Free Trade (%) Items ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance TPP wthout Chna Only Tarff Elmnaton % NTB Elmnaton Trade Cost Elmnaton Global Free Trade Only Tarff Elmnaton % NTB Elmnaton Trade Cost Elmnaton Notes: The same as n Table 6. Source: Calculated and compled by authors. Table 11: Global Free Trade Effects on Some Large Countres (%) Items Country ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Only Tarff Elmnaton 50% NTB Elmnaton Trade Cost Elmnaton USA EU Japan Korea Canada USA EU Japan Korea Canada USA EU Japan Korea Canada Notes: The same as n Table 6. Source: Calculated and compled by authors. For Chna, a TPP wthout Chna wll lower welfare but ncrease producton; global free trade wll beneft Chna n nearly all aspects. Comparatvely, the effects of global free trade are much hgher than TPP. We take 50% NTB elmnaton case as an example, TPP wll decrease Chna s 19

20 welfare by %, ncrease producton by %, ncrease export by %, decrease mport by % and ncrease mbalance by %. In the meanwhle, global free trade wll ncrease Chna s welfare by %, producton by %, export by %, mport by % and mbalance by %. For other large countres, global free trade s benefcal to almost all these countres n all aspects ncludng welfare, producton, export, mport and mbalance. But under only tarff elmnaton crcumstance, some large countres welfare and producton wll decrease because of terms of trade effects, these large countres wll export more but mport less and ther total consumpton wll decrease when welfare decreases. In general, global free trade effects are benefcal to nearly all countres, but TPP wll hurt some countres. In the meanwhle, the effects of global free trade are bgger than TPP. 6.5 Comparng Trade Cost Barrer to Tarff at Same Rate We compare the effects of trade cost barrer to tarff at same rate n ths scenaro to show n part changes n model behavor. Trade cost barrer nclude tarff and non-tarff barrer, tarff wll collect tax revenue but non-tarff barrer s net loss and cannot collect revenue. In ths paper we use trade cost to smulate the effects of TPP, what we do here s assumng that all trade costs are tarff and wll collect revenues, and then wth ths same rate we compare the trade cost barrer effects to tarff effects. The purpose s to show that trade cost barrer s dfferent from tarff barrer and prove that our usng trade cost to assess the effect of TPP s mportant and valuable. We compare trade cost effects and tarff effects wth the case of TPP effects of Chna beng out. Table 12 and Table 13 show smulaton results. Table 12: Comparng Effects on Chna of Non TPP Partcpaton under Trade Costs and Tarff at Same Rate (%) Items ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Trade Cost Modelng Only Tarff Elmnaton % NTB Elmnaton Trade Cost Elmnaton Equvalent Tarff Only Tarff Elmnaton % NTB Elmnaton Trade Cost Elmnaton Notes: The same as n Table 6. Source: Calculated and compled by authors. For Chna, the TPP effects on Chna of non TPP partcpaton under trade cost modelng and equvalent tarff modelng are nearly the same. Chna wll be hurt n welfare when out of TPP, but total producton, export and mbalance wll ncrease, mport wll decrease. Comparatvely, these TPP effects on welfare, producton, mport and mbalance are weaker under trade cost modelng than under equvalent tarff modelng. Reversely, TPP effect on export under trade cost modelng s stronger than under equvalent tarff modelng. 20

21 Table 13: Effects on Some Large Countres wth Chna Beng out of TPP When Whole Trade Costs are Tarff (%) Items Country ΔWelfare ΔProducton ΔExport ΔImport ΔImbalance Only Tarff Elmnaton 50% NTB Elmnaton Trade Cost Elmnaton USA EU Japan Korea Canada USA EU Japan Korea Canada USA EU Japan Korea Canada Notes: The same as n Table 6. Source: Calculated and compled by authors. For other large countres, TPP effects on welfare, producton, export, mport and mbalance of Chna beng out under equvalent tarff modelng are the same as the results under trade cost modelng ether. Man dfferences are that effects under equvalent tarff modelng are mostly stronger than under trade cost modelng on welfare, producton, mport and mbalance. These results thus suggest that the TPP effects under trade cost barrer stuaton are the same as tarff barrer TPP effects n same rates. It suggests that our smulaton results are relable. 6.6 Impacts of Japan In/Out TPP Japan wll become member of TPP n August As one of bg developed countres, ts jonng TPP wll nfluence the global economy sgnfcantly. We thus further explore the effects f Japan jons n. We do ths by scenaro smulaton and report these results n Table 14 and Table 15. Smulaton results show that Chna s welfare wll be adversely affected by TPP, and ths loss s larger than the case f Japan does not partcpate n the TPP. Under 50% NTB elmnaton case, Chna s welfare wll decrease % when Japan s n TPP but wll decrease % when Japan s out of TPP. Chna s producton wll ncrease because of export ncrease and mport decrease, then mbalance ncrease. These effects are more sgnfcant when Japan Jons n TPP. For some other large countres, effects are dfferent for dfferent countres and dfferent non-tarff elmnaton cases. Under the 50% NTB elmnaton case, some countres welfare wll ncrease ncludng the US, Japan and Canada, but some countres welfare wll decrease ncludng the EU and Korea. Almost all countres producton wll ncrease except producton. Most countres export and mport wll ncrease except Korea. Most countres mbalance wll ncrease except the EU and Japan. Compared wth effects of Japan out of TPP, the effects of TPP have 21