CoPS/IMPACT Working Paper Number G-111

Title: Medium- and Long-run Consequences for Australia of an APEC Free Trade Area: CGE Analyses using the GTAP and MONASH Models

Authors: Philip D. Adams, Karen M. Huff, Robert McDougall, K.R. Pearson and Alan A. Powell


Two large applied general equilibrium models, GTAP and MONASH, are used in this paper to simulate the elimination of trade barriers among the members of APEC. These models focus respectively on global trading relations and on the detailed sectoral, occupational, and regional dimensions of the Australian economy. We find that the mature industrialized members of APEC are likely to experience modest increases in real GDP from the trade reform, but that there is scope for very big advances in real GDP in some Asian member countries (especially those with high initial trade barriers against imports of capital goods). Relative to base case, Thailand/ Philippines (treated as a single aggregate in these simulations) is projected (after an adjustment period of one to two decades) to have the potential for a 39 per cent rise in GDP due to the formation of an APEC trade block. Other countries reaching double figures are South Korea (14 per cent), New Zealand (11 per cent) and Indonesia (10.5 per cent). These increases are partly at the expense of non-APEC countries which experience on average a 1 per cent fall in GDP due to lost markets and deteriorating terms of trade. A substantial limitation of these projections is that we have not been able to keep track of the ownership of assets; thus rises in GDP do not necessarily imply increases in welfare. The potential long-run increases in APEC members' GDP are highly dependent on international capital mobility. Relative to the case of full mobility, limiting capital growth to what can be financed internally within regions causes the sizes of the projected increases to fall in all member regions except North America. In the case of Thailand/ Philippines, the 39 per cent increase falls dramatically to about 2.5 per cent. The projected long-run rise in Australia's GDP when capital is mobile is about 3 per cent (relative to the no-APEC case). Considerable structural changes accompany this rise: milk and meat products do extremely well (with rises in real output of over 30 per cent relative to base case); traditionally highly protected industries (e.g., synthetic fibres, cotton yarns, footwear and motor vehicles) experience long-run falls of approximately 10 to 20 per cent. Over two thirds of the gain in the rise in the demand price for Australian milk products is due to the opening up of the Japanese market.

JEL classification: D58, F14

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