Regional Interest of China and India in EAS: In a CGE Framework

9.1 Regional Interest of China and India in EAS: In a CGE Framework

As discussed earlier, India’s long-term interest will be in its association with the EAS process 66 . The ASEAN+3 process is getting wider acceptability within the region with the recent changes in the political regime in Japan, but the EAS process is also active in the regional forum. A firm decision in this regard is still under consideration. The present exercise is to focus on the advantages of the EAS over the ASEAN+3 in meeting the aspirations of peoples of the region and the specific advantage of India from the process by using a CGE model. 67

65 The study shows that India’s inclusion in the ASEAN+3 process may be beneficial for all individual countries in the caucus including China. For details, see Mohanty (2008).

66 For details, see Asher and Sen (2008). 67 For a brief discussion on CGE model used in the study, see Appendix III.

9.1.1 Model Specification In this regard two issues need attention in order to take a view on the future

architecture of EAS. These are as follows: (a) What could be the ideal process in EAS (i.e. ASEAN+3, ASEAN+4 or ASEAN+6) which can maximise the economic

interest of the ASEAN Member countries; and (b) What should be the sectoral coverage of economic liberalisation to make the EAS an effective regional trading arrangement.

It is apparent from the recent spate of activities that the EAS is to be reconstituted keeping the ASEAN in the driver’s seat. ASEAN’s view is an authoritative one in the shaping of the architectural structure of the new caucus.

Taking into account the economic interest of the regional grouping, a CGE model is carried out in this Section. In the broad architecture of the EAS, there could

be three sets of counties which could be considered as the ‘core’ group of the EAS (i.e., ASEAN+3, ASEAN+4 and EAS or ASEAN+6). Another issue concerns the scheme of sectoral liberalisation, ranging from trade to a more comprehensive form of liberalisation. In the economic literature, various schemes of economic liberalisation are discussed including trade, ‘Singapore issues’ and services, among others. As most of the Member states of ASEAN are in favour of comprehensive economic cooperation (CEC), we have taken most elements of CEC in the model. We have taken tariff liberalisation to cover trade; investment for covering ‘Singapore Issues’, and ‘movement of natural persons’ to represent services.

In the CGE modelling literature, discussion often refers to an underlying assumption relating to the structure of the economies (i.e. modelling with perfect competition or monopolistic competitions). Assumption of monopolistic competition is mostly preferred to perfect competition in the CGE modelling

framework. In this case, a monopolistic 68 version of the multi-regional CGE model is used in the present simulation analysis to estimate the welfare implications of the EAS. For the estimation of the model, the GTAP database is used where we have grouped global economic activities into 26 aggregated sectors and 16 aggregated

regions/countries including rest of the world. 69 The GTAP database 70 is supplemented by additional data from other sources. 71

68 In the CGE model, we have taken three sectors, i.e. agriculture, manufacturing and services, where the manufacturing sector is assumed as having a monopolistic structure while other two sectors are operating

under perfect competition.

69 For aggregation of sectors and regions, see Appendix V. The present model is an updated version of an earlier model, which is used to analyse implication of the formation of JACIK (Japan, ASEAN, China,

India and South Korea) on individual countries and the region as a whole (Mohanty, Pohit and Sinha Roy, 2004).

70 It may be noted that 11 out of 16 country/regional groups are representing EAS country-grouping in the model. Similarly, global and regional/country economic actives are categorised in to 5 agricultural sectors, 17

manufacturing sectors and 4 services sectors for each economy. 71 The database provided by the GTAP is not sufficient to handle a CGE model, based on monopolistic

competition. Therefore, other databases are supplemented to meet the specific requirements of the model.

This model pays attention to three principal factors of production, namely, unskilled labour, skilled labour and capital. Among these factors, unskilled labour is

considered mobile perfectly across sectors within a country and not across the EAS Member countries. This assumption is uniformly maintained in all scenarios of the model. However, it is assumed that factors like skilled labour (representing ‘natural persons’) and investment are perfectly mobile across all sectors and EAS Member countries, depending upon the model specifications in different scenarios. 72

Several scenarios are drawn based on the above factors and alternative regional groupings of the EAS. The alternative country-groupings are ASEAN+3, ASEAN+4 and ASEAN+6 in the model. It is assumed that, for effective regional arrangement in the EAS, deeper integration is required. Taking this into account deepening of integration in the region, more sectors are introduced gradually through the model in different scenarios. For each alternative regional grouping, three alternative scenarios are undertaken based on liberalisation of the number of sectors. To begin with, the first scenario takes into account liberalisation of tariff, followed by liberalisation of tariff and investment together in the second scenario while the last scenario covers simultaneous liberalisation of trade, investment and movement of natural persons.

Table 9.1: Alternative scenarios for East Asian Summit: simulation analysis

ASEAN+3

ASEAN+4 ASEAN+6

Free Trade Area (FTA) I II III FTA+ Singapore Issues

IV V IV FTA+ Singapore Issues +Services

Note: These scenarios are simulated using monopolistic CGE models.

In this section, nine alternative scenarios are conceptualised involving the EAS, and they are presented in Table 9.1. As we move from the first row towards the third, greater deepening of the region in terms of liberalising additional sectors is displayed.