Estimating The Economic Impact Of The EU-Japan Economic .
Estimating the Economic Impact of theEU-Japan Economic Partnership AgreementJens Wrona MercatorSchool of Management and Institute for East Asian StudiesUniversity of Duisburg-Essen, CESifo, and DICENovember 6, 2020WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement1 of 21
What Have Economists to Say on the EU-Japan EPA?The last decade saw significant progress in:1. estimating the effects of free trade agreements,2. quantifying the general equilibrium effects of trade policy.How can these new insights be used to quantify theeconomic effects of the EU-Japan Economic PartnershipAgreement?WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement2 of 21
OutlookThis presentation:I What do we know about international trade?I The gravity equation for international tradeI Quantifying general equilibrium effects of trade policyI Predicting general equilibrium effects of the EU-Japan EPAI Challenges in the ex-post evaluation of the EU-Japan EPAI Brexit, COVID-19 and the future of the EU-Japan EPAWronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement3 of 21
Stylized Facts (Trade and Market Size)Stylized fact #1: Bilateral Trade proportional to market size.Figure 1 – Trade is proportional to size(a) Japan’s exports to EU, 2006(b) Japan’s imports from EU, RTDNKslope 1.001fit .85CYPESTSVNMLTFRAITAGBRIRLNLDDNKSWEESPBELFIN AUTHUNCZEPOLSVKMLTPRTslope 1.03fit .75GRCESTLVASVNLTU.5.05Japan's 2006 exports (GRC 1).1.515BELJapan's 2006 imports (GRC 1)15 1050 10010DEUCYPLVA.05.1.51GDP (GRC 1)510.05LTU.1.51GDP (GRC 1)510Source: Head, K. and T. Mayer (2009): “Chapter 3 - Gravity Equations: Workhorse, Toolkit, and Cookbook,” inHandbook of International Economics, ed. by K. R. Elhanan Helpman and G. Gopinath, Elsevier, vol. 4, 131–95.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement4 of 21
Stylized Facts (Trade and Bilateral Frictions)Stylized fact #2: Bilateral Trade inversely proportional to distance.Figure 2 – Trade is inversely proportional to distance(b) France’s imports (2006)Imports/Partner's GDP (%, log scale).05 .1.5 15 10slope -.683fit .22other500slope -.894fit ophone.05Exports/Partner's GDP (%, log scale).1.5151025(a) France’s exports (2006)100020005000Distance in kms1000020000other500100020005000Distance in kms1000020000.005Source: Head, K. and T. Mayer (2009): “Chapter 3 - Gravity Equations: Workhorse, Toolkit, and Cookbook,” inHandbook of International Economics, ed. by K. R. Elhanan Helpman and G. Gopinath, Elsevier, vol. 4, 131–95.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement5 of 21
How to Explain these Stylized Facts?Good news: Research has found a formula – the gravity equationWronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement6 of 21
Gravity: Physics versus TradeSource: Yotov, Y. V., R. Piermartini, J. A. Monteiro, and M. Larch (2016): “An Advanced Guide to Trade PolicyAnalysis: The Structural Gravity Model” co-published by UNCTAD and WTO.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement7 of 21
Structural Gravity EquationYi EjXij YtijΠi Pj!1 σ,in which Πi and Pj are the multilateral resistance (MR) terms:Π1 σ iXjWronatijPj!1 σEjYand Pj1 σ XitijΠi!1 σEstimating the Economic Impact of the EU-Japan Economic Partnership AgreementYi.Y8 of 21
Structural Gravity EquationYi EjXij YtijΠi Pj!1 σ,in which Πi and Pj are the multilateral resistance (MR) terms:Π1 σ iXjtijPj!1 σEjYand Pj1 σ XitijΠi!1 σYi.Ymarket size term: Yi Ej /YI corresponds to the frictionless trade volume for tij 1,WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement8 of 21
Structural Gravity EquationYi EjXij YtijΠi Pj!1 σ,in which Πi and Pj are the multilateral resistance (MR) terms:Π1 σ iXjtijPj!1 σEjYand Pj1 σ XitijΠi!1 σYi.Ymarket size term: Yi Ej /YI corresponds to the frictionless trade volume for tij 1,trade cost term: (tij /Πi Pj )1 σ ,I bilateral trade cost tij from i to j,WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement8 of 21
