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The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications

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The Trans-Pacific Partnership (TPP) agreement, now in negotiation among nine Asia-Pacific countries, could yield annual global income gains of $295 billion (including $78 billion for the United States) and offers a pathway to free trade in the Asia-Pacific with potential gains of $1.9 trillion. The TPP is a crucial step on what is becoming a "Trans-Pacific track" of trade agreements, and its expected template promises to be unusually productive because it offers opportunities for the leading sectors of emerging-market and advanced economies. A parallel pathway that the authors call the "Asian track" includes agreements centered on the Association of Southeast Asian Nations (ASEAN), negotiations among China, Japan, and Korea, and proposals for pan-Asian free trade areas. Both the TPP and Asian tracks are large, positive-sum projects that would yield substantial net gains. Asian templates prepare the ground for cooperation by addressing primarily goods liberalization, but the TPP is likely to go further by liberalizing sectors important in both emerging-market and advanced economies (such as services and technology), thus expanding opportunities for trade between them. Together, the TPP and Asian tracks are a dynamic process—an example of competitive liberalization—that could consolidate the "noodle bowl" of existing trade agreements and lead to a Free Trade Area of the Asia Pacific (FTAAP). A comprehensive agreement among all major Asia-Pacific economies does not appear to be feasible in the current macroeconomic and political context but hopefully will become more acceptable in the future. An ambitious TPP template would generate greater benefits from integration than less demanding alternatives, but it will be harder to sell to China and other key regional partners as the TPP evolves toward wider agreements. The importance of Asia-Pacific integration argues for an early conclusion of the TPP negotiations, without jeopardizing the prospects for region-wide or even global agreements based on it in the future.
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The Trans-Pacific Partnership
and Asia-Pacific Integration:
Policy Implications
Peter A. Petri and Michael G. Plummer
Peter A. Petri is a visiting fellow at the Peterson Institute for International
Economics, the Carl J. Shapiro Professor of International Finance at the
Brandeis International Business School, and a senior fellow at the East-
West Center in Honolulu, Hawaii. Michael G. Plummer is the Eni
Professor of International Economics at the Johns Hopkins University,
SAIS-Bologna, and a senior fellow at the East-West Center.  ey thank the
East-West Center and the Peterson Institute for International Economics
for supporting this work and C. Fred Bergsten, Gary Clyde Hufbauer,
Je rey J. Schott, and participants at presentations of earlier results for valu-
able comments.
© Peter G. Peterson Institute for International Economics. All rights reserved.
SUMMARY
e Trans-Paci c Partnership (TPP) agreement, now in negotia-
tion among nine Asia-Paci c countries, could yield annual global
income gains of $295 billion (including $78 billion for the United
States) and o ers a pathway to free trade in the Asia-Paci c with
potential gains of $1.9 trillion.  e TPP’s expected template
promises to be unusually productive because it o ers opportu-
nities for the leading sectors of emerging-market and advanced
economies. An ambitious TPP template would generate greater
bene ts from integration than less demanding alternatives, but
it will be harder to sell to China and other key regional partners
as the TPP evolves toward wider agreements.  e importance of
Asia-Paci c integration argues for an early conclusion of the TPP
negotiations, without jeopardizing the prospects for region-wide
or even global agreements based on it in the future.
INTRODUCTION
e Trans-Paci c Partnership (TPP), currently at an advanced
stage of negotiation, began as a small agreement but now has
big implications.1 e TPP would strengthen ties between
Asia and the Americas, create a new template for the conduct
of international trade and investment, and potentially lead
to a comprehensive free trade area (FTA) in the Asia-Paci c.
It could generate large bene ts—greater than those expected
from the World Trade Organization’s (WTO) global Doha
Development Agenda.  is Policy Brief reports on our
ongoing quantitative assessment (with Fan Zhai) of the TPP
and other Asia-Paci c integration e orts.2
Since the last major multilateral trade agreements were
concluded nearly two decades ago, the action on trade rules
has shifted from global to bilateral and regional agreements.
In 2000 there were six trade agreements among member
economies of the Asia Paci c Economic Cooperation (APEC)
forum; today there are 47, with more in the works. Groups of
“like-minded” partners appear better able to reach agreements
that achieve mutual gains, address wider issues, and mitigate
opposition.  e WTO reports 319 such agreements now in
1.  e negotiations originated in the Trans-Paci c Strategic Economic
Partnership (so-called P4) agreement among Brunei, Chile, New Zealand,
and Singapore.  ey now include Australia, Malaysia, Peru, Vietnam, and the
United States. Canada, Japan, and Mexico have also indicated interest in the
agreement but their participation in the negotiations is uncertain at the time
of this writing.
