A General Equilibrium Analysis of the China-ASEAN Free Trade Agreement

We simulate the effects of the China-ASEAN free trade area (CAFTA) with a recently developed global trade, applied general equilibrium (AGE) framework. This AGE model is different from other comparative-static models in two important aspects: we explicitly model transnational supply chains and export processing zones in China. The CAFTA was signed in November 2002. China and ASEAN began lowering barriers to trade in 2005. Under the CAFTA, China, Indonesia, Thailand, the Philippines, Malaysia, Singapore and Brunei removed almost all tariffs in January 1, 2010. Some agricultural products and parts for motor vehicles and heavy machinery will still face tariffs in 2010, but those will gradually be phased out. ASEAN’s newest members — Cambodia, Laos, Vietnam and Myanmar — will gradually reduce tariffs in coming years and must eliminate them entirely by 2015. Our analysis will focus at the sectoral and macro implications of CAFTA for China, selected ASEAN countries (i.e., Malaysia, the Philippines, Singapore, Thailand, Vietnam and Indonesia) and their trading partners (e.g., Japan, Korea, India, the European Union and the United States). Our data contains 26 countries or regions and 41 aggregate sectors. Producers operating in processing zones in China and Mexico are modeled as separate and different from producers in the rest of the economy.