Trade Impact Assessment (Trade SIA) of an EU-ASEAN Free Trade Agreement

We analyze the effects of potential measures to liberalize trade between the European Union and ASEAN using a computable general equilibrium (CGE) model of world trade. The results on the whole point to positive effects for most of ASEAN under all scenarios, and small but positive effects over the long-run for the European Union. Throughout the study, some negative results are observed for other ASEAN countries (Brunei, Cambodia, Laos, and Myanmar). As expected, income and trade gains increase as liberalization deepens and as more dynamic effects are taken into account. The latter is particularly important for ASEAN, whose growth is often constrained by insufficient capital resources. In terms of income effects, the EU and Singapore gain the most, 51 and 78 percent of these gains, respectively, are due to the removal of the barriers to Services trade. It is Vietnam, however, that reaps the largest rise in GDP growth, while the EU, followed by Thailand, gains the most from the removal of non-tariff barriers. For the EU, about 87 percent of the income rise between these two scenarios is due to direct and indirect effects of trade facilitation alone. The productivity effects of an EU-ASEAN FTA are also visible in the form of higher wages both for skilled and unskilled workers. This is particularly important for ASEAN as this would mean that the employment increase in key growth sectors will outstrip the reduction of employment in contracting sectors. In terms of exports, the strong export performance of ASEAN projected here is largely driven by the export growth of ASEANÕs new members, i.e., Vietnam (35%), Cambodia, Laos & Myanmar (13%). There are negative effects for third countries, however. Indeed the net gains for most of ASEAN in the long-run are mirrored by comparable losses in third countries, much of which is carried by India and Pakistan. However, one must note that even in the scenario where the potential of trade diversion is the greatest, the effects are negative but rather trivial. Under the most ambitious trade liberalization scenario between the EU and ASEAN, it is PakistanÕs exports that are largely affected, with its exports falling by 2.4 percent. For the rest of the world, exports fall by just 0.05 percent, so that trade diversion effects can indeed be considered minimal.