2.  e results reported here are based on a model described in Peter A. Petri,
Michael G. Plummer, and Fan Zhai, e Trans-Paci c Partnership and Asia-
Paci c Integration: A Quantitative Assessment, East-West Center Working Paper
no. 119, October 24, 2011.  at study will be updated shortly in publications
by the Peterson Institute for International Economics and the East-West
Center. As anticipated in the 2011 version, we expanded the scope of our
preliminary estimates to include (a) foreign direct investment e ects and
(b) the e ects of trade liberalization on the “extensive margin” of trade, that is,
exports by companies not involved in international markets before liberaliza-
tion.  ese and other changes have increased estimated bene ts.  e e orts to
re ne the model’s assumptions and database continue and may lead to further
revisions of the estimates.
1750 Massachusetts Avenue, NW Washington, DC 20036 Tel 202.328.9000 Fax 202.659.3225 www.piie.com
Policy Brief
NUMBER PB1216 JUNE 2012
2
force worldwide.3 Renewed progress on trade and investment
rules could prevent backsliding on existing agreements and
generate much-needed engines for global economic growth.4
For now, regional negotiations o er the best options for
making such progress.
Against this challenging background, the United States
and eight (potentially 11) partners on both sides of the Paci c
are working to shape the TPP into a cutting-edge, 21st century
agreement. US participation,  rst proposed by President
George W. Bush, has become a centerpiece of President Barack
Obama’s trade policy.  e negotiation is complicated and
ambitious in terms of issues and membership.5 If successful, it
could stimulate trade by bene ting the competitive industries
of both emerging-market and advanced economies. And it
could yield an innovative model for consolidating the “noodle
bowl” of existing trade agreements.6
e TPP is a crucial step on what is becoming a “Trans-
Paci c track” of trade agreements.  e track already includes
the P4 agreement among Brunei, Chile, New Zealand, and
Singapore and many bilateral agreements spanning the Paci c.
A parallel “Asian track” includes a major cluster of agreements
centered on the Association of Southeast Asian Nations
(ASEAN), negotiations among China, Japan, and Korea, and
proposals for pan-Asian FTAs.  e Trans-Paci c and Asian
tracks are already stimulating mutual progress.  e TPP may
have been motivated by past Asian agreements, and it appears
to have led to a new investment agreement among China,
Japan, and Korea and to the expected launch of free trade
negotiations among the three later in 2012.
3. See the WTO website, www.wto.org (accessed on March 19, 2012).
4. As argued by the famous “bicycle theory,” liberal trade regimes are inher-
ently unstable and require new initiatives to stay open. See C. Fred Bergsten
and William R. Cline, Trade Policy in the 1980s, Washington: Institute for
International Economics, 1982, 71.
5.  e possible details of the agreements are discussed in our technical paper.
See also Claude Bar eld, “ e Trans-Paci c Partnership: A Model for Twenty-
First-Century Trade Agreements?” AEI International Economic Outlook no. 2,
June 2011; and Deborah Elms and C. L. Lim, e Trans-Paci c Partnership
Agreement (TPP) Negotiations: Overview and Prospects, RSIS Working Paper
no. 232, February 21, 2012.
6.  e full consolidation of preexisting agreements within the TPP is not likely
to be completed at this stage, but importantly TPP negotiators are committed
to establishing common rules of origin and full cumulation of inputs originat-
ing within the region.
Free trade agreements often have geopolitical objec-
tives, and the Asia-Paci c tracks are no exceptions.  e TPP
emerged as a US priority some years ago, but it has recently
become identi ed with the “rebalancing” of US foreign policy
toward sustaining a US presence in Asia. Asian agreements,
in turn, have aimed to promote the ASEAN Economic
Community, improve political relations in Northeast Asia,
and de ne “space” for an emerging China. Much commentary
in the press and from academic observers has focused on these
political issues and, more often than not, has viewed them
from a zero-sum perspective. For example, the TPP has been
portrayed as an e ort to contain China, “a kind of economic
warfare within the Asia Paci c region.7 Meanwhile, some
American observers describe Asia-only agreements as attempts
to establish Chinese hegemony in the region at the expense of
a US role.8 ese harsh perceptions are ampli ed by interest
groups that attempt to in uence the negotiations.
Whatever the merits of such political narratives,
economics suggests much more constructive interpretations.
e TPP and Asian tracks are large, positive-sum projects that
promise substantial gains to all participants. Together, they
are a dynamic process—an example of competitive liberal-
ization—that could lead to better rules for Asia-Paci c and
perhaps global trade. To be sure, the interests of countries
diverge in many details. Asian emerging-market economies,
for example, prefer to focus liberalization on goods trade and
allow extensive exceptions for sensitive products. Advanced
countries, in turn, favor comprehensive liberalization and
coverage of “new” issues that a ect their leading sectors. But
importantly, these divergences mainly a ect the sharing of
what could become a much larger pie.
