Very Early Draft Please do not quote or cite Economic Effects of Trade Facilitation in APEC: Policy Implications by Scenarios 2006. 3 Sangkyom Kim (KIEP)
Table of Contents I. INTRODUCTION II. TRADE FACILITATION: THEORY AND PRACTICE 1. Trade Facilitation, Trade Costs, and Trade Flows 2. Overall Gains from Trade Facilitation 3. Overview of Achievements in Trade Facilitation: Case of Korea III. ECONOMIC EFFECT OF TRADE FACILITATION 1. Indexation of Trade Facilitation 2. Scenarios 3. Simulation Result: Economic Effect by Scenarios IV. CONCLUDING REMARKS 1
I. INTRODUCTION The 13 th APEC Economic Leaders Meeting, held in Busan in November 2005, adopted the Mid-term Stocktake of Progress towards the Bogor Goals report and the Busan Roadmap to the Bogor Goals. The Busan Roadmap contains six strategies and specific ways to pursue the Bogor goal as follows: 1) support for a multilateral trading system, 2) strengthening of collective and individual actions, 3) promotion of highquality FTAs/RTAs, 4) Busan business agenda, 5) strategic approach to capacity building, and 6) pathfinder approach. The Bogor goals of free trade and investment in the Asia-Pacific region for 2010 for industrialized economies and 2020 for developing economies were set out in the Bogor Declaration in 1994, and this roadmap will serve as one of the most important guides for APEC s TILF activities until the goals are accomplished. In particular, the Busan Business Agenda suggests that member economies take concrete action to achieve an additional 5% reduction in transaction costs by 2010. Although APEC has emphasized trade liberalization and facilitation from the onset of its establishment in 1989, assessment of its first ten years of Trade Investment Liberalization and Facilitation (TILF) activities after Bogor have witnessed that more resources have been invested into activities related to tariff reduction. However, after failing to reach an agreement in the EVSL initiatives in 1988, APEC began to place more emphasis on seeking alternative means to achieving the goals. In 1999, at the 11th APEC Ministerial Meeting in Auckland, emphasis on the need to speed up the process of trade facilitation in the fields of customs procedures, standards and business mobility were stressed. APEC s target on trade facilitation was set for the first time in 2001, when Leaders met in Shanghai agreed to reduce average business transaction cost by 5 percent within 5 years. The Shanghai Accord States: Leaders instruct Ministers to identify, by Ministerial Meeting in 2002, concrete actions and measures to implement the APEC Trade Facilitation Principles by 2006 in close partnership with the private sector. The objective is to realize a significant reduction in the transaction costs 2
by endeavoring to reduce them by 5% across the APEC region over the next 5 years. Leaders also instruct Ministers to explore the possibility of setting objective criteria on trade facilitation, taking fully into account the diversity among the members as well as progress achieved in respective economies so far. Leaders also agree that assistance programmes to help build the capacity of developing economies in trade facilitation is particularly important. Since then, APEC s efforts to promote trade facilitation have emerged as an important engine for achieving Bogor goals. As a follow up to the mandate to reduce transaction cost as addressed in Shanghai Accord, APEC member economies developed a Trade Facilitation Action Plan (TFAP) and agreed to report annually the progress individual economy has made in the area of 1) customs procedures, 2) standard and conformance, 3) business mobility, and 4) e-commerce. As A Mid-term Stocktatke of progress Towards the Bogor Goals report clearly suggests that trade and investment facilitation, transparency and behind-the-border regulations and administrative procedures are now emerging as important determinants that ensure that Bogor goals are achieved under new economic environment. More specifically, APEC Ministers met in Busan instructed APEC Senior Officials to carry out further concrete actions in identified priority areas, such as improving customs procedures, enhancing the alignment of domestic standards, facilitating business mobility and fostering a paperless trading environment, with a view of producing tangible benefits for the business community. The purpose of this paper is not to develop work plans that would take TFAP for successful implementation of 5 percent reduction in business transaction costs by 2006 and beyond. On the contrary, this paper will attempt to draw up a series of policy options and strategies that APEC policy makers may utilize in the course of constructing Action Plans to achieve Busan Roadmap with particular reference to trade facilitation activities. As part of these efforts, we will briefly analyze the economic significance of the trade facilitation in theory, and then overview the achievements made by Korea in the selected areas relevant to trade facilitation as reference. Next, with a view to make a realistic empirical analysis we will set up eight different scenarios. This research employed the Computable General Equilibrium (CGE) Model in order to measure each scenario quantitatively, and also introduced the Trade Facilitation Index based on the Gravity Model and survey data. Based on analysis and 3
