Book - Economic and Environmental of Trade Agreements in ASEAN

Economic and Environmental Impact of Free Trade
in East and South East Asia

Kakali Mukhopadhyay · Paul J. Thomassin
Economic and Environmental

Impact of Free Trade in East
and South East Asia
Foreword by Hideyuki Mori and Mark Elder
123
Kakali Mukhopadhyay Paul J. Thomassin
Department of Agricultural Economics Department of Agricultural Economics
McGill University, Macdonald Campus McGill University, Macdonald Campus
21, 111 Lakeshore 21, 111 Lakeshore
Ste-Anne-de-Bellevue Ste-Anne-de-Bellevue
Montreal, Quebec Montreal, Quebec
Canada H9X 3V9 Canada H9X 3V9
[email protected] [email protected]
ISBN 978-90-481-3506-6 e-ISBN 978-90-481-3507-3

DOI 10.1007/978-90-481-3507-3
Springer Dordrecht Heidelberg London New York
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Foreword
During the last two decades Asian countries have recognized the potential of
regional economic integration. There are now a number of free trade agreements
(FTAs) and economic partnership agreements (EPAs) between various countries
in the region, and efforts are continuing to further expand the scope of economic
integration. Some believe that an East and South East Asian multi-lateral regional
trading community could be established by 2020.
To assess the economic and environmental implications of this integration, a
project entitled “Promotion of Sustainable Development in the Context of Regional
Economic Integration—Strategies for Environmental Sustainability and Poverty
Reduction” was initiated by the Institute of Global Environmental Strategies
(IGES) in Japan, together with the United Nations Environment Programme—
Economics and Trade Branch (UNEP-ETB), McGill University in Canada, the
Korea Environment Institute (KEI) in the Republic of Korea, and the National
Institute for Environmental Strategies (NIES) in Japan in October 2005. This three
year project was funded by the Ministry of the Environment of Japan as one of
three sub projects of a larger project called APEIS (Asia Pacific Environmental
Innovation Strategy Project). Also, this study was developed as the first project of
the United Nations Environment Programme—Network of Institutes for Sustainable
Development (UNEP-NISD). IGES was the lead institute coordinating the project.
Other institutions from the region provided input into the project and supported
the research with both data and policy information. These institutions included:
the Policy Research Centre for Environment and Economy (PRCEE) of the State
Environment Protection Administration of China (SEPA) (now the Ministry of
Environmental Protection), the Indonesian Institute of Sciences (LIPI), the Thailand
Environment Institute (TEI), and the Institute for Environmental Science and
Technology of the Hanoi University of Technology in Vietnam (INEST). The
project was divided into two components: economy-wide modelling analysis, and
sector/issue-specific policy analysis. McGill University’s contribution focused on
the economy-wide modelling analysis. China, Indonesia, Japan, the Republic of
Korea, Thailand and Viet Nam were selected as case studies for analysis because
they reflect the diversity of East Asia in terms of economic and social development,
priority environmental concerns, and geographical representation of the sub-regions
of Northeast and Southeast Asia. It was expected that this set of cases would provide
v
vi Foreword
a spectrum of results in terms of both economic and environmental impacts. This

monograph is a partial outcome of this project.
The goal of this monograph is to estimate the economy wide impact of different
scenarios of potential future regional economic integration of East and South East
Asian economies covering ASEAN, China, Japan and the Republic of Korea. The
economic analysis was undertaken with the Global Trade Analysis Project (GTAP)
database and modelling software, while the environmental impacts were estimated
with a number of air and water pollution indicators. Environmental policy options
were applied in order to mitigate the expected pollution effects and to promote sus-
tainable development in the context of regional economic integration. The analysis
was dynamic and took into account estimated changes in macroeconomic vari-
ables to the year 2020. Results of the analysis indicate that regional integration will
enhance economic growth and intra regional trade in the East and South East Asian
regions. The overall impact on the environment was not significantly different from
baseline estimates; however, distributional effects were observed. This book makes
a valuable contribution to the literature on regional economic integration of East
and South East Asian economies. The academic community and policy makers, it is
hoped, will find the book useful.
Institute of Global Environmental Strategies (IGES) Hideyuki Mori

Japan Vice President
Mark Elder
Senior Policy Researcher
Preface
In recent years the East and South East region of Asia has witnessed a rapid
expansion of regional economic cooperation programs through bilateral and pluri-
lateral free trade agreements (FTAs). Slow progress on multilateral negotiations
under the WTO and APEC is shifting preferences to regional agreements. Recent
developments in individual economies such as China’s rapid export-driven growth
performance and entry into the WTO, Japan’s prolonged recession and desire to
regain its leadership role in the region, Republic of Korea’s change toward a more
liberalized economic system, and Singapore’s active role to become a hub of region-
alism, can be considered as additional factors behind the strategic change in East and
South East Asian regionalism.
Currently, Asian countries are moving towards more free trade agreements
(FTAs) and or economic partnership agreements (EPAs) in the region. Each coun-
try in East and South East Asia, including China and Japan, is accelerating its
move towards concluding such agreements with other countries in the region. The
potential of an “East Asian Free Business Zone” is likely to become a reality by
2010. It is expected that an East-Asian multi-lateral regional trading community will
be established by 2020. This multi-lateral regional trading community is expected
to decrease the current barriers to trade between individual countries, expand the
movement of goods and services between countries, and continue economic growth
within individual countries, increase welfare and reduce poverty.
Economic growth concerns are often expressed in terms of the potential for
environmental degradation from free trade agreements. Climate change, ozone
depletion, and deforestation are often cited as examples of environmental prob-
lems that have resulted from economic growth. This region has also been plagued
with various environmental problems as a result of rapid industrialization and trade
openness.
One of the on-going debates in trade discussions is how to protect the envi-
ronment when multi-lateral regional trade agreements are being negotiated. Many
environmental advocates argue that freer trade harms the environment and, by fos-
tering more trade liberalization is environmentally unfriendly. They claim that trade
policy reforms produce substantial resource depletion and environmental degrada-
tion effects. Others argue that, on the contrary, trade liberalization is beneficial to
the environment. It is also argued that increasing one’s environmental standards in
vii
viii Preface
the framework of a regional trade agreement results in increased competitiveness of

firms in these countries as they become more innovative in their industrial processes.
Thus, the impact of trade liberalisation on the environment continues to be debated.
Towards this end, the present study estimates the economic and environmental
impacts of trade liberalization in East and South East Asian countries by the year
2020. The book uses a multiregional general equilibrium model. The economy wide
impact of economic integration across the regions is estimated for the future of the
world economy at 2020. Further, it estimates how the changes in the aggregate level
of output, composition of that output, and inputs and technologies used, as a con-
sequence of trade liberalization are likely to impact the environment of countries
in the agreement. The study also uses the decomposition analysis to find the fac-
tors responsible for changes in pollution. The book suggests several policy options
from the analysis. Impact of several environmental policies for specific pollutants
is applied in the analysis. Overall the trade liberealisation is not too unfavourable
for the environment especially for Japan, the Republic of Korea and some ASEAN
countries in 2020. GHG emissions and Industrial waste are likely to be a serious
concern in this region.
Thus the study provides an insight in pursuing a concrete multilateral trade lib-
eralization policy (combining ASEAN and other countries in East Asia) and throws
more light on the trade environment debate. This book will be a good addition to
the field of Regional Economic Integration for East and South East Asian coun-
tries. The academic community primarily researchers and policy makers, and world
bodies like WTO, ADB, World Bank may find the book useful.
Acknowledgements
This book is partially an outcome of the Research project “Promotion of Sustainable

Development in the Context of Regional Economic Integration Strategies for
Environmental Sustainability and Poverty Reduction” funded by Ministry of
Environment Japan (MOEJ), Network Institute for Sustainable Development
(NISD) and UNEP. The authors would like to express their gratitude to all of these
organizations and in particular to the MOEJ for their financial support.
Authors gratefully acknowledge Institute for Global Environmental Strategies
Japan (IGES), the coordinator of the project, and the contribution of other country
partners of the project—Thailand Environment Institute, LIPI-Indonesia Institute
of Sciences, State Environmental Protection Agency-China, Korea Environmental
Institute, INEST-Hanoi University of Technology, Vietnam.
Special thanks are given to Prof. Hironori Hamanaka, Dr. Hideyuki Mori,
Dr. Mark Elder, Dr. Akira Ogihara, Dr. Satoshi Kojima and other researchers at
IGES, Japan for their supports. Patience and administrative skills.
We are indebted to Prof. Ryokichi Hirono (Seikei University, Japan), Prof.Kimio
Uno (Keio University, Japan), Prof. Shunji Matsuoka (Waseda University, Japan),
Prof. Kiichiro Hayashi (Nagoya University, Japan) and Mr. Fulai Sheng (Economic
Affairs Officer, UNEP, Switzerland) for their valuable comments at various research
workshop of the Project.
This study would not have been completed without immense cooperation from
Centre for Global Trade Analysis, Purdue University, USA in general and, Dr.Terrie
Walmsley (Director, Centre for Global Trade Analysis) and Dr. Badri Narayanan
(Research Economist) in particular.
The findings of the current study have been presented in various interna-
tional conferences (The International Input-Output Meeting on Managing the
Environment, Seville 9–11 July 2008; 11th Annual Conference on Global Economic
Analysis, Marina Congress Centre Helsinki, Finland, June 12–14, 2008 and
16th International Conference on Input-Output technique at Istanbul Technical
University, Turkey, 2–6 July, 2007). The authors are thankful to the participants
of these conferences for their comments and suggestions which have contributed to
the improvement of the book.
Finally, special thanks goes to Prof. Debesh Chakraborty (Department of
Economics, Jadavpur University, Calcutta, India) for his continuous support,
ix
x Acknowledgements
encouragement, helpful comments, constructive suggestions and insights while

preparing the manuscript and refining the text.
The authors also acknowledge the assistance provided by Mr. Howard Gumilong
(Master student, McGill University, Canada).
This book would not have been completed without the support and facilities pro-
vided by McGill University in general and Department of Agricultural Economics
in particular for its completion.
Kakali Mukhopadhyay is deeply indebted to her mother, Kamala Mukhopadhyay
for being a source of inspiration and for providing inseparable support to complete
the book. Paul J. Thomassin would like to thank the love and support of his wife
Patricia and his three children; Daniel, Caroline and Emily, during the undertaking
of this project and the writing of this book.
Department of Agricultural Economics Kakali Mukhopadhyay

McGill University, Montreal, Canada Paul J. Thomassin
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Globalization and Regionalization . . . . . . . . . . . . . . . . . . 1
1.2 Basic Issues of Regional Trade Agreements . . . . . . . . . . . . . 2
1.3 Proliferation of Regional Trade Agreements . . . . . . . . . . . . . 3
1.4 Global Development of RTAs . . . . . . . . . . . . . . . . . . . . 6
1.5 Economic Integration in East and South East Asia . . . . . . . . . 7
1.5.1 FTA in East and South East Asia—A Brief History . . . . . 8
1.5.2 Factors Affecting FTA Initiatives in East and South
East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.5.3 Features of Existing RTAs in East and South East Asia . . . 13
1.5.4 FTA Initiatives in East and South East Asia . . . . . . . . . 13
1.5.5 Efforts and Time Frame for Economic Integration . . . . . . 17
1.6 Environmental Degradation . . . . . . . . . . . . . . . . . . . . . 18
1.7 Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.8 Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . . . 20
2 Review of Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.2 FTAs/RTAs Around the World . . . . . . . . . . . . . . . . . . . . 24
2.3 FTAs/RTAs in East and South East Asian Region . . . . . . . . . . 26
2.4 Impact of FTAs and RTAs on the Environment . . . . . . . . . . . 36
3 Features of the East and South East Asian Economies . . . . . . . . . 41
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.2 Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.3 Economic Growth of the East and SouthEast Asian Economies . . . 43
3.3.1 GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.3.2 Agricultural Sector in East and South East Asia . . . . . . . 46
3.3.3 Industrial Sector in East and South East Asia . . . . . . . . 50
3.3.4 Manufacturing Sector in East and SouthEast Asia . . . . . . 53
3.3.5 Service Sector in East and SouthEast Asia . . . . . . . . . . 55
3.4 Poverty and Unemployment . . . . . . . . . . . . . . . . . . . . . 57
3.5 The Structure of Foreign Trade and FDI . . . . . . . . . . . . . . . 59
3.5.1 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
xi
xii Contents
3.5.2 Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.5.3 Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.5.4 Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.5.5 Republic of Korea . . . . . . . . . . . . . . . . . . . . . . 63
3.5.6 Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.5.7 Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.5.8 Myanmar . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.5.9 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.5.10 Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.5.11 Trend of Intra Regional Trade . . . . . . . . . . . . . . . . 66
3.5.12 Status of FDI in East and South East Asia . . . . . . . . . . 67
3.6 Environmental Profile: An Overview . . . . . . . . . . . . . . . . . 69
3.6.1 Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.6.2 Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.6.3 Cambodia . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.6.4 Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.6.5 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.6.6 Republic of Korea . . . . . . . . . . . . . . . . . . . . . . 75
3.6.7 Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.6.8 Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.6.9 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.6.10 Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
3.6.11 Lao-PDR . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4 Theoretical Framework, Database and Scenario Development . . . . 85
4.1 The Theoretical Framework of the GTAP Model . . . . . . . . . . 85
4.2 Aggregation Scheme . . . . . . . . . . . . . . . . . . . . . . . . . 88
4.3 Environmental Indicators and Coefficients . . . . . . . . . . . . . . 89
4.4 Updated Environmental Coefficients Across the Countries . . . . . 90
4.5 Scenario Development . . . . . . . . . . . . . . . . . . . . . . . . 91
4.6 Modifications of the GTAP Model to 2020 . . . . . . . . . . . . . 93
4.7 Macroeconomic Variable Estimates and Underlying Assumptions . 93
5 Economic Impact of Economic Integration . . . . . . . . . . . . . . . 97
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.2 Output Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.3 Export and Import Performance . . . . . . . . . . . . . . . . . . . 100
5.4 Sectoral Analysis of Output . . . . . . . . . . . . . . . . . . . . . 108
5.5 Sectoral Analysis of Export and Import . . . . . . . . . . . . . . . 109
5.5.1 Sectoral Export Analysis . . . . . . . . . . . . . . . . . . . 117
5.5.2 Sectoral Import Analysis . . . . . . . . . . . . . . . . . . . 119
5.6 Intra-Industry Trade . . . . . . . . . . . . . . . . . . . . . . . . . 122
5.7 Welfare Implication . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.8 Effects on Factor Returns . . . . . . . . . . . . . . . . . . . . . . . 126
5.9 Poverty Implications . . . . . . . . . . . . . . . . . . . . . . . . . 129
Contents xiii
6 Environmental Impact of Economic Integration . . . . . . . . . . . . 133

6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
6.2 Environmental Impact in BAU and Trade Scenarios . . . . . . . . . 133
6.2.1 Air Pollution . . . . . . . . . . . . . . . . . . . . . . . . . 134
6.2.2 Water Pollution . . . . . . . . . . . . . . . . . . . . . . . . 138
6.2.3 Industrial Waste . . . . . . . . . . . . . . . . . . . . . . . 140
6.3 Sectoral Analysis in BAU and Trade Scenarios . . . . . . . . . . . 142
6.3.1 BAU Scenario . . . . . . . . . . . . . . . . . . . . . . . . 142
6.3.2 Trade Liberalization Scenarios . . . . . . . . . . . . . . . . 150
6.4 Decomposition Analysis . . . . . . . . . . . . . . . . . . . . . . . 155
6.4.1 Methodology of Decomposition Analysis . . . . . . . . . . 155
6.4.2 GHG Indicators at BAU 2020 . . . . . . . . . . . . . . . . 158
6.4.3 GHG Indicators in Trade Liberalisation Scenarios . . . . . . 160
6.4.4 Decomposition Effect on BOD in BAU
and Trade Scenarios . . . . . . . . . . . . . . . . . . . . . 160
7 Strategies for Green Trade . . . . . . . . . . . . . . . . . . . . . . . . 165
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
7.2 Multiple Sector Tax . . . . . . . . . . . . . . . . . . . . . . . . . . 166
7.2.1 Assessment of Moderate Multiple Sector Tax . . . . . . . . 167
7.2.2 Assessment of Drastic Multiple Sector Tax . . . . . . . . . 168
7.3 Tax on Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
7.4 Tax on Coal and Oil . . . . . . . . . . . . . . . . . . . . . . . . . 170
7.5 Policy Option for Industrial Waste . . . . . . . . . . . . . . . . . . 172
8 Summary and Conclusion . . . . . . . . . . . . . . . . . . . . . . . . 175
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
List of Figures
5.1 Export share of selected countries among the ten regions in

BAU and trade scenarios (%) . . . . . . . . . . . . . . . . . . . . . 106
5.2 Import share of selected countries among the ten regions in
BAU and trade scenarios (%) . . . . . . . . . . . . . . . . . . . . . 107
6.1 BOD growth from 2001 to 2020 in Different Scenarios (%) . . . . . 138
6.2 COD growth from 2001 to 2020 in Different Scenarios (%) . . . . . 139
6.3 Suspended solid growth from 2001 to 2020 in Different
Scenarios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
6.4 Industrial waste growth from 2001 to 2020 in Different
Scenarios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
xv
List of Tables
1.1 Notified RTAs in goods and services by date of entry into

force and type of partner as of December 2006 . . . . . . . . . . . 5
1.2 Historical overview of ASEAN relations and agreements . . . . . . 10
1.3 Growth of FTAs in East Asia, 1976–2008 (cumulative
number of FTAs) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.4 Liberalization timeframe for major economic groups in East
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 Size, growth, and density of population in East and
SouthEast Asian countries . . . . . . . . . . . . . . . . . . . . . . 42
3.2 Annual growth rate of GDP . . . . . . . . . . . . . . . . . . . . . . 44
3.3 GDP per capita (at constant 2000 US$) . . . . . . . . . . . . . . . . 44
3.4 Agriculture, value added (% of GDP) . . . . . . . . . . . . . . . . . 47
3.5 Industry, value added (% of GDP) . . . . . . . . . . . . . . . . . . 50
3.6 Manufacturing, value added (% of GDP) . . . . . . . . . . . . . . . 54
3.7 Services, value added (% of GDP) . . . . . . . . . . . . . . . . . . 56
3.8 Export growth and contribution to GDP . . . . . . . . . . . . . . . 60
3.9 Imports of goods and services (annual % growth) . . . . . . . . . . 61
3.10 Trend of the intra regional trade share from 1980 to 2006 (%) . . . . 67
3.11 Emerging East and SouthEast Asia’s FDI inflows, 1995–2005 . . . . 67
3.12 Intra ASEAN direct investment flows (millions of US$) . . . . . . . 68
3.13 Status of the environment, Vietnam . . . . . . . . . . . . . . . . . . 70
3.14 Status of the environment, Philippines . . . . . . . . . . . . . . . . 71
3.15 Status of the environment, Cambodia . . . . . . . . . . . . . . . . . 72
3.16 Status of the environment, Indonesia . . . . . . . . . . . . . . . . . 73
3.17 Status of the environment, China . . . . . . . . . . . . . . . . . . . 74
3.18 Status of the environment, Republic of Korea . . . . . . . . . . . . 75
3.19 Status of the environment, Malaysia . . . . . . . . . . . . . . . . . 77
3.20 Status of the environment, Japan . . . . . . . . . . . . . . . . . . . 80
3.21 Status of the environment, Singapore . . . . . . . . . . . . . . . . . 82
4.1 Business as usual, medium, and deep scenarios description . . . . . 92
4.2 Factor inputs, GDP, population projections (2001–2010):
cumulative percentage changes . . . . . . . . . . . . . . . . . . . . 94
xvii
xviii List of Tables

5.1 Real value of total output in business as usual (BAU)
scenario (million US$) . . . . . . . . . . . . . . . . . . . . . . . . 98
5.2 Percentage change in the real value of output (BAU) during
2001–2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
5.3 Percentage change in the real value of output for each trade
scenario relative to the BAU 2020 . . . . . . . . . . . . . . . . . . 99
5.4 Trade openness index in different trade scenarios . . . . . . . . . . 100
5.5 Export growth rate for BAU and trade scenarios . . . . . . . . . . . 102
5.6 Import growth rate for BAU and trade scenarios . . . . . . . . . . . 102
5.7 Percentage change in the export growth for each trade
scenario relative to the BAU, 2020 . . . . . . . . . . . . . . . . . . 104
5.8 Export share among the ten regions in BAU scenario and
trade scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.9 Import share among the ten regions (BAU scenario) and
trade scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.10 Export share of ASEAN-CJK within region and rest of the
world in BAU 2020 and different trade scenarios . . . . . . . . . . 108
5.11 Ranking of the top six industrial sectors’ output growth,
BAU 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
5.12 Ranking of the top seven industrial sectors’ output growth in
trade scenarios at 2020 . . . . . . . . . . . . . . . . . . . . . . . . 111
5.13 Top six sectors’ export share in BAU, 2001 and ASEAN+3,
2020 (percentage) . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
5.14 Principal export shares under different economic integration
scenarios within the region (percentage) . . . . . . . . . . . . . . . 116
5.15 Top six sectors’ import share in BAU, 2001 and ASEAN+3,
2020 (percentage) . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
5.16 Grubel–Lloyd index in different trade scenarios . . . . . . . . . . . 123
5.17 Welfare decomposition of the different trade scenarios
(million USD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
5.18 The effects of terms of trade in different trade scenarios
(percentage change) . . . . . . . . . . . . . . . . . . . . . . . . . 127
5.19 Real returns on the factors of production in different trade
scenarios (percentage change) . . . . . . . . . . . . . . . . . . . . 128
5.20 Poverty scenario (percentage change) . . . . . . . . . . . . . . . . 130
6.1 CO2 growth in business as usual period (Gg) . . . . . . . . . . . . 134
6.2 CH4 growth in business as usual period (Gg) . . . . . . . . . . . . 134
6.3 N2 O growth in business as usual period (Gg) . . . . . . . . . . . . 135
6.4 CO2 growth in different trade scenarios at 2020 (Gg) . . . . . . . . 135
6.5 CH4 growth in different trade scenarios at 2020 (Gg) . . . . . . . . 136
6.6 N2 O growth in different trade scenarios at 2020 (Gg) . . . . . . . . 136
List of Tables xix
6.7 CO2 intensive sectors for the ten countries at BAU 2020 . . . . . . 143
6.8 CH4 intensive sectors for the eight countries at BAU, 2020 . . . . . 145
6.9 N2 O intensive sectors for the eight countries at BAU 2020 . . . . . 146
6.10 BOD intensive sectors for the six countries, BAU 2020 . . . . . . . 147
6.11 COD intensive sectors for the six countries, BAU 2020 . . . . . . . 148
6.12 Suspended solid intensive sectors for the six countries, BAU
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.13 Industrial waste intensive sectors for the six countries, BAU
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
6.14 CO2 intensive sectors for the ten countries at ASEAN+3,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
6.15 Sectoral CO2 growth in ASEAN+3 integration at 2020
compared to BAU 2020 (%) . . . . . . . . . . . . . . . . . . . . . 152
6.16 CH4 growth in ASEAN+3 integration at 2020 compared to
BAU 2020 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
6.17 BOD growth in ASEAN+3 integration at 2020 compared to
BAU 2020 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
6.18 COD growth in ASEAN+3 integration at 2020 compared to
BAU 2020 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
6.19 Industrial waste growth in ASEAN+3 integration at 2020
compared to BAU 2020 (%) . . . . . . . . . . . . . . . . . . . . . 156
6.20 Decomposition effect of CO2 , BAU 2020 (Gg) . . . . . . . . . . . 159
6.21 Decomposition effect of CH4 , BAU 2020 (Gg) . . . . . . . . . . . 159
6.22 Decomposition effect of N2 O, BAU 2020 (Gg) . . . . . . . . . . . 159
6.23 Decomposition Effect of BOD, BAU 2020 (tons) . . . . . . . . . . 160
6.24 Decomposition effect of CO2 under different scenarios (Gg) . . . . 161
6.25 Decomposition effect of CH4 under different scenarios (Gg) . . . . 162
6.26 Decomposition effect of N2 O under different scenarios (Gg) . . . . 163
6.27 Decomposition effect of BOD under different scenarios (tons) . . . 164
7.1 Multiple sector tax (moderate) . . . . . . . . . . . . . . . . . . . . 167
7.2 Impact of multi-sector tax (moderate) in different scenarios . . . . . 168
7.3 Multi-sector tax (drastic) . . . . . . . . . . . . . . . . . . . . . . . 169
7.4 Impact of multi-sector tax (drastic) in different scenarios . . . . . . 170
7.5 Impact of electricity tax in different scenarios . . . . . . . . . . . . 171
7.6 Tax on coal and oil in different scenarios . . . . . . . . . . . . . . 172
Chapter 1
Introduction
1.1 Globalization and Regionalization
Globalization facilitates economic growth, improvement in resource allocation, and

the promotion of technological progress. But it has its costs such as increased
income inequality and potential environmental damage. Similarly regionalization
has its benefits and costs. For example, the benefits of pooling labor and infor-
mation sharing resulting from regionalization are also associated with the costs of
congestion (Urata, 2003).
The world economy has experienced considerable intensification of economic
and financial integration since the late twentieth century. Trade and capital account
liberalization, rapid technological improvement in transport and telecommunica-
tions, have increased the pace of the international flow of goods and services.
The process of ‘globalisation’ has also been accompanied by the strengthening of
economic and financial linkages within and between geographic regions.
Multilateral trade liberalization under the General Agreement on Tariffs and
Trade (GATT), succeeded by the World Trade Organization (WTO) has accelerated
the speed of postwar globalization. Unilateral liberalization of trade and invest-
ment, deregulation and privatization of state-owned enterprises, and the lower cost
of foreign transactions due to technological progress in telecommunications and
transportation have hastened the process of globalization.
Recent trends show that the world economy is simultaneously becoming more
‘regionalized’ and more ‘globalized’. These trends are reflected in globalization
indicators. For example, the ratio of foreign trade to gross domestic product (GDP)
increased from 25% in 1960 to 46% in 1999 to 57% in 2006. Foreign direct invest-
ment (FDI), has grown more than 90-fold since 1970, and world trade by 18-fold.
Thus, both FDI and World Trade have increased faster than GDP.
The General Agreements on Tariffs and Trade (GATT) and the World Trade
Organization (WTO) were created to promote international trade and oversee the
multilateral trading system. Currently, the WTO has 150 members, and a signifi-
cant amount of global trade is covered by the WTO agreement. However, recently
problems have arisen in the WTO over agreements on agriculture and intellectual
property rights. These problems at the WTO have ushered in a gain in popularity in
regionalization (Hasmi & Lee, 2008).
K. Mukhopadhyay, P.J. Thomassin, Economic and Environmental Impact of Free Trade 1

in East and South East Asia, DOI 10.1007/978-90-481-3507-3_1,

C Springer Science+Business Media B.V. 2010
2 1 Introduction
1.2 Basic Issues of Regional Trade Agreements

Regional trade agreements (RTA) are economic trade agreement that reduce tariffs
and restrictions on trade between two or more nations within a certain region (WTO,
2007). RTAs are of different types. Some are complex, for example, European
Unions, while others are far less intensive, for example, North American Free Trade
Agreement (Whalley, 1998). Governments in most countries favour RTAs. However,
the WTO argues against these. According to Pascal Lamy, Director-General of the
WTO, the proliferation of RTA ‘. . . is breeding concern—concern about incoher-
ence, confusion, exponential increase of costs for business, unpredictability and
even unfairness in trade relations’ (Lamy, 2007).
RTAs have become a very prominent feature of the Multilateral Trading System
(MTS) in recent years. The surge in RTAs has continued unabated since the early
1990s (WTO, 2009). Initially the WTO encouraged the growth of RTAs because it
believed that regional integration initiatives can complement the multilateral trade
regime. However, the rapid increase of RTAs in global trade results in increased
diversion of trade through this route and this is increasingly becoming a cause for
concern for the multilateral trading system under the WTO (Pal, 2007).
There were 421 RTAs that have been notified to the GATT/WTO up to December
2008 and an additional 400 expected by 2010 (WTO, 2009). Of these, 324 RTAs
were notified under Article XXIV of the GATT 1947 or GATT 1994; 29 under
the Enabling Clause; and 68 under Article V of the GATS (General Agreement
on Trade in Services). In addition there were, 230 agreements already in force as of
December, 2008. RTAs, free trade agreements (FTAs), and partial scope agreements
accounted for over 90% of the agreements, while customs unions accounted for less
than 10% (WTO, 2009). Almost every country in the world has become a member
of at least one agreement (WTO, 2009).
Regional economic integration is a form of RTA. It can be referred to include any
type of arrangement in which countries agree to coordinate their trade, fiscal, and/or
monetary policies. Regional economic integration plays an important role in global
trade.
According to Balassa (1961) economic integration increases as trade barriers
diminish. There are six degrees of economic integration depending upon their level
of integration. These are Preferential Trading Areas (PTAs), Free Trade Areas
(FTAs), Customs Union (CU), Common Markets, Economic and Monetary Unions,
and Complete Economic Integration. A PTA is a union in which member coun-
tries impose lower trade barriers on goods produced within the union, with some
flexibility for each member country on the extent of the reduction. A Free Trade
Agreement (FTA) is a special case of PTA where member countries completely
abolish trade barriers; both tariff barriers and non-tariff barriers for goods originat-
ing within the member countries. It should be noted that in most cases countries do
not abolish trade barriers completely even within Free Trade Area. Most agreements
tend to exclude sensitive sectors. A Customs Union (CU) provides deeper integra-
tion than an FTA. In FTAs member countries are free to maintain their individual
level of tariff barriers for goods imported from non-member countries. In a CU
1.3 Proliferation of Regional Trade Agreements 3
member countries apply a common external tariff (CET) on goods imported from
non-member countries. The CET can vary across goods but not across union part-
ners. PTA, FTA and CU are called ‘shallow integration’ arrangements in the trade
literature (World Development Report, 2008).
Apart from these shallow arrangements there are three types of regional agree-
ments which provide ‘deep integration’. The first is Common Markets. In a
Common Market member countries attempt to harmonize institutional arrange-
ments, and commercial and financial laws, and regulations among members.
Common markets require the free movements of factors of production, i.e. labour
and capital. ‘Economic and Monetary Union,’ is the most advanced type of
economic integration. Here countries implement common economic policies and
regulations and common currency among member countries. The final stage of deep
integration is Complete Economic Integration. In this case, the integrated units have
no or negligible control of economic policy, including full monetary union and com-
plete fiscal policy harmonization (World Development Report, 2008). These later
two types of Economic Integration are also referred to as regionalism. Burfisher,
Robinson, and Thierfelder (2003) argue that there is a major transition from a
shallow to a deeper economic integration in most RTAs. The old version of regional-
ization is based on traditional trade theory that describes trade creation versus trade
diversion adopted from Viner (1950) and Meade (1955). While the new regionalism
focuses more on broader issues such as the linkages between trade and productiv-
ity, the role of FDI, productivity growth and the integration between developed and
developing countries.
Among the Regional Trade Agreements, it is found that, a large majority of
the agreements are shallow integration agreements, for example, PTAs or FTAs.
In contrast, only a handful of Customs Unions, Common Markets, and Economic
and Monetary Union are found worldwide. Most of the deep integration arrange-
ments are found in Europe. The Maastricht Treaty and the EU Single Market
programme provide examples of deep integration schemes. The ANDEAN Pact1
and the Central American Common Market (CACM) are examples of Preferential
Trade Agreements. The North American Free Trade Agreement (NAFTA) and the
ASEAN Free Trade Agreement (AFTA) provide examples of FTAs. MERCOSUR
(Mercado Comun Del Cono Sur) is an example of a customs union.
1.3 Proliferation of Regional Trade Agreements
Regional Trade Agreements have increased significantly in recent years. Apart from
removing tariffs on intra-bloc trade in goods, the newer agreements aim to have
deeper coverage. The following emerging trends have been noted in regional trade
integration (Crawford & Fiorentino, 2005).
First, countries are increasingly attempting to make RTAs a central objective
of their trade policy and giving priority over multilateral trade objectives. Second,
RTAs are becoming more complex, in many cases establishing regulatory regimes
4 1 Introduction
that go beyond multilaterally trade regulations. Third, the emergence of trade

agreements between key developing countries may indicate a strengthening of
‘South–South’ trading cooperation. Fourth, RTAs are expanding and consolidating.
The number of cross-regional RTAs is increasing and they account for a large pro-
portion of the total increase in RTAs. In addition, regional trading blocs that span
continents are being proposed.
WTO (2003) highlights two broad emerging trends. First, many countries which
traditionally relied on multilateral trade regime are increasingly joining regional
agreements to promote trade. Second, a number of continent-wide big trade blocs
like the Free Trade Area of the Americas (FTAA) or the Euro-Mediterranean FTA
are under negotiation. Once these negotiations are finalized, a significant share of
global trade flow will be diverted through these mega trade blocs.
Several of the new RTAs, proposed by developed countries, include more
regional rules on investment, competition, and standards and provisions for the
environment and labour. Most of these new agreements also include preferential
regulatory frameworks for mutual services trade.
RTAs are also becoming increasingly less regional since many countries appear
to be looking for preferential partners beyond their regional borders. Traditionally,
RTA formation took place between ‘natural’ trading partners, neighbouring coun-
tries with already well-established trading patterns. For example, Australia and
New Zealand, the NAFTA countries, the EC, the European Free Trade Association
(EFTA), and Central European Free Trade Agreement (CEFTA) belong to this
category. It should be mention that most countries sign their first RTA with one
or several neighbouring or regional partners. South East Asian countries’ partic-
ipation in ASEAN, sub-Saharan African groupings such as the Economic and
Monetary Community of Central Africa (CEMAC) or Southern Africa Customs
Union (SACU) or the Western Hemisphere groupings of Central America Common
Market (CACM), the Caribbean Common Market (CARICOM) and MERCOSUR
(Mercado Comun del Sur) provide examples (Fiorentino, Verdeja, Toqueboeuf
2007). These regional groups are making efforts to deepen intra-regional integration.
RTAs differ considerably in terms of their scope and depth. Some are for the
exchange of tariff preferences on a limited range of products, others are attempt-
ing to remove tariffs on a wide range of products. Other RTAs integrate several
regulatory regimes including common currency provisions and fiscal policy.
The diversity and complexity of RTAs is increasing with overlapping RTAs
and networks of RTAs spanning within and across continents at the regional and
subregional levels. An important aspect of the proliferation of RTAs is that their
configurations are changing overtime. There has been a decrease in the number of
plurilateral RTAs and a net increase in the number of bilateral and cross-regional
RTAs. Bilateral agreements account for 80% of all RTAs notified and in force;
94% of those signed and under negotiation; and 100% of those at a proposal stage
(Fiorentino et al., 2007).
Table 1.1 provides Notified RTAs in goods and services by date of entry into
force and type of partner as of December 2006. Besides RTAs among transition
economies, the major clusters of RTAs are North–South followed by South–South
1.3
Table 1.1 Notified RTAs in goods and services by date of entry into force and type of partner as of December 2006
Developed Developed Developing

Developed only developing transition Developing Only transition Transition only Total
g s g s g s g s g s g s g s
1958–64 2 1 1 3 1
1965–69 1 1
1970–74 5 1 2 8
1975–79 3 1 4
Proliferation of Regional Trade Agreements
1980–84 2 1 1 4
1985–89 1 1 1 2 4 1
1990–94 3 2 3 4 6 1 4 21 2
1995–99 3 1 7 1 2 6 4 2 17 35 8
2000–2 1 11 5 4 11 5 3 6 35 11
2003–6 3 1 18 14 1 12 6 2 19 54 22
Total 19 7 45 20 8 3 43 15 8 0 46 0 169 45
Source: Fiorentino et al., 2007.