A CONTEST OF TEMPLATES
From the viewpoint of large economies like the United States
and China, the bene ts from the smaller regional trade agree-
ments have less to do with immediate gains than with their
in uence on the future trading system.  us, the much-
remarked competition between the Trans-Paci c and Asian
tracks appears to be a “contest of templates” for organizing
future cooperation, not economic warfare between them.
From an economic perspective, neither group of countries
would bene t from dividing the region into blocks, but each
could gain from rules that improve the terms of trade for its
strongest sectors.  e tracks can be considered moves in a
7. Anthony Rowley, “What the TPP Is Really About,Business Times
(Singapore), February 2, 2011.
8. Aaron L. Friedberg, “Hegemony with Chinese Characteristics,National
Interest, July-August 2011.
The TPP and Asian tracks are large,
positive-sum projects that promise
substantial gains to all participants.
NUMBER PB1216 JUNE 2012
3
strategic game; they are “disagreement points” in a bargaining
process with large positive-sum results.
e contrast in templates can be documented. Our
research shows that recent US and ASEAN trade agreements
have both included large eventual reductions in tari s (96
and 90 percent of most favored nation [MFN] levels, respec-
tively), but Asian agreements have been slower to take e ect
and have more exceptions.  ere are even more marked di er-
ences between templates in approaching nontari barriers. We
used detailed information from the text of past agreements to
“score” provisions on 21 issues, accounting for the proportion
of potential disciplines covered, the depth of such coverage,
and the enforceability of provisions. As  gure 1 shows, US
agreements had higher scores than ASEAN agreements on
average, and especially in provisions related to competition,
intellectual property rights, government procurement, state-
owned enterprises, and labor. ASEAN agreements had higher
scores than US agreements in a few areas, including dispute
resolution and cooperation (typically provisions on capacity
building). Neither set of agreements received high marks on
small and medium enterprises and science and technology,
areas that are also expected to be covered by the TPP.
What explains these di erences? As already noted, Asian
templates are negotiated by mainly emerging-market econo-
mies with comparative advantages in manufacturing—hence
the focus on market access for goods.  e templates nego-
tiated by the United States re ect the interests of advanced
economies in services, investment, and intellectual property,
and sometimes agriculture.  ey also emphasize rules-based
approaches that are common in a developed-country insti-
tutional setting. Both templates include measures to attract
domestic political support, but those too re ect their political
setting: Asian agreements focus on cooperation and tech-
nology, and US agreements on labor and the environment.
Since potential gains from trade are especially signi cant
among diverse economies, the ideal template will o er market
access for the manufacturing industries of emerging-market
economies as well as good rules for the service, investment,
and technology sectors of advanced countries.9 Asian templates
prepare the ground for cooperation by addressing primarily
goods liberalization, but the TPP is likely to go further by
liberalizing sectors that lead in both types of economies, thus
expanding opportunities for trade between them. Advanced
economies led the liberalization of goods trade in earlier global
rounds and are now seeking similar access for industries in
9. Gary Clyde Hufbauer, Je rey J. Schott, and Woan Foong Wong argue
that the lack of such symmetry helps to explain why the Doha Development
Agenda received little support in advanced economies. See Figuring Out the
Doha Round, Policy Analyses in International Economics 91, Washington:
Peterson Institute for International Economics, June 2010.
new areas of comparative advantage.  e economic case for a
comprehensive template is not that it represents US interests
(although that will be the argument made in US politics) but
that it expands the scope of liberalization and thus potential
gains to all participants.
Despite its advantages, a comprehensive agreement among
all major Asia-Paci c economies does not appear to be feasible in
the current macroeconomic and political context.  us, China
is unlikely to agree now to various concessions—on state-owned
enterprises, services, intellectual property, and labor—that the
United States would likely demand to open its markets further.
e contest of templates is therefore bound to continue until
more favorable conditions develop for bridging di erences. But
conditions could improve over time, and the tracks themselves,
as argued below, could facilitate convergence and compromise.
ECONOMIC IMPLICATIONS OF THE TPP AND
ASIAN TRACKS
Some detractors of regional agreements, including prominent
economists, criticize all such initiatives because they are not
multilateral.  ey implicitly assume that diversion e ects—
harm to excluded countries—will dominate the bene ts of
regional trade and investment creation. Most importantly,
they underestimate, on one hand, the hurdles facing global
negotiations, and on the other, the positive “domino e ects”
of regional agreements on subsequent negotiations.