Structural Gravity EquationYi EjXij YtijΠi Pj!1 σ,in which Πi and Pj are the multilateral resistance (MR) terms:Π1 σ iXjtijPj!1 σEjYand Pj1 σ XitijΠi!1 σYi.Ymarket size term: Yi Ej /YI corresponds to the frictionless trade volume for tij 1,trade cost term: (tij /Πi Pj )1 σ ,I bilateral trade cost tij from i to j,I outward multilateral resistance term Πi : measures the ease ofmarket access for exporter i,WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement8 of 21
Structural Gravity EquationYi EjXij YtijΠi Pj!1 σ,in which Πi and Pj are the multilateral resistance (MR) terms:Π1 σ iXjtijPj!1 σEjYand Pj1 σ XitijΠi!1 σYi.Ymarket size term: Yi Ej /YI corresponds to the frictionless trade volume for tij 1,trade cost term: (tij /Πi Pj )1 σ ,I bilateral trade cost tij from i to j,I outward multilateral resistance term Πi : measures the ease ofmarket access for exporter i,I inward multilateral resistance term Pj : measures the ease ofmarket access for importer j.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement8 of 21
Quantifying General Equilibrium Effects of Trade PolicyPartial Equilibrium EffectsFree Trade Agreement (FTA) reduces bilateral trade costs tij :Yi EjXij YtijΠi Pj!1 σ,holding fixed Yi , Ej , and the multilateral resistance terms:Π1 σi XjtijPj!1 σEjYandPj1 σ XitijΠi!1 σYi.YPartial equilibrium: Only partner countries are directly affected.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement9 of 21
Quantifying General Equilibrium Effects of Trade PolicyGeneral Equilibrium EffectsFree Trade Agreement (FTA) also affects MR terms via tij :Yi EjXij YtijΠi Pj!1 σ,holding fixed Yi , Ej , and the multilateral resistance terms:Πi 1 σ XjtijPj!1 σEjYand Pj 1 σ XitijΠi!1 σYi.YGeneral equilibrium: Partner and non-partner countries areindirectly affected via the MR terms Πi and Pj .WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement10 of 21
Quantifying General Equilibrium Effects of Trade PolicyGeneral Equilibrium Effects Cont’dInduced changes in MR terms Πi and Pj require adjustment inexpenditure and income levels Ej and Yi :Yi EjXij YtijΠi Pj!1 σ,holding fixed Yi , Ej , and the multilateral resistance terms:Πi 1 σ XjtijPj!1 σEjYand Pj 1 σ XitijΠi!1 σYi.YGeneral equilibrium: Partner and non-partner countries areindirectly affected via changes in Πi , Pj , Ej and Yi .WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement11 of 21
Quantifying General Equilibrium Effects of Trade PolicyGeneral Equilibrium Effects of NAFTAPartial equilibrium% 00.000.000.000.00.General Equilibrium% Exports14.8837.4643.51-0.35-0.41-0.17-0.23-0.13.% Real GDP0.151.841.30-0.03-0.02-0.010.000.00.% IMRs-0.18-1.48-2.40-0.02-0.010.000.010.00.% OMRs0.333.403.81-0.01-0.02-0.01-0.01-0.01.Source: Yotov, Y. V., R. Piermartini, J. A. Monteiro, and M. Larch (2016): “An Advanced Guide to Trade PolicyAnalysis: The Structural Gravity Model” co-published by UNCTAD and WTO.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement12 of 21
Quantification of the EU-Japan EPABased on: Felbermayr, G., F. Kimura, T. Okubo, M. Steininger(2019): “Quantifying the EU-Japan Economic Partnership Agreement,” Journal of the Japanese and International Economies, vol.51(C), 110-128.Same basic gravity framework as before multiple sectors(including services) input-output linkages.Forecast based on the EU-Korean Free Trade Agreement (2011).Quantifies the trade-creating effect of reducing non-tariff barriers.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement13 of 21
Average Import tariffs EU versus JapanSource: Felbermayr, G., F. Kimura, T. Okubo, M. Steininger (2019): “Quantifying the EU-Japan EconomicPartnership Agreement,” Journal of the Japanese and International Economies, vol. 51(C), 110-128.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement14 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tWronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tI EU KORij,t and KOREUij,t as directional FTA dummies,WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tI EU KORij,t and KOREUij,t as directional FTA dummies,k as import tariffs,I τij,tWronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tI EU KORij,t and KOREUij,t as directional FTA dummies,k as import tariffs,I τij,tI Zij,t as a vector of controls (e.g. for other FTAs),WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tI EU KORij,t and KOREUij,t as directional FTA dummies,k as import tariffs,I τij,tI Zij,t as a vector of controls (e.g. for other FTAs),k , χk as origin/destination-sector-time-specific fixed-effects,I πi,tj,tWronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tI EU KORij,t and KOREUij,t as directional FTA dummies,k as import tariffs,I τij,tI Zij,t as a vector of controls (e.g. for other FTAs),k , χk as origin/destination-sector-time-specific fixed-effects,I πi,tj,tI µkij as directional sector-specific pair fixed effects.