g-goods
s-services
5
6 1 Introduction
RTAs accounting for 27 and 25%, respectively, of the total number of notified RTAs
in goods. In terms of Economic Integration Agreements (EIAs), N–S and S–S agree-
ments account for 44 and 33%, respectively. Both of these clusters will be expanded
given that almost all of the RTAs in the making fall under these two categories
(Fiorentino et al., 2007).
1.4 Global Development of RTAs
A closer look at the development of RTAs within the region, and across regions
provides additional information on the global development of RTAs.
Europe has the largest number of RTAs. Almost half of the agreements are noti-
fied to the WTO and are in force. The main regional groupings are the European
Union (EU) and the European Free Trade Association (EFTA). South-Eastern
Europe is consolidating into a third trading group under the auspices of the Stability
Pact.2 The EU accession negotiations with Croatia were officially launched in
October 2005 (along with Turkey). In the Mediterranean basin, the establishment
of a Euro-Mediterranean FTA between the EU and its Mediterranean partners made
further progress in June 2005. The EU continues to expand its RTA negotiations
beyond its immediate neighbourhood. These include FTAs with MERCOSUR, the
Gulf Cooperation Council (GCC) and the six Economic Partnership Agreements
(EPAs) with sub groupings of the African Caribbean and Pacific (ACP) countries.
The EU has also taken an interest in starting new FTA negotiations with the Republic
of Korea, India and the countries belong to the ASEAN, the Central American
Common Market (CACM) and the COMUNIDAD ANDINA (CAN) as partners.
As for the EFTA States, their FTAs with Tunisia and the Republic of Korea entered
into force in June 2005 and September 2006 respectively and an FTA with the
SACU countries was signed in June 2006. EFTA States opened FTA negotiations
with Thailand in 2005 and with GCC countries in 2006 (Fiorentino et al., 2007).
The United States is also expanding the number and regional locations of its
RTAs. It has signed FTAs with Colombia, Peru and with five Central American
countries and the Dominican Republic-Central American Free Trade Agreement
(DR-CAFTA).3 It has pursued negotiations with Ecuador and Panama and made
deals with some Northern African and Middle Eastern countries, as part of its
Middle East Free Trade Initiative. In Asia-Pacific, the United States has opened
FTA negotiations with the Republic of Korea and Malaysia in order to strengthen
ties with ASEAN countries (Fiorentino et al., 2007).
The other two NAFTA members are also active in RTA negotiation. Canada
has opened FTA negotiations with the Republic of Korea and is considering pos-
sible FTAs with the Caribbean Community and Common Market (CARICOM),
MERCOSUR and the Dominican Republic. Canada has signed an FTA with Japan.
It has also started FTA negotiations with Singapore (Fiorentino et al., 2007).
Countries in Central and South America are also negotiating RTAs across a wide
range of regions. Panama has concluded an FTA with Singapore and CARICOM
has ratified agreements with Cuba and Costa Rica. Chile is increasing its FTA
1.5 Economic Integration in East and South East Asia 7
network under the Trans-Pacific Strategic Economic Partnership (SEP-4) which

includes New Zealand, Brunei and Singapore. All of these FTAs were in place as
of November 2006. Chile has also signed an FTA with China, and a framework
agreement for a possible FTA with India. MERCOSUR has signed a framework
agreement for possible FTAs with the GCC, India, Israel, Egypt, Morocco and the
SACU (Fiorentino et al., 2007).
Efforts for regionalism have also occurred in the Asia-Pacific region. At a
country level, Japan has taken several initiatives to establish RTAs. Developments
since 2006 suggest that it has expanded its partnerships focus from Asian coun-
tries to cross-regional partners.4 Japan has an FTA with Mexico and has launched
negotiations with Chile and the GCC countries. In early 2007, it started FTAs nego-
tiation with Vietnam and has initiated studies for FTAs with Australia, India and
Switzerland. The Republic of Korea, in addition to its FTAs with Chile and the
EFTA States, has signed an FTA with Singapore. It has launched negotiations with
ASEAN, Canada, the United States, India and Japan, and it is considering FTAs with
Australia, MERCOSUR, Mexico and the EU. China, an emerging economy has also
adopted this trade strategy. It has signed an FTA with Chile and Pakistan, and started
negotiations with the GCC, Singapore, Australia, and New Zealand. China is also
considering an agreement with India. The ASEAN group is negotiating with India,
Japan, Australia and New Zealand, as well as considering an FTA with the Republic
of Korea and the EU. At the same time, some ASEAN countries (Singapore,
Thailand and Malaysia) are negotiating individual agreements. Singapore has estab-
lished FTAs with Jordan, India, the Republic of Korea, and Panama. It is negotiating
a FTA with Canada, China, Mexico, Pakistan, Peru. Thailand has also become an
active RTA player in recent years. Its FTAs with Australia and New Zealand have
started to operate. It has concluded a framework agreement with India and signed
an FTA with Bahrain. Thailand is currently negotiating FTAs with the EFTA States,
Japan, Peru and the United States and is considering FTAs with Chile and Pakistan.
Malaysia has signed an FTA with Japan and a partial scope agreement with Pakistan.
It is negotiating FTAs with Australia New Zealand and the United States and is con-
sidering an FTA with India. In South Asia, SAARC members are implementing
the South Asian Free Trade Area (SAFTA). Beside regional initiatives, India and
Pakistan are also very keen to have an RTA. In addition to its FTA with Singapore,
India has signed an FTA with Mauritius and has partial scope agreements with Chile,
MERCOSUR, SACU and Thailand. In addition, India is in FTA negotiations with
ASEAN, the GCC countries and the Republic of Korea. Pakistan has concluded an
FTA with Sri Lanka and China, and a partial scope agreement with Malaysia. It
is negotiating FTAs with the GCC and Singapore, and is considering an FTA with
Indonesia (Fiorentino et al., 2007).
1.5 Economic Integration in East and South East Asia
In the last section, we have mapped various global developments of RTAs and type
of regional economic integration already negotiated or being negotiated around the
8 1 Introduction
world. We now turn to East and South East Asia, our territory of study for more
in-depth analysis.
East and South East Asian economies have grown rapidly over the last few
decades, driven by the expansion of international trade and foreign direct invest-
ment. Although not yet having formed a legal economic integration as a whole,
as seen in North America and Europe, the growth in intraregional trade has been
higher than in these two counterparts. East and the South East Asia’s increased
trade and investment linkages are due to unilateral reforms, and the fragmentation
and relocation of production processes that has arisen since the mid-1980s (Kawai
& Wingaraja, 2008a). East and South East Asia’s economic development has moved
toward regional economic cooperation and integration. Even without the support of
formal regional trade agreements, countries in East and South East Asia achieved
lowered barriers to intra regional trade, increased trade both within the region and
with world markets, diversification of production and trade, increased foreign direct
investment and growth and lower average tariff rates than most other regions.
Economic integration in this region has been market-driven, with private activ-
ities as the primary and public policies as secondary in the early stages. Recently,
however, new efforts in institution-driven integration are being initiated to further
accelerate or complement the market-driven integration in East and South East Asia.
The region has witnessed a rapid expansion of regional economic cooperation pro-
grams through bilateral and plurilateral FTAs. Recent developments in individual
economies such as: China’s rapid export-driven growth performance and entry into
the WTO, Japan’s prolonged recession and desire to regain its leadership role in
the region, the Republic of Korea’s change toward a more liberalized economic
system, and Singapore’s active role to become a hub of regionalism, can be consid-
ered as additional factors behind the strategic change in East and South East Asian
regionalism.
1.5.1 FTA in East and South East Asia—A Brief History
The two major East and South East Asian efforts at economic integration and
cooperation are the Association of Southeast Asian Nations (ASEAN) and the
Asia-Pacific Economic Cooperation forum (APEC).
1.5.1.1 APEC
APEC was established in 1989 to further improve economic growth and prosper-
ity in the region and to strengthen the Asia-Pacific community. It is the premier
forum for facilitating economic growth, cooperation, trade and investment in the
Asia-Pacific region. APEC is the only inter governmental group operating on the
basis of non-binding commitments, open dialogue and equal respect for the views
of all participants. Unlike the WTO or other multilateral trade bodies, APEC has
no treaty obligations required of its members. Decisions made within APEC are
reached by consensus and commitments are undertaken on a voluntary basis. APEC
has 21 members–referred to as ‘Member Economies’. These economies account for

approximately 40.5% of the world’s population, 54.2% of world GDP and approxi-
mately 43.7% of world trade (APEC, 2009). Since its inception, APEC has worked
to reduce tariffs and other trade barriers across the Asia-Pacific region, to create
efficient domestic economies and to substantially increase the volume of exports.
APEC’s vision is to liberalize trade and investment in the Asia-Pacific by 2010 for
industrialized economies and 2020 for developing economies. These goals were
adopted by Leaders at their 1994 meeting in Bogor, Indonesia (The Department of
Trade and Foreign Affairs, 2008).
Since APEC’s inception it has had a favorable impact on trade and GDP growth.
APEC s total trade has grown 395%, significantly more than the rest of the world.
In the same period, GDP (in purchasing power parity terms) in the APEC region has
tripled, while GDP in the rest of the world has less than doubled. The Asia-Pacific
region has thus been one of the most economically dynamic regions in the world
(The Department of Trade and Foreign Affairs, 2008).
APEC works in three main areas: Trade and Investment Liberalisation, Business
Facilitation, and Economic and Technical Cooperation. These activities have been
the drivers of rapid economic growth, job creation, and increase in the standard of
living for people of the region.
1.5.1.2 ASEAN
In 1967 the Association of South East Asian Nations or ASEAN was established.
The five original member countries were the Philippines, Indonesia, Malaysia,
Singapore, and Thailand. ASEAN was extended in 1984 to include Brunei
Darussalam, Vietnam in 1995, both Laos PDR and Myanmar in 1997 and Cambodia
in 1999. Enhanced integration between the ASEAN countries already commenced
early on, starting in 1977 with the Agreement on ASEAN Preferential Trading
Arrangement, amended in 1995. Since then, the relations between member coun-
tries of ASEAN have grown and deepened both in scope and importance. These
relations include among others trade, investment, customs, and intellectual property
(European Commission, 2008). Table 1.2 presents a historical overview of these
relations and agreements between the ASEAN member countries. As of 2006, the
ASEAN region had a population of 560 million, an total area of 4.5 million square
kilometers, a combined gross domestic product of almost US$ 1,100 billion, and
total trade of about US$ 1,400 billion. Tariffs for goods covered by the agreement
were lower than the MFN (most favoured nations) tariff, but not necessarily zero
(ASEANSEC, 2009).
The aims and purposes of the ASEAN are: (i) to accelerate the economic growth,
social progress and cultural development in the region through joint endeavours in
the spirit of equality and partnership in order to strengthen the foundation for a
prosperous and peaceful community of Southeast Asian nations, and (ii) to promote
regional peace and stability through abiding respect for justice and the rule of law
in the relationship among countries in the region and adherence to the principles of
the United Nations Charter (ASEANSEC, 2009).
10 1 Introduction
Table 1.2 Historical overview of ASEAN relations and agreements
Year Agreements
1967 ASEAN is formed by the Philippines, Indonesia, Malaysia, Singapore and Thailand
1977 Agreement on ASEAN preferential trading arrangement (implemented in 1977 and
further extended in 1987)
1984 Brunei joins ASEAN
1992 Agreement on the ASEAN free trade area
1992 Agreement on the common effective preferential tariff scheme for the ASEAN free
trade area
1992 Framework agreements on enhancing ASEAN economic cooperation
1995 Vietnam joins ASEAN
1997 Laos PDR and Myanmar join ASEAN
1999 Cambodia joins ASEAN
2003 Declaration of ASEAN Concord II (Bali Concord II); ASEAN Economic
Community
Source: European Commission, 2008.
Economically, steps have been taken to reduce trade barriers between mem-
ber states. In 1992, ASEAN members agreed to form the ASEAN Free Trade
Area (AFTA). In the early and mid-1990s, foreign investment in the region grew
rapidly. However, the pace of integration slowed because member states were
reluctant to take steps that would lower the tariffs of protected industries and
expressed concerns about national sovereignty. Further, the economic crises of 1997
hit these economies severely. AFTA was signed by Brunei, Indonesia, Malaysia,
the Philippines, Singapore and Thailand in 1992 and came into force on January
1, 1993. At that time it covered a selection of non-agricultural goods, known as
the ‘inclusion list’. Trade will eventually be completely liberalized within ASEAN
members, with only a few exceptions allowed to remain permanently as stated in
the AFTA. During the implementation period the member countries enjoyed some
freedom in identifying the products they granted preferences on and in setting their
preferential tariffs.
Each country excluded some products temporarily, and a few products were
on a ‘general exclusion list’. The preferential tariff is called ‘Common Effective
Preferential Tariff’ (CEPT). It included products that were either on a ‘fast track’-
list or on a ‘normal track’ list. For fast-track-products, tariffs above 20% had to be
reduced to 0–5% by 2003, and other tariffs had to be reduced to this level by 2000.
Tariffs below 20% had to be reduced to 0–5% by 2003. For normal-track products,
tariffs above 20% had to be reduced to 20% by 2001 and to 0–5% by 2008. Members
were free to set tariffs until the end of the implementation periods, but encouraged
to use a linear tariff reduction formula (ASEANSEC, 2007).
In 1995, the six members amended the 1992 agreements to include agricul-
tural products and the timeframe for tariff reductions. Tariffs were to decrease to
20% by 1998, instead of 2001, and to 0–5% by 2003, instead of 2008. In 1999, a
protocol was signed which defined country-specific sensitive and highly-sensitive
agricultural products. Those were implemented into the CEPT scheme until 2001
and 2003, and tariffs for sensitive products have to be reduced to 0–5% until 2010
and 20% for highly-sensitive products (ASEANSEC, 2007).
Economic integration increased with the signing of the 2003 Protocol for
Elimination of Import Duties. In 2003, members agreed that tariffs for all products
of the inclusion list should be abolished by 2010. By 2003, significant tariff reduc-
tions had been made among the members. Tariffs on 99.55% of products mentioned
on the Inclusion List of 2003 have been reduced to below 5% or removed alto-
gether. This mostly holds for the original six signatories; Brunei, the Philippines,
Singapore, Thailand, Malaysia, and Indonesia. However, the other member coun-
tries of ASEAN are not far behind this target. The ASEAN countries have not only
agreed on reducing or eliminating tariffs under the CEPT Scheme, they have also
agreed upon Rules of Origin. In 2004, sector-specific agreements were concluded.
This provided for increased tariff reduction for most products within a list of sectors.
Investment in the region had increased substantially in 2005. However, some
countries, such as Singapore and Malaysia, receive significantly more invest-
ment than other countries within the organization. In addition, intra-ASEAN trade
remains only a small part of ASEAN’s total trade. The ASEAN members faced
other challenges such as extreme poverty found in many of the countries and the
continuation of military regime in Myanmar (ASEANSEC, 2007).
ASEAN Vision 2020

In 1997 the ASEAN countries continued the process of economic integration by
establishing a vision and outlook for the year 2020. Their vision is to have a Zone
of Peace, Freedom, and Neutrality for the ASEAN countries. The pathway chosen
to reach this vision is to expand the economic integration of member countries. It is
hoped that by 2020 an ASEAN Economic Region can be established that is a Free
Trade Area for member countries.
ASEAN+3
At present, the most important framework for economic integration in East and
South East Asia is ASEAN+3 (ASEAN+3).
The ASEAN+3 cooperation began in December 1997 at an informal summit among
the leaders of ASEAN and their counterparts from East Asia that is China, Japan
and the Republic of Korea. The ASEAN+3 process was institutionalized in 1999
when the Leaders issued a Joint Statement on East Asia Cooperation at their third
ASEAN+3 Summit in Manila. In this statement ASEAN+3 leaders expressed deter-
mination in strengthening and deepening East Asia cooperation at various levels and
in various areas, particularly in economic, social and political areas (ASEANSEC,
2009).
Substantial progress has been made in the areas of economic, monetary and finan-
cial cooperation. Total trade value between ASEAN and the +3 Countries has been
increasing over time reaching US$ 195.6 billion in 2003 compared to US$170.8
12 1 Introduction
billion in 2002 (14.49% growth in trade). Bilateral trading arrangements between

ASEAN and China and ASEAN and Japan and ASEAN and the Republic of Korea
have been established. These arrangements will serve as the building blocks for
the possible establishment of an East Asia Free Trade Area (EAFTA). In terms
of financial cooperation, a regional financing arrangement called the ‘Chiang Mai
Initiative’5 (CMI) has been in place. The CMI consists of an expanded ASEAN
Swap Arrangement (ASA) and a network of bilateral swap arrangements (BSAs)
among ASEAN members.
Significant progress has been achieved in developing the Asian Bond Market
Initiative (ABMI) for China, Japan and the Republic of Korea. ASEAN+3 coun-
tries are taking initiatives to alter existing regulations to help the issuance of and
investment in local currency denominated bonds under the ABMI.
1.5.2 Factors Affecting FTA Initiatives in East

and South East Asia
Three major factors are responsible for FTA initiatives. These are (i) the deepen-
ing of market-driven economic integration; (ii) the progress of European and North
American economic integration; and (iii) the Asian financial crisis (ADB, 2007).
First, the expansion of regional economic linkages and interdependence is the
most important reason for recent initiatives for institutional cooperation to support
economic integration in Asia. East Asia has long enjoyed market-driven inte-
gration through trade and foreign direct investment. It has traditionally worked
through a multilateral liberalization framework under the GATT/WTO and through
APEC. The degree of regional economic integration through trade in East Asia has
increased rapidly over the last twenty-five years (Hasmi & Lee, 2008).
Recent economic cooperation has increased the foreign direct investment flow
to East Asia. Recently, firms in the Asian newly industrialized economies (NIEs)
i.e. the Republic of Korea, Taiwan, Singapore and Hong Kong have been investing
in ASEAN and China (ADB, 2007; Hasmi & Lee, 2008).
Second, the success of economic regionalism in Europe (EU) and North America
(NAFTA)—has encouraged the East and South East Asian economies to pursue
regional trade arrangements. Governments in this region recognise that the two giant
blocs—the European Union and the United States—might dominate the global trad-
ing system and minimize the role of Asia in global competition and multilateral
negotiations. They realised that uniting and consolidating themselves through a pro-
cess of integration would strengthen their bargaining power and make them a major
economic force. They could be a powerful group to voice the region’s views on
global trade issues (Hasmi & Lee, 2008).
Finally, the 1997–1998 Asian financial crisis had made them aware of the neces-
sity to strengthen monetary and financial cooperation. The region must establish its
own ‘self-help’ mechanism for economic management. This financial crisis encour-
aged the development of the sense of a ‘region’ to brave a common set of challenges
(Hasmi & Lee, 2008).
Let us discuss the features of East and South East Asia’s RTA.
1.5.3 Features of Existing RTAs in East and South East Asia

Diverse geometry: RTA partners range from bilateral to plurilateral. Plurilateral
agreements include ASEAN/AFTA, ASEAN+1, ASEAN+3 as well as agreements
with other regional groupings such as the EFTA, GCC, SACU and MERCOSUR.
Theoretically, these RTAs are discriminatory and have negative trade diversion
effects on excluded countries and are thus the second best options to multilateralism
(Yue, 2007).
Diverse geographical partners: Geographical proximity traditionally facilitates
trade, but due to technological innovation in transport and telecommunications, geo-
graphic distance is no longer the trade barrier. RTAs are found to exist not only
among ASEAN countries, between ASEAN and northeast Asia, but also between
East Asian countries and countries in the Americas, Europe, Middle East, Africa,
South Asia and Oceania (Yue, 2007).
Diverse economic partners: RTAs have diverse economic partner. Economic
complementarity between north–south economies encourages inter-industry trade,
particularly between high tech manufacturers and primary commodity producers,
for example, the Japan-ASEAN partnership. The south partners benefit from FDI
and technology transfers from the north.
Comprehensive scope and coverage: In some FTAs in East Asia, 100% of the
bilateral trade and tariff lines are included for immediate liberalization for mar-
ket access. Singapore-New Zealand and Singapore-Australia are examples of such
cases. In other situation, the percentage coverage is less, and the tariff elimination
is phased out over a period, usually 10 years. Agreements also vary in the length of
the exclusion lists (Yue, 2007).
ASEAN as hub: AFTA was the first FTA uniting the countries of Southeast Asia.
No comparable grouping in the economically advanced Northeast Asia exists. There
are agreements and/or proposals for FTAs/EPAs between ASEAN and separately
with the three northeast countries—China, Japan and the Republic of Korea. These
agreements will make ASEAN a hub in the region (Yue, 2007).
Multiple and overlapping RTAs: As RTAs differ in their rules of origin, how-
ever, the rapid increase of multiple and overlapping RTAs creates a ‘spaghetti bowl’,
affecting business transaction costs and potential economies of scale (Yue, 2007).
1.5.4 FTA Initiatives in East and South East Asia
In the formation of an ‘East Asia Free Business Area,’ Japan, China and the
Republic of Korea are pushing forward FTA-based integration, with the ASEAN
Free Trade Area acting as a hub (Zhao, 2007). Here we shall discuss briefly these
initiatives.
1.5.4.1 China-ASEAN
China-ASEAN trade and economic relations have passed through several stages.
During the first stage (from 1967 to 1990) the relations between two has experienced
14 1 Introduction
from mutual suspect to mutual understanding and trust. China and ASEAN began
to gradually strengthen mutual understanding through bilateral activities, espe-
cially in the late 1970s and early 1980s when China changed its foreign policy.
China established diplomatic relations with all ASEAN members by 1991 for future
cooperation.
The second stage covers the period from 1991 to 2001. During this period, polit-
ical and economic relations between China and ASEAN increased very quickly. In
1997, both sides issued a joint declaration on building a good-neighborly partnership
oriented to the 21st century (Zhao, 2007).
The third stage is from 2002 to the present. In 2002, the both sides signed the
Framework Agreement on China-ASEAN Comprehensive Cooperation, with the
purpose of forming the China-ASEAN Free Trade Area by 2010. In 2003, China
joined the Treaty of Amity and Cooperation in Southeast Asia, becoming the first
non-ASEAN signatory to the treaty. In 2004, all ASEAN members unanimously
recognized China’s full market economy status and signed the Agreement on Trade
in Goods of the Framework Agreement on Comprehensive Economic Cooperation
with China. In July 2005, the ‘early harvest trade in goods’ programme came into
effect. Early Harvest Package, which includes market access and economic coop-
eration activities particularly in the five priority areas identified i.e. agriculture,
investment, information and communications technology, human resource devel-
opment and the Mekong Basin development (Greenwald, 2006). In 2007, both sides
signed the Agreement on Trade in Services. These agreements have resulted in
China and ASEAN developing a close economic relationship.
CAFTA brings direct benefits to both China and ASEAN. It decreases the trans-
action cost between the two. These reductions bring direct benefits to the producers
and consumers from both sides. The first ASEAN+China summit was held in
1997. The framework agreement on China-ASEAN comprehensive cooperation was
signed in 2002. In addition the agreement on trade in goods and dispute settle-
ment mechanism was signed in 2004. Finally, an agreement on trade of services
was signed in 2007 (Zhao, 2007).
The development of the China-ASEAN trade and economic relationship has
important implications for the whole region. It alters the economic pattern in the
region, enlarges the regional internal market, and develops the construction of the
regional institution, which helps expand the regional economic scale and improve
the regional integration.
1.5.4.2 Japan-ASEAN
A comprehensive free-trade agreement between Japan and the 10-member ASEAN
came into force on December, 2008. The FTA includes goods, services and invest-
ment. It enables Japanese companies that are expanding their markets in Southeast
Asia to reduce their trade costs. For example, the tariffs on Japanese exports from
one ASEAN country to another will be removed. In particular, electronics and
automobile manufacturers will benefit from this agreement as parts from various
countries in the region can be assembled without tariffs being levied. Japan will
repeal tariffs on 93% of the imports from ASEAN by value within 10 years of
the deal. Meanwhile, six major ASEAN members—Brunei, Indonesia, Malaysia,
the Philippines, Singapore and Thailand—will eliminate tariffs on 90% of imports
from Japan, including automobiles, within 10 years. A more gradual tariff elim-
ination table has been set for the remaining four ASEAN members with smaller
economies—Cambodia, Myanmar, Laos and Vietnam. The deal with ASEAN,
signed in April 2008, is Japan’s eighth FTA, following bilateral agreements with
Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia and Brunei (Kyodo News,
2008).
1.5.4.3 Republic of Korea-ASEAN

The Republic of Korea free trade agreement covering goods with nine of the ten
members of Association of Southeast Asian Nations took effect on June 1, 2007.
Thailand, the world’s top rice exporter, refused to join the agreement to protest
Seoul’s insistence on excluding rice (Oryza, 2007). According to the final tariff
concession schedule for goods, the Republic of Korea and ASEAN will eliminate
tariffs on products constituting 90% of their respective imports by 2010. The prod-
ucts making up the other 7% of imports are to have their tariffs lowered to 0–5%
by 2016. Taking into consideration the sensitive nature of the products making
up the remaining 3%, items under this group are eligible for receiving protection
through various measures, such as exemption from concessions, long-term tariff
reduction schemes, and tariff rate quotas (TRQ). In particular, with the elimination
or reduction of ASEAN member countries’ tariffs on major Korean exports such as
automobiles and steel products, Korean corporations are expected to secure a more
advantageous position in the export market to ASEAN compared to their major
competitors such as China and Japan (Oryza, 2007).
The Republic of Korea has included rice and other sensitive agricultural and
marine products within the 3% category of highly sensitive products. These can
receive protection through measures such as exemption from concessions and long-
term tariff reduction schemes (KOREANET, 2006).
1.5.4.4 ASEAN Countries FTA in East and South East Asia

There are a number of bilateral FTA already signed by ASEAN countries individu-
ally with Japan, China and Republic of Korea or within themselves. A summary of
the FTAs in East and South East Asia is presented in Table 1.3.
At the bilateral level, Thailand has made progress in her bilateral consultations
and arrangements with a number of countries including Japan with a view to fos-
tering long-term economic partnership and multilateral trade liberalization with the
ASEAN countries since 1993. Thailand was one of the main countries that played
an important role in the Free Trade Area development in ASEAN. The tariff reduc-
tion program has been implemented in Thailand since January 1993. The AFTA
was endorsed at the Fourth ASEAN Summit in Singapore in 1992. Regarding the
CEPT, Thailand reduced its average tariff rate from 10.6% in 1998 to 4.64% in 2003
16 1 Introduction
Table 1.3 Growth of FTAs in East Asia, 1976–2008 (cumulative number of FTAs)
Status of FTAs
Year No. of FTAs Concludeda Under negotiation Proposed
1976 1 1 0 0
1986 1 1 0 0
1996 4 3 0 1
2000 7 3 1 3
2001 10 5 2 3
2002 14 6 4 4
2003 23 9 5 9
2004 42 14 16 12
2005 67 21 30 16
2006 96 31 42 23
2007 103 37 40 26
2008b 108 41 38 29
Source: Compiled from Asian Development Bank Free Trade Agreement Database,
Asia Regional Integration Center, www.aric.adb.org.
Notes: a. Concluded FTAs are those signed and/or under implementation; FTAs under
negotiation cover those with or without a signed framework agreement; and proposed
FTAs include official pronouncements of parties to negotiate an FTA, joint study
groups established, and feasibility studies conducted to determine the desirability of
establishing an FTA. b. Data as of 30 June 2008.
(Ministry of Commerce, 2003). This also reduced its product tariff rates to 0% on
5,337 product items at the end of 2003 (Ministry of Commerce, 2003).
AFTA is expected to influence the necessary reforms of Vietnam’s trade policies.
Full participation in AFTA creates opportunities for Vietnam. The possibility of
expanding labor intensive exports to ASEAN markets on a preferential basis will
assist the Vietnamese producers (Thanh, 2001). In July 2003, the government of
Vietnam announced a revised CEPT schedule resulting in industrial adjustments as
regional free trade begins to improve.
Indonesia is a founding member of the ASEAN and participates in the AFTA.
With few exceptions, AFTA tariffs on intraregional trade were reduced to between 0
and 5% in 2002. Initially, 20% of Indonesia’s tariff lines were excluded from AFTA
reductions. Now, only 1% is excluded. Tariff reductions for certain sensitive items,
such as rice and sugar, were also finalised after 2002. Reductions in Indonesia’s
AFTA tariff rates have closely followed reductions in MFN rates. As a result, the
margin of preference for Indonesia’s ASEAN trading partners has remained fairly
small at about 2.5%. The margin is probably even smaller for agricultural commodi-
ties because of the sharp reduction in tariffs required by Indonesia’s Letter of Intent
(LOI) with the IMF (FAO, 2003).
The Philippines is firmly committed to the multilateral trading system of the
WTO. However, the country is also seeking to further expand trade in the region.
Following the Japan-Philippine Summit in May 2002, the Philippines is currently
exploring the feasibility of establishing an economic partnership agreement with
Japan. Singapore is strongly committed to free trade and the multilateral trading
system (WTO, 2008).
A free trade agreement was negotiated and implemented between Japan and
Malaysia in 2006. This agreement will scrap tariffs on essentially all industrial
goods and most agricultural, forestry and fishery products within 10 years. The
FTA will contribute toward enhancing the cross-border flow of goods, services and
capital between Japan and Malaysia. For example, Malaysia will remove tariffs on
finished passenger cars with engine displacements by 2010 and smaller vehicles by
2015. It will also immediately abolish tariffs for completely knocked down auto
parts for Japanese carmakers assembling vehicles in Malaysia. For farm products,
Japan will eliminate tariffs on Malaysian imports of tropical fruits. The accord will
cover trade in goods and services, intellectual property right protection, investment
rules, competition policies, business facilitation and cooperation projects for per-
sonnel training in Malaysia. As a result both sides will gain (FTA Malaysia, 2006).
Malaysia completed the legal procedures necessary for entry into the Agreement
on Comprehensive Economic Partnership among Japan and Member States of the
Association of Southeast Asian Nations (Japan-ASEAN Comprehensive Economic
Partnership Agreement). They became a part of the agreement is of February 1,
2009. Other countries who have already entered into the agreement include Japan,
Singapore, Laos, Vietnam, Myanmar and Brunei (Bernama, 2009).
1.5.5 Efforts and Time Frame for Economic Integration
The time frame for implementation of EAFTA will take into account existing bench-
marks. This indicates that the developed countries of EAFTA, Japan, Republic of
Korea and possibly Singapore, should move at a faster pace than the APEC. As
a consequence these countries must achieve their objectives by 2010, while the
remaining countries not later than 2020. For the ASEAN-6 countries, this should
not be much a problem, because ASEAN-6 have targeted CEPT zero tariff by
2010 under the AFTA. The pace of liberalization of EAFTA should not take longer
the pace of liberalization to which ASEAN members have already agreed under
AFTA i.e. elimination of tariff by 2010 for ASEAN-6 and 2015 for the new mem-
bers. CLMV (Cambodia-Laos-Myanmar-Vietnam) need more time to adjust to the
required liberalization policies. Hence, some amount of flexibility and differential
deadlines in their liberalization commitments should be given to these countries
(Kawai & Wingaraja, 2007).
The Asian movement towards regionalization6 —known as ASEAN 10+3, +4 or
+6—is relatively new, but it may assume importance, as it includes China, Japan and
the Republic of Korea. The move in the region is now towards the conclusion of free
trade agreements and economic partnership agreements. All countries in East Asia,
including China and Japan, are moving towards the conclusion of such agreements
with other countries in the region. The potential of an East Asian free trade area
may be realized by 2010. It is also expected that an East Asian multilateral regional
trading community will be established by 2020 (Hew, 2006).7
18 1 Introduction
Table 1.4 Liberalization timeframe for major economic groups in East Asia
For developing countries

Group/FTA (Year of full For developed or For advanced six For other four
negotiation completed) partner countries ASEAN members ASEAN membersa
APEC (voluntary and 2010 2020 2020

unilateral)
ASEAN (1992) – 2003 (0% tariff by 2006–10 (0% tariff
2010) by 2015)
ASEAN economic Community to be
launched by 2015
ASEAN+China (2010) 2007 (China) 2007 2010
ASEAN+Korea (2008) 2008 (Korea) 2010 (excl. Thailand) 2015 (flexibility
allowed)
ASEAN+Japan (2007) 2010 (Japan) 2012 2018
ASEAN+India (2011) 2011 (India) 2011 (excl. Philippines) 2016 (incl.
Philippines)
ASEAN+CER (Australia 2010 (CER) 2017 2017
and New Zealand) (2009)
Source: Kawai & Wingaraja, 2008a.

Note: a. Cambodia, Laos, Myanmar and Vietnam.
The ASEAN Economic Community (AEC) is one of the three pillars of the
ASEAN Community. It is considered the goal of economic integration as outlined
in the ASEAN Vision 2020. ASEAN is expected to become a single market and
production base by 2020. Free flow of goods, services, capital, equitable economic
development, and reduction of poverty and socio-economic disparities are expected
to be achieved (Kawai & Wingaraja, 2008a). Table1.4 presents the time frame for
the major economic integration agreements in East Asia.
1.6 Environmental Degradation

Globalization triggered by free and open trade has had a considerable impact on the
Asia-Pacific region. This region has emerged as an integrated economic player in
the world economy. It is expected that an East and South East Asian multi-lateral
regional trading community will be established by 2020. This multi-lateral regional
trading community is expected to decrease the current barriers to trade between
individual countries, expand the movement of goods and services between countries,
and continue the economic growth within individual countries.
Economic growth has often also been accompanied by environmental degra-
dation of both national and international environments. Climate change, ozone
depletion, and deforestation are often sited as examples of environmental prob-
lems that have resulted from economic growth. This region has also been plagued
1.6 Environmental Degradation 19
with various environmental problems as a result of rapid industrialization and trade

openness.
One of the on-going debates in trade discussions is how to protect the envi-
ronment when multi-lateral regional trade agreements are being negotiated. Many
environmental advocates argue that freer trade harms the environment and, by fos-
tering more trade, liberalization is environmentally unfriendly. They claim that
trade policy reforms produce substantial resource depletion and environmental
degradation effects. Others argue that, on the contrary, trade liberalization is ben-
eficial to the environment. By reducing market distortions, which protect dirty
industries and encourage excessive intensification of production, trade liberaliza-
tion would improve environmental quality. Further, it will increase the amount of
environmental-friendly technology that is adopted. This occurs because capital and
technology can flow more freely under a regional trade agreement. It is also argued
that increasing environmental standards in the framework of a regional trade agree-
ment results in increased competitiveness of firms in these countries as they become
more innovative in their industrial processes. Thus, the impact of trade liberalization
on the environment continues to be debated (Mukhopadhyay, 2007).
The East and South East Asian region has a major stake in the global response
to the challenges of environmental degradation, climate change, and clean develop-
ment. At the APEC meeting in Sydney 2007, leaders agree to work through bilateral,
regional and global partnerships to foster clean development and adopt the APEC
action agenda. This agenda includes an APEC wide reduction in energy consump-
tion intensity of at least 25% by 2030 and an increase in forest coverage in the region
by at least 20 million hectares by 2020 (Griffin, 2007).
Rapid urbanization, industrialization, growth of sectors such as tourism, pres-
sures exerted by agricultural land use and fish cultivation on natural land, in
combination with governance issues and illegal trade are putting tremendous pres-
sures on ASEAN natural resources and environment. Although the gravity of the
situation is recognized by authorities and various initiatives and laws are in place
or being developed, the capacity of authorities in many countries for environmental
management is limited. More resources are needed to fight the current environmen-
tal problems. Widespread urbanization and the creation of ‘mega cities’ has directly
caused mass migration, increased automobile traffic and, consequently, severe air
pollution. City infrastructure is not developed adequately to address the problem of
solid waste and wastewater pollution (European Commission, 2008). Deforestation
has also affecting the growing economies in the region. To achieve stable and sus-
tainable economic growth is a major concern for individual economies of the region.
Increasing attention is needed to search out new approaches for “clean and sustain-
able” development. To address environmental issue such as climate change requires
region wide or world wide cooperation.
Towards this end, the present study makes a modest effort in this area. The book
estimates the economic and environmental impacts of trade liberalization in East
and South East Asian countries by the year 2020.
20 1 Introduction
1.7 Objective
The overall objective of the book is to provide policymakers with strategic envi-
ronmental policy options for promoting sustainable development in the context
of regional economic integration, identifying strategies for environmental sustain-
ability, and poverty reduction. This research has focused on regional economic
integration in Asia through the process of creating an East and South East Asian
trading community.
More specifically, the objective of the study was to estimate the economic, social
and environmental impacts of the development of an East Asia multi-lateral trading
community. This includes estimating the economic impact of this trading commu-
nity on individual country industrial output, exports and imports, and the resulting
impact on poverty and the environment. The environmental impacts are estimated
with a number of selective environmental indicators In addition, the impact of
alternative environmental policy packages are estimated on the economic growth,
industrial development, welfare, and environment of the countries under study.
1.8 Structure of the Book

The literature review is presented in Chapter 2. It analyzes studies related to the
economic effects of RTAs and its sectoral and regional implications, environmen-
tal as well as poverty implications. To address these impacts the empirical research
identifies different methods to evaluate these. One relies on a simulation approach
based on global general equilibrium models to analyze the economic effects of pol-
icy changes due to the formation of a RTA. The other method applies econometric
techniques to historical trade data and assesses the impacts of the formation of a
RTA on bilateral trade flows. The review critically addresses all of the literature. The
chapter continues by evaluating free trade agreement impacts on the environment,
particularly addressed by those studies that use a general equilibrium framework.
This would provide a picture of the gap in the trade and environment literature using
different methods in East and South East Asian countries.
The features of the East and South East Asian Economies are described in
Chapter 3. This chapter will present the performance of the ASEAN economy along
with China, Japan, and the Republic of Korea since the 1990s. It also covers the
status of environmental pollution in each country. This chapter will provide the
background material for the model building and the subsequent empirical experi-
ments to trace the direction of the future development of these economies to achieve
both their economic and environmental goals.
The economic and environmental framework used in the book along with
database and scenario development is described in Chapter 4. The GTAP database
is augmented with an environmental database to produce a model that is used to
evaluate the impact of economic integration in the region. The study uses a CGE
global model which includes households, industry, government and global sectors
across countries. Countries and regions in the world economy are linked together
1.8 Structure of the Book 21
through trade. Prices and quantities are determined through factor and commodity
markets.
Apart from the theoretical framework, the chapter also includes detailed data
description of GTAP, data for macro projections, and environmental data, sourced
for East and South East Asian countries. The detailed regional aggregation scheme
of GTAP data will also be presented. Further, the chapter provides various scenarios
for the regional trade agreement. The scenarios developed are based on regional
scope; for example: Within ASEAN or ASEAN-CJK or ASEAN+3, timing of tariff
reductions; for example: the reduction implemented at 2010 or 2015, degree of tariff
reduction; for example: 80% or 100% import tariff reduction and export subsidies,
and the nature of the commodities-agricultural versus non-agricultural.
Chapter 5 discusses the economy wide impact of economic integration across
the regions. It estimates the future world economy to 2020. Further, it shows the
impact on output growth of each economy along with sectoral analyses; detailed sec-
toral export and import performance; effects on factor returns; welfare and poverty
implications for the regions under different trade liberalization scenarios.
The environmental impact of economic integration is analysed in Chapter 6. It
examines how the changes in the aggregate level of output, composition of that
output, and inputs and technologies used, as a consequence of trade liberalization
are likely to impact the environment of countries in the agreement. The analyses
focus on air pollution (CO2 , N2 O, and CH4 ), water pollution (BOD, COD, and
Suspended Solids), and industrial waste for these countries. This chapter also uses
the decomposition analysis to find the factors responsible for changes in pollution.
The study is designed to integrate both trade and environmental policies in a
coherent manner so that trade related environmental policies (TREMS) and environ-
ment related trade measures (ERTM) could be coordinated so that the objectives of
obtaining the gains from trade while protecting the environment could be achieved.
In this context, the book suggests several policy options from the analysis which is
included in Chapter 7.
Chapter 8 summarizes the major discussion in each chapter of the book and
concludes. It also compares the findings of the current study with those of other
Regional Trade Agreement studies.
Chapter 2
Review of Literature
2.1 Introduction
The process of globalization including trade liberalization generated a number of

agreements all over the world, varying from bilateral preferential trade agreements
to world-scale integrations like the European Union. Bhagwati (1993) recognizes
two waves of creation of RTAs. The first one took place in the1960s and 1970s
and did not spread beyond Western Europe. The second one started in the 1980s
when US changed its trade policy from multilateral approach to regional liberal-
ization of trade within RTAs. There are large number of RTAs already notified to
the GATT/WTO till December 2008 and the more is expected by 2010 (detail in
Chapter 1).
Free trade agreements among developing countries can facilitate and solidify
regional cooperation. But trade treaties between developed and developing coun-
tries can lead to various problems for different stake holders such as consumers
and producers. Further the impact on the environment due to the RTA/FTA cannot
be ignored, especially for the North–South RTA or South–South RTA. The present
effort thus attempts to provide a comprehensive survey in this area.
The discussion of the present chapter begins with a brief review of the existing
literature on FTAs/RTAs around the world. Then the following section captures the
studies on FTAs and RTAs in East and South East Asia. Finally, the survey presents
the literature on the impact of trade liberalization (RTAs/FTAs) on the environment.
There are numerous studies on the impact of trade liberalization including the
WTO impact, economic effects of RTAs—sectoral, regional, welfare and poverty,
as well as environmental. To address all those impacts the empirical studies have
used various approaches. The estimates of these impacts have been generated using
primarily three approaches. First, simulation approach is based on global general
equilibrium model. The second applies other quantitative methods, mainly using
gravity model. The third one uses descriptive approach based on historical trade
data and relationships. Other recent approaches like CEPII Mirage model and Nuno
Limao type are also used by various scholars. The review of literature covers these
various approaches as far as possible.