To assess these e ects, we explored the implications of
Asia-Paci c trade agreements using a state-of-the-art model
of global trade and investment. We added rich detail on tari
and nontari barriers and, recognizing that such barriers will
not be fully eliminated, estimated realistic reductions based
on the provisions of past agreements. We began by gener-
ating baseline projections for 2010–2025, assuming plausible
growth patterns and the scheduled implementation of all
47 existing trade agreements among Asia-Paci c economies
(including, for example, the Korea-US agreement and the
ASEAN Economic Community Blueprint).
We then simulated future agreements with varied assump-
tions about their timing, membership, and content. For the
TPP track, we assumed an agreement among nine partners in
2013 and the addition of four other countries (Canada, Japan,
Korea,10 and Mexico) one year later. For the Asian track, we
10. Korea has not expressed o cial interest in joining the TPP so far.
Korea has good access to the US market through the Korea-US Free Trade
Agreement and its immediate priority is to gain similar access to the Chinese
markets through a bilateral or trilateral agreement. At the same time, senior
Korean policymakers have indicated their continuing interest in the TPP and
Korean membership is probable in the medium term.
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4
Figure 1 Average scores of provisions on major issues
ASEAN = Association of Southeast Asian Nations
Source: Based on Peter A. Petri, Michael G. Plummer, and Fan Zhai, The Trans-Pacic Partnership and Asia-Pacic Integration: A Quantitative Assessment, East-West Center Working Paper no. 119, October 24, 2011.
0.0
0.2
0.4
0.6
0.8
1.0
average score of agreements
United States
ASEAN
NUMBER PB1216 JUNE 2012
5
assumed a China-Japan-Korea agreement in 2013 and a pact
with the ten ASEAN economies three years later.
In some scenarios, we assumed that the tracks would then
lead to a region-wide FTA in 2020. We de ned that outcome
as an agreement among the 21 APEC economies—essentially
the Free Trade Area of the Asia-Paci c (FTAAP) endorsed
in several APEC Leaders’ Declarations. As discussed below,
region-wide free trade could be achieved by various means,
but the FTAAP is a useful prototype.  ese scenarios are illus-
trated in  gure 2; many more are discussed in our technical
report. In each case, we assumed that an agreement would
come into force the year after it was signed and would then
take  ve years to implement.  e structures of agreements
were based on the average templates of recent agreements
involving the United States (TPP track) and ASEAN (Asian
track). is tight timeline enables our simulations to capture
the full e ects of the agreements in a reasonable timeframe.
Table 1 reports the income e ects generated by the simu-
lations. Both tracks of agreements would generate substantial
gains by 2025, especially if they lead to the FTAAP. By 2025,
the TPP track would yield global annual bene ts of $295
billion, and the Asian track $500 billion. Gains from region-
wide free trade would reach $1,922 billion, or 1.9 percent
of world GDP.  e results also show that Asian agreements,
although less ambitious than the TPP, would yield greater
gains—they address larger preexisting trade barriers. And
they suggest that about 20 percent of the total gains would be
associated with foreign direct investment (FDI). All of these
numbers are large absolutely and comparatively—for example,
Gary Clyde Hufbauer and colleagues recently estimated the
bene ts from a Doha Development Agenda agreement in the
$63 billion to $283 billion range.11
Table 2 reports the trade changes generated by the simu-
lations.12 Both tracks would increase trade substantially, but
the e ects of an FTAAP are especially striking, leading to a 12
percent increase in world trade. As the world’s second-largest
exporter after Europe, China would be most dramatically
a ected, with results ranging from modest trade diversion
under the TPP, in which China is not assumed to participate,
to large export increases from initiatives in which it does.
While an Asia-Paci c-wide FTA would lead to great increases
of Asia-Paci c trade, it would also generate enough trade
diversion from Europe, India, and the rest of the world to
raise the prospects for a global initiative.
All of these estimates are uncertain, of course, subject to
many assumptions about the content of future agreements
and the model itself.  e results reported here are based on
assumptions that seemed to us most reasonable—for example,
unlike most other studies, we assume that FTA tari prefer-
11.  ese estimates are not directly comparable to the present results because
they are not scaled to the economy of 2025; in percentage terms they range
from 0.1 to 0.5 percent of world GDP (see Hufbauer, Schott, and Wong,
op cit). Some larger estimates are also reported in Ian F. Fergusson, World
Trade Organization Negotiations:  e Doha Development Agenda, CRS Report
RL32060, Congressional Research Service, Washington, January 18, 2008.
12. Since the implementation of the simulated trade agreements could take
15 years or more, we use a long-term, “full employment” speci cation of the
model.  is means that the trade balance is una ected by trade policy and ben-
e ts appear as higher incomes rather than increased employment. Depending
on economic conditions in 2025, the agreements could mean higher employ-
ment rather than just higher incomes (given an underemployment environment
in 2025), or greater in ation (given an overemployment environment).
