WORKING PAPER 97.10

CHANGING TRADE PATTERNS AND THE IMPACT OFTRADE LIBERALIZATION IN ASIA PACIFIC

Tubagus Feridhanusetyawan

August 1997

A joint research project onLinkages Between Indonesia’s Agricultural Production, Trade and the Environment

funded by the Australian Centre for International Agricultural Research,

between

CASER (Bogor) • CIES (Adelaide) • CSIS (Jakarta) • RSPAS (ANU, Canberra)

Lead institution: CIES • University of Adelaide • Adelaide • SA 5005 • AustraliaTelephone (61 8) 8303 4712 • Facsimile (61 8) 8223 1460 • email: cies@economics.adelaide.edu.au

Homepage: http://www.adelaide.edu.au/cies/indon1.htm

CASER/CSIS/CIES/ANUjoint research project on

policy analysis of linkages betweenIndonesia's agricultural production, trade and

environmentRapid economic growth in Indonesia has been accompanied

by significant structural changes, including for its agricultural sectorand its unique natural environment. Recently questions have been raised about the impact ofIndonesia’s agricultural, industrial, trade and environmental policies on sustainable ruraldevelopment. The nature of interactions between the economic activities of different sectorsand the environment are such that an intersectoral, system-wide perspective is essential forassessing them. An international perspective also is needed to assess the impact on Indonesiaof major shocks abroad, such as the implementation of the Uruguay Round agreements,APEC initiatives, or reforms in former centrally planned economies. There is increasingpressure on supporters of liberal trade to demonstrate that trade reforms at home or abroadaffecting countries such as Indonesia will not add to global environmental problems (e.g.,deforestation, reduced biodiversity). Again, this requires system-wide quantitative models ofthe economy and ecology, because typically there are both positive and negative effects atwork, so the sign of the net effects ultimately has to be determined empirically.

To begin to address these issues, the Australian Centre for International AgriculturalResearch (ACIAR) has generously provided funds for a collaborative 3-year project (to mid-1999) involving the University of Adelaide’s Centre for International Economic Studies(CIES) as the lead institution, Bogor’s Centre for Agro-Socioeconomic Research (CASER)which is affiliated with the Ministry of Agriculture, Jakarta’s independent Centre forStrategic and International Studies (CSIS), and the Economics Division of the ResearchSchool of Pacific and Asian Studies (RSPAS) at the Australian National University inCanberra. Being based on Indonesia with its rich diversity of environmental resources (andon which there are relatively good data) and its rapid economic growth, the project could alsoserve as a prototype for similar studies of other developing countries in Southeast Asia andelsewhere.

The key objective of the project is to assess the production, consumption, trade,income distributional, regional, environmental, and welfare effects of structural and policychanges at home and abroad particularly as they will or could affect Indonesia’s agriculturalsector over the next 5-10 years. Among other things, the analysis will focus both on theeffects of economic changes on the environment, and on the impacts on Indonesia’sagricultural production and trade of resource and environmental policy changes. Theimplications of regional and multilateral trade liberalization initiatives and Indonesia’songoing unilateral trade reforms will be analysed, along with other potential domestic policychanges and significant external shocks such as the entry of China and Taiwan into the WorldTrade Organization. The analysis will draw on and adapt computable general equilibrium(CGE) models such as the national INDOGEM Model (built as part of an earlier ACIARproject) and the global GTAP Model.

The project is being undertaken in close collaboration with the Indonesian Ministry ofAgriculture and ministries involved in trade, planning, and the environment. A ResearchAdvisory Committee has been established to encourage close collaboration of representativesfrom those and other ministries.

ACIAR INDONESIA RESEARCH PROJECT

WORKING PAPER 97.10

CHANGING TRADE PATTERNS AND THE IMPACT OFTRADE LIBERALIZATION IN ASIA PACIFIC

Tubagus FeridhanusetyawanCentre for Strategic and International Studies

Tanah Abang III/23-27Jakarta 10160

Indonesia

Ph: (62 21) 386 5532Fax: (62 21) 380 9641

Email: tf.csis@inovasi.com

August 1997

Revision of a paper prepared for the Second Workshop of the ACIAR IndonesiaResearch Project on Agriculture, Trade and the Environment, CASER, Bogor, 7-8July 1997. An earlier version of this paper was presented at the Seminar onKorea and Southeast Asia in the 21st Century, at the Centre for Strategic andInternational Studies, Jakarta, Indonesia, on July 2, 1997.

SUMMARYOver the last twenty five years, the Asian and Pacific region has achieved the most rapid

trade growth in the world. Intra-Asia-Pacific trade has dominated trading activities in Asia

Pacific, while the share of Asia Pacific in total world trade has been increasing. The composition

of East Asian exports have changed drastically from primary products to labor intensive and

capital intensive products for the last three decades. The growth of export declined in 1996,

however, due to the weaker performance of Japanese economy and raising real wages in some

countries, especially Thailand. Successful growth strategies in Asia Pacific have been built

based on private ownership and market based economic organization, supported by export

promotion strategies and open trade regime. Lower tariff rates and the absence of quota

restrictions combined with an open and faster international financial transaction have led to

growth in manufactured products for exports.

The impacts of further trade liberalization in Asia Pacific through WTO and APEC are measured

by using a Multi-country Computable General Equilibrium Model for international trade. The

results show that, first, the more progressive liberalization would lead to the bigger welfare gain.

Complete elimination of border tariffs would lead to bigger gain compared to gradual tariff

reductions. Second, reduction in domestic distortion or domestic deregulation is crucial to get the

most from trade liberalization. Third, countries with more open trade policy and larger share of

trade in their GDP, such as Newly Industrializing Countries in East Asia, would get more benefit

from trade liberalization. Fourth, the larger scope of international liberalization would lead to

larger welfare gain. APEC member economies would get more benefit from liberalization based

on open regionalism rather than the creation of APEC trading block. For Indonesia, further

international trade liberalization would lead to reallocation of resources away from the

agricultural sectors to the manufacturing sectors.

CHANGING TRADE PATTERNS AND THE IMPACT OF TRADE LIBERALIZATION

IN ASIA PACIFIC

by Tubagus Feridhanusetyawan

The rapid economic growth of the Asia Pacific economy for the last two decades has been

associated with an increasing level of economic interdependence and market integration as a

result of international trade liberalization in the region. Trade liberalization leads to more

efficient resource allocation, raises output and income, and contributes to rapid economic growth.

It is the fact that rapid growth of many Asia Pacific economies has been led, particularly in early

periods, by rapid expansion of exports. There has been significant unilateral reduction of trade

barriers by many countries in the region over the last decade, and considering the remaining level

of protection, the pressure to have further liberalization remains strong.