24 2 Review of Literature
2.2 FTAs/RTAs Around the World

The world trading system in the 1960s reflected a bipolar world with Europe and the
US. These two formed blocs with some of their close neighbors, former colonies,
and/or cold-war partners and with hub-and-spoke links to the rest (World Bank,
2005). Europe and the US dominate their blocs—the other countries belong to
these blocs. In the 1970s, a realignment of world trade began. The major changes
in world trading patterns occurred. The earlier European and US-centered blocs
ended. Diversification of trade by countries formerly closely linked to either Europe
or the US took place. Both the European and North American blocs concentrated
more on their core countries and immediate peripheries. The East and Southeast
Asia emerged as a new trade bloc—a major force in world markets. This bloc has a
bigger share of total world trade than North America. In the 1980s, the realign-
ment of world trade continued and the various trade blocs formed. In addition
to the EU and North America, the new East and Southeast Asian bloc expanded
and solidified, with increasing links to the US. The trade shares for Europe and
North America within bloc rose, while the European bloc expanded by one region
to include Mediterranean countries in North Africa (‘rest of MENA’). The North
American bloc did not change composition. Researchers were involved in assessing
the implications of these developments (World Bank, 2005).
A number of variants of the gravity model have been used in several stud-
ies to assess the effects of RTAs. Braga, Safadi, and Yeats (1994) using gravity
model showed that if the Americas were to employ EU level of trade integration,
shares of intra-member trade is expected to increase from 41.1 to 62.5%. Zahniser
et al. (2002) analyzed the impact of NAFTA and MERCOSEUR on US agricultural
exports to the region. They concluded that NAFTA did not have a significant impact
on US trade with Canada while MERCOSEUR had a trade diversion impact on
US agricultural export to Brazil, especially on wheat. Dee and Gali (2003) exam-
ined large number of RTAs and found that many of them have negative net trade
effects where trade diversion from non-members are greater than trade creation
among members. In addition, more liberal RTAs such as the EU and NAFTA did
not have significant positive impact on members’ trade when compared to other less
liberal agreements.
Some of the studies used a computable general equilibrium model to explore the
magnitude of the potential gains from economic integration. Hoekman and Konan
(1999) find that a free trade agreement between the European Union and Egypt lim-
ited to goods could raise welfare by around 4% while an agreement that reduced
barriers to services in Egypt could raise economic welfare by over 13%. Similarly,
Brenton, Tourdyeva, and Whalley (2002) find that an EU-Russia FTA limited to
tariff removal would increase welfare marginally while a comprehensive agree-
ment removing technical barriers to trade in goods and services would raise welfare
significantly.
For over three decades Sub-Saharan African (SSA) countries have had an inter-
est in regional integration initiatives to accelerate their industrialization and growth.
Yeats (1998) shows that Preferences for African intra-trade do not appear to have
2.2 FTAs/RTAs Around the World 25
the potential to make an important impact on these countries’ trade due to high
non-complementarity of the region’s exports and imports, and the lack of appro-
priate infra-structure. The study suggested that trade reforms, implemented on a
general most-favored nation basis, are a better strategy for African development.
Yeboah et al. (2007) develop gravity models to estimate and predict the potential
bilateral trade flows between US and CAFTA countries using the panel data. All
the six CAFTA countries except Costa Rica are trade creators. The study has also
revealed the importance and positive effects of differences between resource endow-
ment, relative size of the economies, and exchange rates on trade flows. Results
concluded that Free Trade Agreement will lead to an expansion of trade between
the United States and the DR-CAFTA countries. But it will benefit the US pro-
ducers from the agreement, given the already low duties on agricultural imports
from these countries to the US and the relatively high duties placed on the US
agricultural exports.
Rivera and Ramagosa (2007) use a top-down macro–micro approach to esti-
mate the effects on poverty and income inequality of two major trade agreements in
Central America: DR-CAFTA and EU-CAAA (European Union–Central American
Association Agreement). They assess the main changes in factor and goods prices
associated with each trade agreement, and then combine this information with
household surveys for Costa Rica and Nicaragua. Headcount poverty is reduced in
both countries, although DR-CAFTA provides the largest decreases. Inequality in
Costa Rica remains unchanged with both agreements, although it increases slightly
in Nicaragua under the EU-CAAA
Drogué, Pyykkönen, and Virolainen (2008) assess the impacts of different levels
of a trade agreement between Russia and the European Union using GTAP. The sce-
narios consider three levels of agreement between the two: a ‘minimum’ agreement,
a total liberalisation except for sensitive products and the creation of a free trade area
with the abolition of all protection between the two blocs. They have drawn several
conclusions. A free trade agreement between the EU and Russia leads to welfare
loss for Russia even if combined with multilateral trade liberalisation because of
adverse terms of trade. As the industrial sector is the most important in the com-
position of trade of these two economies, it is also the sector which gains most. In
agro-food, gains are more modest in absolute terms. Increases in trade in relative
terms are significant for dairies, meats, cereals, fisheries and food for Russia; meats,
dairies and other crops for the EU.
Kinnman and Lodefalk’s (2008) study analyses the potential effects from uni-
lateral trade liberalisation, using a CGE-model with monopolistic competition.
They address the tariffs, subsidies, services barriers and trade facilitation, and
non-tariff-measures (NTM) in a simulation. The effect of a ‘Global Baltic’ would
be a substantial boost to national income and trade of the region (1 and 0.9%
increase in regional income, in the main and the NTM-scenario, respectively).
Particularly strong results are found for the group of emerging economies. The
largest income gains stem from a country’s own liberalisation. With respect to the
different simulation elements, trade facilitation and reductions in NTMs bring the
major sources of gains.
Jensen, Baltzer, Babula, and Frandsen (2007) estimate the economic effects on
the world and Danish economies of the Non-Agricultural Market Access (NAMA)
negotiations. They used the GTAP model and database to simulate trade shock
scenarios that mimic WTO’s ‘August 2004 NAMA Framework’. They use the
economic impacts of the proposed NAMA tariff reductions, with and without the
developing country flexibility rule. Results suggest that modest NAMA-induced
effects—relatively small average tariff reductions increase global trade by about
1% and global welfare by just over 9 billion US$. Trade would expand for most
observed sectors, but vary across the sectors. Large gains would be realized for the
textile and clothing sectors. A number of Asian countries would benefit from the
NAMA tariff reductions. The NAMA tariff reductions with flexibility would gen-
erate modest increases in Danish trade and produce a slight improvement in the
trade balance. It would also shift Danish trade patterns from the EU and EFTA mar-
kets towards other world markets. The removal of the developing country flexibility
rule would increase global welfare by 26%, with the largest gains occurring in the
Asian countries. The removal of the flexibility rule has virtually no impact on the
Danish welfare.
There are couple of studies dealing with the East–West trade agreements.
Plummer (2002) looks at economic integration between the EU and ASEAN and
also at trade integration within these regions. He used an econometric gravity
model to show that the EU-ASEAN relationship is stronger than one would pre-
dict based on economic factors. He also showed that the EU trade policy has not
been particularly conducive to building the partnership.
An attempt has been made by Antimiani, Mitaritonna, Salvatici, and Santuccio
(2008) to estimate a set of trade restrictiveness indices for six major agricultural
trading countries, such as Brazil, China, and India among developing countries,
and the EU, Japan and the US among developed countries. The overall level of
protection of these six markets is assessed through the uniform tariff equivalent of
different trade policy instruments that would generate the prevailing level of trade
(MTRI). A GTAP model is used with imperfect competition as well as the bilateral
tariffs. Results show that developing countries appear to be substantially restricted
in their trade with the EU, Japan, and the US.
Jugurnatha, Stewarta, and Brooks (2007) examine the effect of trade creation
and trade diversion using a gravity model. Annual data from 26 countries covering
five RTAs in the Asia and Pacific region for the years 1980–2000 were used. The
results show that the effects of the different RTAs varied significantly. The ASEAN
and the Australian and New Zealand Closer Economic Relations (CER) promoted
larger trade with trading partners and with the rest of the world. While the APEC,
MERCOSUR and the NAFTA tended to be trade diverting.
2.3 FTAs/RTAs in East and South East Asian Region
A number of studies attempted to address Regional Trade Agreements (RTAs)

focusing primarily on the East and South East Asian Region.
2.3 FTAs/RTAs in East and South East Asian Region 27
Implications of accession to the WTO are addressed by scholars [Lejour (2000),

Ianchovichina and Walmsley (2003) on China and Abbott et al. (2007) on Vietnam].
Lejour (2000) focuses on the impact of China’s accession to the WTO. Worldscan8 ,
a general equilibrium model, has been used. The study concentrates on the sec-
toral production within China and its main trading partners. The result shows that
China benefits much more from trade liberalization if other countries also reduce
their trade barriers. A Chinese unilateral action would mainly benefit other coun-
tries in East and South–East Asia. Within China, the sectors Wearing Apparel and
Electronic Equipment would expand. Similar issue using a dynamic GTAP model
is attempted by Ianchovichina and Walmsley (2003). China will be the biggest
beneficiary of accession, followed by the industrialized and newly industrializing
economies (NIEs) in East Asia. By contrast, developing countries in East Asia are
expected to incur small declines in real GDP and welfare as a result of China’s acces-
sion. This will occur because with the elimination of quotas on Chinese textile and
apparel exports to developed countries China will become a formidable competitor
in areas in which these countries have comparative advantage. With the WTO acces-
sion China will increase its demand for petrochemicals, electronics, machinery, and
equipment from Japan and the NIEs, and farm, timber, energy products, and other
manufactures from the developing East Asian countries.
Abbott, Bentzen, and Tarp (2007) examine Vietnam’s past experience with eco-
nomic integration as a basis for predicting the economic impact of WTO accession,
and whether this accession will accelerate economic growth and poverty reduc-
tion. It explores Vietnam’s experience with bilateral trade agreements and compares
the results with predictions from the other computable general equilibrium models.
Those assessments have greatly underestimated the impact of past agreements. They
suggest that a distinctly different analytical path to the evaluation of trade agreement
impacts has to be pursued at both national and international level. It must be better
to address institutional reforms and services trade issues.
Some trade agreements are of bilateral type. An analysis of the economic effects
of Japan–Republic of Korea FTA has been attempted by Nakajima (2002). They
applied a GTAP model to see the short run as well as long run impacts. The Republic
of Korea’s real GDP increased in the long run case. On the other hand, gains for
Japan were limited in terms of real GDP. However, both countries benefited from
equivalent variation. With regard to sectoral effects, it is found that removal of tar-
iff decreases the costs of electronic sector in the Republic of Korea. This implies
that an increase in intra-industry trade will enlarge the static effects of the FTA.
The elasticity of substitution of imports played a crucial role in terms of export
sales of Japanese motor vehicle and other transport equipment. Cheong (2002) pro-
vides an overview of the Republic of Korea’s bilateral FTA policy and progress
with Chile and Japan using GTAP. The author shows that despite many obstacles,
a Republic of Korea–Japan FTA is strategically significant and offers various eco-
nomic benefits, by strengthening the alliances among the firms of the two countries.
He also concluded that Chile is a suitable partner for Republic of Korea’s first FTA
since the effects of structural adjustment would be moderate due to Chile’s distance
from Republic of Korea while the effects of increasing exports would be great. The
Republic of Korea’s export to Chile will double once the FTA is in place. Another
study on Korea by McKibbin, Lee, and Cheong (2004) estimated that gains for
Korea and Japan from a bilateral FTA would amount to 0.1–0.2% of GDP per year
for both countries. A study focusing on Indonesia by Hartono, Priyarsono, Nguyen,
and Ezaki (2007) analyzed how different FTAs scenarios may affect Indonesia’s
GDP, welfare, investment, trade and income distribution. Overall, they found that
most of FTAs have positive impacts on these factors. For example, an Indonesia–
China FTA will lead to a 0.20 and 0.65% increase in GDP and welfare, respectively,
while it will cause real investment, exports and imports to increase by 2.28, 0.85
and 2.66%, respectively. Their analysis of an Indonesia–Japan FTA (IJFTA) also
yielded similar results, with GDP, real investment and welfare increasing by 0.04,
1.81 and 0.38%, respectively, while increasing income equity. Hence, this indicates
that it may be beneficial for Indonesia to pursue a FTA with Japan.
Preferential Trade Agreement is a trading bloc which gives preferential access to
certain products from several countries. Various researchers have attempted to study
the impact of this. Dee and Gali (2003) quantify the impact of traditional and ‘new
age’ provisions of preferential trading arrangements (PTAs) on merchandise trade
and investment using the gravity model. They found adverse effects on investment
flows, negative impact of FTA on its members’ trade and a positive effect on AFTA
members’ trade with non-members. Lochindaratn (2008) performs the impact anal-
ysis of certain bilateral preferential trading agreements Thailand has reached with
Japan, China, India, Australia, and New Zealand. He emphasized the degree of com-
modity market competition by sector and labour market by skill level with a view
to better reflect economic reality using GTAP model. Among Thai bilateral FTAs
in place, in terms of equivalent variation, Japan–Thailand Economic Partnership
Agreement (EPA) is the most beneficial while Thailand–New Zealand–China EPA
turns out to be the least beneficial FTA for Thailand. Real gains from bilateral FTAs
are poor compared to the benefits from the groupings that include ASEAN. On
the whole, trade diversion is offset by trade creation and improving welfare gains.
Strutt and Rae (2007) argue that multilateral trade negotiations have faced many
hurdles and frustrations in recent years, giving increased impetus for some coun-
tries to negotiate regional and bilateral trade agreements. In this paper, they focus on
some of the agreements that China is currently negotiating. Agreements with coun-
tries that include New Zealand and Australia and a framework agreement between
China and ASEAN were signed in 2002. They explore how such preferential trade
agreements might impact on one another. They use the dynamic GTAP model to
assess the anticipated impact of possible liberalization scenarios. Results reveal
that China–New Zealand agreement is unlikely to have a large economic impact
on China. Significant gains may accrue to New Zealand, if the sensitive agricultural
sector is liberalised. However, if China also enters into preferential agreements with
other countries, this is likely to have adverse impact on the gains accruing to New
Zealand. If the spokes emanating from the China hub can be joined in a regional
free trade area, rather than bilateral hub-and-spoke agreements, the overall gains
can be much greater. Manchin and Pelkmans-Balaoing (2008) examine the current
state of intra-ASEAN trade under the preferential regime of the AFTA. It assesses
the impact of the utilisation of AFTA preferential tariffs. The results show that at
very high differential margins, the significance of AFTA preferences might not be
favourable.
There are numerous studies which evaluate the economy wide impacts of
regional trade agreements. The primary goal of most of these studies is to evaluate
the impact of ASEAN integration with other Asian and Pacific countries. Studies are
also attempted to verify the ASEAN simulation with +1 +2 +3 or +6 using different
type of model.
Studies using econometric analysis by Clarete Edmonds, and Wallack (2002);
Frankel and Wei (1996); Soloaga and Winters (1999 a,b); Gosh and Yamarik (2004);
Lee and Park (2005) are worth mentioning.
Frankel and Wei’s (1996) work is one of the first empirical studies assessing the
impact of ASEAN trade integration using gravity framework. The authors found
the intra-ASEAN bias to be significant for every year of the period under study
(1970–1992). Moreover, the intra-ASEAN orientation is only slightly reduced when
the openness of ASEAN, which is significantly more than what is predicted by
the model, is accounted for. The ASEAN effect, however, disappears when the
East Asian bloc is tested simultaneously. This is consistent with the finding of Lee
and Park (2005), who found ASEAN regionalism to have a significantly positive
effect on intra and extra-regional trade. The significance of the AFTA bloc also
looses when estimated with the ASEAN+3 grouping (China, Japan and the Republic
of Korea). Similar studies are also produced by Soloaga and Winters (1999 a,b).
Investigating nine major blocs over the period of 1980–1996, they found a highly
significant increase in the extra-bloc coefficient, together with a fall in intra-ASEAN
trade. Asian Development Bank study by Clarete et al. (2002) showed that the AFTA
might have reduced extra-ASEAN trade, and found no evidence of an effect on the
pattern of intra-regional exports and imports. The inclusion of the new ASEAN
members, namely, Cambodia, Myanmar, Laos and Vietnam in the 1990s, may have
diluted the impact of regionalism. These countries are being less outward oriented
and less developed relative to the rest of ASEAN. Gosh and Yamarik (2004) use
extreme bound analysis to look at trade creating and diverting effects of regional
trade agreements. Using least squares estimators they found trade creating effects
for ASEAN, while at the extreme bounds, negative effects for ASEAN regional inte-
gration. Lee and Park (2005) estimated the economic impact of possible East Asian
free trade areas based on a bilateral gravity model. The paper explored the effects
of possible RTAs in East Asia; such as: a China-Republic of Korea free trade area
(FTA), a Japan-Republic of Korea FTA, a China-Japan-Republic of Korea FTA, and
an ASEAN+3 (China, Japan, Republic of Korea) FTA. They compare the economic
effects of the existing RTAs, and the proposed East Asian FTAs. They proposed
strategic policy measures that would enable East Asian RTAs to further promote
free trade and economic integration at the global level. Overall, they concluded
that an East Asian FTA would be a building bloc for a global FTA if it takes the
form of deeper integration. The trade creation effect expected from the proposed
East Asian FTAs would be significant enough to dampen the trade diversion effect.
Therefore, the proposed East Asian FTAs were likely to be non-discriminatory trade
blocs without incurring any significant impact on interregional trade. Furthermore,

if the three major East Asian countries successfully implement their own FTA and
expand it into an ASEAN+3 arrangement that lead to the East Asian FTA, then the
study anticipated a tripolar system of international trade consisting of the American
FTA, the European FTA, and the East Asian FTA. Such a tripolar system could
prove to be a vital impetus for expanding free trade around the globe. Lee and
Park (2007) quantitatively analyzed the trade effects of enhanced trade facilita-
tion with extended gravity equations. Their findings confirm that RTAs comprising
countries equipped with better trade facilitation were more trade-creating, less trade-
diverting, and would thus lead the world economy toward global free trade. The
gains from a combined trade liberalisation strategy through tariff reductions and
enhanced trade facilitation will be greater for North-South RTAs in East Asia such
as a China-Republic of Korea and an ASEAN+3 RTA.
Studies that used a general equilibrium approach to analyze the impact of the
RTAs in ASEAN and neighboring Asia Pacific region are reviewed. Some studies
were based on individual country computable general equilibrium (CGE) models,
while others used a multi regional general equilibrium approach. Among them Urata
and Kiyota (2003), Cheong (2005), Chawin (2006), Park (2006), Ando and Urata
2005, 2006) deserve to be mentioned.
Urata and Kiyota (2003) examine the effect of an East Asian FTA on trade in
the region using GTAP. Their results indicate that an East Asian FTA would have a
positive impact on members’ GDP and welfare. Moreover, the positive impacts on
ASEAN countries are sizeable with Thailand’s GDP increasing by 16% as a result of
the FTA. Further sectoral analysis revealed that sectors with comparative advantage
gained from trade liberalization. It indicates that many East Asian economies have
a comparative advantage in the electronic equipment sector that arises from labour-
intensive assembling part of the production process. Unfortunately, the FTA leads
to a decline in non-members countries’ GDP and welfare, indicating the presence
of trade diversion. However, their result indicated that an East Asian FTA does not
have a great impact on export and import composition. GTAP simulations by Zhang
et al. (2006) confirm these findings—an ASEAN+3 FTA is estimated to increase the
overall GDP of East Asian countries by 1.2% and economic welfare by $105 billion
and raise every member’s GDP in excess of 1.7%, with the exception of Japan. In
a similar tune and based on a GTAP exercise, Mohanty, Pohit and Roy (2004) find
that an ASEAN+3 and India FTA will bring gains to members.
Another strand of literature compares alternative FTA scenarios in East Asia and
provide additional insights on the costs and benefits of possible FTAs. Using GTAP,
Gilbert, Scollay, and Bora (2004) found that an ASEAN+3 FTA will produce higher
welfare gains for members than a narrower China–Japan–Republic of Korea FTA
indicating that broadening FTAs in East Asia brings more benefits. Based on a
GTAP model which includes capital accumulation, Cheong (2005) reports that all
members reap larger gains from an ASEAN+3 FTA compared to a series of bilateral
arrangements between East Asian economies and ASEAN and Japan.
Park (2006) evaluated the effects on East Asia of Regional Trade Agreements
-expansionary, duplicate, and overlapping RTAs, applying a computable general
equilibrium model analysis. The study found that the static effect of existing,
proposed, and negotiating East Asian RTAs on world and members’ welfare was
sufficiently positive. From the scenario analysis, it was found that expansionary
RTAs, such as an ASEAN+3 (or +6) or a Global Asia RTA, were the optimum
strategy for East Asian members and the world economy in terms of net trade cre-
ation, welfare improvement, and output growth. Duplicating a separate RTA, such
as an ASEAN-China versus Japan–Republic of Korea RTA, may not be desirable
for both members and the world economy. The hub-and-spoke type of overlapping
RTAs, such as ASEAN+1 RTAs (ASEAN-China, ASEAN-Republic of Korea, and
ASEAN-Japan RTA), China Hub RTAs, or Japan Hub RTAs were the worst strat-
egy for both member countries and the world economy. Moreover, it was found that
RTAs, driven by the hub-and-spoke type of overlapping RTA or duplicating bilateral
RTA, were proliferating in East Asia because of the higher positive welfare and out-
put gains and positive trade creation effects to original members of existing RTAs.
However, the increasing trend of RTAs in East Asia was found to be stumbling blocs,
working against global free trade. The study also confirmed that the static effect of
the proposed East Asian RTAs on world and members’ welfare was sufficiently pos-
itive, and would lead to non-discriminatory global free trade. Park’s finding satisfies
the Bhagwati (1993) conditions for RTA to be long lasting. His conclusions strongly
suggested that East Asian policy-makers take an expansionary path of RTAs, such as
the proposed ASEAN+3 or the East Asian RTAs, including Hong Kong and Taiwan
as members.
Chawin (2006) assessed the economic effects of East Asian regionalism under
ASEAN+3 using the GTAP model. He simulated several hypothetical FTAs cover-
ing ASEAN and China, Japan, and the Republic of Korea. The economic scenario
of an FTA was assumed to decrease tariffs to zero for all goods and services. The
simulation impact of a FTA among North East Asia showed that the welfare gains
were concentrated in either Japan or Republic of Korea. For China welfare or GDP
gains only in the case of a CJK agreement with small positive margin. The East Asia
FTAs and ASEAN-China FTA do not bring any gains to China. In contrast, ASEAN
was the large gainer in this FTA with China among the three North East partners.
Japan and Republic of Korea did not earn any economic or welfare gain in ASEAN-
CJK compared with the CJK case, while ASEAN gained in terms of welfare. On
the other hand, ASEAN–China, ASEAN-Republic of Korea, and China-Republic of
Korea FTA scenarios could have a negative impact on the future of ASEAN. If East
Asia regionalism under ASEAN+3 was achieved, benefits would occur. However,
ASEAN would be worse off, if Japan, Republic of Korea, and China formed a FTA
among themselves.
Ando and Urata (2006) estimated the impacts of an East Asian FTA involv-
ing ASEAN members and non members using CGE. A variety of groupings
were considered for the study. These included: AFTA, ASEAN–China, ASEAN–
Japan, ASEAN–Republic of Korea, China–Japan–Republic of Korea, ASEAN+3
and APEC. They found that the ASEAN+3 FTA was the most desirable among the
all FTAs. Results demonstrated that capital accumulation and various facilitation
and coordination programs had significant impacts on the member economies. At
the sectoral level, many sectors gained in terms of output and trade. Some sectors in
some countries had dipped in industrial output as a result of ASEAN+3, but most of
them experienced increases in both exports and imports even if output declined. On
the whole, the greatest benefits accrued to member countries.
Kawai and Wignaraja (2008a, b) capture the possibility of various East Asian
FTA and its economic impacts. They used a computable general equilibrium model
to examine the economic impact of various types of FTAs in East Asia (among
ASEAN+1, ASEAN+3, and ASEAN+6). They found that consolidation at the
ASEAN+6 level would yield the largest gains to East Asia among plausible regional
trade arrangements—while the losses to non-members are relatively small. For such
consolidation, ASEAN must act as the regional hub by further deepening ASEAN
economic integration, including three countries (China, Japan, and Republic of
Korea) and India needs to pursue further structural reforms. Furthermore, substan-
tial international support is required to strengthen the supply-side capacity of poorer
ASEAN countries—including the building of trade-supporting infrastructure (trans-
port, energy, and telecommunications). This would help them take advantage of
integrated regional markets and reduce development gaps within ASEAN.
Ezaki and Nguyen (2007) studied the impact of regional economic integration
on growth, income distribution, and poverty in East Asia (Vietnam, Thailand and
China) using GTAP. The results indicated that East Asian FTA’s generally have
positive effects on growth, improved income distribution, and poverty reduction.
Though, impacts on China were found to be of an exception.
Mukhopadhyay, Thomassin, and Chakraborty (2008) estimate the economic
impacts of proposed ASEAN+3 trade agreements on the South Asian economy
based on GTAP. The findings reveal that South Asia will be affected adversely in
terms of GDP growth, export and also welfare.
Francois and Wignaraja (2008) used both GTAP and gravity model to explore the
implications of broad-based regional trade initiatives in Asia, highlighting the bridg-
ing of the East and South Asian economies. They examine regionally narrow and
broad agreements-ASEAN and northeast Asian economies (China, Japan, Korea)
and also the South Asian economies. The inclusion of the South Asian economies
in a broader regional agreement sees gains for the East Asian and South Asian
economies. Most of the East and South Asian gains follow directly from the Indian
participation.
The descriptive approach uses historical data and trade relationships to draw con-
clusions on the potential impact of changes in ASEAN trade relationships. JETRO
(2003) studied the FTAs trends in East Asia and the current state of trade within the
region. This analysis included a number of different countries and regions, namely
ASEAN as a whole, the so-called ASEAN 6 (Indonesia, Malaysia, the Philippines,
Singapore, Thailand, and Vietnam), China, Hong Kong, Republic of Korea, Taiwan,
and India. They also studied the approaches to FTAs being taken in other parts of
the world, particularly the United States, the European Union, and Australia. The
study looks at the impact of FTAs on domestic industries and the prospects for the
period to come. Their findings show that (1) a Japan-ASEAN Closer Economic
Partnership (JACEP) between 1997 and 2020 would augment exports by 27.5%
in Japan to ASEAN and 44.2% in ASEAN to Japan, while it would boost gross
domestic product by 1.99% in ASEAN and 0.07% in Japan; (2) if tariffs were
reduced to zero in an ASEAN-China Free Trade Area (ACFTA), it was predicted
that exports would expand by US$13 billion per year (48.0%) from the ASEAN 6
to China and US$10.6 billion (55.1%) from China to ASEAN 6, while GDP would
grow by 0.86% in the ASEAN 6 and 0.27% in China; (3) a Thai-Japan FTA accom-
panying JACEP would boost Thai exports to Japan by 19.7% and Japanese exports
to Thailand by 33.3%. This would increase Thai GDP by 6.4%, providing greater
benefits than could be expected from ACFTA. Among the FTA proposals under
negotiation, social welfare in Thailand would be best served by a bilateral trade
agreement with Japan. Igawa and Kim (2005) discussed the optimum FTA map
of the world and FTA players in East Asia. An East Asia FTA would give China
a greater opportunity of maintaining a high growth rate with higher productivity
growth. They examined the costs and benefits of forming a bilateral FTA between
the three countries; China, Japan, and Republic of Korea. With a China- ASEAN
FTA, China was relatively larger than ASEAN and static gains of trade creation
would go to the smaller members of ASEAN. Dynamic gains of concentration and
scale/space economies would not be large with the unification of the two markets,
although potential gains in the future would be large. The FDI that flows into China
might be diverted into ASEAN. ASEAN might get larger benefits by specializing in
relatively more capital-intensive products and inviting FDI, which might have gone
to China without an ASEAN-China FTA. On the other hand, ASEAN might have
to pay greater costs in adjusting from labour-intensive products into more capital-
intensive products. Thus, a FTA between the two parties may be possible, however,
it may not be an effective FTA. For Japan and Republic of Korea, both ASEAN
and China were important partners for trade and investment. ASEAN was interested
in attracting FDI and in obtaining technology from Japan and Republic of Korea.
However, Japan and Republic of Korea, in the economic environment of global com-
petition, were more interested in directing FDI into China. Competition between
Japanese and Republic of Korean firms with regard to FDI into China would reduce
the benefits for firms in both countries and give China an advantageous position.
However, the benefits would increase if Japan and Republic of Korea cooperated to
devise a negotiation strategy against China. Through a J–K FTA, Japan and Republic
of Korea could strengthen their bargaining power against outsiders. Competition in
a free and large market with a J–K FTA might help both countries in their economic
restructuring. They suggested various strategies for promoting an East Asian FTA.
They concluded that it would be better for all East Asian players to have a large
economic concentration in East Asia. An East Asia FTA would enable the region to
generate its large economic potential.
Apart from the major three approaches, Lendle (2007) used the recent Limão
(2005, 2006) approach to investigate empirically whether the ASEAN Free Trade
Agreement had a building bloc or stumbling bloc effect on subsequent changes
in MFN tariffs of four major ASEAN members. The study uses tariff data to test
whether MFN tariffs were changed differently for preferential products compared
to otherwise similar products without a preference. He finds a significant building
bloc effect for Indonesia, the Philippines and Thailand. MFN tariffs of preferential
products were reduced by more than for non-preferential products and obtain
ambiguous effects for Malaysia. This suggests that overall the ASEAN Free Trade
Agreement has rather helped than hindered nondiscriminatory trade liberalization.
Bchir and Fouquin (2006) use the CEPII Mirage Model to create several scenar-
ios of economic integration based on a hub and spoke approach (ASEAN+1) and an
ASEAN+4 (including India) regional approach. They find that ASEAN would be
better off with a series of bilateral agreements than with an ASEAN+4 approach
as this would allow them better to exploit their comparative advantage in agri-
culture, having much higher levels of protection in the region than manufactures.
Drawing on GEMAT simulations for an FTA involving goods only, Plummer and
Wignaraja (2006) report that the current wave of bilateral FTAs is inferior to any of
the major FTA proposals in East Asia (including an ASEAN+3, an ASEAN+6, or
an APEC FTA). They find that an ASEAN+6 FTA will bring larger global welfare
gains than an ASEAN+3 FTA. Their study provides a preliminary assessment of the
economic effects of an ASEAN+3 and ASEAN+6 FTA even though services trade,
trade facilitation, and other aspects of FTAs are excluded from the exercise.
Some attempts (Cheong, 2003; Ballard & Cheong, 1997) have focused on North
East Asia and Pacific region using multiregional CGE. Ballard and Cheong (1997),
carry out simulations of different RTA scenarios involving different countries in the
Pacific Rim region (including East Asian countries) using a CGE model. Their main
conclusions are that these countries would have welfare gains by participating in the
RTA and that these gains enhanced with increasing RTA size. In addition, their com-
parison of perfectly-competitive and imperfectly-competitive model indicates that
the former results in smaller welfare gain. Cheong (2003) reviews the status of eco-
nomic integration in Northeast Asia and future prospects for economic integration
in the region. The study also discusses the issues on regional trade and investment
relations, financial cooperation, environmental cooperation, science and technology
cooperation and industrial cooperation. The simulation model used in this exercise
is a GTAP model with Baldwin-type capital accumulation. It is highly possible
that China is likely to become more actively involved in economic integration in
Northeast Asia in near future. The Republic of Korea, which is aiming to become
a Northeast Asia economic hub, would set up conditions for the free movement of
goods and resources in Northeast Asia as well as improve the internal business envi-
ronment. As for improving external conditions, the China–Japan–Republic of Korea
FTA could be an effective method of doing so. Considering China and Japan’s com-
petitive relationship, Republic of Korea’s role as mediator is crucial in the Northeast
Asian economic integration.
Individual country assessment of regional economic integration has been studied
by Fukase and Martin (1999) for Vietnam and Kawasaki (2005) for Japan.
Vietnam’s accession to ASEAN Free Trade Area has been an important step in its
integration into the world economy. Fukase and Martin (1999) use a multiregional,
multisector computable general equilibrium model to evaluate how different trade
liberalization policies by Vietnam and its main trading partners affect Vietnam’s
welfare. They considered the simultaneous impacts on trade, output, and industrial
structure in their framework. The result implies that economy wide effects of AFTA
liberalization to which Vietnam is currently committed are small. On the import
side, the exclusion of a series of products from the AFTA commitments would
limit the scope of trade creation, and the discriminatory nature of AFTA liberal-
ization would divert Vietnam’s trade from non-ASEAN members. Vietnam’s small
initial exports to ASEAN result modest gains from improved access to partner mar-
kets. Since Singapore dominates Vietnam’s ASEAN exports and initial protection
in Singapore is close to zero, gains from preferred status in this market are small.
When Vietnam extends its AFTA commitments to all of its trading partners on a
most favored-nation (MFN) basis, its welfare increases substantially. This is partly
because of the greater extent of liberalization which reduces the trade diversion
created by the initial discriminatory liberalization, and because of the more effi-
cient allocation of resources among Vietnam’s industries. AFTA benefits Vietnam’s
agriculture by giving it better access to ASEAN market. Broader unilateral liber-
alization beyond AFTA is likely to shift labor from agriculture and certain import
competing activities toward relatively labor-intensive manufacturing. These sectors
conform to Vietnam’s current comparative advantage. By contrast, more intense
import competition may lead some import substitution industries to contract. This
suggests that AFTA should be treated as the important initial step towards broader
liberalization for Vietnam. This will help upgrading of existing firms and invest-
ment in efficient and dynamic firms. Kawasaki (2005) looked at the sectoral and
regional implications of trade liberalization on the Japanese economy by using sim-
ulation of a CGE model of global trade based on the GTAP database. In model
simulations, the dynamic impacts of trade liberalization through capital formation
mechanisms and productivity improvements were taken into account in addition to
standard static efficiency gains. Trade liberalization will benefit all of Japan’s trad-
ing partners. However, within Japan the ratio of agricultural production, which is
estimated to shrink with trade liberalization, was higher in lower- income prefec-
tures. In contrast, the ratio of transport equipment production, which is estimated to
expand with trade liberalization, was higher in higher-income prefectures. Regional
differences in income levels would increase given the current structure of industries
by region. Structural reforms of the economy would be required in implementing
trade liberalization measures.
Several studies (Thierfelder et al., 2007; Dimaranan, Ianchovichina, & Martin,
2007) attempted to evaluate the impact of East Asia integration on the global econ-
omy. Thierfelder et al. (2007) using a global general equilibrium trade model, study
the impact of the dramatic expansion of trade by India, China, and an integrated
East and SouthEast Asia trade bloc on the global economy, especially develop-
ing countries. The analysis considers the importance of their different degrees of
integration into regional and global economies, focusing on potential complemen-
tarities and competition with other developing countries. The result indicates that
the integration of East and South East Asia with the creation of free trade area
would increase welfare in the region and generate small losses for countries outside
the bloc. This would also lead to significant changes in the structure of production
and trade. Dimaranan et al. (2007) using the GTAP framework analysed the impact
of rapid growth in China and India on the world economy. They argue that both
China and India were labor abundant and dependent on manufacturing. However,
their export mix was very different. The findings revealed that accelerated growth
through efficiency improvements in China and India, especially in their high-tech
industries, would intensify competition in global markets resulting in the contraction
of the manufacturing sectors in many other countries.
The analysis on the different free trade scenarios in East and South East Asia
studies discussed so far have clearly concluded that East and South Asian countries
stand to benefit from adopting FTAs/RTAs. However, many of them employ a 100%
tariff reduction to capture policy shocks in their FTA analysis which is unfortunately
both unrealistic and unlikely to be adopted by countries in their free trade negoti-
ations. The relatively recent nature of FTAs negotiations in East and South East
Asia may have prevented them from using actual tariff shocks that was ultimately
adopted. However, these studies provide a good indication of the range of gains that
can be achieved. The conclusions of several FTAs in the region in the past few years
provide new opportunities to analyze the impacts of these trade agreements using
the actual tariff reduction schedules.
2.4 Impact of FTAs and RTAs on the Environment

The above discussed literature mainly focused on the RTA impacts on the econ-
omy and welfare. The literature on energy-economy-environment-trade linkage, an
important objective in applied economic policy analysis, is growing. Environmental
issues began to appear in trade studies in the 1970s. This section reviews these
studies.
The survey by Dean (1992) highlights the various areas of discussions in the trade
and environment literature: (i) environmental regulation and comparative advantage;
(ii) trans-boundary pollution and trade; (iii) non-tariff barriers in term of stan-
dards; (iv) trade of hazardous substances and (v) impact of trade liberalization on
the environmental degradation. Among these, (i) and (v) are more important and
often discussed issues. A study by Robinson (1988) using a general equilibrium
investigated the effect of changes in pollution abatement cost on US trade. Results
concluded that environmental abatement costs have changed US comparative advan-
tage with the country importing more high-abatement goods and exporting more
low-abatement goods. The ratio of import to export abatement content rose from
1.17 to 1.39 during 1977 to 1982, an indication that import composition is get-
ting more pollution intensive. In addition, 1% increase in US sectoral price due
to environmental abatement costs results in a 0.67% decrease in US trade in
1977. This facts shows that marginal changes in abatement cost will only lead to
marginal changes to trade flow. Utilizing the Trade and Environment Equilibrium
Analysis (TEQUILA) CGE model on Mexico and NAFTA, Beghin, Roland-Holst,
and van der Mensbrugghe (1995) run a 20-year simulation where advalorem tariffs
are reduced gradually over the period. One of their main conclusions was that
2.4 Impact of FTAs and RTAs on the Environment 37
although increased trade liberalization resulted in a 3.2% rise in real GDP and a
corresponding 2.5–4.8% increase in pollutants, there was no evidence of the PHH.
Despite the expansion of a few dirty activities in certain sectors, composition of
industries in Mexico had actually become cleaner. However, it must be noted that
Mexico did increase its imports of ‘dirty’ products to replace domestic production
and this may constitute in itself a pollution export to other nations but just not to its
free trade partners. Similarly, authors (Ederington, Levinson, and Minier, 2004) con-
cluded that there is little link between tariff reductions and dirty industries migration
across borders. They found that tariff reduction in the US from 1974 to 1994 did not
have a significantly different impact on imports from clean and polluting industries.
There are a few studies using GTAP-E that dealt with energy and environmental
implications only, in particular, the Kyoto Protocol. Burniaux and Truong (2002)
used an extended version of the GTAP model called GTAP-E, which includes
the standard GTAP model as a special case. GTAP-E incorporates carbon emis-
sions from the combustion of fossil fuels and provides a mechanism to trade these
emissions internationally. Implications for policy analysis were demonstrated via
a simple simulation experiment in which global carbon emissions were reduced
via a carbon tax. Results showed that incorporating energy substitution into GTAP
model was essential for analyzing this problem. The policy relevance of GTAP-E
in the context of the existing debate about climate change was illustrated by some
simulations of the implementation of the Kyoto Protocol.
Studies on international capital mobility related to the reallocation of investment
and the resulting effects on growth and emissions were undertaken by McKibbin,
Ross, Shackleton, and Wilcoxen (1999) and Babiker (2001). With a fairly elaborate
description of international capital markets, the G-Cubed model reported that capi-
tal reallocation in the context of the Kyoto Protocol had little impact on leakages, as
most of this reallocation took place among Annex 1 countries rather than non-Annex
1 countries (McKibbin et al., 1999). They examined and compared four potential
implementations of the Protocol involving various degrees of international permit
trading, focusing particularly on short term dynamics and on the effects of the poli-
cies on output, exchange rates, and international flows of goods and financial capital.
They presented calculations of some of the gains from allowing international per-
mit trading, and examined the sensitivity of the results. The results suggested that
regions that did not participate in permit trading systems, or that can reduce carbon
emissions at relatively low cost, would benefit from significant inflows of interna-
tional financial capital under any Annex 1 policy, with or without trading. Their
results indicated that the United States was likely to experience capital inflows,
exchange rate appreciation and decreased exports. In contrast, the Rest of OECD
region, as the highest cost region, saw capital outflows, exchange rate depreciation,
increased exports of durables and greater GDP losses. Similarly, Babiker (2001)
showed that assuming perfect capital mobility did not affect the carbon leakage
significantly. Burniaux (2001) analyzed the influence of international investment
reallocation in the context of unilateral reductions of GHG emissions undertaken by
industrialized countries. The analysis was based on the simulation results obtained
by using a recursive dynamic AGE model (GDYN-E). This model was designed to
simulate the economic consequences of the Kyoto Protocol. Results showed that
the existence of investment reallocation may become much more influential under
certain circumstances related to different types of investor’s expectations, differ-
ent levels of inter-fuel substitution, a longer time horizon and the possibility of
alternative carbon-free energy sources (called ‘backstops’ energies).
Dagoumas, Papagiannis, and Dokopoulos (2006) investigate scenarios concern-
ing the economic implications of the Kyoto Protocol. The general equilibrium
model, GTAP-E was used to examine the cases of the USA participation and on
the role of Russia as a major emission credits seller. A significant issue in the
Kyoto Protocol negotiations is the introduction of sinks in the Marrakech Accords.
This seems to weaken the initial targets by replacing CO2 emissions reduction with
afforestation activities and reduces the cost of the Protocol compliance. It is also
shown that the absence of the USA may reduce the costs for the other developed
countries and may influence the total costs more than the CDMs. A new scenario is
studied by introducing a guaranteed minimum of 60% in the emission credits sold
by Russia. Results show that the profits of Russia are not significantly affected by
the guaranteed minimum.
There are few GTAP studies focusing on trade liberalization and its impact on
the environment. Kuik and Gerlag (2003) examine the effect of trade liberalization
on carbon leakage using GTAP. They estimate the carbon leakage under the Kyoto
Protocol with and without freer trade by means of import tariff reductions agreed
to in the Uruguay Round of multilateral trade negotiations. The study finds that
under a plausible range of assumptions, the implementation of these import tariff
reductions increases the overall rate of leakage. But they also found that the costs of
abating the trade-induced leakage are modest relative to the welfare gains of freer
trade. Analysis of the trade-induced carbon leakage shows large differences between
leakage caused by reductions of import tariffs on energy goods and by reductions
of import tariffs on non-energy goods. It also shows large differences in emission
responses among developing country regions. Tsigas, Gray, and Hertel (2004) inves-
tigated the impact of a trade policy on the environment using the GTAP modelling
framework. It involved trade liberalization in the Western Hemisphere a topic which
has received considerable discussion in the past decade, and its environmental con-
sequences. They found that trade liberalization in the Western Hemisphere was
likely to benefit all participating countries. However, it guarantees neither improved
environment nor more degradation. Authors noted that existing global models failed
to provide a coherent view of the magnitude and regional distribution of the carbon
leakages that could emerge following the implementation of emission abatement by
a group of industrialized countries. Similarly, Kang and Joon (2004) analyzed the
air pollution impact in Republic of Korea induced by trade liberalization between
Republic of Korea and Japan using a standard multi-region CGE model based on
the GTAP database Version 5.0. The simulation results showed that the aggregated
environmental effect depends on the change in specialization structure between
pre and post trade liberalization. The inter-industrial difference of emission coef-
ficients and of disposal cost by air pollutants plays a major role in determining
the scale of the aggregated environmental effect. A free trade agreement between
2.4 Impact of FTAs and RTAs on the Environment 39
Republic of Korea and Japan reduced the overall air pollution emission by 0.36%
but increased the pollution disposal cost slightly by 0.06%. This analysis provides
useful environmental policy guidelines for pursuing a ‘win-win strategy’ in trade.
Beghin et al. (1995) has found that trade liberalization under NAFTA led to a
2.5–4.8% increase in pollutants level in Mexico while Dessus and Bussolo (1998)
estimated that trade liberalization will lead to a 15–20% higher emissions level
among pollutants in Costa Rica when compared to the benchmark scenario in the
year 2010. A study by Lee and Roland-Holst (1997) on the impact of trade liberal-
ization between Indonesia and Japan has also arrived at the same conclusion. The
analysis involves creating a two-country, 19-sector CGE framework based on the
1985 SAM of both nations and CGE model specifications. Data for pollution emis-
sions are obtained from Industrial Pollution Projection System of the World Bank.
Effluent intensities of Indonesian and Japanese industries are derived from that of
the US industries. This, however, means that the Indonesian effluent level is likely
to be understated while it is the reverse for Japan. Their results indicated that in
the absence of technological improvements, a unilateral tariff reductions adopted by
Indonesia will lead to an increase in emissions of all pollutants in Indonesia, rang-
ing from 0.51% for BOD to 3.73% for lead. For Japan, emission level decreased
for these pollutants but only by a marginal amount, ranging from – 0.02 to –0.09%.
Between the two countries, emission level increases for the majority of pollutants.
These studies suggest that trade liberalization leads to an increase in pollution level.
On the contrary, Strutt and Anderson (2000) found the positive impact of major
multilateral and regional trade liberalizations on the Indonesian economy and envi-
ronment. They used GTAP to project the world economy to 2010 and 2020 without
and with trade reforms. They estimated the effects of changes in economic activ-
ity due to trade liberalisation on air and water pollution in Indonesia. A base case
projection without trade reform was compared with alternative scenarios involving
full global implementation of Uruguay Round commitments by 2010, and the addi-
tional move to MFN free trade by APEC countries by 2020. The study concluded
that trade policy reforms would improve the environment and reduce the depletion
of natural resources for most of the scenario cases and in the worst cases would add
only slightly to environmental degradation. This occurred even without toughening
the enforcement of existing environmental regulations or adding new ones, and even
if the reforms stimulated a faster rate of economic growth.
Eickhout, van Meij, Tabeau, and van Zeijts (2004) quantified the impact of trade
liberalization on poverty and environment for developing countries. A framework
based on two models, GTAP and IMAGE, was used to obtain the economic and
environmental impact of the scenarios. IMAGE is a dynamic integrated assess-
ment modeling framework for global environmental changes. IMAGE used the
GTAP outcomes to calculate land use changes and environmental consequences.
With regard to the current Doha round they found that liberalization generated eco-
nomic benefits. The benefits were modest in terms of GDP and unequally distributed
among countries. Developing countries gained relatively the most. However, a large
part of the benefits for developing countries were the result of their own reform poli-
cies in agriculture. South–South trade liberalization was key to the ‘development’
part of this round. Trade liberalization had environmental consequences that could
be positive or negative for a region. Liberalization can be helpful in gaining wel-
fare. Economic growth in developing regions was necessary to alleviate poverty.
However, uncoordinated liberalization can lead to pressures on the environment.
Moreover, the continuation of trade-blocs throughout the world can also have neg-
ative effect. For example, the Transatlantic Market (EU-USA FTA) scenario had
negative impact with low economic growth in developing countries and large pres-
sures on the natural system. Overall they suggested that environmental and trade
agreements and policies must be sufficiently integrated or coordinated to improve
the environment and attain the benefits of free trade.
Though some studies address the environmental implications, but none of them
have undertaken an integrated assessment of the economic, social and environmental
implications of Regional Trade Agreements covering ASEAN and China, Japan and
the Republic of Korea using a GTAP framework. The current study deals with that.
Chapter 3
Features of the East and South East
Asian Economies
3.1 Introduction
The East and Southeast Asia has occupied an important position in the wider
Asian economy, linking China and the Far East with India and the Middle East,
and has also played a major role in the world-economy during last few decades
(Dixon, 1991).
East and Southeast Asian nations are extremely heterogeneous, much more than
are European, including East European countries.
Economic development in East and South East Asia has followed a notable pat-
tern, compared to any other developing regions in the world. During the last half
century, the economic performance of the East and Southeast Asian countries has
been far from uniform rather with remarkable diversities. The several countries of
this region have made good progress while others did not. The following features
have been commonly observed in East and SouthEast Asia. Some of these features
are unique to this region (Ohno, 2002).
1. Wide diversity in ecosystem, population, ethnicity, religion, social structure, and
political regime.
2. Equally wide diversity in GDP, per capita income, and economic performance.
3. High growth maintained over a long period almost throughout the region.
4. High savings and investment rates are associated with this high growth rate,
openness of the economies, export orientation, industrialization, and general
improvements in social indicators.
In spite of these diversities these countries have common interest in cooperation
for peace and prosperity.
One of the most significant events in the history of East and Southeast Asia was
the formation of the Association of Southeast Asian Nations (ASEAN) in 1967.
Bilateral or trilateral, and multilateral negotiations with other developed Asian
countries and ASEAN bloc are implemented already and some are in the offing.
ASEAN already negotiated with China, Japan, the Republic of Korea, New-Zealand
and Australia. The details of the regional economic integration in this region have
been discussed in Chapter 1.


