CEPII, Recherche et Expertise sur l'economie mondiale
Economic Impact of a Potential Free Trade Agreement (FTA) Between the European Union and Asean

Yvan Decreux
Lionel Fontagné
Houssein Guimbard

This report proposes an assessment of the likely outcome of a free trade agreement between the ASEAN and the European Union. Such an agreement would have multiple effects on sectors, countries and factors, and need to be addressed using a properly designed methodology. Various scenarios have been assessed using a computable general equilibrium (CGE) model: the CEPII’s CGE model, nicknamed MIRAGE. In order to have a realistic approach to the negotiation process, the initial protection level has been be calculated at the finest available level of detail (the HS6 six digit nomenclature of international trade), using the MAcMap database. Three scenarios have been modelled and simulated below: - In a first scenario, tariffs on goods are fully dismantled, while 50% of trade barriers in services are removed. As a sensitivity analysis, this scenario will be compared with a situation where trade in services is not liberalised. - The second scenario introduces a list of sensitive products excluded from the agreement. - In a third scenario an alternative preexperiment scenario is considered in order to assess the impact of a changing environment as regards the world economy. In all scenarios, the tariff dismantling begins in 2008 and is fully implemented in 2015. The impact of trade liberalisation on foreign direct investment is taken into account in the simulations. Several conclusions can be drawn from this exercise: - First, as compared with other simulations done by CEPII, the gains accruing to ASEAN members are very large, adding up to more than 2% of GDP in 2020. Accordingly, this potential agreement would have an enormous impact on trade, production and welfare, as compared to other episodes of trade liberalisation. - Second, the bulk of the gains (actually three quarter of the gains accruing to the ASEAN) are associated with the liberalisation in services. All scenarios including a liberalisation in services are associated with welfare gains shared by all countries taking part in the agreement. This remains true when obstacles to trade in services are kept unchanged, with the exception of Philippines for which a FTA EU-ASEAN would not be profitable unless liberalisation of trade in goods is accompanied by a substantial liberalisation in services. Given the difficulty to make progress in the WTO arena as regards the liberalisation in services, it is thus worth to engage a negotiation at the “regional” (i.e. ASEAN-EU) level on this issue. - Third conclusion, the introduction of a list of sensitive products, as a result of political economy constraints, will increase the overall expected welfare gains for the ASEAN and the EU. - The third scenario confirms the desirability of the agreement when the changing environment is taken into account: considering a different environment in which an EU-ASEAN FTA occurs in conjunction with an EU-Mercosur agreement as well as ASEAN FTAs with Japan and the US leads to even stronger overall gains than those obtained in the first scenario. In this alternate background a EUASEAN trade liberalisation would lead to a reduction of tariff discrimination while in the first scenario it was the converse.

 Keywords : ALE | UE | ASEAN
CEPII Research Report
N°2008-04, December 2008

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 Fields of expertise

Trade & Globalization