evaluation of empirical outcomes, we will provide policy implications that APEC member economies and policy makers can utilize to develop strategic options conducive to promoting trade facilitation. 4
II. TRADE FACILITATION: THEORY AND PRACTICE 1. Trade Facilitation, Trade Costs, and Trade Flows Trade facilitation can be defined as an effort to pursue greater convenience in international trade through the simplification of economic activities such as the movement of goods and services across borders. In a broad sense it can be defined as the lowering or elimination of non-tariff barriers. More specifically, it is an attempt to lower the costs of administration, standardization, technology, information, transaction, labor, communication, insurance, and financing, as well as reduce the time costs related to these procedures. The administration costs arise during customs procedures, the technology costs are involved during standards procedures, and the information costs arise while importing or exporting goods and services. Those costs result in the loss of economic efficiency and reduce gains from trade. Assuming that total costs related to international trade are equivalent to the price difference between world market price of imported goods and domestic consumer price, we can define this to be trade costs. In this context, trade costs can be divided into three categories. The first category is for transaction costs, consisting of transport and insurance costs. Second are policy costs, which are mainly incurred by protection policies like tariff and non-tariff barriers. Last are trade costs due to the lack of trade facilitation. That is, trade costs incurred by the movement of goods and services across borders can be defined as a sum of transaction costs, policy costs, and facilitation costs. Therefore, the reduction in trade costs resulting from better trade facilitation has an identical effect as a reduction of tariffs or non-tariffs, both resulting in an increase in social welfare through the gains from freer trade. More specifically, we apply the iceberg method, which is a traditional method of explaining transaction costs involved in international trade and derive the following equation. 5
(1+ t) p = c [ ] (1 γ )(1 τ ) p w In this equation, the p w and p c are world market price and domestic price of the imported goods, respectively, and t represents policy costs, where γ represents transaction costs and τ represents facilitation costs respectively. Let us assume that γ (0<γ<1) represents the percentage occupied by transport costs in a single unit of exportable and only (1-γ) arrives at the importing country. Then γ represents direct transaction costs. If we apply this iceberg method to define the trade costs related to trade facilitation, out of the (1-γ) of imports received, τ (0<τ<1) percent will additionally be discarded due to inefficient customs procedures in the importing country. Therefore, only (1-γ)(1-τ) of exportables will enter the domestic market. With these assumptions, we can interpret τ as the facilitation cost. Therefore, according to the above-mentioned equation, trade facilitation improves the welfare of importing countries by narrowing the gap between the world market price (p w ) and domestic price (p c ) of the imported goods, leading to an increase in the volume of world trade. This implies that when τ is closer to 0, the difference between the two prices will narrow and therefore one can expect higher welfare gains. The development of information and communication technology along with great efforts to liberalize trade has brought about a considerable reduction in transaction (γ) and policy (t) costs. At the same time, due to developments in information and communication technology, and increases in e-commerce as well as efforts to increase efficiency in customs procedures, facilitation costs (τ) have also fallen. However, this reduction in facilitation costs has been highlighted recently and is only a small fraction of the reduction in transaction and policy costs. It is believed that there is still plenty of room for additional reductions in facilitation costs, which can lead to a remarkable improvement in the world trade environment. 6