Despite this optimism, however, the dynamic changes of comparative advantages as a

result of international trade liberalization could lead to resistance among economies in the region.

Resource reallocation caused by international liberalization requires some form of domestic

adjustments, and problems will arise when the economy fails to undertake the necessary

adjustment. While international trade liberalization would potentially benefit every participating

economy in the long run, resource reallocation might hurt some economies in the short run.

Short run resource reallocation within the economy or country will also benefit some part of the

society and hurt the other. It is important to note that one important aspect of trade liberalization

is political economy. Therefore, it is understandable that many have argued that trade

liberalization is a political process to secure an economic results, rather than a pure economic

process to achieve higher efficiency.

The impact of trade liberalization on each participating country depends on at least four

factors. The first is the scope of liberalization; whether it is a multilateral, regional, or unilateral

in nature. The second is the form of the commitment to conduct liberalization; whether it is

based on request-offer approach, involuntary, or voluntary commitments. The third is coverage

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of the liberalization scheme; for example, whether it involves removal of domestic distortions,

elimination of non-tariff barriers, or merely reduction in border tariff. And finally, the fourth is

the speed at which the liberalization schemes proceed. The interaction among these four factors

will determine the changes in resource allocation and the amount of benefit or loss accrued by

each country.

There are two objectives of this paper. First, this paper presents an overview of the

changing patterns of trade in Asia Pacific region, and second, this paper measures the welfare

impact of trade liberalization in Asia Pacific based on various liberalization scenarios. A Multi-

country Computable General Equilibrium approach will be used to model international trade

liberalization and to capture various liberalization schemes that are relevant to the current

situation in Asia Pacific. The first section of this paper presents the changing trade pattern and

discusses the recent slow down in export growth. The second section elaborates some trade

liberalization schemes in Asia Pacific by focusing on the Uruguay Round results and APEC

(Asia Pacific Economic Cooperation) Individual Action Plans. The third section presents the

model, data and scenarios that will be used to measure the impact of liberalization, and then

followed by the discussion of the results in the fourth section. The final section presents

conclusion.

THE CHANGING TRADE PATTERNS IN ASIA PACIFIC

Over the last twenty five years, the Asian and Pacific region has achieved the most rapid

trade growth in the world. Intra-Asia-Pacific trade has dominated trading activities in Asia

Pacific over long period of time, while the share of Asia Pacific in total world trade has been

increasing. Asia-Pacific share of the world trade has grown rapidly, from 37 percent in 1983 to

47 percent in 1997, showing that around half of total exports and imports activities are taking

place in Asia Pacific. The developing countries in Asia Pacific have also become major players

in international trade. The share of Asia-Pacific Developing Countries (ADC) in world trade has

3

risen from 10 percent in 1978-87 to more than 18 percent in 1993-96. In terms of total export

from all developing countries in the world, ADC exports accounted for 33 percent in 1978-87

and 58 percent in 1993-96 (ADB, 1997).

Around 70 percent of Asia Pacific export destinations or import origin are now intra-

regional. The size of Asia Pacific trade and the proportion of intra-regional trade are about the

same as the European Union. It is important to note that Asia Pacific region has reached a degree

of trade interdependence and integration similar to those of European Union without forming any

trade block.

Foreign direct investment (FDI) from and into Asia Pacific economies has also grown

significantly in recent years. In terms of values, the flow accounted for over one-third of global

FDI. Three major participants in the world FDI activities, United States, Japan, and China, are

located in Asia Pacific. For example, United States and Japan together shared around 30 percent

of total global FDI outflows in 1990s. China has also become one of the major recipient of FDI

in the world. Similar to the pattern in trade flows, high proportion of FDI flows in Asia Pacific

are intra-regional. For example, over half of Japanese FDI goes to other Asia Pacific economy,

especially the United States and other East Asian Economies. More than a quarter of United

States outward FDI also goes to other Asia Pacific economies. It is also important to note that

most FDI in Asia Pacific is channeled to export-oriented industries, which in turn will lead to

rapid export-led economic growth in those economies.

Asia Development Bank Report (1997) indicated that the strong performance of

manufacturing export has been the source of growth in Asia Pacific, especially the East Asian

region. By comparing all economic indicators, there are several characteristics which have made

East Asia distinct from other regions in the world for the last two decades. First, export and

imports accounted for larger share of GDP than other countries in the world. Manufactured

exports, in particular, have been substantially more important than anywhere else. Second,

saving and investment rates in Asia have been above the average of other countries. And third,

4

years of schooling has been higher than world average. It seems that extensive trading, high

saving and investment, combined with high human capital investment have contributed to faster

growth in Asia Pacific.

From primary products, to textile and electronics

The composition of East Asian exports have changed drastically for the last three decades

(Table 1). In 1970s, most East Asian exports were primary products. For example, primary

products - including primary-based manufactures accounted for more than 90 percent of exports

in 9 of 15 Asian economies. Labor intensive goods - especially textile and clothing- accounted

for 25 percent of export only in Bangladesh, India, Pakistan, Korea and Hong Kong. Capital and

technology intensive products were much less common. Only Hong Kong, India, Korea, and

Singapore did export these products.

The picture changed dramatically in 1990s when export of primary products accounted

for more than 70 percent in only 13 of 16 Asian countries. Several countries have moved to

more labor intensive products, and in the more advanced Asian countries, exports have been

concentrated on skill-intensive and technology-intensive products. More than 50 percent export

from Malaysia and Singapore were capital and technology intensive products such as electronics.

Indonesia, PRC, Philippines are moving to the same direction. In Indonesia, for example, the

export of electrical and electronics equipment grew by more than 30 percent per annum for the

last several years.

The share of primary products in Indonesia’s export declined from 98.6 percent in 1970

to 60.7 percent in 1994. At the same time, the share of manufacturing product increased from 1.2

percent to 39.3 percent. Similar trend happened in South Korea where the share of primary

product in total exports decreased from 35.2 percent to only 8.1, while that of manufacturing

products increased from 64.9 percent to 91.9 percent from 1970 to 1994. In Indonesia, exports

shifted from primary commodities mainly to labor intensive products such as textile, garment and

5

footwear. In Korea, however, the shift in export was faster, from primary commodities to labor

intensive products, and then to electronics, machinery, and other scale intensive products.

One major reason for the late transformation in Indonesia’s case is the greater dependence

on oil and gas exports which generated enough revenue to fuel economic development in 1970s.

High oil prices and abundant foreign earnings in 1970s was supportive for inward looking

development strategy, and as long as oil price remained high, Indonesia did not feel the necessity

to develop other competitive export products. Indonesia changed its development policy

drastically when oil prices plunged in the mid 1980s. Other countries such as Korea, for

example, did not have much oil, and therefore was forced to develop competitive manufacturing

products for international market in its early stages of economic development. The adoption of

export oriented development strategy took place in much earlier period than Indonesia, and

therefore the transformation towards more capital intensive exports has been faster.

