The Impact of a Free Trade Agreement (FTA) Between Major Asian Economies: A Policy Response to TTIP

Many economists believe that Transatlantic Trade and Investment Partnership (TTIP) will rewrite the rules of the global economy and may have significant disadvantage on developing countries in terms of trade diversion and convergence of standards and national regulatory systems. It is now a widely accepted fact that the rising economic power of Asia, China in particular, gave impetus to negotiations of TTIP. Considering these incentives behind TTIP, there is an increasing possibility of China and other major Asian economies to develop their own Asian Free Trade Area which may lead to disintegration of the world trading system into rival trading blocs. This paper analyses the initial economic impact of possible policy responses by major Asian countries as signing a FTA against TTIP under different liberalisation scenarios. When the recent economic integration efforts in Asia is considered, it is seen that the Regional Comprehensive Economic Partnership (RCEP), which is an enlarged framework for ASEAN+1 FTAs, foresees a more broader and deeper integration than other FTA efforts. That’s why, in this study, the possible FTA in Asia is assumed to be between sixteeen RCEP members. A computable general equilibrium (CGE) analysis with static GTAP model is used to examine the economy-wide effects of FTA’s. Three basic scenarios are tested in the analysis. In the first scenario, the impact of TTIP on signing parties and other countries, Asian countries in particular, are tested. In the second and third scenarios, the impact of a policy response of 16 RCEP countries as establishing a FTA in paralel with the TTIP is analysed. The second scenario includes 100% tariff reduction in industrial products and the third scenario includes 50% tariff reduction in agricultural products in addition to 100% tariff reduction in industrial products. The analysis results show that TTIP will have positive impact only on economies of EU and USA while all other countries will worsen in terms of real GDP. On the other hand, in second and third scenarios, in which Asian countries sign a FTA simultaneously, the Asian countries signing FTA and USA are affected positively while EU and rest of the World are affected adversely.