2. Overall Gains from Trade Facilitation The anticipated effects of trade facilitation on the world economy can be summarized as follows: (1) Expected Gains from Trade Facilitation The reduced or eliminated non-tariff barriers through trade facilitation supplement the lowering of tariffs and result in the increase in the world trade volume. Then the world economy and participating countries will be better off. Similar to tariffs, trade facilitation induces a fall in trade costs. It will create more trade and increase gains from freer and easier trade. Trade facilitation will reduce the opportunity costs of international specialization. This will result in more intra-firm trade through vertical integration of multinational corporations. This will directly lead to an increase in trade of intermediary goods and services and, indirectly, lead to an increase in foreign investment, which will raise welfare and produce economic growth. In short, trade facilitation will increase opportunities of outsourcing and expand the fragmentation of production activities across borders. Welfare will be better off through this process. In particular, it will assist in the industrialization of developing economies through the expansion of outsourcing and transferring of technology across borders. Trade facilitation may improve the government s efficiency in administration and may enhance transparency. Other than these anticipated benefits, the government revenue may increase from customs procedure related activities. Trade facilitation will reduce the possibility of international disputes between developed economies and developing economies arising from differences in customs procedures and operating systems. This will reduce the costs of resolving disputes and lead to an increase in world trade. The automation of transactions and the adoption of electronic payments system 7
creates more gains from the reduced transaction costs and gains from tougher competition at the world market. It is expected that trade facilitation will help small and medium enterprises (SME s), especially in developing countries, to be more quickly and actively exposed to the global market. This will in turn produce more gains from trade promising economic growth in developing economies. Another gain in welfare may be achieved by developing economies resulting from trade related regulatory reforms, leading to improvements in areas related to health and safety. Further economic development is expected, by the facilitation of trade related labor force movements through improvements in working environments and the accumulation of human capital in developing economies. Trade facilitation can be easily pushed forward since it has characteristics of a public good and if applied non-exclusively it satisfies the fundamental ideas of the WTO and is consistent with APEC s open regionalism. (2) Expected Costs Accompanying Trade Facilitation Higher implementing costs are expected. Legal and structural infrastructures must be set up prior to carrying out trade facilitation; the amount of skilled labor must be enlarged through continuous education and training; there is also a huge amount of fixed cost involved in obtaining capital and facilities, which are required in improving the system. A discrepancy in Standards among the participating economies is expected. In reality, it will be very difficult to harmonize the differences in customs procedures, systems, infrastructure, labor standard, safety, technology, etc., when each economy is in a different phase of development. There is a difficulty in revealing the effectiveness. Unlike trade liberalization, 8
there are limitations in obtaining statistical evidence of trade facilitation on trade costs. It makes a difficulty to carry out a cost-benefit analysis and thus it creates a political burden for policy makers to push any trade facilitation related policy forward without a quantitative estimation on the expected effect. Free riding problem exists in open regionalism. In addition, this unique characteristic of trade facilitation will inevitably bring about the free riding problem. 3. Overview of Achievements in Trade Facilitation: Case of Korea Building on the successful structural reform that has transformed Korean market into more business friendly one, trade facilitation measures are being carried out to strengthen the elements of transparency, efficiency and competition. One of main objectives Korea s trade facilitation activities is, with no doubt, to reduce transaction cost (trade cost by our definition) by enhancing efficiency. The Korea s ongoing efforts in this endeavor is deeply associated with furthering various reform measures on the one hand, and strengthening R&D capacity by encouraging a more innovative science and technology base on the other. Among other measures, Korea has placed a high priority on simplifying customrelated operations aiming at reducing transaction cost with enhanced security. Korea has continued