Two manufacturing products, namely textiles and electronics have been dominated the

Asia’s export for the last decade. In 1960’s the wave of foreign direct investment from Japan to

Chinese Taipei started the development of textile industries outside Japan. In 1970’s the textile

industries moved to Southeast Asia, and then to PRC and to Vietnam recently. The movement

was originally to search for cheaper labor to reduce the cost of production. In later years,

however, the move was to avoid the export quota imposed by the Multi-fiber Arrangement

(MFA). With the implementation of Uruguay Round agreement, the MFA will be abolished by

the end of the century and will provide bigger market access and opportunity for many countries

in East Asia.

Electrical and electronic products have been the new source of export growth in East

Asia. For example, Malaysia started its export drive in electronics early and now the share of

electronics is more than 30 percent of total exports. Similar trend has taken place in many other

countries such as Korea, Singapore, Hong Kong, even Thailand and Philippine. The start of the

electronic boom in East Asia took place in 1950s when the United States semi conductor

6

industries looked for low-wage location for product assembly. They found Hong Kong, a British

colony which ensured political stability with free and open economic system. The Hong Kong

success story was soon to be followed by Korea, Singapore, Taiwan, and Malaysia. All of them

have relatively open trading regime with special intention to build electronic industries.

Exports slow-down in 1996

In 1996 almost all Asian countries experienced export growth slow-down. Table 2 shows

that the growth of export in Korea, for example, declined from 25.5 percent in 1995 to 4.3

percent in 1996. Indonesia’s non oil export growth decreased form 18.5 percent to 7.5 percent,

while Thailand’s export growth plunged from 19.4 percent in 1995 to 1.5 percent in 1996. One

major reason is the weaker demand from major importing countries. Japan is the biggest

importer of all Asian exports, and the slower growth of Japanese economy for the last several

years has created a slow-down in Japanese import demands.

Weaker Yen was also responsible for the decline in the Japanese purchasing power which

has led to poor performance of Asian exports last year. Thailand, in particular was the major

victim of depreciated Yen. Thailand has pegged its currency to the US$, and when Yen lost its

value against the $US, it was calculated that Baht (Thailand’s currency) appreciated in real terms

relative to the Yen by more than 18 percent. This certainly hurt Thailand export, and partially

contributed to various economic problems in Thailand recently (Warr, 1997).

Another reason for the weaker export performance was the rapid increase in real wages.

In Malaysia for example, the increase in labor demand was around 3.4 percent while the increase

in labor supply was only 3.2 percent last year. In Taiwan, labor productivity in manufacturing

sectors increased by 2.8 percent while real wages increased by 3.8 percent in early 1996 (Bank

Indonesia, 1996). Thailand has also suffered from rapidly increasing real wages. From 1982 to

1994, Thailand’s real wages increased by 70 percent, with the annual growth of around 10

percent per annum for the last several years (Warr, 1997). Indonesia experienced the similar

7

trend. Minimum wages has increased by more than threefold since 1990, and real wages

increased by around 30 percent for the last 10 years. It is not as high as Thailand’s case, but the

faster growth of relative wages relative to labor productivity has been alarming. Pangestu (1997)

indicated that in textile and garment industries, the increase in productivity has not kept up with

wage growth for the last several years.

The other factor which contributed to slower export growth in Asia Pacific is the sharp

decline of semi conductor price in 1996. The price of the most frequently used DRAM memory

chip declined by 70 percent and led to drastic reduction in semi-conductor exports last year. The

most serious impact was on Korea, which suffered a 16 percent decline in its term-of-trade and 6

percent drop in the value of its exports. Other countries which suffered from the decline in chip

prices include Singapore, Malaysia, Chinese Taipei, and for some extent Philippine (PECC,

1997).

The importance of open trade regime

There are several key policies which have strongly contributed to rapid growth in East

Asian region. First, successful growth strategies have been built based on private ownership and

market based economic organization. The economy relies more on market forces and private

ownership to solve its problems. Then export promotion strategies and open trade regime has

been put on top of government’s agenda. At its early stage, development was fueled by export

earnings which provided enough foreign reserves to purchase high quality capital inputs and

technologies. High saving rates, both in the private and government sectors, helped financing the

growth and provided enough money for investment in infrastructure. Agricultural development

was not left behind and the agricultural sector turned out to be the source of growth during

economic recession. The flexibility of economic policy and higher level of human capital

investment allowed the economy to progress from labor intensive to high-skilled and capital

intensive activities.

8

Among those policy factors, an open trade policy has been the major contributor to the

strong performance of manufactured exports. Lower tariff rates and the absence of quota

restrictions combined with an open and faster international financial transaction are likely to

support growth in manufactured products. To be competitive in the world market, exporters must

be free to sell their products in the world market and must be able to get their imported inputs

without any restrictions. Most labor intensive products in East Asian developing countries

depend on imported inputs, and therefore liberalizing the trade for factor inputs is crucial in

supporting export growth. Tariffs on intermediate and capital goods were low to moderate, and

exporters were provided with special export processing facilities and duty free rebate schemes.

There has been a strong and positive relationship between trade openness and global

economic integration and economic growth. Countries that were consistently open to trade

between 1965 to 1990 grew about 2 percentage point faster per years than countries that were

consistently closed. The gains from more liberal international trade is clear. First, the growing

international financial market will provide enough saving and investment to fuel the economic

growth. Second, freer international trade would reallocate resource to more efficient uses based

on comparative advantages. Third, increasing level of competition will also increase efficiency

and contributes to higher level of production output from the same level of input. In economic

terms, the first is scale efficiency of factor accumulation, the second is often called allocation

efficiency, and the third is technical efficiency. All three of them are factors which are known to

be the major source of economic growth.

An open trade regime is important to prepare for the globalization. Rapid technological

changes requires the ability to assimilate technology from abroad and companies are increasingly

relying on international joint-ventures. Countries that are well integrated into international

market trends and exposed to international competition will take the most benefit from

globalization. All of these trends require trade and investment openness, supported with

international standards for trade and harmonized financial markets. Considering the importance

of trade liberalization for economic growth and preparation for globalization, it is important to

9

identify the future direction for international trade liberalization in Asia Pacific, which will be

discussed in the next session.

SCHEDULES FOR INTERNATIONAL TRADE LIBERALISATION

After the implementation of NAFTA (North American Free Trade Area) in 1994, Asia

Pacific economies are currently facing two major pressures for ongoing international

liberalization. The first is the multilateral trade liberalization based on the implementation of the

Uruguay Round in the form of WTO (World Trade Organization) commitments. Most Asia

Pacific economies are member of the WTO and therefore they have to follow the WTO rules and

commitments for trade liberalization. The second pressure is regional trade liberalization

through the formation of APEC (Asia Pacific Economic Cooperation). The participation for

liberalization in APEC is more voluntary and unilateral in nature as each of the APEC member

economy has to submit its Individual Action Plan (IAP) for trade liberalization1.