42 3 Features of the East and South East Asian Economies
The appropriate approach for analyzing this region seems to be to look into each
country separately in order to find its diversities, similarities, and uniqueness. The
subsequent sections will present the salient features of the different countries of the
East and SouthEast Asia.
3.2 Population
The ASEAN region as a whole has a population of about 560 million as of 2006.
The fourth highest populated region in the world and first rank in ASEAN region is
Indonesia with 220 million plus population according to 2005 census. The second
rank in the region is the Philippines with 84 million followed by Vietnam (83 mil-
lion) and Thailand (62.4 million). The lowest population in the region is Singapore
(4.24 million). But density of population is highest in Singapore with 6366 per sq.
km and lowest in the region is Lao-PDR (24.54 per sq. km.). Other countries in the
region are in the range of 70–270 per sq. km. The other major countries in East
Asia are China, Japan and Republic of Korea. Though China is the world’s largest
and most populous country with 1.3 billion people but density is 139.85 sq. km far
behind than Japan (350.44 sq. km). The population size, growth and density are
presented in Table 3.1
Table 3.1 Size, growth, and density of population in East and SouthEast Asian countries
Density of
population
Population (millions) Population growth per sq km
1990 2000 2007 1990–2000 2000–07 2005
Brunei
Darussalam 0.25 0.33 0.38 29.75 16.72 70.93
Cambodia 9.69 12.78 14.44 31.78 13.04 79.05
China 1135.18 1262.64 1319.98 11.22 4.54 139.85
Indonesia 178.23 206.26 225.63 15.72 9.38 121.74
Japan 123.53 126.87 127.77 2.69 0.71 350.44
Republic of
Korea 20.14 22.94 23.78 13.91 3.64 196.12
Malaysia 18.10 23.27 26.55 28.56 14.07 78.07
Myanmar 40.14 45.88 48.78 14.29 6.31 72.94
Philippines 61.22 76.21 87.89 24.47 15.32 283.61
Singapore 3.04 4.02 4.58 32.19 13.92 6366.86
Thailand 54.29 60.66 63.83 11.74 5.22 123.31
Vietnam 66.20 77.63 85.14 17.27 9.66 268.01
Lao-PDR 4.07 5.22 5.86 28.15 12.17 24.54
Source: WDI, 2007 (prepared by the author from the WDI online data base of population and land
area).
3.3 Economic Growth of the East and SouthEast Asian Economies 43
The issue of population and economic growth is as old as economics itself

(Malthus, 1798). Population growth increases labour force and thus facilitates
economic growth while unregulated population growth could push into many eco-
nomic problems. Over the past two decades, the remarkable growth of the East
and Southeast Asia has established the region as one of the major pillars of the
world economy. The region is vigorously pursuing a long term multilateral and
liberalization of trade. The region’s integration into world economy has been a pow-
erful vehicle to promote rapid economic growth and poverty reduction. However,
this impressive economic performance of the region has over shadowed many
other challenges and have raised questions about the sustainability of this achieve-
ment. Thus it is of high interest to look at the determinants of the economic
success.
A brief sketch of the country related development strategy and important growth
factors are described in the following section.
3.3 Economic Growth of the East and SouthEast

Asian Economies
Most of the countries in East and Southeast Asia have enjoyed the highest annual
GDP growth rates in the world for the past two decades, averaging well over 6%
(GSI, 2008). Steady trade liberalization has contributed to this regional growth.
Over the past three decades, tariffs have fallen by an average 8% while in the last
fifteen years trade as a percentage of GDP has risen from 45 to 81% (GSI, 2008). In
the 1960s Singapore and the Republic of Korea started their industrialization effort
and moved upwards with rapid strides since the 1980s. China with its sweeping
economic and structural reforms has been able to expand its economy with annual
growth rates averaging over 9%. If China continues its path of reform—in differ-
ent fields like financial sector, monetary policy, WTO-mandated trade policy, and
the political sphere—the country will likely move to the top surpassing the United
States in total size of economy by 2041, according to Goldman Sachs projections
(GSI, 2008). Reforms in other Asian economies are also changing the scenario.
Republic of Korea, Vietnam, the Philippines, and Indonesia are among Goldman
Sachs’ N-11 countries—a set of the ‘Next Eleven’ developing countries that could
reach a level of global influence similar to the BRIC (Brazil, Russia, India, and
China) economies (GSI, 2008).
3.3.1 GDP Growth

Table 3.2 records the annual growth of GDP of different East and Southeast Asian
economies. Table 3.3 reports GDP per capita of these economies for selected years.
Table 3.2 Annual growth rate of GDP
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Brunei Darussalam 2.7 4 −1.1 0.5 1.8 3 1.1 3.6 −4 2.6

Cambodia 6.5 5.3 5.7 5 12.6
China 3.8 9.2 14.2 14 13.1 10.9 10 9.3 7.8 7.6
Indonesia 9 8.9 7.2 7.3 7.5 8.4 7.6 4.7 −13.1 0.8
Japan 5.2 3.4 1 0.3 1.1 1.9 2.6 1.4 −1.8 −0.2
Republic of Korea 9.2 9.4 5.9 6.1 8.5 9.2 7 4.7 −6.8 9.5
Malaysia 9 9.6 8.9 9.9 9.2 9.8 10 7.3 −7.4 6.1
Myanmar 2.8 −0.7 9.7 6 7.5 7 6.4 5.7 5.9 10.9
Philippines 3 −0.6 0.3 2.1 4.4 4.7 5.8 5.2 −0.6 3.4
Singapore 9.2 6.5 6.3 11.7 11.6 8.2 7.8 8.3 −1.4 7.2
Thailand 11.2 8.6 8.1 8.3 9 9.2 5.9 −1.4 −10.5 4.5
Vietnam 5.1 6 8.7 8.1 8.8 9.5 9.3 8.2 5.8 4.8
Lao PDR 6.7 4.1 6.8 5.9 8.2 7 6.9 6.9 4 7.3
2000 2001 2002 2003 2004 2005 2006 2007
Brunei Darussalam 2.8 3 2.8 3.8 1.7 – – 3
Cambodia 8.4 7.7 6.2 8.6 10 13.4 10.5 –
China 8.4 8.3 9.1 10 10.1 10.2 10.7 10
Indonesia 4.9 3.6 4.5 4.8 5 5.7 5.5 6
Japan 2.9 0.4 0.1 1.8 2.3 2.6 2.2 2
Republic of Korea 8.5 3.8 7 3.1 4.7 4.2 5 4
Malaysia 8.9 0.3 4.2 5.7 7.2 5.2 5.9 6
Myanmar 9.8 11.3 12 13.8 3 5 – 6
Philippines 6 1.8 4.5 4.9 6.2 5 5.4 6
Singapore 10.1 −2.4 4.2 3.1 8.8 6.6 7.9 6
Thailand 4.8 2.2 5.3 7.1 6.3 4.5 5 4
Vietnam 6.8 6.9 7.1 7.3 7.8 8.4 8.2 8
LaoPDR 5.8 5.8 5.9 6.1 6.4 7.1 7.6 –
Source: WDI, 2007.
Table 3.3 GDP per capita (at constant 2000 US$)
1990 1995 2000 2006 2007
Brunei Darussalam 18713 19043 17996 18304 –

Cambodia – 225 286 445 482
China 392 658 949 1611 1791
Indonesia 612 827 800 983 1034
Japan 33369 35439 36789 39824 40656
Republic of Korea 6615 9159 10884 13884 14540
Malaysia 2511 3471 3881 4535 4715
Myanmar – – – 243∗ 334∗
Philippines 918 913 996 1154 1216
Singapore 14658 19359 23019 28033 28964
Thailand 1462 2086 2023 2605 2713
Vietnam 227 305 402 576 617
Lao PDR 231 274 332 438 462
Source: WDI, 2007.

∗ calculated by the authors from EIU (2009a).
The growth experience of all the economies of East and South East Asia is not
similar as it is seen from Table 3.2.
The first group of economies are those which had very low per capita income
and have experienced very modest growth rates since the 1960s. Cambodia, Lao-
PDR and Vietnam fall into this category. However, GDP growth has accelerated
in Vietnam and Laos since the early 1990s. There are several factors behind the
growth of Vietnam. Since Doi Moi (Economic Reform) Vietnam becomes more and
more open to regional and world market. Overall, significant economic reforms tak-
ing place over nearly two decades of Doi Moi have yielded encouraging results.
Vietnam has created a competitive and dynamic economic environment. The multi-
sector economy has been encouraged to develop, thus mobilizing effectively all
social resources for economic growth (MOFA, 2007). Three large economic pro-
grams, namely food production program, consumer goods production program and
export commodities program had been initiated. This led to rapid economic perfor-
mance in Vietnam with GDP growth at 6.7% compared with the rate of 4.8% in
1999. Since then the GDP growth is increasing enormously, the average growth of
approximately 7.1% per year from 2000 to 2004 increased to approximately 8% in
2007 (Table 3.2), the second largest growth in this region, trailing only China. The
shift away from a centrally planned economy to a more market-oriented economic
model improved the quality of life for many Vietnamese. Per capita income rose
from $227 in 1990 to $617 in 2007 (Table 3.3).
A second group of low achievers include Brunei and the Philippines. These
economies had relatively high per capita GDP in 1960s but have grown very slowly
since then (Brunei-3% and Phillipines-6% in 2007, Table 3.2). During the 1990s, the
Philippines government introduced a broad range of economic reforms to business
growth and foreign investment. As a result, the Philippines experienced a period
of higher growth, although the Asian financial crisis in 1997 slowed the economic
development of the country (ADB, 2005).
A third group includes those economies which had low per capita GDP in 1960
but which have grown rapidly (4% per annum in per capita terms or more) since
then. This group comprises Indonesia, the Republic of Korea and Thailand. The
growth was 9% for Republic of Korea and Indonesia and 11% for Thailand in the
1990s. But this rate sharply dropped to 4% for Republic of Korea and Thailand and
6% for Indonesia in 2007 (Table 3.2).
The steady growth of GDP is observed for the Republic of Korea since the 1990s.
Sustained increase in fixed investment and exports led this steady growth. There
was also increase in private consumption expenditure and notable rise in equipment
investment, reflecting a sharp rise in domestic capital formation in machinery and
transportation equipment.
Indonesia is the largest national economy in East and Southeast Asia and a major
emerging market. The country is currently classified as low income economy by the
World Bank, with $1,925 GDP per capita (Trading Economics, 2009). A declining
growth rate has been observed from the 1990s with an average of 5% in the current
decade.
On the other hand, Thai economy grew well with reasonable stability for over
three decades. During the decade from 1990 to 1996, Thailand was one of the fastest
growing economies in the world, with an average annual rate of 8.6%. The Thai
economy experienced negative GDP for two consecutive years, i.e. −1.4% in 1997
and 10.5% in 1998. It regained its growth rate slowly and reached 7.1% in 2003
(Table 3.2).
Another group of high growth performers include Malaysia and Singapore which
have grown rapidly since the 1960s. Singapore had the highest per capita income in
the region in 1960 and has grown very rapidly since then and by the mid-1990s its
per capita GDP was higher than the West European average (World Bank, 1997). In
the five years 1993–1997, GDP growth averaged 8.84% but it dropped to 1.4% in
1998(Table 3.2) because of residential property prices fell 40%. Due to the world-
wide boom in IT demand and in impressive recoveries in domestic consumption
and investment, GDP growth soared to 10.1% in 2000 but again it fail to 6% in
2007 (Table 3.2).
Malaysia had maintained a steady GDP growth with average of 9% until 1997.
In the decade of 2000, the average growth declined to 7% (Table 3.2). In 2007,
Malaysia was the 29th largest economy in the world by PPP with gross domestic
product was at $357.9 billion (The Edge, 2008).
China recorded the highest GDP growth in this region (3.8% in the 1990s to 10%
in 2007, Table 3.2). The economy has its high domestic savings rate, high rate of
investment in human capital, large domestic market and unlimited supply of surplus
labor (Spence, 2007).
Japan is the lowest performer in this region in the 1990s which came to 2% in
2007(Table 3.2). Between 1950s and 1980s, the Japanese economy grew extremely
well with just a short slowdown in the middle of the period. Starting from 1991, the
growth has been very weak experiencing a long period of economic underperfor-
mance. There are numerous explanations of the observed behavior of the Japanese
economy: ‘inadequate fiscal policy, the liquidity trap, depressed investment . . .,
problems with financial intermediation’, and ‘low productivity growth’ (Hayashi
& Prescott, 2002). However, one can not deny the fact that Japan’s economy is
highly efficient, highly diversified, and very competitive, being ranked 19th among
111 countries on productivity. Japan has a high level of savings and investment rates
(Hayashi & Prescott, 2002).
As we know that most of the Asian countries are agriculture based, we are trying
here to present the status of agricultural sector.
3.3.2 Agricultural Sector in East and South East Asia
The major contribution of GDP from agriculture is especially for the countries
like Cambodia, Lao-PDR, Myanmar, and Vietnam. For China, the Philippines, and
Thailand, the share which was in the range of 12–27% in the 1990s declined to
11–14% in 2006 (Table 3.4).
Table 3.4 Agriculture, value added (% of GDP)
1990 1995 1997 2000 2005 2006
Brunei Darussalam 1 1 1 1 1 1
Cambodia 45 48 44 36 31 30
China 27 20 18 15 13 12
Indonesia 19 17 16 16 13 13
Japan 3 2 2 2 2 –
Republic of Korea 9 6 5 5 3 3
Malaysia 15 13 11 9 8 9
Myanmar 57 60 59 57 – –
Philippines 22 22 19 16 14 14
Singapore 0 0 0 0 0 0
Thailand 12 10 9 9 10 11
Vietnam 39 27 26 25 21 20
LaoPDR 61 56 53 53 44 42
Source: WDI, 2007.
Economic structural change has been observed in Vietnam. The share of primary
sector (Agriculture) in GDP has decreased from 39% in 1990 to 25% in 2000 and
further declined to 20% in 2006 (Table 3.4). This sector accounted for about two
thirds of domestic employment. The marginal slowdown in the agricultural sector
output to 3.5% in 2004 from 3.6% in 2003 is due to the effects of a drought brought
on by a weak monsoon, an unusually severe winter, and avian influenza (UNESCAP,
2005). Fisheries output increased sharply in 2004 as a result of the vigorous expan-
sion of aquaculture and a greater number of harvests. However, the fisheries sector in
Vietnam is affected by antidumping duties imposed by the United States on shrimp
and catfish exports (UNESCAP, 2005).
Agriculture is not too important in Japan and the Republic of Korea. The con-
tribution from this sector to GDP is as low as 2% for Japan since the 1990s
(Table 3.4). Only 12% of Japan’s land is suitable for cultivation. Due to this lack
of arable land, a system of terraces is used to farm in small areas. This results in
one of the world’s highest levels of crop yields per unit area, with an overall agri-
cultural self-sufficiency rate of about 50% on fewer than 56,000 km2 (14 million
acres) cultivated (Japan, 2009). Japan’s small agricultural sector, however, is also
highly subsidized and protected, with government regulations that favor small-scale
cultivation instead of large-scale agriculture as practiced in North America (Japan,
2009). Japan ranked second in the world behind China in tonnage of fish caught—
11.9 million tons in 1989. After the 1973 energy crisis, deep-sea fishing in Japan
declined, with the annual catch in the 1980s averaging 2 million tons. Japan main-
tains one of the world’s largest fishing fleets and accounts for nearly 15% of the
global catch.
For the Republic of Korea, the agricultural contribution to GDP was more than
10% in 1990s, declined to 4% in 2005 (Table 3.4). The country grew from a predom-
inantly rural agricultural economy to an urban industrialized developed country and
the agricultural workforce shrunk to only 21% in 1989. The number of agricultural
workers reduced further to well under 10% in the current decade. As regards the sec-
toral sources of growth, value added in agriculture, forestry and fishery has made
a negligible contribution in the current decade. This was attributable, in part, to
the poor performance of inshore fisheries and marine aquaculture which more than
offset the ongoing growth in the livestock industry (UNESCAP, 2008).
Agriculture and fishing contribute marginally to Singapore’s GDP. Just 0.9%
of Singapore’s total area is farmland. Vegetables, pigs, and poultry are raised for
domestic consumption, although the vast majority of food is imported.
Though the scope of agriculture in Indonesia was enormous, however, it’s not
tapped properly. The contribution to GDP which was almost 20% in the 1990s
declined to 13% in 2006 (Table 3.4). Agriculture improved its performance in 2000,
helped by an import ban on rice, and in November 2004 the Ministry of Agriculture
announced that Indonesia had regained self-sufficiency in rice production after
nearly 10 years, taking a major step towards food security. Since the late 20th cen-
tury there has been a shift from rice toward less-demanding subsistence crops, such
as cassava. The government intervenes in the marketing of rice to maintain produc-
tion at an economically viable level. Various ‘mass guidance’ schemes to broaden
the availability of credit and to promote the use of fertilizers and high-yielding vari-
eties have increased rice output. In spite of good performance of rice production,
there has been a persistent tendency since the late 1990s to import additional rice
(Indonesia, 2009).
Agriculture, forestry, and fishing once formed the basis of the Malaysian econ-
omy, but between 1970 and the early 21st century their contribution to the country’s
GDP declined from roughly 29% to 9%. Similarly, the proportion of the labour force
engaged in agriculture decreased from about one-half to less than one-eighth over
the same time span, and the trend has continued. But rubber production remains
important and closely tied to domestic manufacturing. By the early 21st century,
Malaysia had become one of the world’s top producers of palm oil. Malaysia
remains the world’s fourth-largest producer of cocoa. Other common cash crops
include pepper, coffee, tea, various fruits, and coconuts (Malaysia, 2009a).
As a newly industrializing nation, the Philippines is still an economy with a large
agricultural sector. Agriculture accounted for one fifth of GDP and growth of this
sector slowed from 1999 onwards largely because of political unrest in the impor-
tant crop-producing area. Still agriculture benefited from extraordinarily productive
harvests of the two food staples, rice and maize during 2000, although cash crops
such as coconut, pineapple and forestry also performed well (UNESCAP, 2005).
The average annual growth was 2% in 2007–8.
Thailand’s share of agriculture in GDP has declined from more than 30% in the
1970s to 11% in 2006 (Table 3.4). This long-term decline reflects in part the slow
growth of demand for farm products compared to the faster growth in demand for
manufactured goods and services due to rising income. It also reflects supply side
factors, especially capital accumulation, which resulted in resources moving out
of labor intensive agricultural industries and into more capital- and skill-intensive
manufacturing and services industries (Mukhopadhyay, 2006). Several factors are
responsible for this decline. Trade policies have encouraged the development of
capital intensive manufacturing, giving that sector an edge when competing for
domestic resources. Although expenditures by the government are high by regional
standards, public investment in agricultural research and investment has been mod-
est. Private capital investment in agriculture, especially in crop production, is also
rather limited. As a result, yield improvements in Thai agriculture are among the
lowest in the region. Apart from that, agricultural production declined due to the
renewed outbreaks of avian influenza took their toll on poultry farming and shrimp
production fell due to the imposition of preliminary anti-dumping tariffs by the
United States. In addition, a prolonged drought aggravated by deceleration in agri-
cultural growth and weak monsoon affected the output of rice and other grains in
the current decade (Mukhopadhyay, 2006).
The two most important sectors of the Chinese economy have traditionally
been agriculture and industry, which together employ more than 70% of the labor
force and produce more than 60% of GDP. According to the United Nations
World Food Program, in 2003, China fed 20% of the world’s population with
only 7% of the world’s arable land. China ranks high worldwide in farm out-
put, and, as a result of topographic and climatic factors, only about 10–15%
of the total land area is suitable for cultivation. (China, 2009). China is the
world’s largest producer of rice and is among the principal sources of wheat,
corn (maize), tobacco, soybeans, peanuts (groundnuts), and cotton. The major agri-
cultural products can be broadly grouped into foods, fibers, fuels, raw materials,
pharmaceuticals and drugs, and an assortment of ornamental or exotic products. In
the 2000s, plants have been used to grow biofuels, biopharmaceuticals, bioplas-
tics, and pharmaceuticals. Biofuels include methane from biomass, ethanol, and
biodiesel. Like Thailand, the importance of agriculture has also slowed down in
China from 27% in the 1990s to 12% in 2006 (Table 3.4). The relative signif-
icance of farming has dropped steadily since the beginning of industrialization
(China, 2009).
Agriculture in Cambodia is important. The severe flooding in September 2000
had an adverse impact on total agricultural production. The country slowly adjusts
its growth—agriculture and forestry expanded by 2.6% in 2000. The situation is
tackled after two years. In particular, improved weather conditions helped lift agri-
cultural output by nearly 8% (UNESCAP, 2005). The contribution of agriculture
declined by 15% within a span of 16 years (Table 3.4).
Lao People’s Democratic Republic is primarily agriculture based. Its contribution
to GDP was 61% in 1990 and declined to 42% in 2006 (Table 3.4).
Another agriculture based economy is Myanmar. Agriculture accounts for almost
59% of GDP in 1997 (Table 3.4). A stable growth is maintained as a result of exten-
sive farming, and incentives to private investors since 1998 to bring unused land
into production (UNESCAP, 2003). Myanmar is devoted to rice, and to increase
production the government has promoted multiple, easily supported by the coun-
try’s climate. As a whole, the sector accounts for nearly one-half of the country’s
gross domestic product (GDP) and employs about two-thirds of the labour force
(Myanmar, 2009). Nevertheless, agriculture remained constrained by shortages of

key inputs such as fertilizers, seeds and diesel for irrigation pumps. There were
also limited irrigation facilities and inadequate logistics, transport and marketing
services (UNESCAP, 2003).
3.3.3 Industrial Sector in East and South East Asia
As we have seen from the previous section that agricultural contribution to GDP is
declining in this region, particularly for Thailand, Vietnam and China. Let us now
look at the share of the industrial sector to GDP for different countries. Table 3.5
presents this share.
For Japan, the industrial growth started before the Second World War. The mid-
1960s ushered in a new type of industrial development as the economy opened itself
to international competition in some industries and developed heavy and chemical
manufactures. Whereas textiles and light manufactures maintained their profitabil-
ity internationally, other products, such as automobiles, ships, and machine tools,
assumed new importance. In the current decade, the key industries dominating in
Japan’s economy are petrochemicals, pharmaceuticals, bio-industry, shipbuilding,
aerospace, textiles, and processed foods. But the contribution of industry to GDP
has declined from 40% in 1990 to 30% in 2005 (Table 3.5). Crude oil, natural gas
and coal production has increased from mid-1990s, the economy had construction
boom associated with huge inflows of foreign capital and a boost in tourism since
the early 1990s (Japan, 2009).
To achieve higher economic growth, the Republic of Korea has adopted a pol-
icy of industrialization. The industrialization programme was sustained by export
demand. After a slump in 2003, the economy began to recover in 2004. Sustained
Table 3.5 Industry, value added (% of GDP)
1990 1995 1997 2000 2005 2006
Cambodia 14 16 22 25 26
China 42 47 48 46 48 48
Indonesia 39 42 44 46 47 47
Japan 40 34 34 32 30 30
Malaysia 42 41 45 51 50 50
Myanmar 11 10 10 10 – –
Philippines 34 32 32 32 32 32
Singapore 35 35 35 36 33 33
Thailand 37 41 40 42 44 45
Vietnam 23 29 32 37 41 42
LaoPDR 15 19 21 23 30 32
Source: WDI, 2007.

by export demand, industry recovered from the slowdown of 2003 and expanded at
a rate of 9.0% in 2004. In 1990 South Korean manufacturers planned a significant
shift in future production plans toward high-technology industries-as new materials,
mechatronics—including industrial robotics, bioengineering, microelectronics, fine
chemistry, and aerospace. As a result of structural reforms in the economy, Republic
of Korea was able to build a strong industrial foundation, especially in the areas of
electronics, automobiles, shipbuilding, and petrochemicals. For example, Korea’s
shipbuilding industry is second only to Japan’s and holds 32% of the world mar-
ket share. In the semiconductor industry, three Korean firms supply more than 40%
of the global demand for DRAMs. Automobiles and petrochemicals rank fifth in
the world in terms of production. Since November 1997, financial meltdown has
impacted economic growth of the country. The economic situation has improved
with considerable restructuring and rebuilding phase. Industries which are highly
dependent on domestic market sales have suffered the most due to the sluggish
demand. Industries like construction, steel, petrochemical, machinery, textiles, and
most services suffered (Korea, 2009a).
Industry is responsible for about 48% of China’s GDP in 2006 (Table 3.5).
Industry (including mining, manufacturing, construction, and power) contributed
52.9% to GDP in 2004 and occupied 22.5% of the workforce. China ranks third
in globally in industrial output. Major industries comprise mining and ore process-
ing, iron and steel, aluminum, coal, machinery, armaments, textiles and apparel,
petroleum, cement, chemical, fertilizers, food processing, automobiles and other
transportation equipment including rail cars and locomotives, ships, and aircraft,
consumer products including footwear, toys, and electronics, telecommunications
and information technology. Overall industrial output has grown at an average
rate of more than 10% per year. Since the founding of the People’s Republic,
industrial development has been given considerable attention. Among the various
industrial branches the machine-building and metallurgical industries have received
the highest priority. These two areas alone now account for about 20–30% of the
total gross value of industrial output. The automobile industry and petrochemical
industry have grown rapidly since 2000. China is the world’s leading manufacturer
of chemical fertilizers, cement, and steel. By 2002 the share in gross industrial
output by state-owned and state-holding industries had decreased to 41%, and
the state-owned companies themselves contributed only 16% of China’s indus-
trial output. China’s construction sector has grown substantially since the early
1980s. China is one of the largest producer of steel in the world and the steel
industry has been rapidly increasing its steel production. Iron ore production kept
pace with steel production in the early 1990s but was soon outpaced by imported
iron ore and other metals in the early 2000s. Steel production, an estimated 140
million tons in 2000, increased to 419 million tons in 2006. Much of the coun-
try’s steel output comes from a large number of small-scale producing centers
(EIU, 2005a, 2003a).
By the early 1980s, Singapore had built a much stronger and diversified econ-
omy, which gave it an economic importance in East and SouthEast Asia. The
government emphasizes during the first half of the 1980s on industrial activities
from traditional labor-intensive, low-wage activities to capital-intensive, high-wage

and high-technology activities, notably the electronic industries and oil refining.
By the late 1980s, Singapore further diversified its economy, provided manufactur-
ing, financial, and communications facilities to multinational firms (Lee, 2000). The
contribution to GDP is maintained at 33–35% since 1990s (Table 3.5).
Malaysia is the world’s largest producer of palm oil, accounting for almost half of
the world’s production. The industrial output is ranked 32nd in the world. The indus-
trial sector is regulated and promoted by Malaysia Industrial Development Authority
(Malaysia 2009b). In the past, the country also was the world’s largest producer of
rubber, but in the early 1990s it was overtaken by Thailand and Indonesia. Mining
sector, which once played a very important role in Malaysian exports, is losing its
importance. However, there is great potential for development of this sector, since
Malaysia has various relatively under-exploited mineral resources, including baux-
ite, iron ore, copper, limonite, and gold. For a long time, Malaysia was the world s
largest producer of tin, but in the early 1990s was overtaken by Brazil and neighbor-
ing Indonesia. Additionally, there are large offshore reserves of high-quality oil and
gas. During recent decades, Malaysia has increased production of crude petroleum
and natural gas. Malaysia was ranked thirteenth in the world in terms of gas reserves
and twenty-second in oil reserves in 1999. The production of gas increased steadily
in the 1990s to meet the rising demand in the domestic and international markets
(Malaysia, 2009b). In Malaysia industrial sector is performing well since 1990s. Its
contribution to GDP is around 50% in the current decade (Table 3.5).
Industrial production in Indonesia has increased by 7% during the 1990s. Its con-
tribution to GDP has also grown from 39% in 1990s to 47% in 2006 (Table 3.5). The
growth of industrial sector was generally broad-based, with all sectors except mining
expanding. The lack of investment in the mining sector has affected oil production
negatively (ADB, 2003). The pace of recovery in Indonesia picked up significantly
in 2000, due to the rise in oil prices, strong private consumption, and a revival in
investment. Due the destruction caused by the tsunami of 26 December 2004, there
has been a substantial loss of human and physical capital. Other key economic assets
in some province, such as coal and copper mines and oil and gas operations, were
not affected (ADB, 2003).
Industrial production in the Phillipines expanded modestly from 3.6% in 2000
to 5% in 2008 (EIU, 2009a) while its contribution to GDP is varying between
30–34% during 1990 to 2006 (Table 3.5). Food processing displayed an improved
performance, but other industries such as chemicals, basic metals, textiles, electri-
cal machinery, wood products and beverages, recorded low growth in the current
decade. The Phillipines is rich with mineral and thermal energy resources. Gold,
nickel, copper and chromite deposits are among the largest in the world. Other
important minerals include silver, coal, gypsum, sulfur, clay, limestone, marble, sil-
ica, and phosphate. About 60% of total mining production are accounted for by
non-metallic minerals, which contributed substantially to the industry’s steady out-
put growth between 1993 and 1998, with the value of production growing by 58%
(EIU, 2002).
Industrial sector in Brunei Darussalam grew strongly due to higher oil revenues.
Growth in the domestic non-energy sectors did not gain much momentum as these
remained dependent on government spending. The promotion of SMEs in the private
sector and the further development of public ICT systems and facilities were moving
upwards (UNESCAP, 2005). Industrial contribution to GDP varies between 60 and
70% since 1990s (Table 3.5). Oil and gas sector output accounts for around 35% of
GDP.
Cambodia experienced considerable growth in garment production, tourism,
non-forestry agriculture and construction which pushed GDP growth since mid-
1990s and their contribution to GDP increased to 26% (Table 3.5).
Industry provided about 32% of total GDP during 2006 in Laos (Table 3.5). It
performed well in process timber and garments. Myanmar experienced expansion
in energy production. Industrial output rose by over 13% in 1999 from about 6%
in 1998. The production of cotton yarn and fabrics and cement has increased in the
currrent decade. Since the economy is agriculture based the industrial contribution
is only 10% of GDP (Table 3.5) during 2000. Industrial production expanded rapidly
in 2003–4 (20.8–21.5%), but dropped sharply in 2007 (9%) (EIU, 2008a).
3.3.4 Manufacturing Sector in East and SouthEast Asia
Though manufacturing and industrial sectors are partly overlapping, still we are
trying to capture the status of manufacturing sector for the countries in East and
South East Asia.
Japanese manufacturing is very diversified, with a variety of advanced indus-
tries that are highly successful. The fields in which Japan enjoys relatively high
technological development include consumer electronics, automobile manufactur-
ing, semiconductor manufacturing, optical fibers, optoelectronics, optical media,
facsimile and copy machines, and fermentation processes in food and biochem-
istry. Manufacturing contributed 21% of GDP in 2006 (Table 3.6), while employing
10.2% of the workforce (Japan, 2009).
The share of manufacturing industries in the Republic of Korea increased from
21.5% in 1970 to 30% in 1990 but dipped to 28.74% in 2005. Electric and elec-
tronics equipment played a pivotal role (especially computers, semiconductors, and
telecommunications equipment).
China’s manufacturing sector produced about 8.74 trillion Yuan in goods accord-
ing to the World Bank for the year 2005. In 2006, China surpassed Japan as the
world’s No. 2 auto market, with total sales of 7.2 million vehicles and production of
7.3 million. In 2007, China also became one of the world’s top producer of merchant
ships (Tkacik, 2007). The contribution of the manufacturing sector to GDP varies
between 33 and 35% since 1990s till 2005 (Table 3.6).
A major vehicle of growth in Singapore continued to be the manufacturing sec-
tor, although trade and tourism activities are no less important. The contribution
to GDP is around 28% in the current decade (Table 3.6). The electronics industry
Table 3.6 Manufacturing, value added (% of GDP)
1990 1995 1997 2000 2005 2006
Cambodia 9 12 16 18 19
China 33 34 33 32 33 35
Indonesia 21 24 27 28 28 28
Japan – – 23 22 22 21
Malaysia 24 26 28 33 30 30
Myanmar 8 7 7 7 – –
Philippines 25 23 22 22 23 23
Singapore 27 27 24 28 27 28
Thailand 27 30 30 34 35 35
Vietnam 12 15 16 19 21 21
LaoPDR 10 14 16 17 21 21
Source: WDI, 2007.
accounted for the largest share of value-added in manufacturing. Manufacturing was

dominated by the production of computer peripherals and oil processing. Singapore
produces a diversity of manufacturing goods, including electronic items, chemicals,
transportation equipment and machinery, petroleum products, rubber and plastic
products, and fabricated metal products. Electronic goods—notably computer disk
drives, communications equipment, and televisions—account for about half of the
country’s manufacturing output. Singapore is developing as a global hub of infor-
mation and communications technology, and telecommunications is a vital aspect of
the economy. The government has placed high priority on upgrading and expanding
the country’s already well-developed telecommunications infrastructure (Singapore,
2009a). Even within manufacturing, further branching off from electronics to other
areas like chemicals and biomedical manufacturing (especially pharmaceuticals) has
been taking place over the decade after the Asian Financial Crisis. In 2006 elec-
tronics accounted for 29% of manufacturing value added compared to more than
50% in 1995. With the emergence of chemicals and biomedical manufacturing also
as key players with 14 and 25% of value added shares, respectively, in 2006, the
manufacturing sector has become more broad based (Abeysinghe, 2007).
Malaysia has developed a diversified manufacturing sector that plays an increas-
ing role in the Malaysian economy. Manufacturing contributes about 30% of GDP
(Table 3.6), providing employment 27% of the workforce during the present decade
(Malaysia, 2009b). Manufacturing sector received incentive in the 1970s and 1980s
by the extensive growth of the electric assembly and electronics sectors. The country
became an important producer of radios, television sets, stereo equipment, and other
related products. In the 1980s, the Malaysian government started its national auto-
mobile project, the locally produced Proton car (in cooperation with Mitsubishi of
Japan). In the late 1980s, it started exporting the Proton to the international market.
In the 1990s Malaysia saw further growth in the manufacturing sector, especially
in export-oriented electronics production, including semiconductors, silicon wafers,

