Thai Ministry of Commerce, Bangkok 30 October 2007

1. COST/BENEFIT ANALYSIS OF ASEAN-EU FTAEdmund W. SimHunton & Williamsadapted from a previous presentation by Dr. Andrew Szamosszegi, Capital Trade Incorporated Thai Ministry of Commerce, Bangkok 30 October 2007

2. Qualitative assessment—economic perspective • Anticipated FTA benefits • Increase in exports • Lower priced imports • Increased competition, leading to lower prices in general • Reallocation of resources toward export industries, where countries have comparative advantage • Increased economic welfare and growth

3. Qualitative assessment—economic perspective (ctd.) • Anticipated FTA costs • Lost industry sales and output due to higher import levels • Lost pricing flexibility in import-competing industries • Adjustment costs in import competing sectors: • Lower rates of return on industry assets • Potential lost jobs/wage pressures

4. Qualitative assessment—economic perspective (ctd.) • Benefits typically outweigh the costs • That is why governments continue to pursue agreements that reduce duties • EU has signed 21 agreements and is currently pursuing other agreements with Asian countries. • The EU is renewing its focus on FTAs as a tool for increasing competitiveness. • Many other countries and regions, including ASEAN, are pursuing FTAs.

5. Qualitative assessment—economic perspective (ctd.) • Potential for trade diversion among ASEAN countries • Trade structures of ASEAN countries are “substitutable.” • Keep eye on the ball. • Losses to other ASEAN countries dwarfed by FTA gains.

6. Quantitative AnalysisAssessment of comparative advantage • Compared competitiveness by 6-digit HS codes for Thailand and EU in 2005. • 5,223 6-digit codes • Trade between the Thailand and the EU is complementary. • Thailand’s comparative advantage is more concentrated. • Thailand has fewer codes in which it has a comparative advantage, but more codes with high comparative advantage values.

7. Quantitative AnalysisAssessment of comparative advantage (ctd.) • In virtually every HS section (22 in all), there are codes for which Thailand has a comparative advantage and the EU does not, and vice versa. • This pattern suggests there will be export and import growth in most sectors. • The Thai sectors that score well in the comparative advantage analysis are live animal and animal products, textile and textile articles, footwear, vegetable products, prepared food, jewelry, and miscellaneous manufactured products. • The EU scored well in chemicals, machinery & appliances, industrial instruments, pulp & paper, and base metals.

8. Quantitative AnalysisAssessment of comparative advantage (ctd.)

9. Quantitative AnalysisMethodology and Analysis (ctd.) • This study’s approach: Applied general equilibrium analysis using the GTAP database and model. • Incorporates actual tariff information, sector-specific data on trade flows and production levels, and macroeconomic data in a unified framework. • Global exports equal imports (less transportation and tariffs) • Global production equals global consumption. • Allows for a detailed assessment of macroeconomic as well as industry-specific performance. • Simply put, the use of GTAP allows for the most detailed analysis of multiple sector and country effects potentially resulting from an FTA.

10. Quantitative AnalysisMethodology and Analysis (ctd.)

11. Quantitative AnalysisMethodology and Analysis (ctd.) • The GTAP base year is 2001. • Updated every two years—next database is expected to be released in Fall 2007 • Changes made to the database to reflect Thailand’s current conditions and needs. • Tariff rates in database were updated using 2006 trade flows and duty rates. • EU-enlargement and the ASEAN FTA were incorporated. • GTAP sector “chemicals, rubber, and plastics” split into two sectors, “chemicals” and “rubber and plastic,” using actual trade and production data.

12. Quantitative AnalysisMethodology and Analysis (ctd.) • 2 simulations of the envisioned FTA • Full liberalization of goods trade – the perfect world • SIM1 = short-to-medium run results • 1-3 years • SIM2 = long run results • 4-10 years

13. Quantitative AnalysisChange in Thai Exports to EU with FTA

14. Quantitative AnalysisChange in EU Exports to Thailand with FTA

15. Quantitative AnalysisChanges to Thai Trade and Balances Due to FTA

16. Quantitative AnalysisChanges to Thai Exports & Imports Due to FTA

17. Quantitative AnalysisTrade Diversion Due to FTA • Long-run diversion = $0.1 billion • Long run increase in Thai exports to EU due to FTA = $5.4 billion • The increase in Thai exports exceeds estimated trade diversion by a factor of 40! • Keep your eye on the ball.

18. Quantitative AnalysisPrice effects of FTA • Import prices decline, as predicted by theory. • Import prices fall in virtually very sector. • Lower import prices, however, do not drag down Thai prices.

19. Quantitative AnalysisCost effects of FTA • The FTA would increase demand in labor intensive industries, resulting in higher wages. • Thus, businesses pay less for imports but more for domestic factors of production. • Returns on capital increase as well, especially in the short run.

20. Quantitative AnalysisEmployment effects • The GTAP model assumes full employment. • Employment can grow in certain industries, but only if other industries in the model experience employment losses. • If the economy in fact has unemployed or underutilized labor resources, then industries predicted to lose employees might not lose any at all. • The rice, meat, footwear, apparel, textiles, fisheries, vehicles, and processed food industries add employees.

21. Quantitative AnalysisInvestment effects • Fixed investment increases disproportionately in Thailand. • Real output of the capital goods sector increases by 3.3 percent in Thailand compared to lower amounts for ASEAN and the EU.

22. Quantitative AnalysisWelfare effects of FTA

23. Quantitative AnalysisGDP effects of FTA

24. Quantitative AnalysisWelfare vs. GDP effects • Welfare and GDP are not the same thing. • GDP measures output. • Welfare also measures the improvement in the “terms of trade,” improvements in resource allocation, and other measures. • In the short run (SIM1), Thailand benefits because its exports “command” more imports than in the pre-FTA period. • Thus, the gain in SIM1 welfare exceeds SIM1 GDP.

25. Quantitative AnalysisWelfare vs. GDP effects (ctd.) • SIM2 (long run) • Thailand’s GDP gains are quite large. • Welfare gains are even larger. • For both measures, Thailand’s gains are proportionately large within ASEAN. • Thailand accounts for 20 percent of ASEAN GDP, but accounts for … • 30 percent of ASEAN long-run GDP increase. • 40 percent of ASEAN long-run welfare increase.

26. Quantitative AnalysisChange in producer revenues due to FTA • SIM2 (long run) • In the long run, 14 of the 22 specified sectors experience increased revenue. • Only 4 of the 22 sectors experience revenue losses in excess of 2 percent: Other crops, dairy, rubber & plastic, forestry & lumber. • However of the 4 sectors, losses in 2 (other crops and dairy) probably reflect a shift of resources to other agricultural and food sectors where demand increases. • In the two remaining sectors, the comparative advantage analysis indicates that these sectors are likely to benefit from an FTA.

27. Quantitative AnalysisPreliminary conclusions • Why an ASEAN-Thai FTA? • An FTA would benefit Thai and ASEAN trade • Trade diversion losses to Thailand are minimal! • Thai and ASEAN welfare and GDP grow • Thai gains are disproportionately large. • Only a handful of sectors experience losses. • Most losses that due occur are not due to increasing imports, but to resource shifts to high demand industries. • The bottom line: the benefits of this agreement would significantly exceed its economic costs.

28. Conclusion • THANK YOU • EDMUND SIM • Hunton & Williams • SINGAPORE • 65-6876-6708 • esim@hunton.com • Special Thanks to Dr. Andrew Szamosszegi, Capital Trade Incorporated