The Uruguay Round Agreement2

The completion of the Uruguay Round was the most important phenomenon in

international trading system during the post-war period. The Uruguay Round exceeds the

previous round of multilateral trade negotiations, in number and scope of areas, and also in the

number of participating countries. The Final Act, signed in Marocco in April 1994 will be the

strong base for international trading system in the next century. The agreement covers a new

range of products, namely the agriculture and services, and includes new aspects of trade such as

1 Another trade liberalization schedule in Asia Pacific is AFTA (ASEAN Free Trade Area) which uses a CEPT(Common Equal Preferential Tariff) schemes to form a free trade region in ASEAN (Association of Southeast AsianNation). While tariff reduction schedule was ambitious, its progress has been very slow mainly due to set back inagricultural liberalization (Pangestu and Feridhanusetyawan, 1996).2 This is taken from Pangestu and Feridhanusetyawan (1996).

10

the Trade-related Intellectual Property Rights (TRIPs) and Trade-Related Investment Measures

(TRIMs)3.

While agricultural trade liberalization can bee seen as the most important result, the

Uruguay Round has set an ambitious agenda of reform in the agricultural sector. One part is a set

of general commitments which specify the new GATT rules to apply to agriculture. The second

part is a series of country schedules that contain the commitments of each participant in terms of

the level of tariffs declared when non-tariff barriers are converted to tariffs; the tariff reductions

on a line-by-line basis; the minimum access concessions and the details surrounding them; the

level of base year spending and volume of exports subsidies and the schedule of reductions on a

year by year basis; and, the aggregate level of trade distorting domestic supports in the chosen

base period and the level of final commitments for reduction.

There are three different areas of obligations covered under agricultural reform contained

in the UR Agreement on Agriculture. First, under improvement in market access, there is the

tariffication of non tariff barriers and reduction of tariffs. “Minimum access” import quotas for

products where imports have faced prohibitive barriers in the past were also established to equal

3 percent of domestic consumption and rising to 5 percent at the end of six years. As a result, the

cost of protection in the agricultural sector will become much more transparent for all GATT

members, although the actual level of protection after tariffication of non-tariff barriers may

remain quite high for the products currently subject to non-tariff measures. There are a few

exemptions from the tariffication commitments (utilized by Japan for rice). In this case, 4

percent of domestic consumption in the 1986-88 base period represent a minimum access

guarantee that must increase by 0.8 percent annually to 8 percent by the end of the

implementation period.

Second under reduction of domestic support there are targeted reductions of Aggregate

Measure of Support (AMS) for developed and developing countries. Support policies which 3 See GATT(1994).

11

have a minimal impact on trade may be excluded from the AMS calculation. These “Green Box”

policies include: research services, pest and disease control, inspection services, environmental

and conservation programs, stockholding for food security, domestic food aid, crop insurance,

disaster relief, regional and structural investment aid. Direct payments to farmers (e.g. deficiency

payments) are not considered part of the AMS and do not have to be reduced if they are made

under production limiting programs. There is also a “de minimis” provision which allows

countries to exclude product specific support from the calculation of the AMS when it does not

exceed 5 percent of the value of production of that commodity.

The Uruguay Round Agreement reinforces programs of domestic agricultural reform that

have been implemented in most OECD countries since 1986 due to budget constraints.

Unfortunately major U.S. and EU farm income support programs (the above “deficiency

payments”) have been exempted from the AMS calculation, but continuing budgetary problems

will provide a brake on the use of this loophole.

Third, under reduction of export subsidies, there are once again targeted reductions for

developed and developing countries. Countries also committed to a standstill, that is not to grant

export subsidies on products that currently do not benefit from such assistance. Privately

financed export aid is not covered by the Agreement. The export subsidy reductions (as for the

lowering domestic subsidies) have been fixed in ad valorem or nominal terms without allowance

for inflation adjustment, so that subsidy reductions in real terms will continue after the transition

periods. They should therefore have a deeper liberalizing impact over time.

The second important result from the Uruguay Round is the ban of MFA (Multi-fibre

Arrangement). This is done by converting the existing quotas on textile and apparel to tariff rate

quotas, and then the tariff will be phased out within a decade. It is obvious that the abolishing of

the MFA will benefit the developed country importers because they will be able to source

imports efficiently. Also, they will benefit from being able to rationalize their production

decision, such as to substitute imports for domestic production, or vice versa, when it is

12

appropriate. The benefit for developing country exporters, however, can be ambiguous. When

the quota is abolished, a significant amount of quota rent might be lost. Those exporting

countries who historically have quotas larger than their current comparative advantages will also

likely to suffer from the ban of the MFA. On the other hand, those exporters who are very

efficient and could compete in the world market, but are currently very restricted by the quotas,

are the ones who likely to benefit.

In terms of manufacturing commodities, the round achieved very substantial tariff

reductions in both the developing and developed countries. Tariff on imports to developed

countries are lowered by an average of 40 percent. The proportion of developed countries’ tariff

on industrial products subject to bindings rose from 94 to 99 percent. The proportion of

developing countries’ imports of manufacturing products subjects to bindings increased from 13

percent to 61 percent after the round.

The overall average tariff cut for industrial commodities is, however, hard to determine

because the differences in the product covered in the round, and the dependence of the tariff cuts

on bilateral negotiations which varies across countries. In addition, there has not been much

pressure from the WTO to developing countries in terms of tariff reductions. The requirement

was to convert the non tariff barriers, and to bind the existing tariff to 40 percent. The pressure

for tariff reduction in the manufacturing commodities was not strong for developing countries.

Some estimates showed that the range of average tariff cuts was from 30 to 45 percent in

developed countries, and around 28 percent in developing countries.

APEC (Asia Pacific Economic Cooperation)

APEC was formed in 1989, partly due to uncertainty in the outcome of the Uruguay

Round. Up to 1993, APEC was the dominated by bureaucrats and was an informal forum to

undertake various discussions. Since the beginning, the consensus was that APEC should not be

institutionalized and not be a negotiating body.

13

There has been more significant progress since 1993. The informal meeting of APEC

Leaders in Blake Island in 1993 provided the vision of free trade and investment in the region.

The meeting in Bogor in the following year set the long term goals of free and open trade and

investment in the Asia Pacific. The time limits are set to be 2010 for the industrialized countries

and 2020 for the developing countries. The Osaka meeting in 1995 laid out the framework to

translate and formalized the long term visions and goals. The recent meeting in Manila in 1996

produced the MAPA (Manila Action Plan for APEC) that consists of Individual Action Plans

(IAP), Collective Action Plans (CAP), and other joint activities in various APEC forum.