Trans- Pacic track
Asian track
FTAAP
2013 2020
China, Japan,
Korea
TPP9
+ Canada, Japan,
Korea, Mexico
+ 10 ASEAN
members
2016
2014
21 APEC
members
Figure 2 Scenarios for the Trans-Pacic and Asian tracks
TPP = Trans-Pacic Partnership; APEC = Asia Pacic Economic Cooperation forum; ASEAN = Association of Southeast Asian
Nations; FTAAP = Free Trade Area of the Asia Pacic
Source: Authors’ illustration.
NUMBER PB1216 JUNE 2012
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Table 1 Income gains under alternative scenarios
Economy
GDP,
2025
(billions of
2007 dollars)
Income gains in 2025
(billions of 2007 dollars) Percent change from baseline
TPP track Asian track FTAAP TPP track Asian track FTAAP
TPP track economies 26,502 128.7 7.8 405.4 0.49 0.03 1.53
United States 20,273 77.5 2.5 266.5 0.38 0.01 1.31
Australia 1,433 8.6 0.2 26.4 0.60 0.02 1.84
Canada 1,978 9.9 0.4 26.2 0.50 0.02 1.32
Chile 292 2.6 0.1 6.5 0.90 0.02 2.23
Mexico 2,004 21.0 4.2 67.7 1.05 0.21 3.38
New Zealand 201 4.5 0.3 5.8 2.25 0.13 2.86
Peru 320 4.5 0.1 6.3 1.42 0.04 1.98
Asian track economies 20,084 –55.9 304.2 844.4 –0.28 1.51 4.20
China 17,249 –46.8 233.3 678.1 –0.27 1.35 3.93
Hong Kong 406 –0.8 42.7 84.9 –0.19 10.51 20.91
Indonesia 1,549 –3.5 12.8 38.0 –0.23 0.83 2.45
Philippines 322 –1.1 5.5 15.9 –0.35 1.72 4.95
Thailand 558 –3.7 9.9 27.4 –0.67 1.78 4.91
Two-track economies 8,660 245.9 210.7 483.4 2.84 2.43 5.58
Brunei 20 0.2 0.6 1.1 1.10 2.77 5.45
Japan 5,338 119.4 103.1 228.1 2.24 1.93 4.27
Korea 2,117 45.8 87.2 129.3 2.16 4.12 6.11
Malaysia 431 26.3 8.3 38.4 6.10 1.93 8.90
Singapore 415 8.1 –2.0 13.6 1.95 –0.49 3.28
Vietnam 340 46.1 13.5 72.9 13.57 3.97 21.46
Others 47,977 –24.0 –22.9 188.6 –0.05 –0.05 0.39
Russia 2,865 –2.0 –2.6 265.9 –0.07 –0.09 9.28
Taiwan 840 –2.9 –15.9 53.0 –0.35 –1.90 6.31
Europe 22,714 –3.4 4.7 –32.6 –0.02 0.02 –0.14
India 5,233 –3.8 –7.9 –29.5 –0.07 –0.15 –0.56
Other ASEAN 83 –0.4 1.0 3.1 –0.50 1.14 3.74
Rest of world 16,241 –11.4 –2.0 –71.4 –0.07 –0.01 –0.44
World 103,223 294.7 499.9 1,921.7 0.29 0.48 1.86
Memorandum
TPP9 23,725 178.5 23.5 437.5 0.75 0.10 1.84
ASEAN+3 28,828 189.5 515.9 1,330.8 0.66 1.79 4.62
APEC 58,951 313.7 504.2 2,052.0 0.53 0.86 3.48
TPP = Trans-Pacic Partnership; APEC = Asia Pacic Economic Cooperation forum; ASEAN = Association of Southeast Asian Nations; FTAAP = Free Trade Area of
the Asia Pacic
Note: The country groups correspond to membership assumptions used in dierent scenarios. “TPP-track economies” participate only in Trans-Pacic track
agreements. “Asian track economies” participate only in Asian agreements. “Two-track economies” participate in both sets of agreements. The FTAAP includes all
of the above economies plus Russia, Taiwan, and Other ASEAN.
Source: Authors’ calculations.