and other items. Malaysia has become the world’s third-largest producer, and one
of the world’s largest exporters of semiconductors. The country was adversely
affected by the 1997 Asian financial melt down, its manufacturing sector contracted.
However, in 1999 and 2000, Malaysia could overcome the impact of recession in
manufacturing, and this sector made an impressive growth of 12% per annum in
recent times (Malaysia, 2009b).
Manufacturing is the second most dynamic economic sector in the Philippines
after services. It employs 9.8% of the labor force and contributes 22% to the GDP
in 1998 and maintained till 2006 (Table 3.6). Modern manufacturing production is
concentrated on processing and assembly operations of the following: food, bev-
erages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals,
paints, plywood and veneer, paper and paper products, small appliances, and elec-
tronics. In the 1990s the electronics industry was the fastest growing sector not only
in manufacturing but also in the Philippines economy as a whole and employs huge
labor in this sector (EIU, 2008b).
From an agriculture based economy Thailand moved towards an industrialized
economy. Manufacturing sector increased by 12.6% annually in the late 1980s and
the early 1990s (before the crisis of 1997). Its contribution to GDP has increased
from 27% in 1990 to 35% in 2006. Among all manufacturing industry transport
sector, electronics and food products dominate. Manufacturing sector showed a
growth rate of 5.4% in 2002. It enjoyed the benefit of growing domestic and exter-
nal demand. In 2003 it grew by 10.3% and contributes to the economic growth
(Mukhopadhyay, 2007).
Vietnam emerges as a major actor in five key manufacturing sectors: textiles,
footwear and garments, agro-processing, electric and electronic industries, and auto-
mobile and motorcycle assembly. The contribution to GDP has increased from 12%
in the 1990s to 21% in 2006 (Table 3.6) while employing 10.2% of the workforce.
The top manufacturing sectors—food processing, cigarettes and tobacco, textiles,
chemicals, and electrical goods—experienced rapid growth in the current decade.
There are a total of 14 joint ventures in the emerging Vietnamese automobile
industry. There is a huge domestic market for motorcycles. Vietnam’s electronics
assembly is also growing rapidly since 1990s (Vietnam, 2009).
3.3.5 Service Sector in East and SouthEast Asia
Table 3.7 provides contribution of the services sector to total GDP of East and South
East Asian economies
The service sector performs fairly well through out 1990s and the current decade
its share to GDP is 69% (Table 3.7). Banking, insurance, real estate, retailing, trans-
portation, telecommunications and tourism are major industries under the service
sector.
In the late 1980s one of the fastest growing sectors of Singapore’s economy was
international banking and finance. This sector accounts for about 25% of GDP.
Table 3.7 Services, value added (% of GDP)
1990 1995 1997 2000 2005 2006
Cambodia – 38 39 42 44 44
China 31 33 34 39 40 40
Indonesia 41 41 40 38 40 40
Japan 58 64 64 66 69 68
Malaysia 43 46 44 40 42 41
Myanmar 32 30 30 33 – –
Philippines 44 46 49 52 54 54
Singapore 65 65 65 64 67 67
Thailand 50 50 50 49 46 45
Vietnam 39 44 42 39 38 38
Lao-PDR 24 25 26 25 26 26
Source: WDI, 2007.
It ranked behind Tokyo and Hong Kong amongst financial service centers in the
East and Southeast Asian region (Singapore, 2003). Services comprise 65% of
the GDP throughout 1990s and further high to 67% in 2006 (Table 3.7). In this
sector, financial and business services are the most important, followed by whole-
sale and retail trade, transportation and communications, and tourism. Singapore
has become East and Southeast Asia’s banking and finance hub. It houses interna-
tional banks, wealth management firms and other financial institutions. A sound
economy, robust infrastructure, pro-business environment, talented international
workforce and strong regulatory framework have made Singapore one of the major
International Finance Centres of the world. Electronic commerce (e-commerce), an
increasingly important component of the service sector, is supported by Singapore’s
well-developed telecommunications infrastructure. Tourism is an important source
of foreign exchange fuelling the nation’s economic growth (Singapore, 2009b).
Service sector is not so important in Brunei, still the restaurant and hotel sec-
tor was doing well in the 1990s, however, contracted quite sharply recently. The
contribution to GDP declined from 37% in 1990s to 26% in 2006 (Table 3.7).
The service sector in Indonesia has always maintained a steady share of 40%
(Table 3.7) of GDP since the 1990s. Tourism along with fairly high private domestic
demand, hotel and restaurant sector, and financial services are working together to
maintain the growth.
The share of the service industries in GDP was 51.5% in 1997 increased to 64.3
in 2005, in the Republic of Korea (Table 3.7). The service industry expanded largely
by higher output, in the transportation, storage, and communication sectors.
In Malaysia, service sector expanded steadily over the last two decades, becom-
ing the second-largest sector of the Malaysian economy. Value added in the service
sector as a whole rose by 5.9% in 2000, compared with 3.6% in 1999. The contri-
bution to GDP varies between 40 to 46% during 1990–2006 (Table 3.7). The good
performance contributed much to the solvency of the financial sector and facilitated
3.4 Poverty and Unemployment 57
efforts in restructuring the corporate sector. Progress in banking reforms and corpo-
rate restructuring and the improved employment prospects strengthened domestic
demand. Private investment expenditure also contributed to the growth.
The Philippines’ services sector had a significant contribution to the economic
growth. The sector’s growth experiences 4.1 and 4.6%, respectively, for 1999 and
2000. The growth further accelerates to 7.3% in 2004 from an average 5.6% in
2002–2003. The contribution to GDP has always maintained above 50% in the cur-
rent decade (Table 3.7). This can be attributed largely to the telecommunications
sector, where investment related to call centre activity and other business process
outsourcing, as well as software development, mushroomed (EIU, 2006).
China’s services output ranks seventh worldwide, it has remained on a high-
growth path (China, 2009). In 2006 the services sector produced 40% of China’s
annual GDP (Table 3.7), second only to manufacturing. China’s tourism industry is
one of the fastest-growing industries in the national economy and is also one of the
industries with a very distinct global competitive edge (China, 2009).
The service sector is performing well in Cambodia. Its contribution to GDP has
increased from 38% in 1995 to 44% in 2006 (Table 3.7).
The service sector is responsible for 26% of GDP in 2006, in Laos and it has been
steady since the 1990s (Table 3.7). This performance is caused by tourism-related
activities, such as transport, hotels and restaurants, and commerce, which are being
promoted under the campaign ‘Visit Laos Year’ in 1999–2000 (UNESCAP, 2003).
Financial, construction, telecommunication and transportation and tourism sec-
tors have expanded rapidly in Thailand (NESDB, 2005). Thailand remained an
interesting and attractive destination for tourists. In the services sector, tourism
industries continued to expand markedly as a result of public–private cooperation
in promotional activities coupled with the strong yen and European currencies. The
service sector’s contribution to GDP was 50% till 2000. In the current decade, it
declined to 45% in 2006 (Table 3.7).
3.4 Poverty and Unemployment

The performance of the broad sectors of ASEAN is expanding rapidly including
China, Japan and the Republic of Korea. But, recent reports of the UNDP and the
ILO tell us that East and South East Asia has been experiencing deeper inequality
and rising unemployment under economic liberalization and globalization. Some
countries are even experiencing jobless growth. The 2006 Asia-Pacific Human
Development Report said ‘. . .the region has embraced free trade, but has free trade
embraced the poor?’ (Tañada, 2008).
This development is vividly illustrated by the present food crisis being expe-
rienced by the Filipino poor, urban and rural, due to policy of deregulating and
liberalizing agriculture, during the last 25 years or so. Today, the Philippines, from
a net rice exporter in the late l970s, has become one of the global importer of rice
(Tañada, 2008).
Likewise, the Philippines has been experiencing a pattern of jobless growth, as

it has become dependent on a few growth industries such as IT/ICT and electronics
while losing all other industries, from shoe and textile production to tire and steel
manufacturing (Tañada, 2008).
Since 1988, unemployment rate kept decreasing due to the economic boom in
Malaysia and amounted to 2.6% in 1997. And it remained moderate at approxi-
mately 3.5% from 1998 to 2004 (Furuoka, 2007).
Unemployment problem has been serious in China between 1997 and 2007. This
is because massive layoffs in the urban areas and the peak in surplus labor in the
countryside happened simultaneously in this period. It is said that China has surplus
workforce of 120 to 150 million (Jianjun, 2002). When they lose their jobs, farmer
still have means of production but urban workers are left with no means of pro-
duction. Tsinghua University’s Center for China Study estimates that urban jobless
rate is 8.3% in nationwide average. As the regional financial and economic crisis
persists in the ASEAN region, social problems have loomed larger as many work-
ers face unemployment and vulnerable and disadvantaged communities experience
greater hardship and poverty. Since much of the region is affected, the combined
potential of social problems from desperate unemployed workers and the new poor
pose a threat to national, as well as regional stability (ASEANSEC, 2009).
The Poverty headcount ratio at national poverty line (% of population) is high-
est in Cambodia (35 in 2004), Lao-PDR (33 in 2003), Vietnam (29 in 2002) and
Indonesia (17, 2004) (WDI, 2007). But other developing countries in the region
are relatively better off in that respect. With economic reforms in China initiated
in the late 1970s, the growth results in significant increase in per capita income
and also a decline in the poverty rate from 64% at the beginning of reform to 10%
in 2004 (Kniivilä, 2007). At the same time, however, different kinds of dispari-
ties have increased. Income inequality has risen, the difference between rural-urban
income has enhanced and disparity between highly educated urban professionals
and the urban working class has been sharpening. There have also been increases
in inequality of health and education outcomes. In Thailand there is a problem of
the huge difference in income between the upper 30% and the rest of the popula-
tion. Thailand’s impressive economic growth in the 1980s and 1990s has improved
overall living conditions, but the benefits of this national affluence have not been dis-
tributed equitably. Those belonging to the lower 30% of the population are merely
surviving (United Nations, 2000). Though the poverty rate in Vietnam has reduced
from about 58% in 1993 to 16% in 2006, or about 34 million people have escaped
poverty, the Gini coefficient (measure of income inequality), has increased from
0.34 in 1993 to 0.36 in 2006 (VietnamNet, 2008).
Japan is a highly developed country with high living standards. It is found that
the rate of poverty (i.e. the headcount ratio) is high among advanced countries.
The degree of inequality of outcome in terms of income distribution has also been
increasing (Tachibanaki, 2006).
The Republic of Korea has been one of the world’s fastest growing economies for
over four decades. The GINI index for Japan and the Republic of Korea is 0.37 and
3.5 The Structure of Foreign Trade and FDI 59
0.35, respectively, while for Thailand, Philippines and Malaysia it is at the range of
0.46–0.52. Among the least developed countries in ASEAN are Cambodia and Laos
at 0.39–0.40 according to the World Bank estimate in 2006 (WDI, 2007).
The economic advances in the region have allowed the East and South East Asian
countries to enjoy improvements in poverty reduction. They are expected to achieve
the UN Millennium Development Goals well before the 2015 target date.
There are various measures taken by the national as well as international level
to eradicate poverty by countries in ASEAN+3. Social safety net programmes can
become more successful coupled with socioeconomic development programmes.
While efforts to promote economic growth are emphasized both at the national
and regional levels through trade reforms, intra-regional trade and investment are
equally important to address the social impacts of the financial and economic cri-
sis, and to reduce the impact on the incidence of poverty and social well-being,
particularly of the rural areas in the ASEAN region. (ASEAN, 1999)
3.5 The Structure of Foreign Trade and FDI
In this section we are going to discuss the pattern of trade and investment. Few basic
issues will be addressed in this section. What are the major exports and imports of
these countries and the primary destination of trade and interregional trade? Also
the sources of FDI are touched upon.
Table 3.8 shows the growth of exports of goods and services and its contribu-
tion to GDP over the period 1990–2006 in ASEAN countries and China, Japan and
Republic of Korea. Export as a percentage of GDP during 1990–2006 is highest
for Singapore followed by Malaysia, Brunei and Thailand. The impressive export
growth rate during the period has also been found for Vietnam and Thailand.
Table 3.9 presents the imports of good and services by ASEAN countries and
China, Japan and Republic of Korea since the 1990s. Import growth shows, how-
ever, a fluctuating pattern for most of the countries. Cambodia and Myanmar show
a steady import growth throughout while for Thailand and Malaysia it declined
considerably after 2000.
Now we are discussing in detail the factors behind the export and import growth
and also the major destinations of each country’s trade along with the principal items
of trade.
3.5.1 Japan
For the Japanese economy, East and Southeast Asia is the most important region. For
East Asia, too, Japan is a particularly important country in trade and investment. The
major exported goods are capital goods and parts, motor vehicles and related goods,
and IT-related goods which accounted for approximately 70% of total exports.
Table 3.8 Export growth and contribution to GDP
1990 1995 2000 2006
Brunei Exports of goods and services (% of GDP) 62 60 67 71

Exports of goods and services (annual % 1 17 12 4
growth)
Cambodia Exports of goods and services (% of GDP) 6 31 50 69
Exports of goods and services (annual % – 44 30 19
growth)
China Exports of goods and services (% of GDP) 19 23 23 40
growth)
Indonesia Exports of goods and services (% of GDP) 25 26 41 31
growth)
Japan Exports of goods and services (% of GDP) 10 9 11 16
growth)
Republic of Exports of goods and services (% of GDP) 28 29 41 43
Korea
growth)
Lao PDR Exports of goods and services (% of GDP) 11 23 30 36
Exports of goods and services (annual % – – 6∗∗ 29
growth)
Malaysia Exports of goods and services (% of GDP) 75 94 124 117
growth)
Myanmar Exports of goods and services (% of GDP) 3 1 0 –
Exports of goods and services (annual % 14 −22 44 –
growth)
Philippines Exports of goods and services (% of GDP) 28 36 55 46
growth)
Singapore Exports of goods and services (% of GDP) – – 192 246
Exports of goods and services (annual % – – 20∗ 18∗
growth)
Thailand Exports of goods and services (% of GDP) 34 42 67 74
growth)
Vietnam Exports of goods and services (% of GDP) 36 33 55 73
growth)
Source: WDI, 2007.

∗ WTO 2001, 2007.
∗∗ 2002 data.
This remained the main pillars of Japan’s exports throughout the 1990s. There
was a sharp increase during 1999–2000 in particular, and then dip in 2001 with
the bursting of the so-called ‘IT bubble’ (Bank of Japan, 2002). Exports of motor
vehicles and related goods declined to about 20% of total exports in 2000 from
Table 3.9 Imports of goods and services (annual % growth)
1990 1995 2000 2006
Brunei 18 16 −6 4
Cambodia – 36 24 15
China 18 7 24 14
Indonesiag 23 21 26 9
Japan 8 13 9 4
Republic of Korea 14 23 20 11
Lao PDR – – – 4
Malaysia 26 24 24 9
Myanmar 48 20 −8 –
Philippines 10 16 4 2
Singapore – 13∗ 21∗ 19∗
Thailand 24 20 27 2
Vietnam −4 34 40 21
Source: WDI, 2007.

∗ EIU, 1995, WTO, 2001, 2007.
approximately 30% in the early 1990s. Furthermore, the percentage of semiconduc-

tor fabrication machines and equipment within the capital goods and parts category
rose.
As for exports by region, the US consistently maintained of 30% of Japanese
exports, and is Japan’s largest export market. However, the percentage of exports
to NIEs (the Republic of Korea, Taiwan, Hong Kong, and Singapore) and ASEAN
4 (Thailand, Indonesia, Malaysia, and the Philippines) and China, then comes to
approximately 40% of all Japanese exports in the current decade. Japan’s main
exports in the 1990s were motor vehicles and related goods to the US and the EU,
and capital goods and parts to the US and NIEs. From 2000 onwards, the percentage
of motor vehicles and related goods exports has been down to about 20% while the
percentage of IT-related goods, which are mostly shipped to the US and East Asia,
has increased more than 20%. The percentage of capital goods and parts exports
remained consistent at around 30% from 1990 (Bank of Japan, 2002).
Raw materials including crude oil and other mineral fuels were the major
imports, but these are recently starting to be overtaken by IT-related goods. The
value of consumer goods imports, is increasing, and explains 10% of total imports.
Office machinery is the largest, accounting for nearly half of total IT-related goods
imports, followed by semiconductors and other electronic parts, which account for
about 30% (Bank of Japan, 2002).
US remains the largest supplier of Japanese imports as a single country. But
imports from the East Asia, particularly China, expanded rapidly from the latter
1990s and now has share of about 40% of the total, which is around twice the US
figure. The value of imports from other regions, which includes sources of crude oil,
has not changed significantly. The importance of IT-related goods imports, mostly
from the East Asia, especially NIEs, and from the US has been growing, and the
percentage of consumer goods imports from East Asia, especially China, is also
expanding (Bank of Japan, 2002).
3.5.2 Thailand
Thailand has changed markedly over the last four decades. In the sixties, agricul-
tural products accounted for the bulk of the country’s exports. Since the seventies,
manufactured exports account for more than 80% of the nation’s total export value.
In the late eighties, Japan and some newly industrialized economies relocated
a number of their industries to Thailand. There were large FDI inflows in export-
oriented and machinery-related industries during this period. The average export-
output ratio in the manufacturing sector has risen over time. Industries with high
export-output ratio are canned food, milled rice and tapioca, sugar and other food
products, textiles, wearing apparel, footwear, wood products and furniture, rubber
products, electronic products, and electrical appliances (UNIDO, 2002). Since 1998
exports of motor vehicles and parts have become the nation’s principal export items
(Mukhopadhyay, 2006).
The United States, the European Union and Japan were the three most important
markets for Thailand until the early nineties when sales to ASEAN markets sur-
passed the EU and Japan. In ASEAN, Thailand’s single largest market is Singapore.
The United Kingdom, the Netherlands, and Germany are the principal EU markets.
Other important destinations for Thai products include China and the newly indus-
trializing economies of Asia (Hong Kong, Taiwan and Republic of Korea), as well
as Australia, Nigeria, Saudi Arabia and the United Arab Emirates.
Thai manufactures rely heavily on imported materials. Products serving primar-
ily the domestic market such as breweries and dairy products, animal and vegetable
oil, animal feed, tobacco, pharmaceuticals, iron, steel and metal products rely much
on imported materials. Some exports depend even more on imported components.
Computer parts, integrated circuits, electrical and electronic products, and transport
equipment are among the leading export items with high import content (UNIDO,
2002).
3.5.3 Vietnam
The policy of openness and industrialization has opened up new opportunities for
Vietnam to make full use of its inherent comparative advantages. Over the years of
the Doi Moi process, Vietnam’s export growth has averaged 20% (MOFA, 2007).
The structure of exports has seen a change. During the 1991–1995 period, major
exports of Vietnam were crude oil, fishery products, rice, textiles, coffee, forestry
products, rubber, peanut and cashew nuts. By 2005, Vietnam was mainly exporting
namely crude oil, garment and textile, footwear, seafood, woodwork, electronics
appliances, and rice. This structure reflects the rise in processing and manufac-
tured products and decline in unprocessed products, including agricultural, fishery,
forestry products and minerals. Despite this shift, unprocessed export products still
make up a large proportion (MOFA, 2007).
The main destinations of Vietnam’s exports in 2004 were the United States
(18.8%), Japan (13.2%), China (10.3%), Australia (6.9%), Singapore (5.2%),
Germany (4.0%), and the United Kingdom (3.8%). Vietnam is facing trade deficit
since 2007 (EIU, 2008a). Vietnam’s merchandise imports were valued at US$31.5
billion in 2004 and growing rapidly. The main origins of Vietnam’s imports were
China (13.9%), Taiwan (11.6%), Singapore (11.3%), Japan (11.1%), Republic of
Korea (10.4%), Thailand (5.8%), and Malaysia (3.8%) (EIU, 2008c).
3.5.4 Singapore
Singapore generally maintains a positive balance of trade. Singapore’s port is one

of the busiest in the world in terms of shipping tonnage. The chief imports, in
order of value, are machinery and transport equipment; basic manufactures, such as
textile yarn, fabric, iron and steel; miscellaneous manufactured articles; petroleum
and petroleum products; and food and live animals. The country’s major exports
are electronics products, machinery and transportation equipment, and refined
petroleum products. Leading purchasers of Singapore’s exports are Malaysia, the
United States, the European Union (EU), Hong Kong, and Japan. Imports come
mainly from Japan, Malaysia, the United States, the EU, and China. Singapore has
no energy resources, so it relies on imported fuels. Crude oil is imported and refined
in the country. Singapore also imports natural gas to meet its energy needs. Some
of the petroleum imports are used to fuel electricity-generating plants (Singapore,
2009b).
3.5.5 Republic of Korea

The principal export commodities of Republic of Korea are machinery and equip-
ment including electronics, telecommunications equipment, semiconductors, LCD
panel, mobile phone, computers related, television, motor vehicle—passenger cars,
steel, ships, and petrochemicals, and metal goods. The Republic of Korea’s export
earnings fared well from 2000 onwards. One of the main factors in the export boom
was the demand from China, which is now the Republic of Korea’s most important
export market. In addition to heavy reliance on a few major markets, the Republic
of Korea’s exports are relatively narrowly based on a limited range of products such
as wireless communication equipment, automobiles and steel. Korean exports to the
United States were sluggish because imports from Japan proved more price com-
petitive that from Korea’s as a result of the weakened yen (EIU, 2005a). The major
imports to the Republic of Korea are machinery, industrial materials, electronics
and electronic equipment, fuels-oil, steel, transport equipment, organic chemicals

and plastics and capital goods, most of which were stimulated by export demand
(EIU, 2005a).
3.5.6 Malaysia
Malaysia’s international trade experienced considerable growth throughout the last
three decades. Even during the Asian financial crises of 1997 and 1998, the country
had a large trade surplus of US$4.0 billion in 1997 and US$17.7 billion in 1998.
The Malaysian government encouraged export-oriented industries, created favor-
able investment environment in the country, and promoted close relations between
the government and private businesses. In the mid-1990s Malaysia faced grow-
ing competition from neighboring Indonesia, the Philippines, and Thailand, which
could offer cheaper labor and larger and growing domestic markets. However, polit-
ical stability in Malaysia has been advantage compared to these countries (Malaysia,
2009a).
The important export products were electrical and electronics products, chem-
icals and chemical products, manufactured metal products, and textiles, clothing,
and footwear, petroleum and liquefied natural gas, chemicals, palm oil, wood and
wood products, rubber. Most of Malaysia’s electrical and electronic products are
produced for export (56% during 2000) to the United States, Europe, and other
markets. Imports are machinery and equipment, chemicals, food, fuel, lubricants.
Historically, the United States has long been one of Malaysia’s largest trading
partners. Trade between these two countries consisted mainly of assembled elec-
trical goods and manufactured electronic products. Singapore is traditionally the
second-largest export market. The proportion of goods exported to Singapore is
around 16.5%. The major exports are electrical and electronic equipment, machin-
ery, metals, and mineral fuels. Malaysia exports 11.6% of total to Japan and exports
comprise electrical and electronic equipment, machinery and mineral fuels. Other
export destinations are the Netherlands, Taiwan, and Hong Kong. Malaysia is one
of ASEAN’s leading exporters of furniture. Access to cheap local wood makes
Malaysian furniture manufactures very competitive in the international market.
The United States was the largest single market for Malaysian wooden furni-
ture (37%), followed by Japan (14%), Singapore (9%), and the United Kingdom
(9%). Malaysian imports originate from Japan, and consisting mainly of electrical
and electronic equipment and machinery. The United States is the second major
source of imports and consists mainly of electrical and electronic equipment and
transportation equipment (Malaysia, 2009a).
3.5.7 Philippines
Since the mid-1980s, nontraditional manufactured exports are becoming important
in the Philippines export basket. The principal export items of the country are elec-
tronic products (29.6%), semiconductor (22.3%), agriculture based product (1.6%),
minerals (2.1%) and garments (2.6%) in 2006. The major items in the import basket
are electronic products (24.4%), mineral fuels (8.2%), transport equipment (2.0%),
industrial machinery (2.0%) and textile fabrics (1.1%) in 2006 (EIU, 2007). The
leading markets of Philippines are China (39.6%), USA (17.7%), Japan (15.6%),
Singapore (10.5%), Hong Kong (10.4%) and others (6.8%) in 2007. The leading
suppliers of imports are Japan (17.1%), USA (14.7%), China (13.5%), Singapore
(11.7%), the Republic of Korea (6.7%) and others including Taiwan and Hong-Kong
(36.3%) in 2007(EIU, 2008b, 2009a).
3.5.8 Myanmar
The principal export of Myanmar was basically rice and rice products, Pulses and
beans, Teak and Rubber during the1990s. From 2000 onwards the major items in
export list were gas, fish and fish products, pulses and teak. The principal imports
throughout the 1990s were raw materials, transport equipment, foodstuffs, machin-
ery and equipment, construction materials. During 2000, crude-oil and edible oil
were also added to the import list as a major item. The main destinations of exports
were Singapore, Thailand, India, Hong Kong, China, Japan and USA during the
1990s. From 2000 onwards Thailand became a major destination with 34% share.
The main origins of imports are Japan, China, Thailand, Singapore, Malaysia, the
EU and Indonesia. During 2000, Singapore, China and Thailand became major
importers with 52% share (EIU, 2003b).
Myanmar recorded a merchandise trade surplus (US$730 million at the official
rate) in 2002, owing to considerable growth in exports and a decline in imports
and this trend continued into the first half of 2003. However, exports for the year
as a whole were impacted by the US sanctions in 2003, banning all imports from
Myanmar, most of which are manufactured goods, primarily garments (EIU, 2003b).
Exports fell by 12.3% during 2007–8. Much of the fall was the result of a contrac-
tion in natural-gas exports due to sluggish demand in Thailand (the main market
for Myanmar’s gas exports) (EIU, 2009b). Exports were disrupted by Cyclone
Nargis, which caused severe damage to the area around Yangon, which is an impor-
tant base for Myanmar’s agricultural-processing and export-oriented manufacturing
sectors. On the other hand, imports increased by 24.2% during the year 2007–8
(EIU, 2009b).
3.5.9 China
China’s international trade has experienced a steady expansion since the opening of
the economy in 1979. China has become an important actor in world trade during
the last thirty years. Its overall share of exports to industrial economies has increased
and become more diversified (China, 2009).
Apart from Asia, China’s leading export destination is USA, the EU and Japan.
China’s export base has diversified from an initial heavy reliance on textiles and
other light manufacturing. In the early 1990s, light manufacturing had a share of
more than 40% of China’s exports. These products largely consisted of footwear,
clothing, toys, and other miscellaneous manufactured articles. A large part of the
remaining exports was accounted for by manufactured goods, machinery and trans-
port. In recent years, China is exporting more sophisticated electronics, furniture,
travel goods, and industrial products. For example, the proportion of China’s exports
by machinery and transport increased from 17% in 1993 to 41% in 2003, while the
share of miscellaneous manufacturing declined from 42 to 28%. The composition
of imports reflects the high degree of vertical specialization of production within
the Asian region. A high share of imports for processing is embodied in China’s
exports. This ratio increased from about 35% of all imports in the early 1990s to
about 50% by 1997 and has remained at about that level since then (EIU, 2004).
3.5.10 Indonesia
In the early 1990s, Indonesia was considered as one of the most promising develop-
ing country. From 1990 to 2006 Indonesia’s export values have been about 20–30%
of its GDP) (Table 3.8). The country experienced a slight dip in exports and much
bigger drop in imports due to the financial crisis in 1997. Indonesia has a few impor-
tant trading partners such as China, Japan, Singapore, the Republic of Korea and the
USA. In 2006, these five countries contributed to 57.5 and 47.7% of Indonesia’s
export and import, respectively. The major export item in the list of Indonesia are
mineral fuels, oil distillation products, wood and wood products, electrical and
electronic equipment, apparel accessories, rubber and footwear. The imports are
intermediates and final goods dominated by nuclear reactors, boilers, machinery,
vehicles, electrical and electronic equipment, organic chemicals, iron and steel prod-
uct. The major chunk of exports is destined to the USA and the EU countries in the
1980s and the 1990s, but after the mid-1990s, the share has gone up to the rest of
ASEAN countries and Japan, the Republic of Korea and China.
3.5.11 Trend of Intra Regional Trade

Over the past two decades, the region’s trade and FDI have expanded rapidly. East
and South East Asia’s exports rose from 14% of world total exports in 1980 to 27%
in 2006, while its imports expanded from 15 to 24% during 1980–2006 (Kawai &
Wingaraja, 2007). After discussing the performance of the individual countries in
ASEAN, it is worth to see the share of intra regional trade. Table 3.10 summarizes
changes in the share of intra-regional trade for various groupings in Asia over the
period 1980–2006. Table 3.10 demonstrates that intra-regional trade as a share of
ASEAN+3 has risen from 30.2% in 1980 to 38.3% in 2006. Within ASEAN the
trade share has increased from 17.9 to 27.2%.
Table 3.10 Trend of the intra regional trade share from 1980 to 2006 (%)
Region 1980 1990 1995 2000 2002 2004 2006
ASEAN(10) 17.9 18.8 24 24.7 24.4 26.7 27.2

ASEAN+China, Japan and 30.2 29.4 37.6 37.3 37.9 39.2 38.3
Republic of Korea (13)
Source: IMF Direction of Trade Statistics CD-ROM (June, 2007) and Kawai & Wingaraja, 2008a.
3.5.12 Status of FDI in East and South East Asia
East and Southeast Asia has long enjoyed a market-driven expansion of trade and
FDI. FDI inflows into East Asia (including Japan) more than tripled from 5% of
world total FDI inflows in 1980 to 16% in 2005, while East Asian FDI outflows
increased from 5 to 11% of world total outflows over the same period (Kawai &
Wingaraja, 2008a).
FDI inflows into East and Southeast Asia have facilitated regional economic
integration. Table 3.11 summarizes the source regions/countries of emerging East
Asian economies’ FDI inflows (cumulative figures) for the period 1995–2005. It
shows that major industrialized countries as well as emerging East Asia are the
main investors in East and SouthEast Asia. Multinational corporations from the
European Union (EU), the United States (US) and Japan account for 15, 14 and
11%, respectively, of emerging East Asia’s cumulative FDI inflows over the period
1995–2005. More specifically, the largest investors in the Asian newly industrial-
izing economies (NIEs), particularly in Singapore and Taipei, China, come from
Table 3.11 Emerging East and SouthEast Asia’s FDI inflows, 1995–2005
Source regions/countries of FDI inflows to emerging

East and Southeast Asia (%)
FDI inflows to USA EU Japan Asian NIEs ASEAN9 Other countries Total
Asian NIEs 16.8 15.8 8.1 5.2 3.9 50.2 100

Hong Kong 5.1 7.4 5.7 5.3 1.8 74.7 100
Republic of Korea 22.4 40.1 13.3 4.1 7.4 12.7 100
Singapore 31.7 19.3 8.5 4.0 5.8 30.7 100
Taipei, China 19.9 13.1 15.5 14.2 2.5 34.8 100
ASEAN 9 18.4 29.1 19.1 29.2 4.2 0 100
Indonesia 5.7 50.9 3.3 15.0 9.3 15.8 100
Malaysia 27.4 23.4 13.6 22.0 2.1 11.5 100
Philippines 23.4 10.3 23.1 16.9 1.1 25.2 100
Thailand 10.5 10.5 25.1 27.6 0.9 25.4 100
Vietnam 4.8 19.1 14.4 39.2 6.6 15.9 100
China 8.1 8.1 8.6 54.0 1.6 19.6 100
Total 13.9 14.7 10.5 34.9 3.1 100
Source: ADB, 2007.

the US. In contrast, the EU is the largest developed region investor in ASEAN-9
(which excludes Singapore), particularly in Indonesia and Vietnam. Japan is the
principal investor in Thailand and Philippines. However, in Thailand and Vietnam,
the Asian NIEs’ firms are the most dominant investors. In the case of China, Hong
Kong is by far the largest investor. The rising importance of FDI by the Asian NIEs’
firms, account for 29.2% of total FDI inflows to ASEAN 9 and 54% of total inflows
to China. More recently firms from the middle-income ASEAN countries, such as
Malaysia and Thailand, have also begun to invest in other ASEAN countries and in
China.
In this connection, the direct investment among ASEAN is also worth check-
ing. Table 3.12 explains the intra-ASEAN direct investment flows. Among ASEAN,
Thailand and Indonesia are the highest investors in this region.
In 1998 the ASEAN member countries signed the Framework Agreement on the
ASEAN Investment Area. This agreement enables the establishment of an invest-
ment area by 2010, recognizing that the inflow of FDI is very important for overall
development. Under this agreement member countries of ASEAN will be granted
immediate national treatment by 2010, and all investors will be granted this benefit
by 2020 (ASEANSEC, 2007).
Initially the objective of this agreement was to promote free flow of investment,
technology and skilled professionals. The agreement has been extended to cover the
agriculture, fishing and forestry sectors, mining, manufacturing and services.
Several factors are responsible for the expansion of trade and FDI. First, East
and South East Asian economies have pursued trade and investment liberalization
as part of their outward-oriented trade and FDI policies within the multilat-
eral framework under the General Agreement on Tariffs and Trade/World Trade
Organization and open regionalism through Asia-Pacific Economic Cooperation.
Second, through FDI, global MNCs and later other East Asian firms have formed
production networks and supply chains throughout East and Southeast Asia. They
have divided their production processes into multiple sub-processes and located
Table 3.12 Intra ASEAN direct investment flows (millions of US$)
Host country 2002 2003 2004 2005 2006 Total 2002–06
Brunei Darussalam 21.23 36.79 19.66 19.43 9.71 106.82

Cambodia 8.52 19.88 31.92 129.18 155.54 345.04
Indonesia 1296.62 383.46 204.25 883.32 1524.53 4292.18
Lao-PDR 2.92 2.98 7.75 6.68 10.56 30.9
Malaysia 0.02 251.12 980.17 572.91 467.82 2272.05
Myanmar 25.11 24.28 9.31 38.35 27.79 124.84
Philippines 87.44 175.37 71.11 12.69 −95.56 251.06
Singapore 762.3 699.2 548 1175.6 1137.7 4322.8
Thailand 1408.29 1060.42 688.71 762.22 2822.12 6741.76
Vietnam 200.43 100.4 242.87 164.72 181.89 890.31
Total ASEAN 3812.89 2753.9 2803.75 3765.11 6242.09 19377.75
Source: ASEAN Secretariat-ASEAN FDI Database, 2007, BOP Basis.

3.6 Environmental Profile: An Overview 69
these sub-processes in different countries based on comparative advantage—i.e.,

relative factor proportions and technological capabilities. As a result intra-regional
of division of labor has evolved and rising vertical intra industry trade in manu-
factured products have been possible. Third, improved infrastructural facilities and
ICT progress have reduced trade costs of conducting cross-border business. This
encourages trade and investment activities. Fourth, rapid growth of China, has also
helped to closer economic linkages among the East and SouthEast Asian economies.
The country has thus become a manufacturing assembly for the East and SouthEast
Asian economies, particularly for Japan and the Asian NIEs. All these factors have
created regional concentration of trade and FDI activities in East and Southeast Asia
(Kawai & Wingaraja, 2007).
Rapid economic expansion in East and South East Asia’s economies are likely to
have environmental implications. What is the current state of the art is to be looked
into.
3.6 Environmental Profile: An Overview
A short profile of the environmental situation in ASEAN countries and China, Japan
and the Republic of Korea is presented in this section.
3.6.1 Vietnam
The rapid economic growth and substantial investments in infrastructure may signif-
icantly threaten the environmental sustainability of the country’s development. Five
key components of the environment are forest, biodiversity, land, water (both inland
and sea water), the air, and hazardous and toxic waste (State of the environment,
2002).
The industries like oil and gas, electricity, and cement have poor environmental
records due to old equipment, lack of adequate controls, and inadequate treatment of
wastewater and air emissions. The major sources of air and noise pollution in urban
areas are from the transport vehicles and the industrial establishments scattered in
residential areas. The total number of transportation vehicles has also increased very
rapidly, in particular motorcycles and automobiles. Automobiles and motorbikes
still use leaded petrol (World Bank, 2007a).
Table 3.13 shows the trend of the major GHG emissions and PM10 in Vietnam
during 1990–2005. The trend shows that the local pollutants like PM10 is declin-
ing due to several measures but the GHG emissions especially CO2 and NOx
are rising at a rapid rate at 166 and 169% during 15 years. Sulfur dioxide lev-
els near some factories occasionally exceed national standards by several times.
Many industrial pollutants have a high environmental health cost. Health dam-
ages from particulate emissions (PM10) have been estimated to account for 0.4%
of GNI.
Table 3.13 Status of the environment, Vietnam
1990 1995 2000 2005
CO2 emissions (kt) 21385 29813 53809 57000∗

Combustible renewable and waste (metric tones of 18900 20967 22631 23955
oil equivalent)
Methane emissions (kt of CO2 equivalent) 52990 59130 71560 75080
Nitrous oxide emissions (thousand metric tons of 13920 20500 27110 37470
CO2 equivalent)
PM10, country level (micrograms per cubic meter) 124 78 70 61
Source: WDI, 2007.

∗ Data for the year 2004.
Rapid urbanization and industrialization in coastal areas, expansion in coastal

tourism, and an increase in the number of oil spills are all contributing to the deteri-
oration of coastal water quality. The Government of Vietnam has implemented fees
on wastewater pollution and introduced a Prime Ministerial Decision to reallocate,
close down or adapt cleaner technologies, but these policies need to be enforced
effectively (World Bank, 2007a).
Vietnam uses Ozone Depleting Substances (ODS) and Halons in industrial facil-
ities. Therefore, Vietnam is eligible for financing under the Montreal Protocol for
ODS phase-out. Implementation of the National CFC and Halon Phase out Plan in
Vietnam is currently under way (World Bank, 2007a).
Vietnam is one of the first countries in the East and Southeast Asia region
to ratify the Stockholm Convention on Persistent Organic Pollutants (POPs). To
address its environmental challenges, Vietnam has raised the profile of environmen-
tal sustainability in its national and international dialogue. In 2003, the Government
established the Ministry of Natural Resources (MoNRE), initiated separation of reg-
ulation of some natural resources from that of users, and approved the National
Strategy for Environmental Protection (NSEP). MoNRE is also taking initiatives
of Law on Environmental Protection to enable new policy tools and remedies for
pollution prevention and cleanup and adjustments to cover environmental manage-
ment in the private sector. In 2004, the Environmental Impact Assessment (EIA)
requirements for project approvals were increased and the Strategy for Sustainable
Development (Agenda 21) was adopted (CAI, 2006a).
Despite these measures, the progress has been slow due to weak commitment by
sectoral agencies, low awareness in local departments and officials. There is a lack
of environmental integration at planning and programmatic levels, especially in the
public investment planning process and in regional plans for land and resource use
(World Bank, 2007a).
3.6.2 Philippines
The Philippines was one of the first countries to adopt the Agenda 21 pro-
cess, initiated at the Rio Earth Summit in 1992, by formulating its own National
Agenda 21, through a highly participatory process, in 1996. However, despite its
government’s good intentions, rapid population growth, urbanization and industri-
alization have far outstripped urban environment services caused by poor natural
resource management system (World Bank, 2007b).
Air pollution levels in Metro Manila and other cities exceed national air quality
standards and impose a serious economic burden on society. Increasing water pollu-
tion is degrading the country’s groundwater, rivers, lakes, and coastal areas (World
Bank, 2007b).
The major sources of air pollution are from mobile sources-20% (primar-
ily, motor vehicles) stationary-54% (mainly, power plants and boilers in various
industrial processes) and the remaining 26% from area sources. Of the pollutants
inventoried, CO has the biggest contribution (39%). The contribution of other pollu-
tants is the following: NOx —35%, SOx —8%, PM—8%, TOG—7%, and VOC—2%
(World Bank, 2007b).The emissions inventory also shows SO2 as the main pollutant
emitted by stationary sources, CO for the mobile sources and PM for area sources.
The transport sector’s contribution ranges from 50 to 90%. In 2005, TSP con-
centrations in Metro Manila exceeded the 90 µg/m3 Philippines annual mean TSP
guideline value (24-h sampling) (CAI, 2006a).
The trend of GHG emission is shown in Table 3.14. CO2 increased heavily
followed by methane, while PM10 is declining during the period 1990–2005.
The World Bank Philippines Environment Monitor 2004 computed that the
annual estimate for urban heath cost can amount to over $1.5 billion or 1.8% of
the 2004 GDP (World Bank, 2007b).
In the last few years the government has employed economic instruments such
as pollution fines and environmental taxes to address the problem. Community and
civil society-led recycling programs have become popular, but hazardous and toxic
waste disposal has emerged as a major environmental challenge. Over the past
decade, the Government of Philippines has tried to address environmental degra-
dation by introducing institutional and legal reforms. In addition, in recent years,
World Bank, has supported efforts to improve overall environmental governance
in the country by building the capacity of the Department of Environment and
Natural Resources (DENR). In spite of all these efforts, capacity in environmental
and natural resources governance still requires significant improvement, particularly
in local government units (World Bank, 2007b).
Table 3.14 Status of the environment, Philippines
1990 1995 2000 2005
CO2 emissions (kt) 43897 62776 77923 80512

Nitrous oxide emissions (thousand metric 17990 18520 16890 18940
tons of CO2 equivalent)
Combustible renewable and waste (metric 7642 8814 9541 10892
tones of oil equivalent)
PM10, country level (micrograms per 55 58 48 26
cubic meter)
Source: WDI, 2007.