developing and implementing specific actions and plans of improving channels of communications, technological equipment, automation of customs operations and procedures to simplify trade operations. As a part of its efforts, the Korea Customs Service (KCS) joined the Revised Kyoto Convention in 2003 and has persistently taken necessary institutional measures to adhere to the convention. First, Korea has devised the Customs Code of Conduct, and carried out the Clean and Transparent Customs Movement. Second, it has set up Internet-based Im/Export Clearance System to enhance transparency in its customs clearance process. Third, to strengthen the safety and security while enhancing efficiency, KCS is operating the Cargo Management System for selection and prevention of high-risk cargoes. Fifth, to enhance effectiveness of Customs administration, the KCS has strengthened cooperation 9
with the private sector, and expanded conclusion of MOUs with private enterprises. KCS concluded MOU with the business sector on the customs surveillance operation so as to effectively deal with the increasing volume of trade on one hand and to prevent taking drugs and dangerous objects into the country. By the end of 2003, the number of MOU with business sectors amounted to 674. At the same time, to enhance custom related security, Korea has sophisticated risk management techniques through customs administration informatization, and encouraged businesses to better observe laws and regulations by carrying out Customs-private cooperation projects. In order to make a significant breakthrough for trade facilitation, the KCS will establish the Clearance Single Window in which Customs plays the central role, and by constantly improving logistics flow, it is going to realize seamless clearance procedures. The KCS has put paperless trading in full swing and established the Internet-based Im/Export Clearance System to reduce trade transaction costs. It has also limited Iim/export requirements to items directly related to pubic health, environmental protection and community security, and drastically reduce the number requirements from 5435 in 1999 to 4114 in 2004. In order to expedite logistics flow, the KCS has measured the time required for cargo processing and analyzed causes of delay in clearance procedures. As a result, it succeeded in reducing the clearance time from 9.6 to 5.5 days. Korea also demonstrated a great success in actions and measures taken in the area of standard and conformance. Korea is committed to increase in umber of domestic standards aligned with international standards such as ISO or IEC. As of December 2004, 11,488 Korean Industrial Standards (KS standards), or 99.6% of the 11,535 KS are harmonized with ISO or IEC standard. In the field of ICT, as of December 2004, Korea has aligned 100% of the 693 Safety Criteria fore electric equipment with the relevant international standards. Korea also placed special emphasis on four priority areas identified by APEC as follows: Regarding food labeling, as of 2003, Korea has completely harmonized its domestic standard with 1 international standard (Codex General Guidelines on Claims) out of 4 international standards. It has also finished partial harmonization (12 out of 19 sub-sectors) on 3 international standards and has been 10
continuously revising the unfinished work. For the remaining 1 standard, Korea will finish the harmonization work by the end of 2003. Regarding electrical and electronic appliances, Korea has 20 standards, 15 of which are harmonized with international standards. Regarding rubber products, Korea has 3 standards, 2 of which are harmonized with international standards. Regarding machinery, Korea has 6 standards, all of which are harmonized with international standards. Korea made great effort on its participation in regional and international MRAs, as well as in various conformity assessment bodies. Korea is participants in all voluntary mutual recognition agreements led by five specialist regional bodies (PASC, APMP, APLAC, APLMF, PAC). Korea has joined APEC TEL-MRA stage I and APEC EE- MRA stage I. Korea agreed to have MRA with Singapore and is actively seeking MRA with other partners through APEC and FTA negotiations. Korea has demonstrated continued commitment to facilitating the mobility of business people in the region. With regard to the relaxation of eligibility for long term residents permits for investors, the investors who invest more than 5,000,000 US dollars will be eligible for applying a permanent residence permit. Korea also implemented streamlined temporary residency processing arrangements for the intra-company transfer of senior managers and executives, and specialist defined by individual economies. As of December 2004, nationals from 109 countries, including 15 APEC member economies, can make a short term visit to Korea without visa. Korea has joined in ABTC in 1997 as one of founding members and is actively promoting the usefulness of this scheme to the business community. Implementation of Advanced Passenger System (API) became effective in 2005, and all relevant information on its government website. 11