NUMBER PB1216 JUNE 2012
7
Table 2 Export increases under alternative scenarios
Economy
Exports,
2025
(billions of
2007 dollars)
Export increase in 2025
(billions of 2007 dollars) Percent change from baseline
TPP track Asian track FTAAP TPP track Asian track FTAAP
TPP track economies 4,555 201.5 0.5 779.9 4.4 0.0 17.1
United States 2,813 124.2 2.1 575.9 4.4 0.1 20.5
Australia 332 14.9 0.2 52.8 4.5 0.1 15.9
Canada 597 15.7 –1.4 32.0 2.6 –0.2 5.4
Chile 151 3.8 –0.9 8.2 2.5 –0.6 5.5
Mexico 507 31.5 0.4 94.3 6.2 0.1 18.6
New Zealand 60 4.7 0.1 6.0 7.8 0.1 9.9
Peru 95 6.7 0.0 10.7 7.1 0.0 11.3
Asian track economies 5,971 –73.8 618.4 1,772.2 –1.2 10.4 29.7
China 4,597 –57.4 516.3 1,505.3 –1.2 11.2 32.7
Hong Kong 235 –1.8 35.3 71.8 –0.8 15.0 30.6
Indonesia 501 –5.6 32.6 97.4 –1.1 6.5 19.5
Philippines 163 –1.9 8.8 27.2 –1.2 5.4 16.7
Thailand 476 –7.2 25.3 70.5 –1.5 5.3 14.8
Two-track economies 2,817 406.4 416.7 852.1 14.4 14.8 30.3
Brunei 9 0.3 0.3 0.6 2.8 3.5 7.0
Japan 1,252 175.7 220.7 423.1 14.0 17.6 33.8
Korea 718 88.7 168.3 245.2 12.4 23.4 34.1
Malaysia 336 41.7 12.4 50.8 12.4 3.7 15.1
Singapore 263 11.0 –9.0 –5.3 4.2 –3.4 –2.0
Vietnam 239 89.1 24.0 137.7 37.3 10.1 57.6
Others 15,072 –90.4 –90.2 –53.5 –0.6 –0.6 –0.4
Russia 1,071 –4.4 –4.0 301.0 –0.4 –0.4 28.1
Taiwan 712 –7.4 –37.7 151.1 –1.0 –5.3 21.2
Europe 7,431 –38.3 –28.3 –268.2 –0.5 –0.4 –3.6
India 869 –6.7 –7.5 –44.7 –0.8 –0.9 –5.1
Other ASEAN 34 –1.1 1.4 7.0 –3.2 4.3 20.8
Rest of world 4,955 –32.4 –14.2 –199.7 –0.7 –0.3 –4.0
World 28,415 443.7 945.4 3,350.7 1.6 3.3 11.8
Memorandum
TPP9 4,298 296 29 837 6.9 0.7 19.5
ASEAN+3 8,822 332 1,037 2,631 3.8 11.7 29.8
APEC 15,126 522 994 3,856 3.5 6.6 25.5
TPP = Trans-Pacic Partnership; APEC = Asia Pacic Economic Cooperation forum; ASEAN = Association of Southeast Asian Nations; FTAAP = Free Trade Area of the
Asia Pacic
Source: Authors’ calculations.
NUMBER PB1216 JUNE 2012
8
ences will not be fully utilized—but experiments with alter-
native choices suggest substantial variations.  e results are
relatively large, since they are based on a model that recognizes
the heterogeneity of  rms within each economy.13 Simulations
that limit the application of this new theoretical structure14
produce income gains that are 41 percent lower.  e di er-
ence between the bene ts of region-wide free trade under the
Asian and TPP templates is 44 percent; this seems to us to be
a reasonable estimate, but its size illustrates the importance
of assumptions about the content of agreements. Variations
in other parameters, for example a ecting FDI estimates, can
easily change estimates by +/–5 percent.15
e results o er strong support for US interest in Asia-
Paci c free trade.  e United States is estimated to gain $78
billion annually on the TPP track and $267 billion with region-
wide free trade.  ese bene ts are driven in part by exports,
which would increase by $124 billion (4.4 percent over the
baseline). Export gains would come mainly in advanced sectors
including business and  nancial services and in agriculture
and food. Manufacturing exports would increase, but overall
the United States would become more import-dependent in
manufacturing to o set its expanding service export surplus.
We estimate that one-third of US gains would be driven by the
investment provisions of the TPP; outward FDI stocks would
increase by $169 billion (1.9 percent over the baseline) and
inward FDI stocks would increase by $47 billion (1 percent
over the baseline). Even with these large absolute changes,
given the scale of the US economy the bene ts would be more
modest compared with GDP (0.4 percent on the TPP track
13.  e modeling framework is based on recent developments in hetero-
geneous- rms trade theory, in contrast to the country-di erentiated-goods
approaches of past studies.  is theoretical structure helps to correct the
systematic underestimation of bene ts that emerges in retrospective studies of
the actual and projected e ects of substantial free trade agreements. For a full
description of the model, see Fan Zhai, “Armington Meets Melitz: Introducing
Firm Heterogeneity in a Global CGE Model of Trade,Journal of Economic
Integration 23, no. 3, September 2008, 575–604.
