Growing Together: Economic Integration for an Inclusive and - escap

advantage of them. Nevertheless, the indicator provides guidance on which trade partnerships
could be most desirable, a useful first step which should be followed by an analysis of the obstacles
and necessary policy measures to facilitate such partnerships.
iii. Computable general equilibrium simulations
The analysis of the potential gains to trade from broader agreements is based on computable
general equilibrium (CGE) simulations using the Global Trade Analysis Project (GTAP) model. The
structure of the model is a standard, multi-region CGE, discussed in detail in T. Hertel, ed., Global
Trade Analysis: Modelling and Applications, Cambridge: Cambridge University Press,1997. The
database used in the simulations is GTAP7.1 with base year 2004, the latest available at the time
of writing. The database was updated to 2010 using a static projection based on labour growth
rates, changes in the skilled/low-skilled labour composition, and capital accumulation. Total factor
productivity was determined residually based on GDP. Applied tariff rates were also updated.
The simulations conducted were based on comparative static techniques. These have the
disadvantage relative to dynamic techniques of not describing the time-path. In other words, the
analysis focuses on the end outcomes rather than the transition to that outcome. However, this
disadvantage is countered by the reduced degree of computational complexity, which allows the
consideration of a larger number of potential scenarios and a greater level of sectoral and regional
disaggregation, while still addressing the primary questions. The results should be interpreted
as indicating how these economies would differ, relative to the updated 2010 equilibrium, after
all adjustments in response to the liberalization have taken place, under the assumption that the
trade arrangements being simulated have been implemented.
In each scenario, trade liberalization is modelled as a removal of all tariffs on merchandise trade.
Thus the simulations represent upper bounds of the liberalization that could potentially take place,
since, in practice, agreements provide for the exclusion of some products, notably agricultural
products, as well as extensive phase-in periods for the elimination of tariffs on other products.
The trade facilitation scenarios are implemented as a positive shock to the productivity of the
transportation sector at the bilateral level for the countries engaged in liberalization. The shock
applies to all goods and is assumed to affect all trading partners in both directions. In order to
capture the potential gains from moving toward best practices, the size of the shock is proportional
to ESCAP measures of comprehensive trade costs net of known tariffs. Both a medium-run closure,
which captures the effects of resource reallocation, and a long-run closure, designed to capture
potential dynamic gains from capital accumulation, are implemented.
As with all CGE studies, the modelling cannot capture all possible economic effects that can matter.
A limitation of the modelling approached employed in this study is that it assumes perfectly
competitive markets throughout, as in most CGE studies. Studies that do incorporate imperfect
competition tend to generate welfare estimates that are roughly double those of competitive
models. 1 Hence, the estimates presented here are probably conservative.
Another reason that the model results are probably conservative is that only merchandise trade
liberalization is considered. However, while many new regional trade agreements do contain
provisions for liberalizing trade in services, it is not always clear to what extent they are effective.
In addition, the mechanisms for incorporating services trade liberalization into CGE models are
still unsettled. One possibility is to use tariff equivalents, but it is not clear that services trade
barriers really affect trade in the same way as tariffs affect merchandise trade. 2 Some authors
argue that it is better to model the impact of services trade liberalization in terms of productivity
enhancement. One example is work conducted by Dr. Phiippa Dee, whose research on the APEC
economies indicates productivity gains in the region of 2 to 14 per cent. 3 In summation, to the
extent that can be realistically assumed that effective service trade liberalization will in fact be part
142