Table 1. Overview on Implementation of Trade Facilitation Actions and Measures since Shanghai Accord Menu of No of Items No of Items No of Items No of Items No of Items Actions and Measures ) Selected Implemented Completed in Progress Pending Implementation [a] [b] [c] [d] = [b] [c] [e] = [a] [b] Customs Procedures 54 48 39 9 6 Standards 20 20 20 Business Mobility Electronic Commerce 11 11 11 Others (if any) Total 85 48 39 40 37 Source: APEC, 2004. Highlights on Trade Facilitation Work cum Mid-Term Review 12
Table 1 presents the overview on Korea s implementation of trade facilitation actions and measures since Shanghai Accord. The menu of concrete actions and measures for trade facilitation lists out 97 items of actions and measures, with breakdown as follows: Customs Procedures - 60, Standards 20, Business Mobility 6, Electronic Commerce 11. Among these lists, Korea selected 85 items 54 from Customs procedures, 20 from standards, and 11 from electronic commerce. Korea reports that it has commenced implementation of 48 items while implementation of 39 actions and measures under the category of customs procedures have been reported to be completed. 13
III. ECONOMIC EFFECTS OF TRADE FACILITATION 1. Indexation of Trade Facilitation In order to quantify the economic effect of Trade Facilitation on TILF, outcome of the APEC wide survey carried out by KIM and Park in 2001 is employed. In order to draw statistically relevant and economically significant outcome, we divide APEC member economies into three groups: Industrialized Economies (Australia, Canada, Japan, New Zealand, U.S.A.), Newly Industrialized Economies (Hong Kong, China, Korea, Mexico, Singapore, Chinese Taipei) and Industrializing Economies (Chile, China, Indonesia, Malaysia, Peru, the Philippines, Former Soviet Union, Thailand, Vietnam). Brunei Darussalam and Papua New Guinea could not be included due to insufficient data. Tables 2 reports the weighted averaged minimum, maximum and median percentage change in transaction costs, in consumer prices of imports and in import demand that caused by trade facilitation for each group. For the purpose of overcoming data insufficiency and enhancing statistical significance, the survey outcome of the representing economy or economies in each group is utilized to produce the effects of the trade facilitation in three areas: i.e. Industrialized Economies (Japan), Newly Industrialized Economies (Korea), Industrializing Economies (Chile, Indonesia, Malaysia, PNG, Peru, the Philippines, Thailand) According to the outcome of the survey, upon the improvement of 50% in trade facilitation in each of the three areas, the resulting transaction cost reduction effect ranged from the lowest 1.3 percent in the area of the standard for industrializing economies to the highest 15.2 percent in the area of customs procedures for industrializing economies. Applying the same assumptions as before, the maximum reduction of import price is realized in the area of customs procedures at 9 percent for industrializing economies, whereas the minimum effect is expected in the area of business mobility at 1.0 percent increase in demand for imports is taking place in the case of industrializing economies. 14
Table 2. Effects of Trade Facilitation (Survey Results) Effect of Trade Facilitation on Transaction Cost (Survey Result) MIN MAX MED Industrialized APEC Economies Customs Procedures 0.029 0.074 0.052 Standards 0.022 0.059 0.041 Business Mobility 0.036 0.061 0.041 Newly Industrialized APEC Economies Customs Procedures 0.052 0.106 0.079 Standards 0.030 0.085 0.058 Business Mobility 0.031 0.074 0.062 Developing APEC Economies Customs Procedures 0.069 0.152 0.110 Standards 0.013 0.030 0.031 Business Mobility 0.022 0.042 0.032 Effect of Trade Facilitation on Import Price (Survey Result) MIN MAX MED Industrialized APEC Economies Customs Procedures 0.019 0.040 0.029 Standards 0.024 0.041 0.033 Business Mobility 0.018 0.031 0.024 Newly Industrialized APEC Economies Customs Procedures 0.020 0.036 0.025 Standards 0.010 0.033 0.022 Business Mobility 0.009 0.027 0.018 Developing APEC Economies Customs Procedures 0.040 0.090 0.065 Standards 0.015 0.029 0.022 Business Mobility 0.010 0.030 0.020 Effect of Trade Facilitation on Import Demand (Survey Result) MIN MAX MED Industrialized APEC Economies Customs Procedures 0.017 0.034 0.022 Standards 0.015 0.033 0.024 Business Mobility 0.018 0.037 0.027 Newly Industrialized APEC Economies Customs Procedures 0.020 0.045 0.033 Standards 0.018 0.039 0.028 Business Mobility 0.015 0.033 0.024 Developing APEC Economies Customs Procedures 0.077 0.135 0.106 Standards 0.005 0.014 0.009 Business Mobility 0.026 0.046 0.036 Sources: Kim and Park (2001) and APEC (2002). 15