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Estimating Non-tariff BarriersNTBs are estimated from the sectoral gravity equation:"kXij,t expδ1kδ2k1kEUKOR KOREUij,t k (1 τij,t)ij,tkkθθθ#δkk 3k Zij,t πi,t χkj,t µkij εkij,tθwith identifiers i, j (origin, destination), t (time), k (sector), and:k as the bilateral sectoral trade volume,I Xij,tI EU KORij,t and KOREUij,t as directional FTA dummies,k as import tariffs,I τij,tI Zij,t as a vector of controls (e.g. for other FTAs),k , χk as origin/destination-sector-time-specific fixed-effects,I πi,tj,tI µkij as directional sector-specific pair fixed effects.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement15 of 21
Trade-creating Effects of Reducing Non-tariff BarriersSource: Felbermayr, G., F. Kimura, T. Okubo, M. Steininger (2019): “Quantifying the EU-Japan EconomicPartnership Agreement,” Journal of the Japanese and International Economies, vol. 51(C), 110-128.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement16 of 21
Implied Real Income Changes of the EU-Japan EPAS1: EU-Jap. EPA; S2: EU-Jap. EPA Brexit; S3: EU-Jap. EPA TPP.Source: Felbermayr, G., F. Kimura, T. Okubo, M. Steininger (2019): “Quantifying the EU-Japan EconomicPartnership Agreement,” Journal of the Japanese and International Economies, vol. 51(C), 110-128.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement17 of 21
Decomposing the Welfare Effects of the EU-Japan EPANon-tariff barriers are much more important that tariffs.Source: Felbermayr, G., F. Kimura, T. Okubo, M. Steininger (2019): “Quantifying the EU-Japan EconomicPartnership Agreement,” Journal of the Japanese and International Economies, vol. 51(C), 110-128.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement18 of 21
Challenge: Ex post Evaluation of the EU-Japan EPAIdentification and Quantification: too early. more data needed!Identifying the trade-creating effect of NTBs:1. Endogenous selection into the EU-Japan EPA.2. NTBs identified as residual (unobserved heterogeneity).3. COVID pandemic affects bilateral trade costs (simultaneity).Quantifying the general equilibrium effects the EU-Japan EPA:I Joint analysis of int. trade and multinational production.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement19 of 21
Brexit, COVID-19, and the future of the EU-Japan EPABrexit:I Brexit lowers Japan’s gains from the EU-Japan EPA.I Negligible effect on EU gains from the EU-Japan EPA.COVID-19:Has globalization reinforced the negative economic effects ofCOVID-19? Would re-nationalization be preferable?Sforza and Steininger (2020): No. the COVID-19 pandemic isalready a global shock. transmission is a second order concern.WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement20 of 21
ConclusionPredicted effects of the EU-Japan EPA:I Moderate overall gains (role of distance and non-tradables).I Lager gains for Japan than for EU (pre-existing asymmetries).I Negligible third-country effects for non-member countries.I Non-tariff barriers much more important than tariffs.Future importance of the EU-Japan EPA:I depends on U.S.-China trade war,I general globalisation trend (re-nationalization),I the future of deep trade agreements (including BITs).WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement21 of 21
Source: Head, K. and T. Mayer (2009): “Chapter 3 - Gravity Equations: Workhorse, Toolkit, and Cookbook,” in Handbook of International Economics, ed. by K. R. Elhanan Helpman and G. Gopinath, Elsevier, vol. 4, 131–95. WronaEstimating the Economic Impact of the EU-Japan Economic Partnership Agreement4 of 21
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