3.6.3 Cambodia
Cambodia is facing the growth of unplanned settlements, higher quantities of
untreated urban domestic sewage, industrial effluent and solid waste polluting sur-
face, and ground water in many of Cambodia’s cities and towns. There are no special
landfills or other treatment facilities for toxic, hazardous or medical waste, which is
often burned at open dumpsites, together with solid waste.
Cambodia is facing a growing air pollution challenge. Ambient concentrations
of PM is increasing resulting in severe impacts on the health of residents of Phnom
Penh and, of other urban centers. The pollution trend shows that methane and CO2
is increasing, while PM10 and nitrous oxide declining gradually (Table 3.15).
Between 1993 and 1996, the Government of Cambodia enacted several key
pieces of environmental legislation to establish the legal framework to control, use
and manage its natural resources and urban environment. The World Bank is help-
ing to increase environmental capacity and information with a range of analytical
and advisory services.
3.6.4 Indonesia
Indonesia is one of the world’s largest greenhouse gas emitter, generating 80% of
greenhouse gases from changed land use following logging and forest/swamp fires
(World Bank, 2007c). Transportation is the main source of ambient air pollution in
Jakarta, with 15,000 people per square kilometer.
According to the Statistic Central Agency, oil fuel consumption increased. In
2003, oil fuel use was 68% of total energy consumption. In 2004–2005, the demand
for gasoline in Jakarta rose, resulting in increased air pollution (World Bank, 2007c).
Industry was estimated to emit about 40% of NOx and more than 80% of Sulfur
dioxide (SO2 ) in Indonesia. Other sources of Nitrogen oxide (NOx ) were transport
and domestic sources. Domestic sources also emitted a large proportion of particu-
lates. PM10 and SO2 averages in Jakarta and Surabaya from 2000 to 2004 exceeded
the WHO air quality guideline (AQG) (World Bank, 2007c).
Table 3.15 Status of the environment, Cambodia
1990 1995 2000 2004 2005
CO2 emissions (kt) 451 549 531 535 –

Methane emissions (kt of CO2 equivalent) 12800 13350 – 14890
Nitrous oxide emissions (thousand metric 4350 3490 – 3820
PM10, country level (micrograms per 116 66 70 66 62
cubic meter)
Source: WDI, 2007.

Table 3.16 Status of the environment, Indonesia
1990 1995 2000 2005
CO2 emissions (kt) 213773 302754 365304 532847

Combustible renewables and waste 45002 48747 49927 51094
(metric tones of oil equivalent)
Organic water pollutant (BOD) emissions 495594 749872 752834 –
(kg per day)
Other greenhouse gas emissions, HFC, 1380 960 900 900
PFC and SF6 (thousand metric tons of
CO2 equivalent)
cubic meter)
Source: WDI, 2007.
The GHG emission as evident from Table 3.16 shows an increasing trend.
CO2 has increased by 150%, methane and NOx have increased by 24 and 15%,
respectively, during the 15-year period.
Health care costs increase by US$3.8 million per year. On average, people have
only 18 ‘good air’ days in a year. In 2004, 46% of all illness cases in Jakarta were
respiratory related. One of the major threats to Indonesians, especially to children is
TSP and lead concentration (World Bank, 2007c).
National energy policies emphasize reliance on renewable energy sources,
including biomass, geothermal, and hydropower. The government plans to increase
the use of coal to reduce Indonesia’s dependence on oil imports. However, this
would lead to adverse environmental impacts (World Bank, 2007c).
3.6.5 China
China’s rapid growth is damaging the natural resource base and generating major
environmental pressure. China is a second-largest source of greenhouse gas (GHG)
emissions in world. Almost 68% of its energy comes from coal, much of which is
burned in thermal power plants or in industrial boilers.
Table 3.17 shows 109% increase of CO2 emission from 1990 to 2005. Methane
and nitrous oxide is also on rise during the period, while BOD shows a decil-
ing trend. In 2006, the total of China’s CO2 emissions from fossil fuels increased
by 9% thus surpassing those of the USA. China has a large share in global
cement production (about 44% in 2006) and nationally their share in CO2 emis-
sions is almost 9% (550 megatonne out of a total of about 6200 megatonne
of CO2 ). China is one of the largest source of SO2 emissions in the world
(http://www.pbl.nl/en/news/pressreleases/2007).
Table 3.17 Status of the environment, China
1990 1995 2000 2005
CO2 emissions (kt) 2398203 3196726 3336334 5005687

CO2 emissions from solid fuel 80 78 72 72
consumption (% of total)
(kg per day)
Other greenhouse gas emissions, HFC, 8640 19890 82590 119720
PFC and SF6 (thousand metric tons of
CO2 equivalent)
cubic meter)
Source: WDI, 2007.
Suspended particulate levels are higher in northern cities, due to industrial

activity (SEPA, 2007). Since 2003, NOx and particularly SO2 concentrations have
increased. The annual average of PM10 levels in excess of 100 µg/m3 , which is
twice the US annual average standard. Twenty-one percent of cities reported annual
average levels in excess of 150 µg/m3 . A direct consequence of air pollution from
SO2 and NOx is acid rain, which remains a serious problem in China. However,
recent data suggest that sulfur dioxide emissions are increasing due to the high
demand for coal in a rapidly growing economy. Emissions in 2005 were over 25
million tons, 28% higher than in 2000, and 42% higher than the 2005 target (SEPA,
2007).
China is an active participant in the climate change talks and other multilateral
environmental negotiations. It is a signatory to the Basel Convention governing
the transport and disposal of hazardous waste and the Montreal Protocol for the
Protection of the Ozone Layer, as well as the Convention on International Trade
in Endangered Species and the Kyoto Protocol, although China is not required to
reduce its carbon emissions under the terms of the present agreement. On June 19,
2007, the Netherlands Environmental Assessment Agency announced, on the basis
of an analysis of fossil fuel consumption (including especially the coal power plants)
and cement production data, that China surpassed the United States as the world’s
largest emitter of carbon dioxide, putting out 6,200 million tons, in comparison with
America’s 5,800 million (China, 2009).
Water pollution is also a cause for serious concern. During the period 2001–2005,
on average about 54% of the seven main rivers in China contained water deemed
unsafe for human consumption. This represents a nearly 12% increase since the
early 1990s. The trends in surface water quality from 2000 to 2005 suggest that
quality is deteriorating which caused substantial increase in COD loads.
Government measures to address pollution, including industrial water and air

pollution (mainly from state-owned enterprises), have achieved significant results.
However, problems remain with the implementation and enforcement of environ-
mental regulations, and the balance between reducing emissions and increasing
production has not yet been satisfactorily achieved.
3.6.6 Republic of Korea
Republic of Korea ranked tenth in the world in terms of CO2 emissions (as of 2004,
IEA statistics). Heavy chemical industry is major cause of air pollution degradation.
Methane emissions have shown an annual decrease of 4.2% due to a decline in farm
lands and the implementation of waste reduction measures. Table 3.18 presents the
GHG emissions of the country.
The other primary air pollutants such as TSP and SO2 are decreasing in Seoul
area, but a sharp increase in fuel consumption and traffic has produced the sec-
ondary pollution problems such as visibility impairment and ozone episodes. Upon
the persistent efforts on the air quality improvement, SO2 , CO, and Pb have been
improving. PM10 has declined since 2000. This phenomenon has been due to
Ministry’s comprehensive policy for air quality improvement. However, NO2 are
getting slightly worse since 2000.
The Republic of Korea’s smaller population is the ninth largest consumer of
ozone-depleting chlorofluorocarbons. The status of ozone exceedance events dur-
ing a short term (0.1 ppm/h), shows that exceedance events have been on the rise,
from 343 exceedances at 49 stations nationwide in 1996 to 1,090 at 220 stations in
2006. This has been due to an increase in the number of automobiles in Seoul and
urban cities.
The Energy Economics Institute and the Korean Environment Institute assume
that if emissions are cut 10% against the expected CO2 emissions of 2020, KRW
3.4 trillion, or 0.29% of GDP, could be lost. On the other hand, a reduction of CO2
emissions by 10% against 2010 levels could generate environmental co-benefits of
Table 3.18 Status of the environment, Republic of Korea
1990 1995 2000 2005
CO2 emissions (kt) 241568 372358 433044 452218

Organic water pollutant (BOD) emissions 366912 353077 309064 316969
(kg per day)
cubic meter)
Source: WDI, 2007.

US$ 5.16 billion, because of the reduction in air pollutants, disease occurrence,
death rates, and agricultural damage.
Transboundary pollution concerns encouraged the creation of a joint commission
among Republic of Korea, Japan, and China to address environmental problems
(Korea, 2009b).
To cope with the environmental problems, the Korean government has improved
the environment-related organizations and laws and increased the government bud-
get for the environment protection (ESRI, 2004). The country has specified areas
with the high pollution rates as Special Atmospheric Preservation Measure Areas
and Atmospheric Environment Regulation Areas. The government has also rein-
forced stronger emission standards compared to general standards. The government
has given effort to cope with this problem by specifying Seoul and the metropolitan
area as the Seoul Metropolitan Environment Regulation Area, and also by establish-
ing the Special Act on Seoul Metropolitan Air Quality Improvement in 2003 (Kim,
2006).
According to the Ministry of Knowledge and Economy, the country intends to
spend 194.4 billion won ($193 million) on technologies and projects, including
solar, wind and biofuel in 2008 to overcome the pollution problem (Korea, 2009b).
Pollutants originating from non-point sources have also increased. The discharge
of nonpoint pollutants has been rising due to growing economic activities and land
use, which have had a negative effect on water quality.
To prevent non-point source pollution, the Ministry of Environment formulated
and implemented the ‘Comprehensive Measures for Water Management in Four
Major Rivers’ from 1998 to 2000, aiming to designate riparian zones, create buffer
zones and urban reservoirs, restrict the use of agricultural fertilizers and pesticides,
and convert livestock waste into energy resources (European Commission, 2008).
Total waste generation has shown an average annual increase of 8.6% over the
past five years (1999–2004). Waste generated is composed of municipal waste
(16.2%), industrial waste (37.6%), and construction waste (43.3%) which has the
largest portion of waste produced. This ratio indicates that there was a substan-
tial rise in construction waste from an increase in construction and reconstruction.
In case of municipal waste, the implementation of the ‘Volume-based Waste Fee
System’ has promoted waste separation and rapidly increased recycling in 2005.
Policies for controlling waste generation (e.g., regulations on disposable goods and
a Volume-Based Waste Fee System) have led to a gradual reduction in the amount
of waste (European Commission, 2008).
3.6.7 Malaysia
Emissions from mobile sources have been the major source of air pollution, con-
tributing to at least 70–75% of the total air pollution. Emissions from stationary
sources generally contribute 20–25%, while open burning and forest fires have con-
tributed approximately 3–5%. Recent estimates of emissions in Malaysia show that
the transport sector contributed to the majority of Nitrogen oxide (NOx ) emissions
and about 35% of the total particulate matter (PM) emissions in the country. The
power sector accounted for about 60% of the total SO2 emissions and almost 50%
of the total PM emissions, while the industries accounted for about 20% of the total
SO2 and PM emissions. The major industries in the country affecting air quality are
the iron and steel industry, nonferrous metal industry, nonmetallic (mineral) indus-
try, oil and gas industry, petrochemical industry, pulp and paper, power plants, and
waste incineration sector (CAI, 2006b).
The annual average concentration levels of ambient PM10 from 1998 to 2004
were generally within the Malaysian Ambient Air Quality Guideline (RMG) for
PM10. The annual average ambient concentration levels of SO2 in Malaysia
between 1996 and 2004 were well below the World Health Organization (WHO)
annual average guideline. The annual averages of 24-h ambient concentrations of
NO2 are relatively low and generally stable. Similar to the other air pollutants,
the annual 8-hourly average concentrations of CO from 1996 to 2004 were consis-
tently higher in urban areas where the main sources of emissions are motor vehicles.
Table 3.19 shows that GHG emissions (CO2 and CH4 ) are rising since 1990s. BOD
is also rising during the period 1990–2005 (CAI, 2006b).
The Environmental Quality Act (EQA), the basic framework for environmental
management in Malaysia, was enacted in 1974. The Act was officially endorsed by
the Government of Malaysia in its Third Malaysia Plan (1981–1985). The main
environmental regulatory agency in Malaysia is currently a part of the Ministry
of Natural Resources and the Environment. It was established to administer and
enforce EQA of 1974 (Heng, 2002). Regulations have since been in place for
both petrol and diesel vehicles under Acts that came into force: the Environmental
Quality (Control of Emission from Diesel Engines) Regulation on 1 September
1996 and the Environmental Quality (Control of Emission from Petrol Engines)
Regulation on 1 November 1996 (Heng, 2002). Though the Government has actively
pursued stricter vehicle emissions standards, the move toward the use of higher
quality fuels has not been similarly aggressive. The growth in the number of
private vehicles has resulted in increased emissions. However, the Ninth Malaysia
Table 3.19 Status of the environment, Malaysia
1990 1995 2000 2005
CO2 emissions (kt) 55264 119417 126359 177425∗

Combustible renewable and waste (metric 2124 2349 2529 2787
tones of oil equivalent)
(kg per day)
cubic meter)
Source: WDI, 2007.

∗ Data for the year 2004.
Plan (2006–10) has recognized the importance of public transportation and the
need to reduce private motorized travel and to encourage a shift toward public
transportation.
3.6.8 Thailand
The major sources of air pollution in Thailand are industries, power plants, trans-
port (primarily automobiles), and area sources that include agricultural wastes and
biomass burning. Key air pollutants include particulate matter (PM)10 with diame-
ter not more than 10 microns (PM10) and with diameter not more than 2.5 microns
(PM2.5), Sulfur dioxide (SO2 ), lead (Pb), Carbon monoxide (CO), Nitrogen oxides
(NOx ), hydrocarbons (HCs), and ground-level ozone (O3 ). The main pollutant of
concern is PM10 (CAI, 2006a).
Mobile Sources
Cars are major sources of CO, HC, and NOx . Two-stroke motorcycles are a dom-
inant source of HC and contribute significantly to PM and CO emissions but are
decreasing in number. Diesel trucks—both heavy and light duty—are responsible
for high emissions of PM, NOx , HC, and CO. Aging bus fleets in urban areas,
including Bangkok, are large emitters of PM. An estimated 10,000 tons per year
of PM can be attributed to light-duty trucks (31%), city buses (30%), city trucks
(23%), motorcycles (10%), long-haul trucks and buses (5%), and passenger cars
(1%) (CAI, 2006a).
Stationary Sources
As large sources such as power plants and refineries have been controlled over the
last decade, small and medium industries have increased in importance as major
sources of PM and NOx pollution. The central region—the most industrialized
area—accounts from 60 to 70% of all industrial emissions. The World Bank (World
Bank, 2002) identified the key sources of PM, SO2 , and NO2 within the central
region as cement, lime and plaster manufacturing, iron and steel making, and other
medium to heavy industries. Within the region, BMR accounts for more than 50%
of SO2 , volcanic organic compounds (VOCs), and CO and over 30% of the total
NO2 from industries. Latest data from PCD reports that out of the 20,119 factories
in BMR, one fourth are causing air pollution (PCD, 2006).
Area Sources
The forest fires in Thailand in 2000 were estimated to have generated approximately
40,000 tons of total suspended particulates (TSP)—equivalent to the total emis-
sions for Bangkok from all sources. The burning of agricultural residues generated
319 tons of TSP each year, causing widespread subregional haze. Other pollution
sources that are usually overlooked are residential and commercial open cooking
and refuse burning (CAI, 2006a).
Thailand’s air quality is still centered on the problem of PM10, which is generally
exceeded in several areas. Ambient PM10 level in 2005 is within the standard of 50
micrograms per cubic meter (µg/m3 ), while roadside ambient PM10 concentrations
exceeded the standard. PCD has identified power plants as the major source of SO2 .
Thus, measurements are made near power stations around the country.
Concentrations of biological oxygen demand (BOD) were almost consistently
worse (higher) than the standard. In one study of 15 waste disposal sites, 11 were
found to have heavy metal (nickel, lead and mercury) contamination exceeding
standard values. It is estimated that more than 200,000 tons of waste (BOD) is dis-
charged into the Gulf of Thailand annually. Industrial pollution discharges to coastal
waters, the heavy metal count, especially mercury, has exceeded Thai water quality
guidelines at times. Solid waste has steadily increased from about 30,000 tons/day
in 1992 to close to 40,000 tons/day in 1997. This totals about 13 million tons/year,
of which about 25% came from Bangkok, 35% from other urban areas, and the
remaining 40% from rural areas (Mukhopadhyay, 2007).
A number of recent studies show that air pollutants have increased mortality
and morbidity rates, most notably in BMR. A study reports that Bangkok’s pop-
ulation has been affected adversely by increases in PM—with an estimated 5,000
premature deaths annually. The Mae Moh valley has recorded an unusual number
of deaths from heart failure and a high incidence of chronic respiratory problems
(CAI, 2006a).
As pollution prevention creates additional costs, manufacturers, including
transnational corporations investing in Thailand, did not pay much attention to
the environmental effects of their production. To cope with this problem the Thai
government took initiatives like other countries by enacting several laws and
regulations.
The natural resource management laws have existed over a century in Thailand.
The first environmental protection legislation was passed in 1975 before any
other Asian countries. Thailand’s policies and planning for natural resources and
the environment was first specified in the Sixth National Economic and Social
Development Plan (NESDP, 1987–1991). By 1997, there were at least three pieces
of legislation in Thailand relating to industrial pollution, discharge of industrial
wastes, and hazardous substances. These are the 1992 National Environment Quality
Enhancement and Protection Act (NEQA), the 1992 factory Act, and the 1992
Hazardous Substances Act. In addition, the 1989 Basel Convention on the Control
of Transboundary Movements of Hazardous Wastes is the first global Convention
designed to control international trade in hazardous substances. The Thai govern-
ment has set up the Policy and Prospective Plan for Enhancement and Conservation
of National Environmental Quality (1997–2016) and the Environmental Quality
Master Plan (1999–2006). At present, several government agencies across many
industries are responsible for environmental protection. However, they seem to have
limited power to work independently and public institutions in Thailand are highly
segmented with limited co-ordination among them. In general, the implementation
of regulations on the environment has suffered from lack of monitoring activities

and weak enforcement (Mukhopadhyay, 2007).
3.6.9 Japan
Japan produces approximately 5% of the total world CO2 emissions, which is the
fourth largest in the world in 2006. Japan emitted 1,355 million tonnes of green-
house gases (CO2 equivalent) in FY2004, which was 8.0% higher than the total
emissions of the base year (1,255 million tonnes) as stipulated in the Kyoto Protocol.
Table 3.20 shows that CO2 emission increased by 16.8% in 15 years period, while
methane and nitrous oxide shows declining trend.
Compared to the base year level 1990, a breakdown by sectors shows that the
emissions of greenhouse gases for the industrial sector had decreased by 3.4%, while
that of the transport sector had increased by 20.3%, the commercial and other sectors
had increased by 37.9%, and the residential sector had increased by 31.5% in 2004
(Quality of the Environment in Japan, 2006).
Japan formulated ambitious climate protection targets in the early 1990s and con-
tinued to give attention to combating global warming throughout the decade. Japan
has a detailed climate protection policy whose implementation is well coordinated
and regularly reviewed. The country has consistently supported international cli-
mate protection efforts under the UN Framework Convention on Climate Change
(UNFCCC). The CO2 intensity of the economy (kg CO2 /unit GDP) decreased by
1.8% during the 1990s to rank eighth among OECD countries. Japan has pursued
fuel switching away from oil and towards gas and nuclear power. Voluntary initia-
tives by Japanese industry have contributed to reductions of greenhouse gas (GHG)
emissions from transport sector. Still Japan is away from its overall goal reducing
GHG emissions by 6% between 1990 and 2008–2012 (OECD, 2005).
Table 3.20 Status of the environment, Japan
1990 1995 2000 2005
CO2 emissions (kt) 1070406 1137072 1211336 1256838

CO2 emissions from solid fuel 28 29 33 38
consumption (% of total)
(kg per day)
cubic meter)
Source: WDI, 2007.

The performance of the other pollutants are not same as CO2 , photochemical
oxidants still exceed the environmental quality standard (EQS) (a one-hour value
of 0.06 ppm or less). As one of the measures to combat photochemical oxidants,
the Air Pollution Control Law was revised in May 2004 to control VOC emissions
from factories. By combining VOC emission regulations and voluntary measures by
business operators, the revised law provides an effective solution for curbing VOC
emissions. The achievement rates for the NO2 -related EQSs were slightly improved
in FY2004.
The government has attempted to control emission of various chemical sub-
stances, in accordance with the Air Pollution Control Law. The government also
encourages the private sector to take voluntary actions to curb emissions. As a result
total emissions of hazardous air pollutants have significantly reduced from 2001 to
2003.
According to the FY2005 Monitoring Survey of Groundwater Quality, 6.3% of
the wells monitored exceeded the EQS (of one or more substances). Specifically,
4.2% of the total did not meet the EQS for nitrate-nitrogen or nitrite-nitrogen. Most
of the wells are polluted by farmland fertilization, livestock excreta, or domestic
wastewater. Appropriate measures to prevent the pollution are necessary for the
conservation of groundwater (MOE, 2007).
The ‘Inter-Ministry/Agency Coordination Committee for Building Sound Water
Cycle’ is serving as a coordinator of policy actions. In FY 2003, of all municipal
solid waste, direct incineration accounted for 78.1%, while recycling accounted for
18.3%. The government implements the Waste Management and Public Cleansing
Law as well as other recycling-related legislation. In spite of the tough policy, in
FY2004 there were 673 cases of illegal dumping of industrial waste in Japan (MOE,
2007).
To solve the acute waste problems Japan has pushed through major reforms in
the field of waste and recycling policies over the past 10–20 years. To create a sound
material-cycle society (‘SMS’), Japan formulates a SMS involving the central gov-
ernment, local authorities, businesses, the general public, and all other stakeholders
of society through the use of the so-called 3R activities (Reduce, Reuse, and Recycle
waste). Some excellent technologies have been introduced following reforms in the
field of waste and recycling policies. Japan, a country with meager natural resources,
has also acquired abundant experience of effectively using resources through the
application of recycling technology (MOE, 2007).
The Ministry of the Environment was established in 2001, 30 years after the
Japan Environment Agency (which it replaced), with more environmental respon-
sibilities such as waste management, international environmental co-operation. A
comprehensive greening of government programme implemented in the late 1990s
has reduced the environmental footprint of the public sector. The procurement of
eco-friendly goods (2000), a new programme for greening of government was
launched in April 2001. Integration of environmental concerns and fiscal poli-
cies has begun with the ongoing greening of the automobile tax and automobile
acquisition tax (OECD, 2005).
Despite improved policies, strategic environmental assessment is not yet sys-

tematically applied to environmentally relevant sectoral policies, plans and pro-
grammes. Concerning market-based integration, little use is made of economic
instruments such as fees, charges, taxes, tradable permits or deposit-refund pro-
grammes. However, through its environmental policy the country has made an effort
to balance between economic growth and environmental protection.
3.6.10 Singapore
The main sources of air pollution in Singapore are from the burning of fossils fuels
for energy generation in industries, power stations, and in the transportation sector.
Other sources include open burning of waste materials and transboundary smoke
haze (CAI, 2006c). Over the past 20 years Singapore has maintained an impressive
environmental record, despite an increase in industrialization and urbanization. The
success in maintaining a clean and safe environment has largely been due to regular
monitoring and assessment of the quality of ambient air. Ambient AQ monitoring
in Singapore was initiated in 1972 and it is routinely undertaken by NEA Pollution
Control Department (PCD) (CAI, 2006c).
Particulate matter (PM) is the most important air pollutant for Singapore.
Comparing the ambient concentrations of pollutants in Singapore with US EPA
guidelines indicates that PM with diameter less than or equal to 2.5 micrometers
(PM2.5) is the major pollutant of concern. The average annual PM2.5 in Singapore
of 21 µg/m3 for 2004 exceeded the US EPA standard of 15 µg/m3 and the 2005
WHO updated guideline of 10 µg/m3 . All other pollutants have relatively very low
concentrations (CAI, 2006a). Table 3.21 shows a marginal increase (15.5%) of CO2
emission during 1990–2005 while nitrous oxide emission increased at a higher pace
(288% p.a.).
In 2005, the average level of SO2 was 14 µg/m3 , considerably lower than the US
EPA standard of 80 µg/m3 . The average level of NO2 in 2005 was 25 µg/m3 , lower
than the WHO guideline of 40 µg/m3 and much lower than the US EPA guideline
of 100 µg/m3 O, which was emitted mainly from mobile sources, had an ambient
Table 3.21 Status of the environment, Singapore
1990 1995 2000 2005
CO2 emissions (kt) 45055 46798 56465 52205

(kg per day)
cubic meter)
Source: WDI, 2007.

air 8-hourly average level of 0.5 mg/m3 in 2005 which is well below the WHO
guideline and US EPA standard. In January 1991, unleaded petrol was introduced
in Singapore and leaded petrol was phased out on 1 July 1998 (ADB, 2006). The
WHO guideline for annual average Pb levels is 0.5 µg/m3 and Singapore currently
complies with this value. O3 levels are not problematic in Singapore. The annual
average was well below the WHO guideline and US EPA standard (CAI, 2006c).
In 2004, Singapore achieved (Pollutant Standards Index) PSI readings of AQ
in the ‘Good’ range for 88% of the year (MEWR, 2005). Although ambient air
concentrations in Singapore have always met the international standards set by the
US EPA and WHO, the economic cost of air pollution on human health in Singapore
can still be considered significant (Quah & Boon, 2003).
3.6.11 Lao-PDR
The economy of the Lao PDR is still highly agriculture based. Industrialization,
rapid urbanization, and motorization with associated emissions are in the early
stages, but are expected to grow (ADB, 2006).
Air quality (AQ) monitoring is still not a routine practice in the country. The
most recent monitoring conducted was in March to April 2004 in three sites in
Vientianne. Total suspended particulates (TSP) monitoring data for all locations
indicate concentration levels ranging from 82 to 296 µg/m3 . This suggests that TSP
is a problem in Vientiane. PM10 monitoring results in Vientiane showed a range of
concentrations between 40 and 179 µg/m3 and an average of all 30 measurements at
87 µg/m3 . It is exceeding the WHO 24-h guideline updates (50 µg/m3 ). SO2 mea-
surements in Vientiane show varying levels depending on the location. The range
of measurements is from 3 to 276 µg/m3 . Only 8 of 29 measurements or (27.6%)
comply with the WHO 24-h guideline of 20 µg/m3 (ADB, 2006).
The results of limited monitoring conducted in Vientiane suggest that the city has
excessive ambient concentrations of PM. There is a need to start AQ management
through AQ monitoring and compilation of an emissions inventory to provide the
basis for decision making (ADB, 2006).
This chapter provides a broad overview of the East and South East Asian coun-
tries. We have seen that remarkable economic developments have occurred in
this region during last two decades. Most significant reason for this achievement
has been their export-oriented growth strategy using low labor costs and opening
their economies to the world market. They have attracted large volume of foreign
investment, brought technology and skills beside the pure capital. The intense eco-
nomic and large industrial development, significant changes in trade pattern and the
production technology have important implications for the environment and also
serious consequences for the future of the East and South East Asian economies.
The next few chapters will be focusing on the future of these economies using an
analytical framework.
Chapter 4
Theoretical Framework, Database
and Scenario Development
4.1 The Theoretical Framework of the GTAP Model
The most widely recognized method to undertake a global trade analysis is with
a Multiregional Computable General Equilibrium (CGE) model. The Multiregional
CGE modeling framework that has been used to undertake the analysis of the current
study is produced by the Center for Global Trade Analysis at Purdue University,
USA. The database and model is called the Global Trade Analysis Project (GTAP)
(Hertel, 1997). The GTAP model is essentially a multi-country multi-commodity
model. The theory of the GTAP model resembles that underlying the standard multi-
regional CGE models.
The origin of GTAP can be traced to the ORANI model, a single country gen-
eral equilibrium model9 first developed for the Australian economy (see Dixon,
Parmenter, Sutton, and Vincent, 1997). The modelling of each region in GTAP is
based on the ORANI model. The theory of the ORANI model has been extended to
allow international trade to take place between the different countries in the global
economy through introduction of a global transport sector and savings institution.
Essentially, the underlying theory of GTAP is captured in two types of equations.
The key drivers of the model are the behavioural equations, which are based on
microeconomic theory. These equations represent the behaviour of agents in the
economy. Accordingly there are behavioural equations for the consumers, and also
for the international trade (exports and imports). The behavioural equations reflect
the behaviour of the optimising agents such as the consumers that allows the deriva-
tion of the demand functions. The second type of the equations is the accounting
relationships. These are essential in order to ensure that the behavioural equations
solution occurs within a consistent macroeconomic framework. Thus, the account-
ing relationships ensure that the receipts and the expenditures of all the agents
(consumers, producers, government, and rest-of-the-world) are balanced.
So the basic structure of the Global Trade Analysis Project (GTAP) model
includes: industrial sectors, households, governments, and global sectors across
countries. Countries and regions in the world economy are linked together through
trade. Prices and quantities are simultaneously determined in both factor markets
and commodity markets.


86 4 Theoretical Framework, Database and Scenario Development
The GTAP model allows international mobility of capital, multiple trading

regions, multiple goods and primary factors, empirically based differences in pro-
duction technology and consumer preferences across regions (Siriwardana, 2001).
In each region there are five types of factors of production. First, the model uses
two types of labour (skilled and unskilled) and a single, homogenous capital good.
Land, and other natural resources are also in the set of factors of production. In the
model, total supplies of labour and land are fixed for each region, but capital can
cross regional borders to equalise changes in rates of return. Labour and land can-
not be traded while capital and intermediated inputs can be traded. In other words,
there is clear distinction between those factors that are perfectly mobile and those
that are sluggish to adjust.
In the model, firms minimize input costs given their level of output and fixed
technology. The production functions used in the model are of a Leontief structure.
Firms are assumed to combine a bundle of intermediate inputs in fixed proportion
with a bundle of primary factors. Similarly, the relationship between the amount of
intermediate inputs and outputs is also fixed. Firms purchase intermediate inputs,
some of which are produced domestically, and some of which are imported.
In the derivation of factor inputs demands, the model structure uses constant
returns to scale technology and nested constant elasticity of substitution (CES)
production functions with three levels. Two categories of inputs in production are
recognised, the intermediate inputs and the primary factors. The technology is
assumed to be weakly separable between the primary and intermediate factors of
production. There are two advantages of the separability assumption. First, profit
maximising firms are able to select their optimal mix of primary factors indepen-
dently of the prices of intermediate inputs and vice-versa. Second, it also implies
that the elasticity of substitution between primary factors and intermediate inputs is
equal. In each region, each sector chooses the mix of inputs to minimise total cost
for a given level of output. At the highest (top) nest level, intermediate input bundles
and primary factor bundles are used in fixed proportions. At the middle nest, inter-
mediate input bundles are formed through combinations of similar imported and
domestic intermediate goods. Similarly, primary factors bundles are formed through
combinations of labour, capital and land at this middle nest. In both cases the aggre-
gator function has a CES form. At the lowest level, imported bundles are formed
through CES combinations of imported goods from each region (TRID, 2003).
Each region or composite region in GTAP has a single representative house-
hold that collects all the regional income. This representative household aggregate
income is exhausted through constant shares10 to private household consumption,
government expenditures and national savings. Household behaviour in the model is
determined with an aggregate utility function. The private household buys bundles
of commodities to maximise utility subject to its expenditure constraint. The con-
strained optimising behaviour of the private household is represented by Constant
Difference Elasticity (CDE) demand system. The CDE function is not as general as
the commonly used CES and Linear Expenditure System (LES) but is more flexible
and easy to calibrate with different price and income elasticities of consumption by
region. The consumption bundles are CES combinations of domestic goods and
4.1 The Theoretical Framework of the GTAP Model 87
import bundles. Then the import bundles are grouped by a CES aggregation of
imports from different region.
Demand equals supply in all markets, which are, considered competitive. This
implies equality between the price received by the producer and the producer’s
marginal cost. Regional governments intervene in their own markets by impos-
ing taxes and subsidies on commodities and primary factors, thus driving wedges
between prices paid by purchasers and prices received by producers (TRID, 2003).
These policy interventions are modeled as ad valorem taxes, tariffs and subsidies, or
quantitative restrictions in case of trade. These policies have a direct impact on the
production and consumption sectors in the model.
The Armington elasticity is an essential component of trade policy analy-
sis. Partial and general equilibrium models that rely on the Armington structure
are universally sensitive to these elasticities. International trade is linked through
Armington substitution among goods differentiated by country of origin. Therefore,
in markets for traded commodities, buyers differentiate between domestically pro-
duced products and imported products with the same name. Product differentiation
between imports by region of origin allows for two-way trade across regions in
each tradable product. Armington elasticities specify the degrees of substitution in
demand between similar products produced in different countries. They are critical
parameters which, along with model structure, data and other parameters, determine
the results of policy experiments. Especially when many tariffs are small, trade liber-
alisation simulations can produce positive or negative welfare outcomes depending
on the values assumed for Armington elasticities (Zhang, 2006).
There are two global sectors in the model: transportation and banking. The trans-
portation sector takes into account the difference in the price of a commodity as a
result of the transportation of the good between countries. The global banking sector
brings into equilibrium the savings and investment in the model.
Other general features of the model are its explicit recognition of savings by
regional economies. These savings are completely exhausted on investments that
are savings-driven in the model. The demand for investments, however, affects eco-
nomic activity through its effect on patterns of production in the capital goods
producing sector in each region to service investment (TRID, 2003).
Investment in each region is financed from a global pool of savings. Each region
contributes a fixed proportion of its income to the savings pool. Two alternative ways
can be used to allocate the savings pool. The first way is where each region’s share
increases by the proportion in which aggregate pool increases. The second way is
where the investment allocation is done according to the relative rates of return.
Regions, which experience increases in their rate of return relative to the global
average, will receive increased shares of the investment budget, whereas regions
experiencing reductions in their rate of return relative to the global average will
receive reduced shares (TRID, 2003).
In equilibrium, all firms have zero real profit, all households are on their budget
constraint, and global investment is equal to global savings. Changing the model’s
parameters allows one to estimate the impact from a country’s/region original
equilibrium position to a new equilibrium position.
Closure plays a very important role in GTAP modeling. Closure is the classifi-
cation of the variables in the model as either endogenous or exogenous variables.
Endogenous variables are determined (solved for) by the model and exogenous
variables are predetermined outside the model. Therefore, these variables may be
shocked. Closure can be used to capture policy regimes and structural rigidities.
The closure elements of GTAP can include: population growth, capital accumula-
tion including foreign direct investment (FDI), industrial capacity, technical change,
and policy variables (tax, subsidies).
The number of endogenous variables has to equal the number of equations.
This is a necessary but not a sufficient condition for a solution. It may be General
Equilibrium (GE) or Partial Equilibrium (PE) depending on the choice of the exoge-
nous variables. The standard GTAP closure is characterized by: all markets being in
equilibrium, all firms earn zero profits, and the regional household is on its budget
constraint.
GTAP is primarily a tool for global trade analysis and seems to be very well
suited to studying the consequences of RTA issues. This is because GTAP has global
coverage, distinguishes bilateral trade flows, admits intra-industry trade and has suf-
ficient coverage of agricultural and non-agricultural commodities. Further, reduction
in tariff and quotas impact on the respective country and also other regions of the
world can be captured.
The models specify the economic structures and behaviour of agents in detail
and, using the framework, simulate the economic effects of existing or proposed
RTAs. The interdependence of the world economy and the comprehensiveness of
the GTAP framework suits the purpose of the study.
4.2 Aggregation Scheme
Version 6 of the GTAP model and database is used to undertake the analysis.11 This
version of the model includes 57 commodities (sectors) and 87 countries (regions).
The 57 industrial sectors in the model provide a broad disaggregation of the indus-
trial sectors in each country and region. Annex 1 provides a description of the
57 industrial sectors and Annex 2 presents the name of the 87 countries (regions)
included in the model.
The 87 countries were aggregated into 14 regions with an emphasis on the coun-
tries in the East and South East Asian region. Annex 2 provides the details of the
aggregation scheme used in the study. Given the regional emphasis of the study,
the greatest level of disaggregation occurs with the countries in East and South East
Asia, while other countries not part of the economic integration were aggregated into
larger regional areas. This aggregation includes nine individual countries in East and
South East Asia and five other regions. The nine individual countries are: Japan, the
Republic of Korea, China, Indonesia, Thailand, Vietnam, Malaysia, the Philippines,
and Singapore. The other regions that have been aggregated and included in the
model are: Rest of South East Asia as ‘other ASEAN’, NAFTA, Rest of OECD,
4.3 Environmental Indicators and Coefficients 89
ROW1 (which includes South Asian countries and Hong Kong), and ROW2 (com-
bines the rest of the countries in the world). All 14 regions by 57 industrial sectors
are included in the model that will be used to address the study objective.
4.3 Environmental Indicators and Coefficients