As in the previous results, the facilitation of customs procedures causes the largest increase in demand for imports (13.5 percent). However, the effects of facilitating standards produce a minimum increase in imports (0.5 percent). For example, from the survey, we found that APEC developing economies importing companies expect minimum 2.0 percent increase in import demand if Korea s customs procedures were improved by 50 percent. We consider this figure to represent the degree to which the customs procedures impede trade with their trading partners. That is, higher expectation of import demand increase reveals larger impediments for importing companies passing through. We include four indicators of trade facilitation that measure four different categories of trade facilitation: customs procedures (CP) standards and conformity (SC) business mobility (BM) information and communication technology (ICT) As the first step to quantify the index, we calculate the average effect of trade facilitation by taking a simple average of the three different effects on transaction cost, import price, and import demand in each country. That is, for each of the three groups (represented by the subscript j), the average effect of the improvement in an area of trade facilitation (represented by the subscript f) is calculated as follow. Step 1 [Equation (1)]: (Average Effect of Trade Facilitation on Trade Cost) fj = [(Effect on Transaction Cost) fj + (Effect on Import Price) fj + (Effect on Import Demand) fj ] / 3 for f = CP, SC, BM As the second step to quantify the index, we calculate an average effect of trade facilitation by taking an average of the three countries as a base. 16
Step 2 [Equation (2)]: (Base for the Trade Facilitation Index) f = [ j (Average Effect of Trade Facilitation on Trade Cost) fj ] / 3 for f = CP, SC, BM Then calculate relative ratio of each country to the base value. Step 3 [Equation (3)]: (Trade Facilitation Index) fj = (Base for the Trade Facilitation Index) f / (Average Effect of Trade Facilitation on Trade Cost) fj for f = CP, SC, BM The trade facilitation indices are figured in Table 3. The higher the value of the index indicates, the better trade facilitation incurring cheaper facilitation costs to be paid by importing companies. For the quantification of ICT index, we take KBE (knowledge based economies) indicators for information and communication technology from APEC (2003). Table 4 reports the KBE indicators in APEC (2003) and the ICT index calculated for this research. As the first step to quantify the index, we calculate the average level of ICT by taking a simple average of the five different areas of ICT numbers of mobile telephone, phone lines, and computers per 100 people and shares of internet and e- commerce users in each country and APEC as a whole, then calculate the relative ratio of each country to the APEC average. Higher index values indicate better ICT, incurring lower information costs to be paid by importing companies. 17
Table 3. Trade Facilitation Index of APEC Average Effect of Trade Facilitation MIN MAX MED Industrialized APEC Economies Customs Procedures 0.022 0.049 0.034 Standards 0.020 0.044 0.033 Business Mobility 0.024 0.043 0.031 Newly Industrialized APEC Economies Customs Procedures 0.031 0.062 0.046 Standards 0.019 0.052 0.036 Business Mobility 0.018 0.045 0.035 Developing APEC Economies Customs Procedures 0.062 0.126 0.094 Standards 0.011 0.024 0.021 Business Mobility 0.019 0.039 0.029 AVERAGE Customs Procedures 0.038 0.079 0.058 Standards 0.017 0.040 0.030 Business Mobility 0.021 0.042 0.032 Indexation MIN MAX MED Industrialized APEC Economies Customs Procedures 1.759 1.604 1.686 Standards 0.831 0.910 0.912 Business Mobility 0.856 0.984 1.029 Newly Industrialized APEC Economies Customs Procedures 1.243 1.269 1.268 Standards 0.874 0.771 0.827 Business Mobility 1.121 0.948 0.910 Developing APEC Economies Customs Procedures 0.615 0.630 0.618 Standards 1.535 1.658 1.441 Business Mobility 1.063 1.076 1.076 AVERAGE Customs Procedures 1.000 1.000 1.000 Standards 1.000 1.000 1.000 Business Mobility 1.000 1.000 1.000 18
Table 4. ICT Index for APEC Economies Industrialized APEC Newly Industrialized Developing APEC APEC Mobile Telephone per 100 people 57.71 67.89 16.11 43.40 Phone Lines per 100 people 60.40 45.70 13.80 37.23 Computers per 100 people 47.70 34.20 2.70 31.06 Internet Users (%) 50.92 55.73 4.21 32.24 E-Commerce (%) 0.68 0.56 0.14 0.46 Average 43.48 (I) 40.82 (II) 7.39 (III) 28.88 (A) ICT Index 1.506 (I/A) 1.413 (II/A) 0.256 (C/A) 1.000 Source: APEC KBE Indicator 2003 2. Scenarios In order to attempt to estimate the combined effect of trade facilitation and tariff reduction, different set of scenarios are designed based on following five approaches: 1) trade facilitation, 2) tariff reduction through a linear cut, 3) tariff reduction through the Swiss Formula, 4) a combination of trade facilitation and trade liberalization, and 5) adjustment of time schedule, 6) early implementation of Bogor goal. Scenario Number One : Trade Facilitation 50 percent increase in trade facilitation in the following four areas; Customs procedures Standard and conformity Business mobility E-commerce Target date: developed (2010)/developing (2020) 19