Since the Bogor meeting, it has become more clearer that APEC cooperation is based on

three pillars: 1) trade and investment liberalization and facilitation (TILF); 2) Economic and

Technical Cooperation (ETC); and 3) development cooperation. Because APEC is not meant to

be a negotiating body, the process of liberalization is voluntary and concerted unilateral actions

to be undertaken by every country based on its own plans, priorities, and taking into account the

different levels of developments. Agreement is reached through a consultative process and based

on consensus.

The Osaka meeting has laid out a set of nine clearly defined principles for APEC4. These

nine principles are then re-emphasized again in Manila with the Manila Action Plans for APEC

(MAPA). Those initiatives and actions come from both individual and collective action plans in

various areas, especially in customs, standard and conformance, competition policy and

deregulation, intellectual property rights, dispute mediations, rules of origin, and mobility of

business people.

APEC members have been lowering tariffs and reducing the number of non-tariff barriers

(NTB) based on their unilateral reform and deregulation initiatives since 1989. As a result, the

4 They are: 1) comprehensiveness, 2) WTO-consistency, 3) comparability, 4) non discrimination, 5) transparency, 6)standstill, 7) simultaneous start, continuous process and differentiated timetables, 8) flexibility, and 9) cooperation.

14

average tariff levels (unweighted) between 1988 and 1996 has been lowered by almost half from

15 to 9 percent. Currently, 14 members have average tariff levels below 15 percent with majority

of those at below 10 percent. The three other members are already at close to zero percent.

Unilateral reforms have also reduced the number of non-tariff barriers. For APEC as a

whole, the non tariff barriers have been cut by half, declining from 9 percent of import coverage

to 5 percent during this period. In some economies such as Australia, Chile, Indonesia, New

Zealand and Singapore, the decline in non-tariff barriers has been dramatic leading to almost

elimination. The use of import licensing and restriction in Indonesia, Malaysia, Philippines, and

Thailand for example are not more than 2 to 3 percent of all tariff lines. Singapore and Hong

Kong have continuously followed a free trade regime.

Because APEC is based on unilateral initiatives, there is a question on whether APEC

tariff reductions are well on track in terms of going towards the Bogor target. The answer is yes,

and even the progress is faster and deeper that the Uruguay Round commitments. There are

some champion countries in APEC, namely those which have already low tariffs and are at or

near the indicative Bogor target (Hong Kong, Brunei, Singapore); and those who have committed

to extensive tariff reduction so that their IAP is more progressive than the Bogor tariff reduction

schedules (Chile, China, Indonesia, and the Philippines). Because of the voluntary nature of

APEC, keeping the liberalization process on track in terms of Bogor target is very important. It

means that tariff reduction will follow a downward trajectory, or at least not returning to higher

bound tariff levels.

The unilateral actions which took place as part of member’s reform processes have been

more effective in reducing the tariff lines. This is clearly shown especially for countries which

did not offer tariff reductions to the UR, but have bound rates that are much higher than their

applied rates such as Indonesia, Chile, and Mexico. China and Taiwan, who are not member of

the WTO, have undertaken voluntary liberalization. More than half of the 17 member economies

submit their IAP which go beyond the Uruguay Round commitments.

15

MEASURING THE IMPACT OF TRADE LIBERALIZATION

Model, Data and Simulation

The impact of trade liberalization based on Uruguay Round and APEC commitments is

measured by using a computable general equilibrium model called GTAP (Global Trade Analysis

Project) which originated at the Industrial Commission in Australia and was further developed at

Purdue University, Indiana (Hertel,1996). The use of general equilibrium framework is important

because the model will directly link any changes in any country and any sector to other sectors

and countries. The general equilibrium model approach reflects the fact that countries in the

world are linked directly or indirectly in an inter-connected network.

Similar to other CGE models, the GTAP is made up of regional sub-models that describe

the economic activities of firms, households, and governments. The central feature of the model

is the input-output structure, that links industries together in a value added chain starting from

primary goods and moving up to intermediate processing and to the final consumer goods for

households and governments. Prices and quantities supplied are then determined simultaneously

in all primary factor markets and in domestic and international commodity markets.

While the standard CGE is a one country model, the GTAP is a multi-country model. As

a multi-country CGE model, the aggregation is based on both sectoral and regional classification.

For the analysis, the world economy is classified to several sectors and regions. The data that

support the GTAP model consists of full 37-sector and 30-region data base. These data are built

on contributions from many countries, especially from those researchers who use the model in all

over the world. The project is also supported by several national and multinational agencies such

as the Industry Commission Australia, World Bank, WTO, and USDA (United State Department

of Agriculture).

16

Because a model with complete 37 sectors and 30 regions is too large and cumbersome,

a smaller aggregation is commonly used. This study uses 10-region by 3-sector aggregation, a

similar aggregation that was used by Young and Huff (1996). The data used in this study is the

second version of GTAP data, that were built based on 1992 input-output data. Regional

aggregation is tailored to represent Asia Pacific economies with composition as follows:

Region 1 United States, Canada, Mexico (North America) Region 6 Taiwan

2 Japan 7 Malaysia and Singapore

3 Australia and New Zealand 8 Thailand and Philippines

4 China and Hong Kong 9 Indonesia

Individual countries were separated as much as possible to measure the impact of liberalization

on welfare and trade flows in greater detail. However, to keep the analysis in manageable size,

several economies have to be combined in one region.

The sectoral aggregation consists of three sectors, namely food and agriculture, natural

resource and manufacturing, and services. This aggregation is admittedly large, but it captures

three major sectors in the economy which fit to major schemes of international trade

liberalization. In fact, around seventy percent of trade by APEC economies is in resource and

manufacturing, with about twenty percent in services, and ten percent in food and agriculture.

Larger sectoral aggregation is used because the focus on this study in on changes in welfare and

general trade pattern. Further study with more detail sectoral aggregation will be needed to

measure the more specific changes in trade patterns in Asia Pacific.

Scenarios

17

To represent two major liberalization schedules in Asia Pacific, there are three scenarios

used in this study. The first is the pure UR/WTO liberalization, the second is the pure APEC-

IAP scenario, and the third is a combination between WTO and APEC-IAP.

The first scenario or the WTO scenario is called the based scenario because it is the least

restrictive scenario in terms of border tariff reduction, especially for developing countries. The

WTO also provides the base scenario for agricultural liberalization which has not been touched

by other liberalization schedules like APEC. Because the WTO results clearly distinguish the

different rules and commitments between developed and developing countries, the reduction in

tax and subsidies are also classified into developed and developing countries5. First, the domestic

tax and subsidy on food and agriculture production were cut by 20 percent in developed

countries, and 13 percent in developing countries. Second, export tax and subsidy on agricultural

exports were also cut by 36 percent and 24 percent for developed and developing countries

respectively, while the export subsidies for manufacturing products were completely abolished.