14.  e results reported here include the reduction of  xed cost barriers to
trade, which stimulates considerable “extensive margin” trade by  rms that do
not initially trade. Smaller e ects are derived when only variable-cost barriers
are reduced, as in conventional models.
15.  e many results generated by the model cannot be fully described here
or even in our detailed technical paper. A website is planned for sharing ad-
ditional information about assumptions and results.
and 1.3 percent from region-wide free trade). Also, under
the phasing and membership assumptions used in this study,
the bene ts would build up gradually; the percentage gains
in 2015 and 2020 would be about one-tenth and one-half as
large as those estimated for 2025, respectively.
Every other economy participating in one or both tracks
can also expect substantial gains. Small economies and those
with large initial barriers would gain the most.  e greatest
absolute gains on the TPP track are estimated for Japan ($119
billion) and re ect in large part inward foreign investment
a orded by the liberalization of Japan’s service and other
investment sectors.  e greatest absolute gains on the Asian
track would accrue to China ($233 billion) because it is large
relative to Asian partners and because its regional  nal goods
exports initially face considerable protection.  e largest
percentage gains on the TPP track are estimated for Vietnam
(14 percent), which would become a much-expanded manu-
facturing hub in textile, garment, and other industries, and on
the Asian track for Hong Kong (11 percent), due to its role as
a service and investment center.
Finally, the results indicate that these bene ts are mainly
the result of trade creation, not trade diversion from excluded
countries. Some trade diversion is evident on both tracks (the
largest losses are projected for China and the rest of the world
on the TPP track and for Taiwan and India on the Asian track),
but the great majority of gains is due to new trade and invest-
ment. In nearly all cases, the losses that result from diversion
are also small relative to the a ected economy’s GDP.
What the model does not capture are the intangible e ects
of renewed momentum toward global economic integration.
e consequences could include enhanced investor con dence
and better macroeconomic performance around the world;
increased competition and cooperation leading to faster
productivity growth and more innovation; and even improved
political relationships. It is impossible to put probabilities or
values on these large e ects, but they could easily overwhelm
the direct e ects reported above.  e importance of secondary
e ects is arguably re ected in the acceleration of world growth
and convergence toward market economics following major
waves of liberalization in the past.
DYNAMICS ON THE TRACKS
Once in motion, the tracks should develop momentum. Each
will generate incentives for enlargement and stimulate progress
on the other.  e mutual development of the tracks, in turn,
will create incentives for consolidation.  e tracks appear to be
incentive-consistent: Each forward step is rewarded by gains
and justi es further steps.
The United States is estimated to gain
$78 billion annually on the TPP track and
$267 billion with regionwide free trade.
NUMBER PB1216 JUNE 2012
9
In the early stages of the Trans-Paci c and Asian tracks,
most gains would be generated by preferential access granted
to smaller partners in the large markets of the United States
and China, respectively.  is would mean, for example, solid
bene ts for countries like Vietnam, Malaysia, and Peru in the
case of the TPP.  e gains would be more muted initially for
the United States and China. However, as larger partners such
as Japan and Korea join each track, the bene ts expand also
for China and the United States.
In the intermediate stages several countries are likely to
join both tracks. Under our assumptions, these include Brunei,
Japan, Korea, Malaysia, Singapore, and Vietnam, but Australia,
Indonesia, New Zealand, the Philippines, and  ailand may
eventually emulate them.  e incentives to join the tracks will
grow as they get larger, and competition between the tracks will
encourage concessions to get others on board. Signing on early
will be attractive, since it will give countries more in uence on
their terms of participation. By the end of this middle stage—in
2020 under our assumptions—most Asia-Paci c economies
should have preferential access to most Asia-Paci c markets.
Given such privileged positions, Japan and Korea, for example,
would have gains equal to 91 and 90 percent, respectively, of the
total potential gains from region-wide free trade.
e nal stages of this “game” would leave the United
States and China among the few countries without preferential
access to both of their large markets. For them, the grand prize
would be a consolidated agreement, o ering nearly four times
the bene ts that they can obtain from the Asian and TPP tracks
alone. At the same time, other economies will have little incen-
tive to push for consolidation, so leadership at the  nal stage
will have to come from China and the United States. Much will
therefore depend on their cooperation, which could take many
forms—a bilateral FTA, a region-wide FTAAP, or even wider
initiatives that include Europe and a new global trade round.
