Conclusiones

A study by Marcus Miller and John Spencer (1977, 71-93) was one of the earliest attempts to incorporate numerical, general equilibrium analysis (a generation one CGE model) of a RTA. They examined the effects of UK entry into the EEC which involves not only lowering trade barriers with the EEC-6 but also the elimination of preferences given by the UK to Commonwealth countries (primarily Australia and New Zealand) as well as its resulting effects on the rest of the world. They used Armington assumption with two goods per country, constant return to scale and perfect competition. They examined two scenarios for the UK joining the EEC, both involving the elimination of mutual tariffs and an adoption by the UK of the EEC common external tariffs. The first scenario requires the UK to transfer 90 percent of its tariff revenue to the EEC, while the second does not. They found that the UK obtained a small terms-of-trade gain on its entry. The price of the UK agriculture rose by 22 percent as compared to manufactures. Under the no-transfer scenario, the UK increased both exports and imports of manufactured goods with the EEC in the amount of 50 percent (in both scenarios). In addition, the UK increased its agricultural imports from the EEC by 72 percent and decreased its imports from the Commonwealth countries by 0.8 percent.

R. G. Harris and David Cox (1984, 45-47) used a second generation CGE model to examine the effects of the US–Canada FTA. They incorporated a non competitive market structure and economies of scale in their study and examined various possible scenarios of trade liberalization arrangements: (1) Unilateral free trade (UFT) where Canada set all its tariffs to zero; (2) Multilateral free trade (MFT) where Canada and the rest of the world set their tariffs to zero; (3) Bilateral free trade (BFT) with the US where tariffs of both countries are set to zero; and (4) Sectoral free trade (SFT) between Canada and the US in selective industries: textiles, steel,

agriculture machinery, urban transport equipment and chemical. They chose nine industries characterized by constant return to scale (CRS) while 20 others characterized by increasing return to scale (IRS) and used the Armington assumption. The IRS firms face fixed and variable costs per unit of output. While Canada is allowed to affect its export prices, it takes import prices as given. They found that Canada enjoyed welfare gains of 4.0, 9.0, 9.0 and 1.5 percent of its Gross Domestic Products (GDP), respectively for scenarios 1, 2, 3 and 4.45 _{In addition, Canadian trade}

volumes with the world respectively increased by 55, 90, 88 and 15 percent. As regard to trade with the US, Canadian trade volume increased by 99 percent and 14 percent under BFT and SFT. Finally, real wages in Canada rose by 10, 25, 28 and 6 percent under UFT, MFT, BFT and SFT.

Bob Hamilton and John Whalley (1985, 446-455) used a multi-countries global general equilibrium model, somewhat similar to Miller and Spencer but with larger dimensionality, to analyse a variety of potential RTAs. They examined the following potential FTAs: US–EEC, US– Japan, US–Canada, US–Other Developed Countries, US–NICs, and US–LDCs. In addition, they also considered (hypothetical) regional free trade areas involving EEC–Japan, Northern FTA (involving the US, EEC, Japan, Canada and other developed countries) and Southern FTA (involving NIC and LDC countries). They employed Armington assumption in addition to the assumptions of constant returns to scale and perfect competition (i.e. a generation one CGE model). They found that in all cases that involve the US (in FTAs), the country always gained. Almost all the left-out countries lost, with the greatest welfare loss experienced by LDC and NIC countries. As for the three regional FTAs, they obtained results showing that EEC–Japan FTA produced small welfare effects; the EEC countries and Japan recorded only small gains (0.8 billion and 1.0 billion in 1977 price respectively), while the left-out countries also recorded small losses.

45 _{Harris and Cox (1984) and latter economists used GDP as a variable in the place of GNP which was popular}

previously. Apparently, this is due to difficulties in finding information about net factor payments accrued to a country which need to be added to the GDP figure in order to derive GNP.

The result for Northern FTA showed greater welfare effects with huge gained for members and substantial losses for non members. The results for Southern FTA were less clear cut; even among members, only LDC countries gained while NIC countries lost and non members recorded small loss.

Harrison, Rutherford and Wooton (1989, 288-294) used a somewhat similar model as of Hamilton and Whalley (1985) to examine the effects that might occur if member countries left the EC. The model incorporated six tradable goods and eleven countries. They employed a static general equilibrium model, used the Armington assumption and firms are characterized by constant returns to scale and perfect competition (i.e. a generation one CGE model). They assumed that trade barriers (tariffs and non tariffs) are equivalent to 40 percent between non members and 20 percent between members. The examined two possible scenarios: (1) eight cases of various countries leaving the EC (with Common Agriculture Policy (CAP) remaining in place); and (2) eight cases of each country leaving the EC (with CAP being eliminated). They found that in both scenarios, all the EC countries recorded welfare reductions on leaving the EC. The US (a non EC member), however, recorded a small welfare gain in all cases. The highest loss was for Ireland (8 percent of GDP) and the smallest losses were for France and Italy (both at 0.9 percent of GDP).

Gasiorek, Smith and Venables (1992, 35-61) employed a generation two CGE model to estimate gains from lowering non-tariff barriers and the integration of the EC. They examined eight countries (and regions), of which seven are France, Germany, Italy, the UK, other EC North (Benelux and Denmark), Greek and Ireland, and Iberia (Spain and Portugal), and the eighth country represents the rest of the world (ROW). They identified 14 IRS and 1 CRS sectors. The factors of production comprise of labour (with four types of skills), capital and intermediate goods. There is a single representative consumer and firms are symmetric in each country and industry.

