Numerical General Equilibrium Analysis of China's Impacts from Possible Mega Trade Deals

Abstract

This paper explores the potential impacts on both China and other major countries of possible mega trade deals. These include the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP), and various blocked deals. We use a numerical 13-country global general equilibrium model with trade costs to investigate both tariff and non-tariff effects, and include inside money to endogenously determine imports on the trade imbalance. Trade costs are calculated using a method based on gravity equations. Simulation results reveal that all FTA participation countries will gain but all FTA non-participation countries will lose. If non-tariff barriers are reduced more, the impacts will be larger. All effects to China on welfare, trade, export and import are positive. Comparatively China-TPP and RCEP will yield the highest welfare outcomes for the US in our model, China-Japan-Korea FTA will generate the second highest welfare outcome, and China-US FTA will generate the third highest welfare outcome. For the US, China-TPP FTA will generate the highest welfare outcome.

The economic impact of the Trans‐Pacific Partnership: What have we learned from CGE simulation?

“…The work of Li and Whalley () and Li et al. () suggests that inclusion of China in the agreement would also have resulted in a slight improvement in the politically sensitive trade imbalance. Including China would likely have a strong negative welfare effect on Vietnam, however.…”

“…In other innovations, Li and Whalley () employ an Armington‐type model, but introduce money and generalised trade costs (see also Li, Wang, & Whalley, ). In a well‐known series of studies (Lakatos, Maliszewska, Ohnsorge, Petri, & Plummer, ; Petri, ; Petri & Plummer, ; Petri et al., ; Petri, Plummer, & Zhai, , ), the framework of Zhai () is adopted.…”

“…Considerable work could also be done extending CGE models to areas that are of importance to policy but often sidelined by standard CGE modelling, such as the effect of trade reform on trade imbalances, as in the approach of Li and Whalley () and Li et al. ().…”