Regional Trade Agreements in East Asia: Will They Be Sustainable?

Abstract

By assessing the sustainability of regional trade agreements (RTAs) for East Asia, we quantitatively evaluate the likely impact of proposed East Asian RTA strategies on the East Asian economies and the world economy with respect to consumption, production, volume of trade and terms of trade effects by applying a multi-country and multi-sector computable general equilibrium model. These strategies include: (i) the ASEAN Free Trade Area (AFTA: a being-left-alone strategy); (ii) an ASEAN Hub RTA (a hub-and-spoke type of overlapping RTA strategy); (iii) the AFTA versus a China-Japan-Korea RTA (a duplicating or competing RTA strategy); and (iv) an ASEAN+3 RTA (an expansionary RTA strategy). We find that an expansionary ASEAN+3 RTA could be a sustainable policy option because the members' gains would be significantly positive, with more equitably distributed gains between members than when using other strategies. The effect on world welfare would also be positive and the negative effect on nonmembers would not be very strong. More interestingly, if the East Asian countries cooperate with Pacific Basin countries to form an APEC-level RTA, such as a free trade area of the Asia-Pacific, the extension of the regional trade bloc might be considered a more desirable policy option than the proposed East Asian RTAs for East Asian economies, even though countries excluded from the free trade area of the Asia Pacific are worse off.