They examined four situations: segmented and integrated markets, each in the short and long run. Market behaviour follows Cornout conditions. The number of firms is fixed in the short run but vary in the long run. They found that under segmented market welfare gains were small for all countries, but increase slightly from short to long run. Greek/ Ireland recorded the highest welfare gains, an increase of 1.1 percent of GDP in the short run, but increased further in the long run to 1.4 percent. Welfare gains for members were higher in the integrated market for both short and long run as compared to segmented markets.

Jan Haaland and Victor Norman (1992, 67-88) used a generation two CGE model to investigate the effects of the EC integration on the EC and EFTA countries, as well as on Japan and the US. They used a model similar to Gasiorek, Smith and Venables (1992). They considered 11 IRS and 1 CRS tradable goods and 1 CRS non tradable good for each regions or countries. The factors of production are skilled and unskilled labours, capital and intermediate goods. They assumed that only one representative agent in each region. The EC and EFTA each consists of 6 separate, but identical, countries and submarkets. Firms are assumed to be symmetric in each industry within a region. They performed four experiments: (1) trade costs in segmented EC markets were reduced by 2.5 percent of the initial value of the EC trade, with initial trade costs assumed to be 10 percent within the EC and EFTA and 20 percent between Europe, Japan and the US; (2) trade costs were reduced and the EC markets were integrated; (3) trade costs in Europe (including EFTA) were reduced, as in the first scenario; and (4) Same as scenario 2, except that now it encompassed all Western Europe. They found that for scenario (1), the EC gained a 1 percent increase in welfare, while EFTA, the US and Japan recorded declining welfares of 0.3, 0.02 and 0.02 percent respectively. For scenario (2), EC experienced welfare gains of 1.9 percent but welfare fell in EFTA, US and Japan by 0.4, 0.4 and 0.6 percent respectively. For scenario (3)

and (4), EFTA experienced positive welfare gains while the EC gains in welfare were smaller than in scenario (1) and (2).

Robert Scollay and John Gilbert (2001) used a CGE model (version 4 of the Global Trade Analysis Project (GTAP) database) to run a comprehensive set of trade liberalization experiments for the Asia-Pacific region. These experiments included cases of various liberalization arrangements: bilateral, plurilateral, hub-and-spokes and global (multilateral). For each experiment they calculated changes in welfare (as percentage of based-period GDP) for individual APEC countries, the EU and for all non member countries of these possible RTAs as an aggregate.

In the case of (potential) Japan–South Korea–China plurilateral RTA, all three countries gained: 0.25 percent, 0.8 percent and 2.09 percent respectively. However, most APEC countries in South East Asia countries lost (for example Singapore lost - 0.87 percent) due to this plurilateral arrangement. The members of this plurilateral RTA gained 0.5 percent in aggregate, whereas the aggregate of non member countries’ loss was – 0.03 percent. They considered ASEAN + 3 (China, Japan and South Korea) as a hub-and-spokes arrangement. For this specific case, all +3 countries gained individually (Japan by 0.34 percent, South Korea by 1.18 percent and China by 1.96 percent), and collectively they gained 0.64 percent, whereas the aggregate of non members loss was - 0.06 percent.

Using the Michigan model of world trade (a generation two CGE model) with version 4 of the GTAP database, Brown, Deardorff and Stern (2003, 803-828) also simulated the ASEAN + 3 RTA. In this study they used (a future) 2005 as the base year, the year in which all post-Uruguay Round liberalization is supposed to be completed. They found that if all members were to eliminate all tariffs on agriculture and manufacturing products and remove barriers to trade in services, then there would be the following welfare gains: Japan would gain 2.62 percent of its

base period GDP, Singapore 10.66 percent, South Korea 4.21 percent and China 1.95 percent. The magnitudes of these gains and the rankings of these countries by the size of the gains are quite different from those obtained by Scollay and Gilbert (2001) because both studies used different underlying economic theories for the design of simulation experiments.

This study also found that if APEC countries were to liberalize on an MFN basis, most (but not all) member countries would gain with the group experiencing aggregate welfare gains of 0.56 percent, while non member countries would also gain (0.05 percent). However, if APEC were to liberalize on a preferential basis, again, most members would gain, with APEC countries as a group gaining a slightly higher (0.58 percent), whereas the aggregate welfare loss of non APEC countries would also be higher (- 0.12 percent).

The findings of this study showed a couple of interesting features. First, global multilateral trade liberalization generates the greatest gains to the whole world (0.56 percent). Second, if the members of APEC liberalize based on an “open regionalism” MFN basis, then the gains to the world economy are greater (0.34 percent) than if the liberalization is on preferential basis (0.27 percent).46 Since the gains to APEC members are slightly higher for preferential than MFN liberalization (0.58 percent as against 0.56 percent), therefore, there would be a possible tension between “open regionalism” and a preferential trading arrangement because the latter leads to greater gains for members, and this occurs at the expense of non member countries.

46 _{The terms “open regionalism” used here follows the definition of Shang-Jin Wei and Jeffrey Frankel (1995). They}

relate this terms to a situation in which members of a RTA collectively lower their external barriers on goods from non members in addition to the reduction of barriers among member countries, although the degree of liberalization against non members need not be as high as that between members.