Scenario Number Two: Tariff Reduction Tariff reduction producing equivalent economic effect generated by 50 percent increase in trade facilitation Target date: developed (2010)/developing (2020) Scenario Number Three: Tariff Reduction by Linear Cut 30 percent tariff reduction by linear cut Target date: developed (2010)/developing (2020) Scenario Number Four: Tariff Reduction by Linear Cut 50 percent tariff reduction by linear cut for developed economies 25 percent tariff reduction by linear cut for developing economies Target date: developed (2010)/developing (2010) Scenario Number Five: Tariff Reduction by Swiss Formula a=16 for developed economies a=16 for developing economies Target date: developed (2010)/developing (2020) Scenario Number Six : Tariff Reduction by Swiss Formula a=16 for developed economies a=35 for developing economies Target date: developed (2010)/developing (2010) 20
Scenario Number Seven: Combination of Number 1 and Number 5 50 percent increase in trade facilitation in the following four areas; Customs procedures Standard and conformity Business mobility E-commerce Tariff reduction by Swiss Formula a=16 for developed economies a=16 for developing economies Target date: developed (2010)/developing (2020) Scenario Number Eight: Combination of Number 1 and Number 6 50 percent increase in trade facilitation in the following four areas; Customs procedures Standard and conformity Business mobility E-commerce Tariff reduction by Swiss Formula a=16 for developed economies a=35 for developing economies Target date: developed (2010)/developing (2010) 3. Simulation Result: Economic Effect by Scenarios Table 5-8 provide a summary outcome of the economic effects of each scenario introduced in earlier chapter. The CGE model used in this simulation is multi-sector and multi-region CGE model based on GTAB Database Version 6. In order to evaluate the economic effects, we analyzed the effect on real GDP (Table 5), welfare (Table 6), exports (Table 7) and imports (Table 8). 21
There are several expected effects, mainly on GDP, from each scenario. First, the outcome of the forecast suggests that more than 85 percentage of tariff needs to be reduced in order to achieve equivalent economic effects generated by 50 percent increase in trade facilitation. Second, the research outcome shows that trade liberalization activities through both trade facilitation and the Swiss Formula will result in the greatest increases in GDP overall in the APEC economies, with a 3.39% GDP increase in Korea. Third, our forecasts also indicate that economic effects of tariff reduction by means of the Swiss Formula surpassed the one through a linear cut in terms of potential GDP increases. For example, Korea would experience a 2.07% GDP increase in the case of the Swiss Formula, as opposed to a 1.14% increase from a linear cut. It is worth noting that most industrialized economies and developing economies in Lain America would experience the opposite. When it comes to positive effects, the difference was significantly large between the two formulas, while differences in the negative effects are relatively small. Fourth, all of our forecasts indicate that developing economies, especially those in Northeast Asia, will gain more profits through promoting trade liberalization and trade facilitation than industrialized economies. 22
Table 5. Economic Effects on Real GDP by Scenario (Unit: %) S -1 S-2 S-3 S-4 S-5 S-6 S-7 S-8 Korea 1.31 2.42 1.14 0.84 2.07 1.44 3.39 2.76 Japan 0.30 0.17 0.09 0.13 0.11 0.11 0.41 0.41 China 0.90 0.80 0.39 0.31 0.50 0.31 1.42 1.22 USA 0.37 0.01 0.01 0.01 0.01 0.01 0.37 0.37 Canada 1.01 0.07 0.03 0.05 0.02 0.02 1.03 1.03 AUS 0.66 0.13 0.07 0.09 0.06 0.05 0.71 0.71 NZ 0.97 0.09 0.04 0.05 0.02 0.02 0.99 0.99 Indonesia 0.96 0.16 0.08 0.07 0.07 0.04 1.03 1.00 Malaysia 2.59 1.07 0.51 0.39 0.53 0.29 3.13 2.89 PHIL 2.21 0.44 0.19 0.15 0.16 0.09 2.37 2.30 Singapore 4.42 0.07 0.02 0.02 0.04 0.03 4.45 4.44 Thailand 1.80 1.10 0.53 0.41 0.74 0.47 2.55 2.27 Chinese T 1.20 0.20 0.11 0.08 0.10 0.06 1.31 1.26 HK China 1.96 0.00 0.00 0.00 0.00 0.00 1.96 1.96 Vietnam 2.59 3.26 1.47 1.15 2.28 1.46 4.97 4.12 Mexico 0.72 0.35 0.18 0.13 0.07 0.04 0.80 0.76 Chile 0.96 0.06 0.03 0.05 0.02 0.02 0.98 0.97 Russia 0.78 0.33 0.17 0.13 0.07 0.04 0.86 0.82 Peru 0.60 0.25 0.13 0.10 0.09 0.05 0.69 0.65 23