Third, following the WTO commitments, the tariff for mining and manufacturing products were

cut by an average of 43 percent for developed countries and 28 percent for developing countries6.

The second scenario is the pure APEC trade liberalization which is developed based on

Individual Action Plan (IAP) submitted by each APEC member country. For the time being,

APEC-IAP covers mainly import tariff reduction, with no commitment on the removal of

domestic distortion and agricultural liberalization. In fact, many countries have clearly excluded

agriculture from their liberalization schedule. Because of its voluntary nature, tariff reduction

following the APEC-IAP varies between countries. This study simulates APEC 2010, when the

average tariff rate is targeted to be around 0 to 5 percent for developed countries, and around 5 to

10 percent for developing countries. Calculated from initial weighted average tariff in 1993,

estimated tariff reductions varies from around 50 in the case of Malaysia and Singapore, and 80 5 Tariff and subsidy reductions for WTO scenario are based on Stephenson and Erwidodo(1995).

18

percent in the case of Thailand and Philippine. It is clear therefore, that while APEC-IAP does

not touch much of domestic distortion and agricultural liberalization, the tariff reductions in term

of APEC-IAP is much more progressive than the WTO commitments.

The third scenario is the combination between WTO and APEC-IAP scenarios which

captures the additional benefit of one scenario the another. This combination scenario captures

not only the removal of domestic distortion in agriculture and export tax following the WTO

schedules, but also the more progressive import tariff reduction following the APEC-IAP.

RESULTS

Welfare Impact

The impact of trade liberalization on welfare are presented in Table 3. The first three

columns of Table 3 present the result from this study, while the last two columns present the

results by Young and Huff (1996). In general, the results clearly show that the more progressive

and the bigger scope of trade liberalization would lead to bigger world welfare. For example,

the pure APEC-IAP scenario (column 2) which relies on the removal of border protection

without any commitments on reducing domestic distortion will lead to smallest benefit in terms

of the world welfare. At the other extreme, the removal of all border tariff between APEC and

Non-APEC countries (column 5), which represents almost free world trade will lead to biggest

welfare gain.

While two sets of result from Young and Huff (1996) in the last two columns do not

capture the realistic scenario for APEC7, they are worth to be compared. The formation of

6 It is not easy to measure the exact tariff reduction for developing countries because the offer from developingcountries often take the form of tariff bindings, and sometimes at a higher level than the actual applied tariff rates.7 The study was done during the early development of APEC. In their study, they modeled an extreme liberalizationschedules where border tariff were completely removed at once. In its further development, APEC adoptedunilateral reform where each country submitted its own gradual tariff reduction.

19

trading block in APEC, namely removing of all border tariffs between APEC economies while

maintaining tariffs between APEC and Non-APEC economies would lead to almost US $ 50

billion increase in terms of world welfare. However, when the rest of the world (ROW)

reciprocates, the total welfare gain increased by almost US $ 72 billion. The result clearly show

that extending APEC liberalization to Non-APEC region would benefit not only Non-APEC

economies, but also APEC member economies. Indonesia, for example, would suffer (US $ 200

million) from the formation of APEC trading block because of trade diversion effect. Following

preferential trade arrangement in APEC, the volume of Indonesia’s import from non-APEC

region (ROW) decreased because other APEC countries could undercut the price. But when the

production in APEC countries is not as efficient as the production in the rest of the world, a

welfare loss arises due to Indonesia switching the source of imports away from the more efficient

source. However, this loss may or may not be offset by the gain in welfare from tariff removal.

In fact, when APEC economies open its trade to Non-APEC countries, Indonesia would get

additional gain of US $ 569 billion. One important lesson is that the move toward trading APEC

trading block is foolish, because APEC member economies would get larger benefit by

participating in multilateral or global trade liberalization.

The simulation results of this study support the argument that for most countries,

participating in the UR/WTO trade liberalization is crucial to get the most benefit from APEC

liberalization. By comparing column one and two in Table 2, it is clear that liberalization

through the UR/WTO would lead to bigger world welfare gain compared to the participation in

APEC-IAP alone. The Uruguay Round would increase world welfare by around US $ 44

billion, compared to US $ 26 billion from APEC-IAP8. The combination scenario leads to more

than $ 50 billion additional world welfare. In other words, the additional benefit from APEC-

IAP to the UR/WTO liberalization is around 16 percent, while the additional benefit of

participating in UR to the APEC-IAP is almost 100 percent or doubled.

8 The welfare gain in this study is smaller compared to the results of Young and Huff (1996) because the scenariosfor this study do not completely remove the border tariffs.

20

In CGE modeling of international trade, there are two potential sources of welfare

changes from trade liberalization for each country. One is from more efficient resource

allocation which always leads to improvement in welfare. Another factor is the changes in terms

of trade, or the relative price of exports over imports, which may improve or deteriorate

depending on the country’s own and other countries’ liberalization. If the change in terms of

trade is negative and large enough, then there is a possibility that welfare will decline as a result

of liberalization. In other words, the loss from deteriorating terms of trade dominates the benefit

from increasing efficiency in domestic resource allocation. This is the case of Thailand and

Philippine which are predicted to suffer from trade liberalization because of deteriorating terms

of trade. Another reason for the lost is the high level of protection in Thailand’s economy. In

fact, Thailand has the highest level of border tariff among Southeast Asean countries (more than

37 percent for manufacturing in 1993).

The superiority of UR/WTO over the APEC-IAP liberalization is clear in the cases of

North America, Australia and New Zealand, Malaysia and Singapore, Philippine and Thailand,

Indonesia, and also ROW. For example, Indonesia could gain US $ 433 million from the

participation in the WTO, which is more than 12 times higher than the US $ 35 million

additional welfare by participating in APEC-IAP alone9. The major difference between

UR/WTO and APEC-IAP is the removal of domestic distortion and agricultural liberalization.

The result shows that the removal of domestic distortion and other agricultural liberalization

would provide bigger welfare gain compared to more progressive border tariff reduction for

manufacturing products through APEC-IAP. More open agricultural trade will clearly benefit

countries with comparative advantages in agricultural production such as North America,

Australia, and New Zealand because of their increasing agricultural exports. The benefit for

South East Asian Countries which have high protection for their agricultural sector is mainly due

to the removal of domestic distortion and reduction of tariff for agricultural imports. The

9 This is consistent to other studies by Stephenson and Pangestu (1996) and also Erwidodo and Feridhanusetyawan(1997) which show that Indonesia would get more benefit by participating in the UR/WTO rather than in APECalone. The magnitude of the welfare gain is different because of different data aggregation and different detailedtariff reduction used in the studies.