The environmental indicators that have been considered for the present study are
CO2 (Gg), CH4 (Gg) and N2 O (Gg), BOD (tons), COD (tons), SS—Suspended
Solid (tons) and Industrial Waste (thousand tons). These seven environmental indi-
cators have been considered due to the importance of these indicators in the
countries under consideration.
CO2 data is available for ten countries under study. CH4 and N2 O are avail-
able for eight countries except Malaysia and Other ASEAN. Water pollution and
Industrial waste data are available for six countries-Japan, China, the Republic of
Korea, Vietnam, Indonesia, and Thailand.
All these countries like China, Vietnam, Thailand and Indonesia are facing envi-
ronmental hazards as the economies are accelerating their growth process.12 The
GHG emissions (CO2 , CH4 and N2 O) are collected from GTAP environmental
database Version 6.2 (Lee, 2006a) for the ASEAN countries and China, Japan
and the Republic of Korea. These databases are for CO2 emissions and non-CO2
GHG emissions (CH4 , N2 O) by 57 sectors and 87 regions (Lee, 2006b). BOD
(except China13 ), COD, SS and industrial waste (except Indonesia14 ) data are col-
lected from individual country data sources [BAPEDAL BPS statistics of Indonesia;
MOEJ Water Pollution Survey (Point-source emissions only), various lake water-
shed management studies for unit emission per ha, and MAFF Crop Statistics (2001)
for cultivation acreage (Non Point pollution emission) and MOEJ Industrial waste
statistics and Industrial sales data from 3EID, Base Year 2001 (sales data: 2000) for
Japan; Pollution Control Department and DIW (Department of Industrial Works)
for Thailand; NIER (National Institute for Environmental Research, the Republic of
Korea) and re-adjusted by KEI (Korea Environment Institute) and Waste generation
and treatment in Republic of Korea, Ministry of Environment, Republic of Korea;
BOD and Industrial Waste data prepared from the project results based on Water
pollution of Vietnam sponsored by Land Ocean-Coastal Zone Office of Vietnam;
and the COD,SS and industrial waste data (2001) for China from China Statistical
Yearbook, 2002].
Environmental coefficients for the year 2001 were estimated in the model by
dividing in the environmental output of a sector by its total industrial output,
as reported in the GTAP model. This approach for estimating the environmental
coefficients allows for consistency in the denominator.
It should be noted that the environmental coefficients are likely to change over
time with technological improvement. Keeping this in mind, we have updated the
environmental coefficients for the years 2010, 2015 and 2020. These updated coeffi-
cients are used to estimate the volume of emission in each scenario during the year.
For example, we use the 2015 environmental coefficient to estimate the volume of
pollution under different trade scenarios for the year 2015 and so on.
4.4 Updated Environmental Coefficients Across the Countries
Environmental coefficients for GHG emissions and others were up-dated based on
past behaviour of the sectoral emissions. Emission coefficients were estimated for
1995 and 2001 to calculate the growth of the emission coefficients. Data on both
industrial output and GHG emissions (CO2 , CH4 and N2 O) and other pollutants
have been obtained to estimate the emission coefficients (57 sectors) for the year
1995 and 2001. The change in growth of these emission coefficients over this period
was used to estimate 2010, 2015, and 2020 emission coefficients.
Data on both industrial output and GHG emissions are obtained to estimate the
GHG emission coefficients for the year 1995. Coefficients are estimated for the 57
sectors. GTAP data is used to estimate the industrial output and GHG emission.
The CO2 emission data for the year 1997 is used as a proxy for the 1995 data.
The data was prepared by Lee (GTAP V5.4). This emission data covers 57 sectors
and 78 regions (Lee, 2002, 2003). GTAP sector-specific CH4 and N2 O emissions
(Gg) were available for 1995. The CH4 and N2 O emissions were prepared by Lee
(2002, 2003). This data covered 57 sectors and 66 regions.
The industrial output data was taken from GTAP V4 (1995) dataset. The indus-
trial sector output data represented 50 industrial sectors and 45 regions. The 50
industrial sectors were converted to 57 industrial sectors on the basis of the 2001
industrial sector output ratios for the disaggregated sectors. Disaggregation of these
sectors were based on the definition of the industrial sectors for the GTAP V4 and
GTAP V6 datasets.
For the year 2001–2010, it is assumed the emission coefficient growth rate of
period, 1995–2001 across the countries, while the half of these growth rate has been
considered for 2010–2015. For the period 2015–2020, we considered one fourth of
the emission growth of 2010–2015. This moderate adjustment for coefficient growth
has been considered by assuming a fair degree of technological improvement during
this period.
When the percentage change in the GHG coefficient from 1995 to 2001 fell
within a ‘reasonable’ range, then these percentage changes were kept. When the per-
centage change in the coefficient was ‘extreme’, a number of different options were
used to modify these estimates. The modification used depended on the country, the
1995 and 2001 emission levels, and other information.
The method used to update the BOD, COD, SS coefficients was different from
that of GHG emission coefficients. The coefficient reduction of 10 and 15% for the
period 2001–2010 has been considered for Japan and the Republic of Korea in agri-
cultural and non-agricultural sector, respectively. While for other four developing
countries—China, Indonesia, Vietnam and Thailand, the considered reductions are
2.5 and 5% for agricultural and non agricultural sector, respectively. The same linear
4.5 Scenario Development 91
reduction for coefficient growth of BOD, COD and SS is taken for consideration for
the 2010–2015 and 2015–2020. The difference between the countries is set for the
technological advancement.
We used the historical data to update industrial waste like GHG emission. The
difference was that the average coefficient growth changes were applied for all sec-
tors instead of having individual sector growth rates due to the non availability of
the data at sectoral level. Here also it is assumed that the coefficient growth of
agricultural sector will be half than that of non agricultural sector.
4.5 Scenario Development
The GTAP database provides a framework of the economies in the year 2001.
New economies can be generated for the years 2010, 2015, and 2020 using
macroeconomic shocks of key variables.
Three scenarios have been attempted: (a) Business as Usual, (b) Medium
Economic Integration and (c) Deep Economic Integration.
(a) Business as usual

We are taking the 2001 model and using the macroeconomic shocks to generate
a new economy for 2010, 2015, and 2020. In this analysis the tariff structure for
all regions and countries remains as they are in 2001. This Business As Usual
(BAU) remains the same throughout the analysis and is the base from which the
other scenarios will be compared.
This BAU scenario projection was developed to provide a picture of how the
global economy and world trade might look with the current tariff barriers. It
provides a baseline to compare the implementation of the trade agreements. It
also facilitates comparison of how the trade agreements may impact economies
overtime, relative to what would have been the case without implementing these
agreements.
(b) Medium economic integration
The Medium Economic Integration scenario describes a situation where the tim-
ing of the tariffs reductions, both import tariffs and export subsidies, is delayed.
This delay in tariff reductions has been implemented for within ASEAN (W-
ASEAN), and ASEAN with a bilateral agreement with China, Japan, and the
Republic of Korea (ASEAN-CJK) together. Tariff reductions are delayed to
2015 and 2020.
(c) Deep economic integration
The Deep Economic Integration scenario describes a situation where economic
integration, reductions in both import tariffs and export subsidies, occurs in a
rapid timeframe. This rapid reduction in tariffs is applied to both within ASEAN
(W-ASEAN) and ASEAN with a bilateral agreement with China, Japan, and
Republic of Korea (ASEAN-CJK) together. In this simulation, tariff barriers
were reduced by 80 and 100% for agricultural and non-agricultural commodi-

ties, respectively, for the ASEAN plus Japan, China, and Republic of Korea.
These reductions occur in 2010 and 2015, respectively. The final simulation run
in the Deep Economic Integration scenario is one where ASEAN and Japan,
Republic of Korea, and China form regional trade agreement where all tariffs,
both import tariffs and export subsidies, are reduced between all countries. This
simulation differed from all of the other simulations because in this case the
tariff barriers between Japan, China, and Republic of Korea are also reduced to
defined levels. This is the simulation that treats ASEAN plus, Japan, China,
and Republic of Korea as a fully integrated trading block where tariffs are
reduced for all countries and between all countries. This simulation is labelled
as ASEAN+3. The economic integrated region in this case includes: Japan,
Republic of Korea, China, Indonesia, Thailand, Vietnam, Malaysia, Philippines,
Singapore, and other ASEAN.
Table 4.1 Business as usual, medium, and deep scenarios description
Business as usual (BAU)

Regional scope Commodity scope By 2010 By 2015 By 2020
ASEAN, Whole study
region (ASEAN+3),
other regions All commodities Current tariffs Current tariffs Current tariffs
Tariff reductions under medium economic integration (MEI)
Within ASEAN, Agricultural 40% 80%

ASEAN with each of Commodities
Japan, China, and Non-Agricultural 50% 100%
Republic of Korea Commodities
Whole study region Agricultural
(ASEAN+3) Commodities
Non-Agricultural
Commodities
Tariff reductions under deep economic integration (DEI)
Within ASEAN, Agricultural 40% 80%

ASEAN with each of Commodities
Japan, China, and Non-Agricultural 50% 100%
Republic of Korea Commodities
Whole study region Agricultural 80%
(ASEAN+3) Commodities
Non-Agricultural 100%
Commodities
4.7 Macroeconomic Variable Estimates and Underlying Assumptions 93
The above scenario description required a change in the development of the

GTAP model to undertake the analysis. In this case, the up-dating of the model
to 2020 require a number of discrete steps. These steps and the models that were
estimated are described in Table 4.1.
The GTAP model simulates the impact of the tariff reductions under several
scenarios. It estimates how trade flows will change while reducing import tar-
iff restrictions. As the trade flow between countries changes, as a result of the
import tariff reductions, the growth of the economies will be impacted, so also will
industrial sector output, trade, and the environment.
4.6 Modifications of the GTAP Model to 2020
In order to undertake the scenario analysis, it is decided that the static GTAP model
with a base year of 2001 would be inappropriate. This is because the scenario devel-
opment requires the removal of tariff barriers over time. As a result, the base year,
2001 of the GTAP model had to be up-dated to the year 2020. There are two gen-
eral approaches to up-dating the model; a recursive process and the use of dynamic
GTAP. The recursive updating process is used to up-date the model in this study.
This approach to up-dating the model uses projections of macroeconomic variables
to simulate what the various economies would look like in the future. Confidence in
the simulated model increases when it can predict the variables that it is based on
and when it falls within an acceptable range of other independent estimates of the
projected macroeconomic variables.
The recursive up-dating process is based on forecasting the countries and regions
economies by exogenously shocking the baseline model with projections of selected
macroeconomic variables. These projections of the macroeconomic variables are
taken from reliable sources that try to predict the future direction and strength of
an economy. The literature suggests that the number of macroeconomic variables to
be used in the forecasting should be kept to a reasonable number. In addition, most
previous attempts of the recursive up-dating process have been for small models
i.e. with fewer industrial sectors and fewer regions. As a model increases in size in
either industrial sectors or regions or both it increases the data requirements but also
the complexities in the modeling and computing tasks.
4.7 Macroeconomic Variable Estimates and Underlying

Assumptions
Five primary factors of production are used in the production system: land is used
only by the primary sector that requires natural resources, unskilled labour and
skilled labour, and physical capital. The first step in the process is to develop a
BAU projection to 2010 from the benchmark 2001 GTAP6 database. The projection
of the global economy to 2010 is made with assumptions concerning economic and
factor growth rates. Exogenous projections of each region’s GDP growth (World
Bank, World Development Indicators) are estimated in addition to estimates of fac-
tor endowments such as population, skilled and unskilled labour, and capital stock
(Mukhopadhyay & Thomassin, 2008; Dimaranan, Ianchovichina, & Martin, 2007;
UN 2006). Total factor productivity is endogenously determined to accommodate
the combination of these exogenous shocks. This approach allowed for a predic-
tion of the level and growth of GDP as well as trade flows, input use, welfare and
a wide range of other variables. The resulting forecast provided a projection of the
global economy in 2010 that is in equilibrium. This forecasted economy to 2010
Table 4.2 Factor inputs, GDP, population projections (2001–2010): cumulative percentage
changes
2001–2010 Population GDP Unskilled Skilled Capital
China 6.42 113.11 8.04 32.30 93.89

Japan 0.57 18.48 1.84 −4.94 25.55
Republic of Korea 4.05 53.79 −2.71 39.51 45.60
Indonesia 13.18 57.98 28.48 74.00 51.63
Malaysia 19.96 55.78 18.69 54.16 58.92
Philippines 22.03 46.70 18.66 50.43 42.16
Singapore 14.31 46.21 6.07 11.24 67.65
Thailand 7.35 56.70 1.00 32.98 65.13
Vietnam 14.86 85.98 14.40 19.74 37.54
Other ASEAN 12.44 48.36 12.67 24.60 43.21
Rest of OECD 5.62 21.50 7.02 5.10 31.97
NAFTA 10.46 30.77 14.55 21.49 33.21
ROW1 17.35 61.64 19.01 38.10 50.33
ROW2 17.22 50.49 22.48 32.40 36.01
changes
China 2.74 46.93 3.67 22.82 41.20

Japan −0.90 10.41 1.63 −4.81 12.27
Republic of Korea 0.91 26.42 10.30 32.88 24.62
Indonesia 4.99 31.94 14.24 37.00 25.82
Malaysia 7.62 29.46 8.96 26.21 29.46
Philippines 8.70 23.43 9.33 25.22 21.08
Singapore 4.73 20.93 3.04 5.62 33.82
Thailand 2.52 28.24 0.50 16.49 32.56
Vietnam 6.19 39.68 7.20 9.87 18.77
Other ASEAN 5.69 25.14 6.54 13.52 22.12
Rest of OECD 1.08 11.83 4.45 0.28 16.74
NAFTA 4.63 15.94 9.52 11.41 17.36
ROW1 7.10 31.78 8.81 19.04 26.69
ROW2 8.04 25.04 11.54 16.67 18.01
4.7 Macroeconomic Variable Estimates and Underlying Assumptions 95
changes
China 2.35 46.93 3.74 16.44 37.39

Japan −1.67 10.41 −0.44 −2.59 11.07
Indonesia 4.09 31.94 14.24 37.00 25.82
Malaysia 6.57 29.46 10.13 19.51 29.46
Philippines 7.58 23.43 9.33 25.22 21.08
Singapore 3.24 20.04 3.04 5.62 33.82
Thailand 1.84 28.24 0.50 16.49 32.56
Vietnam 5.38 37.54 7.20 9.87 18.77
Other ASEAN 5.24 24.47 6.96 10.42 21.73
Rest of OECD 1.24 13.16 4.72 −0.42 16.22
NAFTA 4.11 14.61 10.41 7.98 16.99
ROW1 6.26 27.64 9.10 14.91 25.78
ROW2 7.51 24.36 11.92 13.80 18.01
provides the starting point for subsequent simulation exercise. Projections for the
fundamental drivers of global economic change over the period 2010 are presented
in Table 4.2.
These forecasts are generated using several sources. Population projections are
based on the United Nations publication; 2006 Revised Population Database, United
Nation, Population Division. The projected GDP is estimated from Real Historical
and Projected Gross Domestic Product (GDP) and Growth Rates of GDP for
Baseline Countries/Regions (in billions of 2000 dollars) 2000–2017 from World
Development Indicators adjusted to 2001 base and estimated and projected values
developed by the Economic Research Service (World Bank, 2007d). Projections of
skilled and unskilled labour and physical capital stock were from Dimaranan et al.
(2007) and Mukhopadhyay et al. (2008). This forecasting procedure is also used for
the year 2015 (Table 4.3) and 2020 (Table 4.4).
Capital accumulation and FDI are difficult issues to address in a recursive
updating approach. Capital in the economic integration scenarios is modified by
incorporating the investment in time ‘t’, i.e. It, resulting from the trade liberalization
shocks along with the baseline capital forecast for t+1.
Chapter 5
Economic Impact of Economic Integration
5.1 Introduction
We have discussed in Chapter 4 about the GTAP model which is implemented to

estimate the economic impact of the regional integration. The recursive updating
procedure is used to update the GTAP data of version 6. The model has been run
to analyze the economic impacts of several simulated regional trade agreement sce-
narios. The regional trade agreements decreased import tariff restrictions and export
subsidy between the ASEAN countries as well as Japan, China and the Republic of
Korea in the model. The experiments undertaken in the study are briefly described
in the previous chapter as Business As Usual, Medium Economic Integration, and
Deep Economic Integration.
We begin by comparing the impact of these three integration scenarios. It is
expected that the trade agreements would affect the country’s growth in industrial
output along with its share of exports and imports. The present study is primar-
ily focused on these results along with sectoral analysis. However, the welfare
implications and poverty status are also dealt with each phase of the agreements.
5.2 Output Growth
First, we look at changes in real output growth in business as usual scenarios. Then
we will discuss the same for different trade scenarios. The real value of output
in Business-as-Usual period 2001–2020 divided in three sub periods (2001–2010,
2010–2015 and 2015–2020) is presented in Table 5.1 and percentage change in real
value of output for the same period in Table 5.2.
The results indicate that output growth rate is expected to be highest in China
through out the period till 2020 followed by Vietnam, Thailand, and Indonesia and
the lowest industrial output growth rate in Japan in the BAU periods (Table 5.2). The
output growth of ROW1 is also expected to be higher compared to Rest of OECD
and NAFTA.


98 5 Economic Impact of Economic Integration
Table 5.1 Real value of total output in business as usual (BAU) scenario (million US$)
BAU 2001 BAU 2010 BAU 2015 BAU 2020
China 3135854 7453181 11419955 17630701.8

Japan 7331684 8900080 9892768 10985990.9
Republic of Korea 969486.6 1551934 1992793 2578268.97
Indonesia 289797.9 489425.2 666948.4 918949.024
Malaysia 220174.8 365577.1 487698.5 653837.859
Philippines 152181.9 235113.7 296780.6 377363.729
Singapore 228148.4 362481.2 457405.3 575280.753
Thailand 254791.6 432079 575514.9 774737.716
Vietnam 66231.02 130762.7 185340.3 259580.877
Other ASEAN 138331 212075 267848.4 338226.163
Rest of OECD 15795776 19649798 22187311 25398594.3
NAFTA 20245256 27201363 31779867 36738746.7
ROW1 2217786 3799719 5137321 6768636.79
ROW2 7528336 11565535 14463002 18038318
Total 58573836 82349125 99810554 122037234
Source: Results from the study.
Table 5.2 Percentage change in the real value of output (BAU) during 2001–2020
2001–2010 2010–2015 2015–2020
China 137.68 53.22 54.39

Japan 21.39 11.15 11.05
Republic of Korea 60.08 28.41 29.38
Indonesia 68.88 36.27 37.78
Malaysia 66.04 33.41 34.07
Philippines 54.50 26.23 27.15
Singapore 58.88 26.19 25.77
Thailand 69.58 33.20 34.62
Vietnam 97.43 41.74 40.06
Other ASEAN 53.31 26.30 26.28
Rest of OECD 24.40 12.91 14.47
NAFTA 34.36 16.83 15.60
ROW1 71.33 35.20 31.75
ROW2 53.63 25.05 24.72
Total 40.59 21.20 22.27
Source: Results from the study
The output growth rate is responding positively across the W-ASEAN (Within
ASEAN countries) and ASEAN-CJK (ASEAN countries with China, Japan and the
Republic of Korea) regional trade scenarios (detail discussion in Chapter 4).
Table 5.3 presents the percentage change in output growth of each trade agree-
ment phase compared to the BAU period (2020). The table estimates the percentage
change in the real value of output of the various countries and regions as a result of
the regional trade agreements and the timing of tariff reductions.
5.2 Output Growth 99
Table 5.3 Percentage change in the real value of output for each trade scenario relative to the
BAU 2020
MEI 2020 DEI 2020 ASEAN+3 (2020)
China 0.23 0.22 0.25

Japan 0.04 −0.05 0.01
Republic of Korea −0.21 0.15 0.31
Indonesia 1.30 1.97 2.30
Malaysia 2.06 2.34 3.30
Philippines 2.00 2.71 2.31
Singapore 3.06 3.30 2.07
Thailand 5.31 7.81 6.88
Vietnam 6.52 8.41 13.59
Other ASEAN 0.04 0.25 0.14
Rest of OECD −0.27 −0.15 −0.61
NAFTA −0.26 −0.27 −0.69
ROW1 −0.71 −0.75 −0.77
ROW2 −0.16 −0.23 −0.61
As expected, countries and regions that are not part of the regional agreement
have negative real output growth when compared to the BAU scenario (Table 5.3).
Among all the scenarios experimented, the ASEAN+3 at DEI 2020 scenario is
projected to generate the largest real growth in output for most of the regions which
are part of the agreement.
The largest output growth is achieved by ASEAN member countries particularly
Vietnam followed by Thailand, Singapore, Malaysia, and Indonesia in all regional
trade agreement scenarios. Real output growth appears to fluctuate in each phase
of the various regional trade agreements for the countries involved in the agree-
ment. Timing of tariff and regional integration both plays a very important role in
this respect. It is reflected from the DEI 2020 and MEI 2020 scenario results. The
early tariff reduction (DEI 2020) is favourable for Philippine, Thailand, Singapore
compared to delay in tariff reduction (MEI 2020). So a minor reduction in output
growth is observed for these countries in ASEAN+3 at DEI scenario 2020 compared
to DEI 2020. Moreover, the regional cluster (ASEAN+3 at 2020)—tariff reduction
agreement within China, Japan and the Republic of Korea is not beneficial for some
ASEAN member countries.
China’s real output growth is not significant; however, it is positive with the
various regional trade agreements. It reflects that earlier or late tariff reduction
or regional integration like ASEAN-CJK and W-ASEAN will have minor impact
on output growth. Japan and the Republic of Korea have mixed results depending
on the regional trade agreement that is implemented. Both of these countries have
positive real output growth with the ASEAN+3 at 2020. Regional trade agreement
shows that regional integration—within CJK is favourable for them. The Republic
of Korea has negative real output growth with the MEI 2020 regional trade sce-
nario, however, has positive real output growth with the DEI 2020 regional trade
agreement. It shows that the Republic of Korea’s output growth is sensitive to timing
of tariff reduction while early reduction benefits. On the contrary, Japan will have
a completely opposite experience, with positive real output growth in MEI 2020
and marginal negative real output growth for the DEI 2020. The early tariff reduc-
tion in DEI 2020 benefits most of the countries in the region because the reduction
strategy applies on 2010 and the countries will have a scope of 10 years to roll
on the advantage of tariff reduction. The benefits incurred more for most of the
agreement countries when deep integration applies in ASEAN+3 2020 (part of DEI
scenario).
5.3 Export and Import Performance

The real output growth for the period 2001–2020 can be further analyzed by inves-
tigating the export and import growth and their shares of each country within and
outside the study region for each of the different regional trade agreements.
Before proceeding to discuss the export import scenario, let us see the trade open-
ness index of the ASEAN region and CJK in BAU 2001 and BAU 2020 along with
different trade liberalisation scenarios.
Table 5.4 shows that highest openness index is achieved by Singapore, fol-
lowed by Malaysia and Thailand in BAU 2001 and it will increase during the
course of the period till 2020. The openness index will gradually increase in
different tariff reduction scenarios for most of the countries under agreement.
This is an issue whether trade liberalization is necessarily associated with trade
openness.
Despite the relatively recent development experiences of a number of Asian
countries which adopted various interventionist policies to promote trade, liberal
trade policies and trade openness are still assumed to be strongly linked, and
Table 5.4 Trade openness index in different trade scenarios
BAU 2001 BAU 2020 MEI 2020 DEI 2020 ASEAN+3 2020
China 0.578 0.556 0.602 0.602 0.676

Japan 0.213 0.282 0.285 0.282 0.301
Indonesia 0.788 0.855 0.950 0.955 0.982
Malaysia 2.326 2.411 2.513 2.513 2.530
Philippines 1.156 1.265 1.356 1.372 1.381
Singapore 2.845 3.678 3.750 3.775 3.679
Thailand 1.265 1.614 1.933 2.026 2.060
Vietnam 1.250 1.195 1.441 1.460 1.601
Other ASEAN 0.195 0.190 0.230 0.231 0.250

Trade openness index can be defined as Index = ( export + import)/GDP.
5.3 Export and Import Performance 101
many authors use these terms interchangeably. Trade liberalization is considered as

ultimate vehicle to promote international trade. Several arguments are put forward
why trade liberalization promotes economic growth. For example, these are increas-
ing specialization and efficient resource allocation, greater competition, an increase
in the flow of knowledge and investment, technological progress, a faster rate of cap-
ital accumulation, and reduction in transaction costs. Even if the above arguments
are assumed to be valid, such benefits are unlikely to materialize if trade liberal-
ization does not lead to higher trade openness. Therefore, even if trade openness
leads to better economic performance, whether trade liberalization leads to better
trade performance still needs to be proven (Dean, Desai, & Riedel, 1994; Pritchett,
1996).
In the current study, lowest index is attained by Other ASEAN, Japan and the
Republic of Korea. According to Lloyd and MacLaren (2002) the trade openness
index around the world also reveals the same picture. Hong Kong and Singapore,
retain top ranking, followed by Malaysia (160.9%), Vietnam (112.4%) and the
Philippines (102.8%). Our results are also in the same tune.
Recently Subasat (2008) reveals a diversity of experiences. Trade openness is not
uniformly, universally linked to trade liberalization. Some countries have liberalized
their trade and experienced a higher level of trade openness, and some other coun-
tries experienced a reduction in their trade openness. This signifies that if countries
liberalize their trade prematurely they may lead to a lower level of trade openness
and potentially poor economic performance. Under certain circumstances trade lib-
eralization may indeed lead to trade expansion. This, however, cannot be generalized
(Subasat, 2008).
But trade liberalisation will have a definite impact on export and import growth.
We are now discussing the export and import growth (Tables 5.5 and 5.6) under the
business-as-usual and different trade scenarios.
The main emphasis of the discussion is to capture the behaviour of export and
import due to different level of tariff reduction and regional integration in different
economic integration scenario compared to the Business as usual scenario.
The highest export growth rate is expected for China at BAU 2020 followed
by Indonesia, Vietnam, Thailand and Malaysia, while Japan achieves the low-
est. Among non agreement countries, the export growth of ROW1 and ROW 2 is
encouraging during BAU 2020.
In different trade scenarios at 2020, countries under agreement show a positive
export growth while non agreement countries negative. The highest export growth
is expected for most of the agreement countries at ASEAN+3, 2020. Vietnam and
Thailand’s export growth is highest in all trade liberalisation scenarios at 2020.
Japan’s export growth is not significant in any trade scenarios, rather negative in
DEI 2020.
Like export growth, import growth is also high for Thailand and Vietnam in all
trade scenarios at 2020. For Japan, import growth is positive than export growth
at DEI 2020 and ASEAN+3 2020 (Table 5.6). The export import growth above
explains the broader view of world trade in BAU 2020 and also at the trade
liberalisation scenarios.
Table 5.5 Export growth rate for BAU and trade scenarios
BAU
BAU BAU 2020-MEI BAU 2020-DEI 2020-ASEAN+3
Export 2001–2020 2020 2020 2020
China 282.57 6.98 7.13 18.01

Japan 50.59 0.88 −1.63 5.37
Republic of Korea 103.57 0.33 0.51 11.31
Indonesia 166.78 11.70 12.75 16.19
Malaysia 121.09 7.82 8.81 9.79
Philippines 105.37 10.18 13.28 13.88
Singapore 113.98 8.17 9.13 7.52
Thailand 151.88 24.54 33.36 42.55
Vietnam 163.31 40.26 40.50 75.47
Other ASEAN 72.23 19.26 20.30 31.62
Rest of OECD 39.55 −0.50 −0.58 −1.03
NAFTA 44.44 −0.60 −0.63 −1.12
ROW1 135.94 −1.89 −1.90 −4.25
ROW2 90.71 −0.02 −0.06 −0.29
Total 74.77 1.65 1.74 3.67
From the above export, import and output growth it is revealed that the trade
scenarios benefit the agreement countries under RTAs in East and South East Asia
by boosting output, exports and imports.
Table 5.6 Import growth rate for BAU and trade scenarios
BAU
BAU BAU 2020-MEI BAU 2020-DEI 2020-ASEAN+3
Import 2001–2020 2020 2020 2020
China 259.90 10.73 10.69 27.54

Japan 50.46 0.53 1.56 10.90
Republic of Korea 128.76 0.34 0.41 12.44
Indonesia 177.07 17.35 17.70 22.62
Malaysia 125.47 11.29 9.27 11.14
Philippines 101.65 10.94 11.81 12.96
Singapore 110.23 8.90 9.16 7.75
Thailand 152.20 33.72 36.07 48.12
Vietnam 171.45 30.21 30.52 57.51
Other ASEAN 146.00 18.57 19.36 28.92
Rest of OECD 30.89 −0.54 −0.48 −1.14
NAFTA 56.74 −0.66 −0.66 −1.43
ROW1 150.53 −1.99 −2.02 −4.46
ROW2 122.54 −0.21 −0.19 −0.74
Total 74.77 1.65 1.74 3.67

What about the other countries in the world? The present study assigned the other
countries of the world as NAFTA, Rest of OECD, ROW1 and ROW2. We have
seen the negative output growth of these four regions in different integration scenar-
ios. Similarly, negative export growth is also derived for these four regions, which
are not under agreement. The magnitude of the negative export growth for ROW1
will be the highest. ROW 1 in the current study covers South Asian countries and
Hong Kong. It is expected that due to integration among the ASEAN countries with
China, Japan and the Republic of Korea at 2020 not favourable for the neighboring
South Asian countries because ASEAN, China and south Asian countries have sim-
ilar factor endowment and similar comparative advantage. So the agreement among
ASEAN and CJK, is thus affecting negatively the South Asian countries. We have
also seen in our other study that the economic impacts of proposed ASEAN+3 trade
agreements (if materializes at 2020) on the South Asian economy will be affected
adversely in terms of GDP growth, export and also welfare-wise (Mukhopadhyay
et al., 2008). But the export growth of the world economy will be enhanced due to
economic integration in ASEAN countries and China, Japan and the Republic of
Korea.
Similar arguments can be put forward for the import growth. The four regions
not under agreement will have negative import growth due to this ASEAN integra-
tion with China, Japan and the Republic of Korea. But import growth of the world
economy is likely to increase due to integration.
But non RTA countries in the world would be affected negatively. Now the ques-
tion is why non agreement countries trade turn negative? A part of this answer is due
to trade diversion. How far the integration helped to create trade within the region
(ASEAN and CJK) and divert it away from the other four regions of the world is
also an empirical question.
The concepts of trade creation and trade diversion as a result of discriminatory
trade liberalization can be mentioned here. Trade creation measures the gains from
expanding trade in the products being liberalized. Trade diversion, by contrast, mea-
sures the reductions in the trade of products that are disadvantaged by preferential
liberalization.
The original Viner’s (l950) distinction between trade creation, under which coun-
tries lowering their tariffs shifted away from dependence on high-cost domestic
industry to imports from the lower-cost partner countries, and trade diversion where
low-cost production in the rest of the world is displaced by higher-cost production
in the partner country has been amended and modified in a number of ways. Despite
these analytical advances, no definite conclusions yet derived. The current study is
also investigating this.
Table 5.7 shows the one to one correspondence of export growth in differ-
ent trade liberalisation scenarios. It basically captures how far the tariff reduction
is responsible for export growth among the countries under agreement. We have
focused major three countries—China, Japan and the Republic of Korea and
ASEAN as a combined region’s export growth to the agreement region and rest
of the world. China’s export growth to ASEAN and other countries of the world
in different trade scenarios relative to BAU is positive (except China to the
104
Table 5.7 Percentage change in the export growth for each trade scenario relative to the BAU, 2020
MEI-BAU ASEAN Japan Republic of Korea China Rest of OECD NAFTA ROW1 ROW2
China 63.26 1.54 −1.14 − 2.32 3.14 2.27 1.81

Japan 47.57 − −4.47 −22.07 −1.51 −1.94 −2.09 −1.17
Republic of Korea 58.46 −0.05 − −23.38 −0.31 −0.31 −1.56 0.16
ASEAN 10.94 −1.60 25.24 151.98 −18.49 −20.16 −18.04 −20.36
DEI-BAU ASEAN Japan Republic of Korea China Rest of OECD NAFTA ROW1 ROW2
China 63.17 2.66 −1.37 − 2.51 3.14 2.22 1.97
Japan 43.24 − −6.89 −24.10 −4.42 −4.97 −3.49 −3.46
5
Republic of Korea 59.98 −0.02 − −23.24 −0.12 −0.37 −2.13 0.37

ASEAN 13.71 3.42 27.50 152.68 −15.12 −16.72 −16.72 −17.59
ASEAN+3-BAU ASEAN Japan Republic of Korea China Rest of OECD NAFTA ROW1 ROW2
China 96.19 25.60 57.49 − 7.18 8.07 6.60 7.09
Japan 37.91 − 28.31 54.06 −20.00 −20.24 −23.98 −18.17
Republic of Korea 67.38 1.98 − 58.51 −19.23 −18.52 −20.16 −18.61
ASEAN 9.77 20.67 23.04 207.37 −22.72 −24.49 −23.85 −24.51

Republic of Korea in DEI and MEI). China’s export growth has increased by
96% to ASEAN in ASEAN+3 integration at 2020 compared to BAU 2020. While,
ASEAN’s export growth to China augmented by 207% in ASEAN+3 integration at
2020.
From ASEAN to other countries of the world (Rest OECD, NAFTA, ROW1 and
ROW2) export growth shows a decline relative to BAU in trade reform scenarios.
For Japan and the Republic of Korea, it shows a marginal decline in MEI and DEI
and significantly in ASEAN+3 for the same. Overall, the economic integration will
have significant influence on country’s export growth. The percentage change in the
export growth is negative from the integrated region to other countries of the world
(Rest OECD, NAFTA, ROW1 and ROW2), those who are not under the agreement.
Overall, trade creation is reflected in the agreement region including ASEAN and
China, Japan and the Republic of Korea with a detrimental effect for rest of the
world at various trade liberalisation scenarios. As trade creation and diversion are
two sides of the same coin, the above explanation of trade creation to some extent
predicts the trade diversion effect.
To get more insight in this context, we discuss the export and import share within
the ten regions under the agreement during Business-as-Usual and different tariff
reduction scenarios.
Let us discuss about China, world’s second largest economy. China’s export and
import shares within the ten regions declined in the BAU scenario over the period
2001–2020 (Table 5.8, Figure 5.1). China has the lowest export shares of the ten
regions in the regional trade agreements. It is expected to drop from 22.44% in
BAU 2010 to 20.21% in BAU 2020, while the share is encouraging in different
scenarios—5% higher in the medium and deep economic integration scenarios at
2020 and 8% higher in ASEAN+3 at 2020 compared to BAU 2020. It reflects that
China is likely to export more within ten regions if high tariff reduction occurs in
ASEAN+3 blocs.
Table 5.8 Export share among the ten regions in BAU scenario and trade scenarios
BAU BAU BAU BAU MEI DEI ASEAN+3

Export 2001 2010 2015 2020 2020 2020 2020
China 24.40 22.44 21.84 20.21 25.12 25.18 28.93

Japan 29.54 34.43 37.07 39.97 41.57 41.53 54.79
Republic of Korea 34.66 38.38 40.10 41.93 42.24 42.36 57.88
Indonesia 43.85 45.03 45.31 45.72 60.25 60.05 63.82
Malaysia 41.75 44.37 45.94 47.93 62.17 61.91 64.36
Philippines 38.01 38.85 39.68 40.89 52.68 52.60 56.82
Singapore 39.48 43.16 45.51 48.24 63.93 63.67 65.97
Thailand 38.17 39.70 40.69 41.83 61.50 60.25 67.23
Viet Nam 37.57 40.77 44.17 48.78 67.29 67.49 81.53
Other ASEAN 41.98 49.09 55.64 64.36 64.68 65.07 69.88

90
80
70
60
50
40
30
20
10
0
China Japan Republic of Indonesia Malaysia Philippines Singapore Thailand Viet Nam Other
Korea ASEAN
BAU 2001 BAU 2010 BAU 2015 BAU 2020 MEI 2020 DEI2020 ASEAN+3 2020
Fig. 5.1 Export share of selected countries among the ten regions in BAU and trade scenarios (%)
Japan is the highly developed country in this group. The export share of Japan
within the region has increased by 5% from 2010 to 2020. Further the export share is
likely to be high in different integration scenarios particularly for ASEAN+3 at DEI
2020 (15% higher than BAU 2020). Similar performance has also been observed
for the Republic of Korea. The share of export increases gradually during the
BAU periods. With the agreement in ASEAN+3 at DEI 2020, the share increases
approximately by 16% higher compared to BAU 2020.
The export behaviour of the ASEAN region is quite encouraging. The share of
export is increasing at a moderate pace during 2010–2020 BAU. The highest share of
export is expected for Vietnam and Thailand, almost 20% increase from BAU 2020
compared to different tariff reduction scenarios, while 15% increase is expected
for Indonesia, Malaysia, the Philippines and Singapore at DEI and MEI 2020. A
significant export share increase is observed in case of Vietnam (33% more) and
Thailand (26% more) in ASEAN+3 integration at 2020 compared to the BAU 2020.
It reveals that the highest benefit is likely to be achieved by Vietnam in this region,
if ASEAN+3 integration occurs at 2020.
These shares indicate that the trade agreement in ASEAN countries with China,
Japan, and the Republic of Korea will accentuate the growth of the individual
economies in the agreement. Though Other ASEAN’s share of export has increased
during BAU 2010–2020, a minor increase is observed in ASEAN+3 at 2020.
The import share (Table 5.9, Figure 5.2) among the ten regions reflects almost a
similar picture like export in different integration scenarios. Vietnam’s import share
is highest followed by Thailand at ASEAN+3 integration at 2020.
Table 5.9 Import share among the ten regions (BAU scenario) and trade scenarios
Import BAU BAU BAU BAU MEI DEI ASEAN+3

2001 2010 2015 2020 2020 2020 2020
China 24.97 22.71 22.07 21.72 24.59 24.47 27.58

Japan 30.58 35.60 38.32 41.28 42.35 42.31 55.11
Republic of Korea 35.54 39.39 41.13 42.95 42.84 42.95 57.96
Indonesia 43.15 44.11 44.22 44.50 58.56 58.37 61.81
Malaysia 41.76 44.24 45.70 47.60 61.11 60.89 62.40
Philippines 37.97 38.83 39.70 40.96 52.53 52.59 56.79
Singapore 40.30 44.05 46.42 49.15 64.23 63.96 66.16
Thailand 39.08 40.34 41.26 42.24 61.37 61.99 69.48
Viet Nam 38.01 41.23 44.58 49.05 62.57 68.45 83.27
Other ASEAN 41.24 48.12 54.65 63.36 62.94 64.08 68.51
Overall, the net trade share is positive for Indonesia, Malaysia, Other ASEAN
and China but rest of the countries show negative in ASEAN+3 integration at 2020.
Thus the analysis shows that the export and import shares increased for the
ASEAN and China, Japan and the Republic of Korea for all regional trade agreement
scenarios (MEI, DEI and ASEAN+3 at 2020).
The overall export and import shares again indicate that a considerable trade
creation occurs within the region under agreement in the different tariff reduction
scenarios. In all cases, the agreements lead to an increase in trade amongst the
90
80
70
60
50
40
30
20
10
0
China Japan Republic of Indonesia Malaysia Philippines Singapore Thailand Viet Nam Other
Korea ASEAN
BAU 2001 BAU 2010 BAU 2015 BAU 2020 MEI 2020 DEI2020 ASEAN+3 2020
Fig. 5.2 Import share of selected countries among the ten regions in BAU and trade scenarios (%)
Table 5.10 Export share of ASEAN-CJK within region and rest of the world in BAU 2020 and
different trade scenarios
BAU 2020 From To ASEANCJK Rest of the world
China 21.86 78.14

Japan 40.07 59.93
Republic of Korea 41.93 58.07
ASEAN 46.06 53.94
MEI 2020
China 24.96 74.41
Japan 41.57 58.43
ASEAN 61.67 38.33
DEI 2020
China 25.18 74.82
Japan 41.53 58.47
ASEAN 61.23 38.77
ASEAN+3
China 28.93 71.07
Japan 54.79 45.21
ASEAN 65.81 34.19
countries included in the agreement. Thus, the regional trade agreements increase
the intra regional trade amongst countries in the agreements and divert trade from
non-member countries. The ASEAN+3 agreement in 2020 provide the greatest
increase in export and import shares in the region.
To get more insight on trade diversion due to trade liberalisation, we further
explore the export share of CJK and ASEAN countries to agreement region and rest
of the world in various tariff reduction scenarios compared to BAU, 2020.
The degree of trade diversion from ASEAN and CJK region to rest of other
countries in the world will be highest in ASEAN+3 integration at 2020. China’s
export share is likely to be away from rest of the world by 7%, 14.71% for Japan,
15.95% for the Republic of Korea and 19.75% for ASEAN in ASEAN+3 integration
scenarios at 2020 (Table 5.10).
On the whole, the export, import and output show significant changes for the
agreement countries due to regional economic integration but negative impact for
the other regions in the world cannot be ignored. Next we are trying to explore the
sectoral contribution in this context.
5.4 Sectoral Analysis of Output
Additional information on the impact of the regional trade agreements can be

obtained by investigating the sectors in each country that are most affected by the
5.5 Sectoral Analysis of Export and Import 109
agreements. Table 5.11 ranks the top six sectors in terms of their industrial output
growth. The ranking remains almost constant in each BAU period (2001, 2010, 2015
and 2020), while fluctuations in ranking are observed within the sectors across the
countries. Here we have ranked the top six sectors which are expected to dominate
in 2010, 2015, and 2020. In the case of China, vegetable, fruits and nuts and animal
products are in the top six sectors in 2001 and continue to be in 2010, but in 2015
and later periods these sectors are replaced by the electronic equipment sector. For
Indonesia and Thailand, the food products sector is the most affected sector until
2015, while manufacturing equipment sector and the paper and paper products sec-
tor become the most affected sectors respectively in 2020. For Vietnam, Processed
rice shows in top six sectors list till 2010 but it is likely to be taken away by the
machinery and equipment at 2020.
Now we are discussing how far the agreement is expected to affect the sectoral
rankings in the different regional trade agreement scenarios. It is presented for the
ten countries under the agreement in Table 5.12.
For each country, the same industrial sectors are found in the top six sectors
for the MEI and DEI scenarios. Changes in sectoral impacts between the BAU
and the MEI and DEI will not be significant. The sectoral rankings differ only for
some countries. For example, in the BAU scenario for Vietnam the paddy rice sec-
tor has the third largest impact on total output while this decreases to the fourth
position in the MEI scenario and sixth for the DEI and ASEAN+3 scenarios at
2020.
The sectors that are common to all countries that have had increased output
growth with the regional trade scenarios are: electrical equipment, machinery and
equipment, and chemical and rubber sectors. These three sectors become more
prominent in the MEI and DEI scenarios at 2020.
The ASEAN+3, MEI, and DEI scenarios at 2020 are likely to increase output
growth in heavy manufacturing as compared to primary and light manufacturing
under the BAU scenario. The sectors like ferrous metal and motor vehicle are prob-
ably dominating Japan, the Republic of Korea, Thailand, Malaysia, Other ASEAN
and Indonesia; while textile and wearing apparel to be leading sectors for Vietnam,
other ASEAN, Thailand and China, but vegetable oils and fats, animal products and
food products in Philippines.
5.5 Sectoral Analysis of Export and Import
Before going into the deep analysis of sectoral export and import rank, we esti-
mate the Revealed Comparative Advantage (RCA) index for ASEAN and CJK in
2001. The RCA can be a useful indicator of the comparative advantage of coun-
tries (Balassa, 1965). Annex 3 presents RCAs for the ASEAN countries and CJK.
Following Balassa, ‘Revealed’ Comparative Advantage is defined as the share of
a product group in one country’s exports divided by that product group’s share in
world trade.
110
Table 5.11 Ranking of the top six industrial sectors’ output growth, BAU 2020
Republic of Other
China Japan Korea Indonesia Thailand Vietnam Malaysia Philippines Singapore ASEAN
Machinery Motor Machinery Electronic Electronic Mineral Electronic Electronic Electronic Motor
and vehicles and equipment equipment products equipment equipment equipment vehicles
equipment and parts equipment nec and parts
nec nec
Chemical, Chemical, Electronic Textiles Machinery Leather Chemical, Machinery Chemical, Transport nec
rubber, rubber, equipment and products rubber, and rubber,
plastic plastic equipment plastic equipment plastic
products products nec products nec products
Electronic Electronic Chemical, Chemical, Motor Paddy rice Vegetable oils Chemical, Transport nec textile
equipment equipment rubber, rubber, vehicles and fats rubber,
plastic plastic and parts plastic
products products products
5
Textiles Machinery Ferrous Paper Textiles Oil Machinery Vegetable oils Machinery wearing
and metals products, and and fats and apparel
equipment publishing equipment equipment
nec nec nec
Mineral Ferrous Motor Machinery Chemical, Food Oil Metals nec Petroleum, Mineral
products metals vehicles and rubber, products coal products
nec and parts equipment plastic nec products nec
nec products
Manufactures Paper Petroleum, Motor Wearing Machinery Petroleum, Food Paper Electronic
nec products, coal vehicles apparel and coal products products, equipment
publishing products and parts equipment products nec publishing
nec