e route to full regional integration is hard to divine,
but it would be very pro table. An Asia-Paci c FTA16 would
yield annual bene ts of $1.3 trillion to $2.4 trillion (1.5 to
2.7 percent of world GDP) depending on the template used
to achieve it. As already noted, these gains are much larger
than estimates for the Doha Development Agenda because
the expected liberalization commitments are much greater.
e high estimates are de ned by the TPP template, requiring
near-complete tari reductions and strict disciplines on
nontari barriers.  e low estimates assume an Asian template;
16.  e study de nes this as an agreement among the 21 APEC economies,
which include all members of both tracks, plus Russia, Papua New Guinea,
and Taiwan. For computational convenience we also included four small
Southeast Asian economies that are not APEC members today: Cambodia,
Laos, Myanmar, and Timor-Leste.
our intermediate estimate ($1.9 trillion in table 1) is based on
an average of the two. Each template favors (at least in terms
of percentages) its members, but the size of the pie, not how
the slices are cut, is what really matters. Even Asian economies
would gain more from regional integration based on the TPP
template.
us, region-wide free trade appears to be the logical
endpoint of the two Asia-Paci c tracks. In a decade or so, the
bene ts of consolidation will have become clearer for business,
especially in China and the United States. By 2020, it may
be also easier to agree on a template. As Chinese per capita
incomes rise, markets will increasingly manage its complex
economy. Both China and the United States will have adjusted
to the new realities of the world economy and gained experi-
ence (and hopefully trust) in dealing with each other. Much
will still depend on geopolitics, but the economic case for
region-wide integration will be clear and compelling.
POLICY IMPLICATIONS
In sum, the TPP and Asian negotiating tracks promise substan-
tial, widely distributed bene ts.  ese bene ts will depend on
whether the tracks proceed to region-wide integration and on
the template used—objectives that will be hard to achieve and
suggest di cult tradeo s.  ere are large risks that the tracks
will fail or head o in irreconcilable directions. Leaders and
negotiators will have to reach the right balance between scope
and quality, and they will have to prevent acrimony in the
early stages of the tracks that could block region-wide integra-
tion later. Negotiators may know when to compromise, but
this fragile process will be also tested by special interests and
blogs that clamor for attention with extreme positions.
Four salient implications emerge. First, much is at stake in
reaching an e ective, early agreement among TPP partners—
whether 9, 12, or ideally more. In the foreseeable future,
improvements in the global trading system will depend on the
TPP and Asian tracks, and for now, with 12 intensive rounds
of negotiation already completed, the TPP is setting the pace.
Second, the negotiations have to re ect two strategic
objectives: high standards and full Asia-Paci c economic inte-
gration.  e goal is an ambitious template that applies widely
to the regional trading system. An operational target might
be an agreement that “leads by a decade”—one with disci-
plines both strong and inclusive enough to be acceptable to
any reform-minded economy in the region in 10 years. Given
the multiplicity of special interests, achieving this result will
depend on leadership from heads of government.
ird, a new, collegial dialogue that connects the Trans-
Paci c and Asian tracks of negotiations would be of great value.
NUMBER PB1216 JUNE 2012
10
Such a relationship could encourage the substantive overlap
of the tracks and reduce political frictions between them. It
could a ect whether the tracks learn from each other and adopt
common “best practices.” Formats might include technical
exchanges, discussions among senior o cials, or an Eminent
Persons Group. APEC’s and the WTO’s technical o ces could
also facilitate dialogue:  ey have expertise on technical issues
and can o er nonbinding consultation and advice.
Fourth, since the tracks could lead to friction between the
United States and China, at least for a while, attention also
needs to focus on a third track—direct cooperation between
the two countries on trade and investment.  e Strategic and
Economic Dialogue (S&ED) o ers avenue for such initiatives,
and the political climate appears to be improving for them.
e process could begin with issues where compromises are
now possible—an example is the relaunch of investment nego-
tiations in the May 2012 S&ED. Future work could focus
on issues such as subsidies, government procurement, export
controls, China’s market economy status, services liberaliza-
tion, and intellectual property. Over time, these e orts could
address all major building blocks of regional agreements and
chip away at di erences.  ey should make region-wide FTA
negotiations increasingly feasible.
An integrated Asia-Paci c economy and good rules for
trade and investment are important for the United States, the
Asia-Paci c region, and the world.  e Trans-Paci c and Asian
tracks, and especially the TPP, represent pathways to integra-
tion.  ere is reason to hope that their coherent development
will help to achieve this integration—to realize APEC’s Bogor
Goals of free trade and investment in the Asia-Paci c—and
perhaps export its template to the world.
e views expressed in this publication are those of the authors.  is publication is part of the overall programs
of the Institute, as endorsed by its Board of Directors, but does not necessarily re ect the views of individual
members of the Board or the Advisory Committee.
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