ASEAN+3, ASEAN+4 or EAS: Results of Regional Welfare Gains

9.2 ASEAN+3, ASEAN+4 or EAS: Results of Regional Welfare Gains

Very often the regional process is considered as being inferior to the multilateral process on the grounds that the former is trade diverting in nature, which would increase regional welfare at the cost of global welfare. For making the EAS process

meaningful, it should be trade creating in nature rather than trade diverting. 73 Trade liberalisation policies, following formation of the EAS, may result in reallocation of

productive factors across sectors owing to an increase in demand for tradable

For this purpose other databases such as Handbook of Industrial Statistics, UNIDO; World Development Indicator, World Bank; and UNDP databases are used.

72 In certain scenarios, free movement of skilled labour and investment are not allowed in this model. 73 For a discussion on trade creation and trade diversion, refer Appendix II.

sectors within the region. In the process, the allocative efficiency of the existing factor endowments alters, and so also the relative real prices of different factors.

The scale and level of production also undergo changes in regional economies. On the whole, the implications of such efficiency-seeking restructuring are likely to be reflected in the estimation of welfare gains.

With the formation of an FTA under the EAS, the regional welfare gains could

be within a range of US$ 128.8 billion to US$ 502.8 billion, depending upon the composition of membership and depth of economic liberalisation between member countries as shown in Table 9.2. The results indicate that the proposed FTA is likely to enhance welfare of both regional and individual member countries. The EAS would be trade creating in nature where both the EAS and the global economy are likely to benefit in terms of welfare gains. All the major regions of the world would benefit from the trade liberalisation in the EAS when deepening of the region becomes more comprehensive.

It is shown in Table 9.2 that EAS countries are vibrant countries and, therefore, their welfare gains increase as the grouping is becoming wider. In fact, the welfare gain for the EAS is higher than for ASEAN+3 or ASEAN+4, irrespective of the coverage of sectors under liberalisation. Similarly, as we move from a shallow to deeper level of integration, the welfare gains are likely to improve. This brings home the point that both the region and individual countries can maximise their welfare gains when the ASEAN+6 is considered under the EAS process and three broad sectors outlined in the model are liberalised simultaneously. It is interesting to note that India’s inclusion in the regional caucus makes a significant difference to the whole region in terms of enhancing welfare gains for the region and individual member countries. For example, the absolute level of welfare gain rises between

23.7 per cent to more than 45 per cent in various schemes of trade liberalisation when India joins the ASEAN+4 as compared the ASEAN+3 alone. The region is likely to benefit more when investment along with skilled labour is allowed to move freely within the EAS region. The magnitude of absolute increase in welfare gains under the comprehensive trading arrangement would be US$ 502.8 billion per annum.

Table 9.2: Absolute Change in Welfare Gains from the East Asian Economic Integration

(Billion US$)

Scenario:I Scenario:II Scenario:III Scenario:IV Scenario:V Scenario:VI Scenario:VII Scenario:VIII Scenario:IX

FTA, SI and GATS ASEAN+3

FTA

FTA and Singapore Issue (SI)

ASEAN+4 ASEAN+6

Indonesia -0.8

1.7 4.2 1.7 27.9 39.7 Malaysia

4.2 5.1 -0.8

6.4 7.5 8.1 5.9 9.2 10.0 3.9 6.4 8.6 Philippines

1.7 2.1 2.3 2.3 2.8 3.2 3.6 4.3 6.0 Singapore

3.4 4.2 4.2 3.6 4.7 4.7 2.3 2.6 3.9 Thailand

7.9 9.0 10.0 9.3 11.1 12.4 5.9 7.6 11.4 Japan

29.3 35.2 41.1 76.3 88.0 93.9 88.0 88.0 129.1 Korea

13.4 15.6 16.7 21.2 25.7 27.9 17.9 21.2 30.1 China

India 25.1 31.8 33.5 36.9 58.7 63.7 40.2 58.7 75.4 Australia

26.8 6.0 22.3 25.3 New Zealand

Note: Additional increase in welfare in terms of percentage point in GDP growth for each country in the event of different scheme of regional integration. Under the ‘Singapore Issues’ and GATS; investment and free movement of natural persons are covered in the simulation model. Base value used here is 2011.

The level of welfare gain for individual countries differs from one member country to another depending upon the maturity of economies, composition of trade, level of openness, trade potentials, etc. The size of a member country matters in attaining total volume of welfare gains from the regional liberalisation process, and gains are conceptually proportionate to the size of country under similar conditions. Therefore, the welfare effect of a country/region is viewed in relation to its GDP.

Table 9.3 provides estimates of the potential welfare effect with respect to the GDP of each country and also for the region. The overall responses of member countries indicate that the level of gain increases as one moves from a shallow to a deeper level of integration, though there are a few exceptions. In the ASEAN, countries like Indonesia and the Philippines, which are performing well enough to catch up with other advanced countries within the region, are likely to gain more from comprehensive economic cooperation than others. China has maintained that the ASEAN+3 should be at the core of EAS to start with for obtaining maximum welfare gain for the region, but the results show that China’s economic interest is in the EAS with the ASEAN+6.

India’s expected gain from the regional liberalisation process may be ranging between US$ 31.8 billion to US$ 75.4 billion, depending upon the coverage of the region and the level of regional liberalisation. If the so-called core group (ASEAN+3) starts liberalising among its member countries, India is likely to gain from the region to the extent of more than US$ 25.1 billion due to synergies created in the region.

Table 9.3: Welfare Gains from the East Asian Integration: Percentage Change

(in percent)

Scenario:I

Scenario:II

Scenario:III

Scenario:IV

Scenario:V

Scenario:VI

Scenario:VII

Scenario:VIII Scenario:IX

FTA, SI and GATS ASEAN+3

FTA

FTA and Singapore Issue (SI)

ASEAN+4 ASEAN+6

Indonesia -0.1

0.5 0.6 0.7 1.3 1.5 1.6 1.5 1.5 2.2 Korea, South

1.8 0.4 1.5 1.7 New Zealand

1.0 -0.1

South Asia -0.1

0.3 1.0 1.7 Rest of World

0.2 0.9 1.4 Note: Additional increase in welfare as a percentage of GDP of individual Countries in the Event of FTA and CEC in the Region.

Most of the regional countries are likely to gain at a maximum when the EAS (i.e., ASEAN+6) countries will go in for more comprehensive liberalisation, covering trade, investment and movement of natural persons. Liberalisation among ASEAN+3 countries alone may not generate the expected level of welfare gain irrespective of their level of economic integration.

India is likely to gain from the EAS process regardless of whether it is included in the EAS caucus or not. India’s inclusion in the EAS would improve its gains from the regional integration. Gains from the EAS integration could be ranging between 1.3 percentage points to 2.1 percentage point for India, depending upon the level of integration adopted by the regional economies. Any forward movement in EAS integration with or without India could be beneficial for India. Therefore, India’s association with the ASEAN process could be rewarding in the medium term. Recently, the USA and Russia joined the EAS. Expansion of the EAS Membership has wider implications for the regional grouping in future.