21

removal of both domestic distortion and border protection would lead to more efficient domestic

resource allocation and cheaper food and agricultural products in domestic market.

However, the newly industrializing economies in Asia Pacific such as Korea, Japan,

Taiwan, and also China and Hong Kong would benefit more by participating in APEC-IAP

alone, rather than participating in the WTO/UR liberalization agenda. This is reasonable because

those East-Asian countries have traditionally large share of APEC export and import. Those

newly industrialized countries have been traditionally vary active in Asia-Pacific trade for years,

and therefore, when border tariffs in Asia Pacific is reduced, they would get the larger benefit. It

is true that they would get benefit additional benefit by removing their domestic distortion and

reducing their tariff on agricultural products, but the benefit from more progressive tariff

reduction in manufacturing products in Asia Pacific is more superior. It is worth mentioning that

Japan is the big winner in any scenario because Japan has very large share of APEC exports.

Under various scenarios of trade reforms, Japanese export and terms of trade would increase, and

both of them would lead to large welfare gain.

Selected Examples: Indonesia and Korea

More detailed information on the impact of trade liberalization following the combination

scenario between UR/WTO and APEC-IAP is presented in Table 4. Trade liberalization will

certainly lead to broad changes in the structure of both Indonesian and Korean economy. In both

countries, aggregate output will shift out from agriculture and service to manufacturing. The

productions of the food and agricultural sectors are predicted to decline by 3.4 percent in

Indonesia, and 5.6 percent in Korea. The service sectors are also predicted to produce slightly

smaller output. The output in the resource and manufacturing sectors will increase by 2.8 percent

in Indonesia and 4.0 percent in Korea. These results clearly indicate that protective agricultural

policies adopted by Indonesia and Korea will lead to weak performance of agricultural sector in

the more liberal and global world economy. For Indonesia, the decreasing performance of

22

agricultural sector, accompanied by larger output of manufacturing sector would boost the

structural transformation to more industrialized economy.

The changes in economic structure are also reflected in the significant changes in the

demands for factor inputs. The aggregate demand for labor and capital in the agricultural sector

will decrease by around 5 percent in Indonesia, and around 9 percent in Korea. Labor and

capital will move to the more productive manufacturing sector where demands for labor and

capital are predicted to increase by around 3 percent in Indonesia and 4 percent in Korea. In

Indonesia’s case, once again, this will lead to faster labor market transformation characterized by

labor movement from agricultural sector to non-agricultural sectors accompanied by labor market

tightening and increasing real wages. One might argue that smaller contribution of agricultural

sector in the economy would potentially create employment problem in rural areas. Another

argument, however, views that slower growth of the agricultural sector would permit other

sectors to grow faster as labor moves out from the agricultural sector and enters the more

productive sectors.

Indonesia’s export in manufacturing products will receive large boost from trade

liberalization. While the agricultural exports are predicted to decrease, the manufacturing

exports will increase substantially. It is predicted that Indonesia’s total export in resource and

manufacturing products will increase by more than 20 percent, while the export to North

America alone will increase by more than 76 percent. Korea’s export in resource and

manufacturing will increase by around 28 percent, and the export to Indonesia increase by

around 66 percent. This shows that with trade liberalization, there will be a big wave of Korean

resource and manufacturing products entering Indonesian market.

Total import to Indonesia and Korea will also increase by significant amount as a result of

trade liberalization. Both Indonesia and Korea are predicted to import 20 percent more

agricultural products from abroad, mainly from North America, Australia and New Zealand. For

example, total export of agricultural products from North America to Indonesia and Korea will

23

increase by 51 percent and 66 percent respectively. North America will also dominate the service

sector as its services exports are predicted to increase by more than 16 percent to Indonesia and

Korea.

CONCLUSION: LESSONS FOR ECONOMIC COOPERATIONS

Because of growing economic interdependence and market integration, Asia Pacific

economies realize the need for stronger economic cooperation in the region. As policy changes

in one economy could easily be transformed to other economies, every economy realizes the need

for coordinating its economic policy with that of other countries. The formation of various

economic cooperation in Asia Pacific (APEC, NAFTA, AFTA, etc.) all characterized by stronger

move for trade liberalization.

The empirical results of this study showed several factors which are important in forming

economic cooperation. First, the more progressive liberalization would lead to the bigger welfare

gain. The complete elimination of border tariff, for example, would lead to much bigger welfare

compared to gradual tariff reductions.

Second, reduction in domestic distortion or domestic deregulation is crucial to get the

most from trade liberalization. Uruguay Round agreement that reduced domestic distortion, for

example, is far more superior than the APEC-IAP which relies merely on border tariff reduction.

Less distorted domestic economy would lead to more efficient resource allocation and increase

country’s competitiveness in the world market.

Third, countries with more open trade policy and larger share of trade in their GDP would

get much benefit from trade liberalization. East Asian economies such as Japan, Korea, Taiwan,

Hong Kong, which have participated extensively in the world and Asia Pacific trade, will get the

most benefit from trade liberalization. They are used to be exposed to international competition

and will survive in the more competitive world market.

24

Fourth, the larger scope of international liberalization would lead to larger welfare gain.

It has been shown that multilateral liberalization would create the biggest additional gain to the

world welfare. The formation of trading block, or preferential trade reform, would not only

reduce the world welfare but also decrease the individual country’s welfare.

Trade liberalization through the UR/WTO commitments and APEC-IAP schedules will

change the structure of Indonesia’s and Korea’s economy. In both countries, resource will move

from the agricultural and services sectors to resource and manufacturing sector. Export of

manufacturing products will increase, accompanied by decreasing labor and capital demands in

the agricultural and services sectors, and also increasing imports of agricultural and services

products.

REFERENCES

Asian Development Bank, “Emerging Asia: Changes and Challenges” ADB, Manila, 1997.

Bank of Indonesia. “Laporan Tahunan Bank Indonesia 1996-1997” (Bank of Indonesia AnnualReport 1996-1997).

Erwidodo and Tubagus Feridhanusetyawan. “Indonesia’s Agriculture: Facing the APEC andWTO.” Paper presented at the Workshop on Trade and Environtment: Indonesia and China,during the Australian Agricultural and Resource Economics Society, Goldcoast, Australia,January 1996.

GATT Secretariat, The Results of the Uruguay Round of Multilateral Trade Negotiations, MarketAccess for Goods and Services: Overview of the Results, Geneva November 1994.

Hertel, Thomas W. (ed). Global Trade Analysis: Modeling and Applications. CambridgeUniversity Press, 1996.

