Regional and Multilateral Trade Liberalization The

BROOKINGSDISCUSSIONPAPERSININTERNATIONALECONOMICSNo.134REGIONALANDMULTILATERALTRADELIBERALIZATION:THEEFFECTSONTRADE,INVESTMENTANDWELFAREWarwickJ.McKibbinSeptember1997WarwickJ.McKibbinisaprofessorintheeconomicsdepartmentoftheResearchSchoolofPacificandAsianStudiesattheAustralianNationalUniversity(ANU),andanonresidentseniorfellowintheEconomicStudiesProgramoftheBrookingsInstitution.ThispaperwaspresentedattheU.S.InternationalTradeCommissionAPECSymposium,heldinWashingtonduringSeptember11-12,1997.AnearlierversionofthispaperwaspreparedfortheCEPR/ESRC/GEIconferenceon“Europe,EastAsia,APECandtheAsiaEuropeMeeting(ASEM)heldinLondonduringMay20-21,1997.ThispaperusestheAsiaPacificversionoftheG-CubedMulti-countryModelanddatafromtheInternationalEconomicsDatabank(IEDB)attheANU.TheauthorthanksDavidPearceattheCentreforInternationalEconomics(Canberra)forhelpfuldiscussionandPeterSinclairandotherparticipantsattheASEMconferenceforhelpfulcomments.Theviewsexpressedaretheauthor’sanddonotinanywayreflectthoseoftheabove-mentionedindividualsorinstitutionsnorthestaffortrustees,officersorotherstaffoftheBrookingsInstitutionortheAustralNationalUniversity.BrookingsDiscussionPapersinInternationalEconomicsarecirculatedtostimulatediscussionandcriticalcomment.TheyhavenotbeenexposedtotheregularBrookingsprepublicationreviewandeditorialprocess.Referencesinpublicationstothismaterial,otherthanacknowledgementbyawriterwhohashadaccesstoit,shouldbeclearedwiththeauthororauthors.PaperpresentedattheUnitedStatesInternationalTradeCommissionAPECSymposiumto*beheldinWashingtonSeptember11-12,1997.AnearlierversionofthispaperwaspreparedfortheCEPR/ESRC/GEIconferenceon“Europe,EastAsia,APECandtheAsiaEuropeMeeting(ASEM)Process”heldinLondonMay20/21,1997.ThispaperusestheAsiaPacificversionoftheG-CubedMulti-countryModelanddatafromtheInternationalEconomicsDatabank(IEDB)attheANU.IthankDavidPearceattheCentreforInternationalEconomics(Canberra)forhelpfuldiscussionandPeterSinclairandotherparticipantsattheASEMconferenceforhelpfulcomments.TheviewsexpressedarethoseoftheauthorsanddonotinanywayreflecttheviewsoftheabovementionedindividualsorinstitutionsnorthestaffortrusteesoftheBrookingsInstitutionortheAustralianNationalUniversity.RegionalandMultilateralTradeLiberalization:TheEffectsonTrade,InvestmentandWelfareWarwickJ.McKibbin*ResearchSchoolofPacificandAsianStudies,TheAustralianNationalUniversityandTheBrookingsInstitution,WashingtonDC28July1997RegionalandMultilateralTradeLiberalization:TheEffectsonTrade,InvestmentandWelfareABSTRACTThispaperexplorestheimpactoneconomiesoftradeliberalizationunderalternativeregionalandmultilateralarrangements:unilateralliberalization;liberalizationaspartoftheASEANregionalgrouping;liberalizationaspartoftheAPECregionalgrouping;orliberalizationaspartofamultilateraltradeliberalizationregime.ThepaperisbasedonaDynamicIntertemporalGeneralEquilibriummodel(DIGEM)calledtheAsia-PacificG-CubedModel.Itisshownthatthelongrungainsfromacountry’sownliberalizationtendtobelargerelativetothegainsfromothercountriesliberalizingalthoughthisvariesacrosscountries.ItisalsoshownthatthereisasignificantdifferencebetweentheeffectsonGDP(productionlocation)andtheeffectsonconsumptionpercapitaofthealternativeliberalizationapproachesacrosscountries.Thetimingofliberalizationisalsoshowntomatter.Withopencapitalmarketsthegainsfromcrediblyannouncedtradeliberalizationarerealizedbeforethereformsareputinplacebecausethereisariseinglobalinvestmentwhichraisestheglobalcapitalstock.Inadditionthereisareallocationofcapitalviafinancialmarketadjustment.Thispaperalsodemonstratesthatforsomeeconomies,therecanbeshortrunadjustmentcoststotradeliberalizationbecauseresourcescannotbeinstantlyreallocatedacrosssectorsinaneconomy.Theseadjustmentcostsfromownliberalizationcanbereducedifmorecountriesalsoliberalize.Thenatureofthedynamicadjustmentsuggeststhatothermacroeconomicpoliciesmayplayanimportantroleduringtheearlyperiodofphased-intradeliberalization.WarwickJ.McKibbinResearchSchoolofPacific&AsianStudiesAustralianNationalUniversityACT2600AustraliaorEconomicsStudiesProgramTheBrookingsInstitution1775MassachusettsAveNWWashingtonD.C.20036USAJELClassification30011.IntroductionWhenacountryreducesbarrierstointernationaltrade,thereareanumberoffactorsthatdeterminethenatureofthegainsandlossesthatresultinboththeshortrunandthelongerrun.Someofthekeymechanismsthroughwhichgainsarerealizedaredirectbutmanyothersareindirectandrequiretheuseofaneconomywidemodeltocapturetheseeffects.Inaddition,thetimeprofileofliberalizationaswellasthefactthatitisnotcostlesstorestructureanyeconomycomplicatetheanalysisintheshortrun.Manystudiesandtheprofessionaldebateingeneral,tendtoignoretheshortrunadjustmentissuesoftradeliberalization.Thiscomplicatesthepoliticalbarrierstotradeliberalizationoncetheliberalizationbeginsbecausethegainstakeawhiletomaterializeandarewidelydispersedyetthecostsareusuallyhighlyvisibleandincurredintheshortterm.Thisofcoursediffersacrosseconomiesanddependsonwhetherliberalizationisbeingundertakenduringaperiodofrapidorstagnanteconomicgrowth