Pangestu, Mari. “The Indonesian Textile and Garment Industry: Structural Change andCompetitive Challanges.” In Waves of Change in Indonesia’s Manufacturing Industry. Edited byMari Pangestu and Yuri Sato. Institute of Developing Economies. Tokyo. 1997.

25

Pangestu, Mari and Sherry Stephenson. “Evaluation of Uruguay Round commitments by APECmembers” in Priority Issues in Trade and Investment Liberalisation: Implication for the AsiaPacific Region. Edited by Bijit Bora and Mari Pangestu. PECC, Singapore, 1996.

Pangestu, Mari and Tubagus Feridhanusetyawan. “Liberalization of the Agricultural Sector inIndonesia: External Pressures and Domestic Needs,” Paper presented at the Conference on Foodand Agricultural Policy Challenges for the Asia-Pacific and APEC, Manila, October 1-3, 1996.Forthcoming APEC publication.

PECC (Pacific Economic Cooperation Council), “Perspectives on the Manila Action Plans forAPEC,” PECC Publications. Edited by Mari Pangestu, Christopher Findlay, Ponciano Intal, Jr.and Stephen Parker. December, 1996.

Stephenson, Sherry and Erwidodo. "The Impact of Uruguay Round on Indonesia's Agriculture",Report to the Minister of Agriculture, 1995.

Young, Linda M. and Karen M. Huff. “Free trade in the Pacific Rim: On What Basis” in GlobalTrade Analysis: Modeling and Applications. Edited by Thomas W. Hertel. Cambridge UniversityPress, 1996.

Warr, Peter. “The Thai Economy: From Bloom to Gloom?”. In Southeast Asian Affairs 1997.ISEAS. 1997.

26

TABLE 1. COMPOSITION OF EXPORTS: SELECTED EAST ASIAN ECONOMIES

Economy Year PrimaryProducts

Textile OtherLabor

Intensive

Electronics Machinery ScaleIntensiveItems

OtherHumanCapitalIntensiveItems

TotalManufacturing

PRC 1994 20.3 9.7 34.9 10.4 4.2 7.2 8.4 79.7

Hong Kong 1970 4.8 10.4 49.8 10.5 0.8 1.3 8.0 95.31994 5.2 6.8 36.5 16.0 9.3 3.2 15.5 94.8

Indonesia 1970 98.6 0.2 0.0 0.0 0.0 0.0 0.3 1.21994 60.7 4.4 16.4 3.6 1.2 3.8 6.4 39.3

South Korea 1970 35.2 10.6 29.0 5.3 1.0 3.5 1.7 64.91994 8.1 12.0 10.2 25.6 8.9 24.4 8.1 91.9

Malaysia 1970 94.7 0.4 0.5 0.3 0.7 1.4 0.8 5.31994 29.4 1.5 6.8 32.8 11.6 6.7 8.7 70.6

Philippines 1970 96.8 0.5 0.4 0.0 0.1 1.4 0.2 3.31994 22.6 1.4 13.1 18.2 2.2 2.9 1.6 77.4

Singapore 1970 71.2 3.5 3.3 4.0 4.0 5.3 3.4 28.81994 17.1 1.5 3.4 28.3 29.4 6.7 8.6 82.9

Thailand 1970 90.4 1.2 0.2 0.1 0.0 0.4 0.5 5.91994 31.1 3.9 19.9 15.5 12.2 6.1 7.8 68.9

Source: ADB (1997)

27

TABLE 2. ASIAN EXPORT AND IMPORT SLOW DOWN

Export Export Import ImportEconomy 1995 1996 1995 1996

China 21.0 -11.8 15.3 -2.2

Hong Kong 13.3 0.0 4.0 1.0

Taiwan 20.0 3.9 21.3 -2.2

Indonesia*) 18.5 7.5 26.8 10.3

Japan 4.5 -8.2 17.5 3.4

Korea 25.5 4.3 28.2 7.3

Malaysia 20.4 8.7 25.3 -0.4

Philippine 20.6 24.8 18.9 38.7

Singapore 19.3 11.5 16.6 11.7

Thailand 19.4 1.5 22.8 12.8*) Indonesian export data are non-oil export onlySource: Warr (1997)

28

TABLE 3. WELFARE IMPACT OF TRADE LIBERALIZATION (Change in Equivalent Variation, US $ Million)

(1) (2) (3) (4) (5)

REGION

UruguayRound(UR)

APEC -Individual

ActionPlan

(APEC-IAP)

Combinationbetween UR/WTO and

APEC-IAP___________________Welfare Terms of

Trade

APECTrading

Block(Young andHuff, 1996)

APEC andRest of theWorld Free

Trade *)(Young andHuff, 1996)

North America 5541 -6768 1770 -0.63 -6625 -2260

Japan 36554 64408 66896 4.98 71564 93955

Australia andNew Zealand

748 -876 212 -0.75 -205 738

China andHong Kong

273 7039 7622 0.49 5891 7360

Taiwan 2911 3196 4528 1.76 5041 6430

South Korea 3440 3931 5610 0.33 8424 10967

Malaysia andSingapore

-157 -412 -200 -0.32 2120 2802

Thailand andPhilippine

-565 -1272 -517 -3.41 -4577 -1533

Indonesia 433 35 850 -0.19 -202 569

Rest of theWorld

-3591 -43562 -35894 -1.93 -31668 -47195

Total WorldWelfare

45586 25718 50879 49763 71833

*) All tariffs between APEC and ROW (Rest of the World) are removed, but tariff betweenROW-ROW are maintained.

29

TABLE 4. THE IMPACT OF APEC AND WTO ON INDONESIA AND KOREA*) (Percent Changes)

SECTORSFood and

AgricultureResource and

ManufacturingServices

Output Indonesia -3.4 2.8 -0.0 South Korea -5.6 4.0 -0.5

Demand for Factor Inputs Indonesia Land 0.0 0.0 0.0 Labor -4.6 3.3 0.3 Capital -4.9 2.7 -0.3

South Korea Land 0.0 0.0 0.0 Labor -8.8 4.3 -0.1 Capital -9.2 3.6 -0.9

Export from Indonesia(volume) to the World (total) -11.14 20.45 -1.86 to North America -13.6 76.6 -16.5 to Japan -31.8 -0.8 -5.3 to South Korea -0.1 -13.3 -5.5

Export from Korea(volume) to the World (total) -3.8 28.1 -12.2 to North America 2.3 16.5 -17.3 to Japan -4.9 42.1 -6.3 to Indonesia 32.3 65.9 -6.2

Import to Indonesia(volume) from the World (total) 20.3 16.2 4.3 from North America 51.1 29.8 16.5Import to Korea (volume) from the World (total) 24.3 19.0 5.9 from North America 66.4 54.1 16.2*)Trade Liberalization based on combination between UR/WTO and APEC-IPA commitments.