Table 5.12 Ranking of the top seven industrial sectors’ output growth in trade scenarios at 2020 5.5
The Republic
China Japan of Korea
ASEAN+3 ASEAN+3 ASEAN+3

MEI 2020 DEI 2020 2020 MEI 2020 DEI 2020 2020 MEI 2020 DEI 2020 2020
41 ome 41 ome 41 ome 38 mvh 38 mvh 33 crp 41 ome 41 ome 41 ome

33 crp 33 crp 40 ele 33 crp 33 crp 38 mvh 40 ele 40 ele 40 ele
40 ele 40 ele 33 crp 41 ome 41 ome 41 ome 33 crp 33 crp 33 crp
27 tex 27 tex 34 nmm 40 ele 40 ele 40 ele 35 i_s 35 i_s 35 i_s
34 nmm 34 nmm 27 tex 35 i_s 35 i_s 35 i_s 38 mvh 38 mvh 38 mvh
42 omf 42 omf 42 omf 31 ppp 31 ppp 43 ely 32 p_c 27 tex 27 tex
35 i_s 35 i_s 35 i_s 25 ofd 25 ofd 31 ppp 27 tex 32 p_c 32 p_c
Sectoral Analysis of Export and Import
Indonesia Thailand Vietnam
MEI 2020 DEI 2020 ASEAN+3 MEI 2020 DEI 2020 ASEAN+3 MEI 2020 DEI 2020 ASEAN+3
40 ele 40 ele 40 ele 40 ele 40 ele 40 ele 29 lea 29 lea 33 crp

33 crp 27 tex 33 crp 41 ome 41 ome 41 ome 33 crp 33 crp 29 lea
27 tex 33 crp 27 tex 33 crp 33 crp 33 crp 34 nmm 34 nmm 28 wap
31 ppp 31 ppp 31 ppp 38 mvh 38 mvh 38 mvh 1 pdr 28 wap 27 tex
41 ome 41 ome 41 ome 27 tex 27 tex 27 tex 41 ome 41 ome 34 nmm
38 mvh 38 mvh 38 mvh 28 wap 28 wap 32 p_c 28 wap 1 pdr 1 pdr
30 lum 30 lum 30 lum 32 p_c 32 p_c 28 wap 30 lum 27 tex 41 ome
Malaysia Philippines Singapore
40 ele 40 ele 40 ele 40 ele 40 ele 40 ele 40 ele 40 ele 40 ele

33 crp 33 crp 33 crp 41 ome 41 ome 41 ome 33 crp 33 crp 33 crp
21 vol 21 vol 41 ome 33 crp 33 crp 33 crp 41 ome 41 ome 41 ome
111
41 ome 42 omf 21 vol 36 nfm 25 ofd 21 vol 31 ppp 31 ppp 32 p_c

112
Table 5.12 (continued)
42 omf 35 i_s 42 omf 21 vol 10 oap 25 ofd 37 fmp 37 fmp 34 nmm

35 i_s 41 ome 38 mvh 25 ofd 36 nfm 36 nfm 31 ppp 31 ppp 25 ofd
38 mvh 38 mvh 35 i_s 10 oap 21 vol 10 oap 37 fmp 37 fmp 37 fmp
Other ASEAN
MEI 2020 DEI 2020 ASEAN+3

5
38 mvh 38 mvh 38 mvh

27 tex 27 tex 27 tex
28 wap 28 wap 28 wap
34 nmm 26 b_t 40 ele
40 ele 33 crp 34 nmm
26 b_t 34 nmm 26 b_t
33 crp 40 ele 41 ome

N.B.: Sectoral codes are given in Annex 1.
RCAij = (xij /xwj )/(sum xij /sum xwj )

where x ij is country i’s export of commodity j;
x wj is world’s exports of commodity j;
SUM x ij is country i’s total exports;
SUM x wj is the world’s total exports.
This index with its ‘normalization’ removes the effects of price fluctuations and
indicates the importance of particular commodities in world markets. Thus, the
index is preferable to the simple share of a group of products in a country’s total
exports. It facilitates comparisons between countries at any time, and changes in
comparative advantage to be looked into over time. The measure reflects the under-
lying comparative advantage of the country in particular commodities as determined
by technology and factor endowments. Of course these might be modified by gov-
ernment policies designed to draw resources into favored sectors. This index helps
to classify the major exports of the economies in terms of their respective revealed
comparative advantages. Identifying the goods with RCA in each economy throws
significant light on the prospects of greater trade between them. A value of greater
than one reveals comparative advantage in sectors i. Similarly, if the value is less
than one, the country is said to have a revealed comparative disadvantage in the
sector.
China has a comparative advantage of wide variety of commodities including
agricultural, minerals and manufacturing—leather, wearing apparel, textile, coal,
processed rice, animal products, sugarcane and beet mineral products, electronic
equipment and manufactures nec (Annex 3). In case of Japan the commodities
are restricted to mining and manufacturing especially motor vehicle, transport
equipment, Ferro alloys and metal products. The Republic of Korea’s compara-
tive advantage is almost similar to Japan except textile. In case of Indonesia, coal,
vegetable oils and fats, minerals nec, crops nec, while for Malaysia, vegetable oils
and fats, sugarcane and beet, forestry and wood products are in the comparative
advantage list. Electronic equipment, vegetable oils and fats, wearing apparel and
vegetables, fruit, nuts are in the list of Philippines. For Singapore, the list mainly
restricts to services, electronic equipment and beverages and tobacco. The compar-
ative advantage of Thailand mainly on processed rice, food products, crops nec,
paddy rice in agriculture and electronic equipment, leather products and wearing
apparel in manufacturing. For Vietnam the comparative advantage list is almost
similar to Thailand except oil and fishing. Gas, forestry and sugarcane and beet
and wearing apparel are in Other ASEAN list. The comparative advantage list of
2001 (calculated from GTAP databases) will help us to compare the sectors with
top ranking export list in BAU and different trade integration scenarios.
The list of comparative advantage sectors will be compared with the top rank-
ing export sector across the countries under RTAs. This gives more insight of the
sectors whether maintaining the same comparative advantage after tariff reduc-
tion. Before heading to comparison, we are presenting the export share list in
Tables 5.13 and 5.14. These are also compared with the output sector list in Tables
5.11 and 5.12.
Table 5.13 Top six sectors’ export share in BAU, 2001 and ASEAN+3, 2020 (percentage)
114
BAU 2001
China Japan Republic of Korea Malaysia
Sectors Share Sectors Share Sectors Share Sectors Share
40 ele 17.64 41 ome 26.06 40 ele 28.26 40 ele 49.60

41 ome 15.05 40 ele 20.86 41 ome 11.59 41 ome 6.07
42 omf 11.07 38 mvh 17.84 33 crp 10.24 33 crp 5.84
28 wap 9.69 33 crp 9.22 38 mvh 8.83 30 lum 3.37
29 lea 8.33 39 otn 3.73 27 tex 7.69 21vol 2.35
33 crp 6.31 35 i_s 3.30 39 otn 5.48 16 oil 1.80
Indonesia Thailand Vietnam Philippines
40 ele 12.41 40 ele 24.08 29 lea 17.58 40 ele 57.61

5
30 lum 8.72 41 ome 12.30 16 oil 13.91 41 ome 9.57

33 crp 7.51 33 crp 8.91 28 wap 10.29 28 wap 6.06
28 wap 6.81 25 ofd 6.81 25 ofd 8.83 25 ofd 2.54
27 tex 6.48 42 omf 4.28 41 ome 5.14 27 tex 1.96
41 ome 5.51 27 tex 4.07 8 ocr 5.10 33 crp 1.86
Singapore Other ASEAN
40 ele 44.88 29 lea 21.64

41 ome 11.21 18 omn 16.32
33 crp 9.43 28 wap 13.33
32p_c 3.41 17 gas 12.60
39 otn 1.53 5 osd 4.08
31ppp 1.14 14 fsh 3.84
5.5
ASEAN+3 2020
China Japan Republic of Korea Indonesia Thailand
Sectors Share Sectors Share Sectors Share Sectors Share Sectors Share
40 ele 27.95 41 ome 23.73 40 ele 25.55 40 ele 19.49 40 ele 36.18
41 ome 19.26 38 mvh 15.82 41 ome 15.46 27 tex 10.48 41 ome 19.11
42 omf 12.06 33 crp 12.64 33 crp 9.05 33 crp 10.07 33 crp 13.20
Sectoral Analysis of Export and Import
28 wap 6.85 40 ele 11.12 27 tex 8.91 41 ome 7.65 24 sgr 5.07
33 crp 6.82 35 i_s 8.46 38 mvh 8.58 31 ppp 6.56 38 mvh 3.52
27 tex 5.51 36 nfm 4.63 35 i_s 6.89 15 coa 5.38 27 tex 3.33
Vietnam Malaysia Philippines Singapore Other ASEAN
33 crp 25.90 40 ele 49.71 40 ele 44.67 40 ele 48.84 17 gas 26.81
29 lea 18.87 33 crp 10.27 41 ome 17.85 33 crp 14.63 16 oil 19.05
16 oil 14.97 41 ome 7.35 28 wap 5.61 41 ome 9.19 27 tex 10.72
28 wap 8.82 21vol 5.47 33 crp 5.35 32p_c 7.30 28 wap 10.59
27 tex 6.71 16 oil 2.52 36 4.29 34 nmm 1.69 30 lum 4.95
41 ome 6.56 17 gas 1.47 21vol 3.84 26 b_t 1.37 13frs 4.84

115
Table 5.14 Principal export shares under different economic integration scenarios within the
region (percentage)
MEI 2020 DEI 2020 ASEAN+3 2020
Japan
41 ome 23.81 41 ome 23.43 41 ome 24.12
40 ele 15.28 40 ele 14.78 33 crp 14.60
33 crp 14.43 33 crp 14.71 40 ele 13.69
35 i_s 13.26 35 i_s 13.46 35 i_s 11.74
36 nfm 6.80 36 nfm 6.98 27 tex 7.53
38 mvh 6.76 38 mvh 6.73 36 nfm 6.96
Indonesia
40 ele 21.67 40 ele 22.05 40 ele 23.04
33 crp 12.30 33 crp 12.52 33 crp 13.23
27 tex 10.23 27 tex 10.42 27 tex 10.70
41 ome 8.20 31 ppp 8.33 41 ome 8.33
31 ppp 8.14 41 ome 8.16 31 ppp 7.20
30 lum 6.36 30 lum 6.30 30 lum 6.02
Thailand
40 ele 41.54 40 ele 43.56 40 ele 37.21
33 crp 17.14 41 ome 17.04 33 crp 19.61
41 ome 16.35 33 crp 13.97 41 ome 17.43
27 tex 4.01 27 tex 4.11 24 sgr 7.54
38 mvh 2.38 38 mvh 2.40 27 tex 3.30
32 p_c 1.67 24 sgr 1.72 38 mvh 2.35
China
40 ele 31.63 40 ele 31.74 40 ele 30.72
41 ome 18.36 41 ome 18.29 41 ome 18.26
33 crp 7.02 33 crp 7.09 27 tex 7.97
27 tex 6.78 27 tex 6.75 28 wap 7.95
28 wap 6.73 28 wap 6.66 33 crp 7.49
42 omf 6.16 42 omf 6.10 42 omf 5.61
Republic of Korea
40 ele 27.47 40 ele 27.29 40 ele 24.91
41 ome 16.01 41 ome 15.92 41 ome 15.86
33 crp 11.53 33 crp 11.73 27 tex 11.93
35 i_s 10.04 35 i_s 10.04 33 crp 11.54
27 tex 9.03 27 tex 9.08 35 i_s 8.79
32 p_c 5.67 32 p_c 5.64 38 mvh 5.52
Vietnam
16 oil 24.88 16 oil 24.23 33 crp 31.56
33 crp 13.54 33 crp 14.08 29 lea 16.00
29 lea 11.40 29 lea 11.29 16 oil 15.91
41 ome 10.46 41 ome 10.86 41 ome 7.91
27 tex 6.17 27 tex 6.59 27 tex 6.07
30 lum 5.18 28 wap 5.63 23 pcr 5.04
Malaysia
40 ele 55.51 40 ele 56.16 40 ele 48.75
33 crp 12.90 33 crp 13.02 33 crp 16.60
41ome 8.350 41 ome 8.15 41 ome 10.23
21 vol 3.961 21 vol 4.15 21 vol 3.86
MEI 2020 DEI 2020 ASEAN+3 2020
17 gas 1.40 34nmm 1.31 34nmm 1.32

16 oil 1.37 16 oil 1.30 16 oil 1.31
Philippines
40ele 47.00 40 ele 46.77 40ele 37.45
41ome 19.71 41ome 20.00 41ome 23.99
33crp 8.19 33crp 8.11 33crp 10.42
36 nfm 6.71 36 nfm 6.79 36 nfm 5.46
21vol 3.60 21vol 3.62 21vol 4.31
38 mvh 3.02 38 mvh 2.90 38 mvh 3.73
Singapore
40ele 47.49 40ele 47.52 40ele 43.85
33crp 17.61 33crp 18.01 33crp 16.91
41ome 11.52 41ome 11.12 41ome 13.10
32p_c 7.72 32 p_c 7.70 32 p_c 7.53
34nmm 2.36 34 nmm 2.38 34 nmm 2.69
26 b_t 2.02 26 b_t 2.01 26 b_t 2.06
Other ASEAN
17 gas 41.46 17 gas 41.37 17 gas 35.26
16 oil 25.86 16 oil 25.57 16 oil 22.17
30 lum 6.71 30 lum 6.47 33 crp 11.17
13 frs 5.25 13 frs 5.31 40 ele 9.56
40 ele 3.49 40 ele 3.34 30 lum 5.57
27 tex 2.74 27 tex 2.77 13 frs 4.28

N.B: Sectoral codes are given in Annex 1.
5.5.1 Sectoral Export Analysis

The ranking of the top six sectors’ export share for each country is more or less
similar to the sectoral output ranking (Table 5.13), except for one or two changes
in various BAU scenarios. For China, wearing apparel is in the top six sectors of
export share ranking while mineral products is in output rank. For Japan, metals nec
is in the top six sector ranking while paper publishing does not belong to the top
six. The scenarios indicate that for Indonesia the coal and the leather sector are in
the top six export share replacing the chemical rubber and plastic sector and motor
vehicle sector that are in the top six output sectors. In the Republic of Korea, the
leather sector is in the top six export share and taken over by the chemical rubber
and plastic sector in the output list. The leather sector is likely to be replaced by
motor vehicle in Thailand and Crops nec, instead of mineral products in Vietnam.
The sectoral ranking in export is not showing any significant changes in ASEAN+3
integration at 2020 compared to BAU 2001 except few changes.
The top six sectors export share in BAU 2001 and ASEAN+3 at 2020 are given
in Table 5.13. The export share rank for the top six sectors remains fairly constant
for the MEI and DEI scenarios. The percentage share of exports has not changed
much with the trade agreements. For example, the electronics equipment sector
for China, Malaysia, Philippines, Indonesia, the Republic of Korea and Thailand
ranked first in their export share in BAU 2001 and ASEAN+3 integration at 2020.
Comparing the export share between BAU (2001) and ASEAN+3 (2020), for China
the share has increased from 17.64% (BAU 2001) to 27.95% (ASEAN+3, 2020),
while for Thailand the share has increased from 24.08% (BAU 2001) to 36.18%
(ASEAN+3 2020). The most interesting result is observed for Japan. The export
share of manufacturing equipment would be from 26.06% (BAU 2001) to 23.73%
(ASEAN+3 2020), electronic equipment would be from 20.86 to 11.12%, and motor
vehicles from 17.84 to 15.82%, while Ferro alloys from 3.30% (BAU 2001) to
8.46% (ASEAN+3). Except ferro alloys, most of the sectors’ share have declined.
A minor increase in textile and motor vehicle sectors share is observed for the
Republic of Korea when comparing BAU 2001 and 2020 ASEAN+3 agreement.
For the Republic of Korea, the manufacturing equipment sector increased its share
from 11.59 to 15.46% during the same period and scenarios. For Vietnam, chem-
ical rubber and plastic sector will be a new addition in the export share list in the
ASEAN+3 scenario. In the ASEAN+3 scenario, this sector will be expected to have
the largest export share for Vietnam at 25.90% (ASEAN+3). For Vietnam, the new
two sectors in the top export ranking, chemical rubber and plastics sector and the
textile sector, accounted for over 32% of the export share under the ASEAN+3
scenario. For Thailand the electronic equipment sector and manufacturing equip-
ment sector export shares are projected to increase by 1.5-fold between BAU 2001
and ASEAN+3 (2020) (Table 5.13). Thailand has had a comparative advantage in
electrical equipment since the 1990s. The implications of tariff reductions on the
electrical equipment are quite obvious in Thailand. The export-led industrial boom
began in the mid-1980s in Thailand and electrical equipment captured market shares
of 21.55% in 1990 and 48.87% in 2001 (Mukhopadhyay, 2006). For Singapore and
Malaysia, the electronic equipment share continues to be top in ASEAN+3 at 2020,
but the share will be down in case of Philippines. For Singapore transport equipment
and paper products at BAU 2001 are replaced by mineral products and beverages
and tobacco at ASEAN+3 at 2020. For other ASEAN, oil, textile, forestry and wood
products are dominating at ASEAN+3 2020 instead of leather products, fishing and
minerals nec in BAU 2001. From the above export share analysis it is clear that the
export sectors in Japan are not very sensitive to the RTA. However, the impact of
the economic integration scenarios on the export sectors of Thailand and Vietnam,
other ASEAN, Indonesia and Philippines are quite significant.
Reiterating the concept of trade creation and trade diversion due to trade liberali-
sation, the sectoral exports share in BAU and ASEAN+3 scenarios at 2020 presented
above throw some significant insights. The trade creation occurs in ASEAN+3 2020
because the sectoral share has increased compared to BAU 2001 especially for the
ASEAN countries. To further explore the impact on the sectoral export shares in
different trade liberalisation agreement, we capture the export share within the trade
region under RTAs. The result of this analysis is presented in Table 5.14 for each of
the economic integration scenarios.
Within the region the share of six most important export sectors for China and
Indonesia stays the same in BAU and the economic integration scenarios. For Japan,
Thailand, and Vietnam there is movement of one sector into or out of the top six
export sectors depending on the scenario investigated. For Japan, the motor vehicle
and parts sector is in the top six export sectors share for the MEI and DEI scenarios.
However, for the ASEAN+3 scenario, this sector is replaced by the textile sector
(Table 5.14). In Thailand, the petroleum and coal products sector is in the top six
export share within the region in the MEI scenario while sugar sector is in the DEI
and ASEAN+3 scenarios. In the Republic of Korea, petroleum and coal industry is
in the top six sectors in the MEI and DEI scenarios. This sector drops out of the top
six in the ASEAN+3 scenario and is replaced by the motor vehicle and parts sector.
The rank of the top six sector changes for each economic integration scenarios for
Vietnam. In the MEI scenario, the wood products sector in the list, is replaced by
the wearing apparel sector in the DEI scenario, and the petroleum and coal sector
in ASEAN+3. For all countries, except Vietnam, the first ranked sector for exports
within the region remains the same in each scenario. But in Vietnam, the oil sector
which occupies rank first in the MEI and DEI scenarios is replaced by chemical,
rubber, and plastics sector in the ASEAN+3 scenario. For Malaysia and Philippines,
the chemical, rubber and plastic and manufacturing equipment share is expected
to increase and electronic equipment to decline at ASEAN+3 at 2020 compared to
MEI 2020. For Singapore, electronic equipment shows a decline in ASEAN+3 2020
from MEI 2020.
The sectoral export share for most of the countries increased in DEI 2020, par-
ticularly for ASEAN countries compared to ASEAN+3 2020 (except Vietnam and
Indonesia). For China, Japan and Korea, the change in sectoral share of ASEAN+3
2020 and DEI 2020 is marginal.
From Tables 5.13 and 5.14 we came to know about the top ranking export sec-
tors in BAU and various trade scenarios and Annex 3 presents the RCA index 2001
across the countries. These tables can tell us whether the comparative advantage of
the sectors is at all maintained in different tariff reduction scenarios at 2020. For
China, Japan and Republic of Korea, the sectoral comparative advantage remains
same. Among ASEAN, Malaysia, Philippines and other ASEAN the sectoral com-
parative advantage does not change. On the other hand, Vietnam and Thailand do
not maintain the RCA in sectors biased towards agriculture. It is expected to change
the advantage towards heavy manufacturing industries and core emerging sectors.
For Indonesia, except coal other top export sectors are not complying with the
comparative advantage list. The regional economic integration among ASEAN and
China, Japan and Republic of Korea reveals significant changes in the trade sectors
particularly for Thailand, Vietnam and Indonesia.
5.5.2 Sectoral Import Analysis
A look at the ranking of the import shares of different sectors would show variations
in each of the trade agreement phases, across countries. New sectors entered in the
top six list when comparing the BAU to the economic integration scenarios. There
are, however, large commonalities amongst industrial sectors between the share of
top six exporting and importing sectors. This occurs because of intra-industry trade.
Intra-industry trade occurs when a country exports and imports goods in the same
industry. It represents international trade that occurs within industries rather than
between industries. The top exports and imports of most industrial countries are
actually quite similar items. Such trade is more beneficial than inter-industry trade
because it stimulates innovation and exploits economies of scale. We will explain
later the intra-industry trade. The top six import sector shares for BAU 2001 are rep-
resentative of all other BAU periods (2010, 2015, and 2020). Though the percentage
shares fluctuate within the BAU periods, the sectors remain constant.
A comparison of the share of top six import sectors for BAU 2001 and ASEAN+3
scenario is given in Table 5.15. For Japan, most of the sector’s shares have gone
down, while the share of Ferro alloys sector increased from 3.52 to 8.66% and that
of chemical, rubber and plastics sector increased from 9.45 to 12.64%. For China,
the import shares of the sectors like electrical equipment, machinery and equipment,
and manufactures nec, increased in the ASEAN+3 scenario, while the import shares
of wearing apparel and textiles decreased. The import share of electrical equipment
increased rather dramatically between the BAU 2001 to ASEAN+3 (2020) from
16.43 to 26.93% (Table 5.15). The shares for the Republic of Korea remained similar
between the two scenarios with the largest being almost 4% increase in the import
share of machinery and equipment in the ASEAN+3 scenario. The import shares of
four of the six sectors increased for Indonesia from the BAU to the ASEAN+3 sce-
nario. The only sector that shows a decline is the wood products sector (import share
decreased from 9.02 to 5.36%). Sectoral import shares have increased significantly
for Thailand. The electrical equipment sector and machinery and equipment sector’s
import share more than doubled between the two scenarios in Thailand. Vietnam had
the largest change in rank of the import share. In the ASEAN+3 scenario, three new
sectors enter the top six sectors; chemical rubber and plastics, processed rice, and
textiles. These three sectors accounted for almost 44% of the import share in the
ASEAN+3, 2020 scenario (Table 5.15).
The import share of electronic equipment for Malaysia, Philippines, and
Singapore is expected to decline in ASEAN+3 at 2020 compared to BAU 2001.
Table 5.15 Top six sectors’ import share in BAU, 2001 and ASEAN+3, 2020 (percentage)
BAU 2001
Sector Share Sector Share Sector Share Sector Share
40 ele 16.43 41 ome 25.87 40 ele 26.82 40 ele 47.95

41 ome 14.46 40 ele 20.18 41 ome 11.55 33 crp 6.17
42 omf 10.87 38 mvh 18.29 33 crp 10.67 41 ome 6.04
28 wap 10.32 33 crp 9.45 38 mvh 9.05 30 lum 3.68
29 lea 8.81 39 otn 3.80 27 tex 8.42 21 vol 3.28
27 tex 6.50 35 i_s 3.52 39 otn 5.57 16 oil 1.97
40 ele 11.43 40 ele 22.25 29 lea 18.29 40 ele 55.46

30 lum 9.02 41 ome 11.80 16 oil 13.32 41 ome 9.47
33 crp 7.57 33 crp 9.31 28 wap 10.54 28 wap 6.77
28 wap 7.34 25 ofd 6.93 25 ofd 8.65 25 ofd 2.88
27 tex 6.71 28 wap 4.28 8 ocr 5.16 27 tex 2.15
41 ome 5.13 27 tex 4.24 41 ome 4.95 33 crp 2.001
Sector Share Sector Share
40 ele 43.68 28 wap 22.07

41 ome 11.48 17 gas 15.97
33 crp 9.92 27 tex 13.3
32 p_c 3.62 16 oil 12.0
48 otp 1.625 4 v_f 5.49
39 otn 1.53 13 frs 3.97
ASEAN+3 (2020)
40 ele 26.93 41 ome 23.39 40 ele 24.60 40 ele 43.76

41 ome 19.17 38 mvh 16.22 41 ome 15.39 33 crp 13.31
42 omf 12.42 33 crp 12.64 27 tex 9.42 41 ome 8.67
28 wap 7.51 40 ele 10.78 33 crp 9.18 21 vol 7.43
33 crp 7.02 35 i_s 8.66 38 mvh 9.07 16 oil 2.47
27 tex 5.82 27 tex 4.71 35 i_s 7.03 38 mvh 1.80
40 ele 18.38 40 ele 53.23 33 crp 28.12 40 ele 36.97

27 tex 10.60 41 ome 27.49 29 lea 17.36 41 ome 20.10
33 crp 10.00 33 crp 13.30 16 oil 12.35 33 crp 7.08
41 ome 7.34 38 mvh 10.61 23 pcr 10.28 28 wap 6.43
31 ppp 6.60 27 tex 6.86 28 wap 7.92 21 vol 4.63
30 lum 5.36 32 p_c 4.89 27 tex 5.93 36 nfm 3.74
Sector Share Sector Share
40 ele 44.73 17 gas 23.95

33 crp 14.43 16 oil 17.04
41 ome 10.26 33 crp 12.23
32 p_c 7.43 28 wap 10.00
22 mil 2.33 27 tex 9.39
34 nmm 2.30 40 ele 7.64

On the other hand manufacturing equipment in Philippines is likely to increase in

ASEAN+3 integration compared to BAU 2001.
The sector specific regional export share and the import share for the 10 countries
indicate that the top six sectors are expected to remain more or less constant with
few exceptions. As expected, the greatest change in shares occurs when there are
higher tariff reductions. This is particularly true for Indonesia, Thailand, Vietnam
and Philippines. While for China (electrical equipment), Japan and the Republic
of Korea (ferrous), the sectoral performance of export and import is insignificant
except few sectors.
What we have learnt from the exercise of export import share within the region
in BAU and the different integration scenarios that intra-industry trade is leading
in this region. As intra-industry trade generates more trade competitiveness, in the
next section we are exploring more on this.
5.6 Intra-Industry Trade
Intra-industry trade arises if a country simultaneously imports and exports similar

types of goods or services. Similarity is identified here by the goods or services
being classified in the same ‘sector’. The phenomenon of intra-industry trade first
received attention in the 1960s in studies by Verdoorn and Balassa on the increased
trade flows among European countries. Grubel and Lloyd (1975) provided the
empirical study on the importance of intra-industry trade and how to measure it.
Theoretical foundations for explaining intra-industry trade came later (in the 1980s
and 1990s) with the new trade literature, to a large extent based on a monopolistic
competition framework. The most comprehensive and widely accepted explana-
tion, at least within economic theory, is that of Paul Krugman’s New Trade Theory
(Krugman, 2008). Krugman argues that economies specialise to take advantage
of increasing returns, not following differences in regional endowments (as con-
tended by neoclassical theory). In particular, trade allows countries to specialise in
a limited variety of production and thus reap the advantages of increasing returns
(i.e., economies of scale) but without reducing the variety of goods available for
consumption.
It is customary to distinguish between two different types of intra-industry trade,
each warranting a different type of explanation, namely horizontal and vertical intra-
industry trade. Horizontal intra-industry trade refers to the simultaneous exports
and imports of goods classified in the same sector and at the same stage of pro-
cessing. This is based on product differentiation, for example, the Republic of
Korea’s simultaneous import and export of mobile telephones in the final pro-
cessing stage. As these mobile phones are produced using similar technology
and provide similar functions they are classified in the same sector. Nonetheless,
the exported Samsung telephones differ in appearance and product characteristics
slightly from the imported Nokia telephones, catering to the desires of different
types of consumers (Reinert, Rajan, Glass, & Lewis 2009).
5.6 Intra-Industry Trade 123
Vertical intra-industry trade refers to the simultaneous exports and imports of

goods classified in the same sector but at different stages of processing. This is
based on the increasing ability to organize ‘fragmentation’ of the production pro-
cess into different stages, each performed at different locations by taking advantage
of the local conditions. China, for example, imports technology-intensive computer
components and uses its abundantly available labour force to assemble these com-
ponents in the labour intensive final production stage, before the components (as
part of a finished computer) are exported again to Europe or the USA (Marrewijk,
2008).
The most often used method for determining the extent of intra-industry
trade was proposed by Grubel and Lloyd (1975). This measure is known as the
Grubel–Lloyd index. It is calculated as
GLi = 1 − [{mod(exporti − importi )}/(exporti + importi )]
where i = sector.
If the country only imports or only exports goods or services within the same
sector, such that there is no intra-industry trade, the second term on the right-hand
side of the above equation is equal to one, such that the whole expression reduces
to zero. Similarly, if the export value is exactly equal to the import value (export
sector i = import sector i ), the second term on the right-hand side of equation
is equal to zero, such that the whole expression reduces to one. The Grubel–Lloyd
index therefore varies between zero (indicating pure inter-industry trade) and one
(indicating pure intra-industry trade).
In Table 5.16, the index of agriculture and industry (aggregation scheme is shown
in Annex 4) is presented in BAU 2020 scenario and MEI 2020 and ASEAN+3 at
2020 for regions under the agreement. The agriculture indexes are in the range of
0.58–0.80 but for the industrial sector the values are mostly 0.90 or above. From
Table 5.16 Grubel–Lloyd index in different trade scenarios
BAU 2020 MEI 2020 ASEAN+3 2020

Agriculture Industry Agriculture Industry Agriculture Industry
China 0.74 0.93 0.77 0.93 0.67 0.92

Japan 0.78 0.92 0.78 0.93 0.78 0.78
Republic of Korea 0.81 0.81 0.74 0.83 0.75 0.88
Indonesia 0.74 0.91 0.76 0.92 0.78 0.93
Malaysia 0.82 0.92 0.80 0.93 0.78 0.93
Philippines 0.58 0.90 0.65 0.86 0.59 0.90
Singapore 0.84 0.88 0.82 0.86 0.78 0.86
Thailand 0.69 0.95 0.67 0.94 0.55 0.84
Vietnam 0.79 0.89 0.67 0.90 0.71 0.92
Other ASEAN 0.65 0.88 0.79 0.87 0.73 0.87
Total 0.85 0.93 0.85 0.93 0.76 0.90

the G–L index it implies that pure intra industry trade is expected to take place in
2020. For most of the countries indexes are increasing due to integration except
Japan and Thailand. It reflects that tariff reduction scenarios will further intensify
the intra-industry trade.
5.7 Welfare Implication

Let us now analyse the welfare effect of tariff reduction scenarios. In global CGE
model each region’s representative agent aims to maximize welfare level. When
trade policy is changed the agent will calculate a change in income level. The
changed income level affects the scale of savings and consumption of each com-
modity so that the marginal utility of consumption is same across the commodities.
In this case price variables are used in the decision making process for clearing
markets in the model. While the welfare level of representative agents in trade agree-
ment member countries (here ASEAN and CJK) would improve, the welfare level
of agents in other regions (here four regions—Rest of OECD, NAFTA, ROW1 and
ROW2) would likely to decline. Since each region’s welfare function is different,
the impact of trade reforms between ASEAN and CJK on welfare level of other
regions would likely to be different.
How do the results of trade liberalization compare in terms of their estimated
welfare effects across fourteen regions. Table 5.17 summarizes those results. Gains
and losses are not spread evenly. It can be observed that the final round of economic
integration scenarios for MEI, and ASEAN+3 leads to increase global welfare.
However, further analysis shows that the gain in welfare are mainly attributed to
the ten regions involved in the economic integration, while the rest of the regions
faced a loss in welfare with the exception of ROW2 under the MEI scenario. Yet,
not all the gain in welfare is distributed evenly among the ten regions involved. In
the MEI 2020 scenario, China, Malaysia and Thailand are the countries that expe-
rienced the greatest welfare increases, while the Republic of Korea faced a decline
in total welfare. In case of ASEAN+3 2020 scenario, China, the Republic of Korea
and Thailand gained, while Japan is expected to decline in welfare. From these
two scenarios, China and Thailand appeared to gain the most welfare from trade
liberalization in the region.
The welfare decomposition results provide further insight into the analysis. The
impact of trade liberalization on welfare differs between large and small countries.
A large country can affect the international terms of trade by raising the world
prices of its imports and lowering the world prices of its exports. In contrast, since
a small country cannot influence the international terms of trade, it has to accept the
world prices of its exports and imports. The present analysis included both small
economies, such as Thailand and Viet Nam, and large economies, such as China
and Indonesia. Welfare gains from a multilateral (i.e. regional) liberalization are
fundamentally determined by two factors: (a) the change in efficiency with which
any given economy utilizes its resources; and (b) changes in a country’s terms of
trade, which permit us to calculate the regional equivalent variation or the amount
5.7 Welfare Implication 125
Table 5.17 Welfare decomposition of the different trade scenarios (million USD)
MEI (2020) ASEAN+3 (2020)

Allocative Terms of Total Allocative Terms of Total
efficiency trade effect efficiency trade effect
China 10072.4 −5991.6 4373.1 27833.1 −13692.5 15894.8

Japan 2253.5 −707.1 1627.9 −8249.6 7686.1 −1624.8
Republic of 477.8 −726.1 −225.2 1849 4416.3 5939.1
Korea
Indonesia 1059.4 1793 2753.2 634.9 130.8 894.1
Malaysia 2909.8 3183.7 6688.9 2092.5 −272.4 2070.3
Philippines 996.6 374.3 1379.3 477.9 −108.6 375.1
Singapore −222.1 3108.6 3035.3 81 993.4 1115.4
Thailand 3628.4 3088 6842.3 2217.3 6504.2 8833.7
Vietnam 2812.1 360 3578.3 1692.4 1292.3 4698
Other 401.5 −139.3 238.4 541.1 −78.6 455.3
ASEAN
Rest of −847.8 −3613.7 −3976.6 −213.5 −3266.6 −3028
OECD
NAFTA −652 −1771.1 −3888.6 −580.8 −1512.4 −4158.4
ROW1 −1431.7 −2200.6 −3743.3 −1700.3 −4094 −6033.8
ROW2 −1248.1 3241.8 1526.9 −1750.1 2002.1 −505.9
Total 20209.7 0 20209.7 24924.9 0 24924.9
of money that could be taken away from consumers, at initial prices, while leaving
them at the same level of post-simulation utility.15 If a particular country experi-
ences an improvement in its terms of trade, i.e. export prices rise relative to import
prices, then the equivalent variation16 gain will be larger than the efficiency gain.17
If the terms of trade deteriorate, then the opposite will happen.
Further decomposing these two results (Table 5.17), most regions involved in the
economic integration improved in their allocative efficiency resulting in an increase
in the global allocative efficiency. However, the exceptions to this general trend are
Singapore in the MEI scenario and Japan in the ASEAN+3 scenarios, which expe-
rience a deterioration in allocative efficiency (−8249.6 million US$). On the other
hand, with economic integration there appears to have resulted in a large deterio-
ration in the terms of trade for China in both scenarios. The terms of trade effect
is negative for China, Japan, and the Republic of Korea in the MEI 2020 scenario,
while positive terms of trade effects are observed for Japan and Republic of Korea
in the ASEAN+3 scenario. The terms of trade (TOT) effect will be clear further if
we consider the export price and import price impact.
The terms of trade (TOT), which is usually defined as the ratio of the region’s
export price to import price, is a key concept in evaluating the effects of price
changes on welfare. The trade liberalization in ASEAN and CJK leads to two off-
setting effects. (i) Liberalization of ASEAN imports reduces costs in ASEAN and
hence increases its supply into world markets. This, in turn, can be expected to
reduce the prices received for exports per unit. (ii) As its East Asia partners reduce
their tariffs on ASEAN exports, their demands for ASEAN exports rise, and this
in turn improves ASEAN export prices. The net effect depends on which effect is
larger. Table 5.18 demonstrates the effects on the terms of trade.
The result implies that in some ASEAN countries(Indonesia, Malaysia,
Philippines, other ASEAN) and China terms of trade deteriorate primarily through
changes in its export prices in ASEAN+3 scenario at DEI 2020. On the other hand
MEI 2020 reveals an improved terms of trade effect for those ASEAN countries
but not for China, Japan and the Republic of Korea. The countries like Thailand,
Vietnam and Singapore reveals a positive TOT for both scenario cases.
The result on TOT shows that late tariff reduction and restriction in regional inte-
gration (i.e., WASEAN and ASEAN-CJK) in MEI scenario is not favourable for
China, Japan and Republic of Korea. But it proves to be favourable for ASEAN
countries. The deep integration covering all the countries (ASEAN+3) and early
reduction in tariff is beneficial for Japan and Republic of Korea and Thailand,
Vietnam and Singapore. While the TOT effect of China and Other ASEAN will
always be negative.
Most of the terms of trade deterioration results from decline in the prices received
for exports, but a part results from increases in the prices of imports. The larger mag-
nitude in change in export prices relative to import prices is related to the assumption
of the product differentiation by country of origin on the demand side, a standard
feature of the Armington (1969) model. With the standard GTAP elasticities of
substitution that we have used in this chapter, increases in China’s export supplies
require fall in the prices of China’s exports if China is to increase its export share.
On the import side, China faces highly elastic export supply curves. Thus, China
needs to pay higher prices for its imports only to the extent that it is a relatively
large importer from world markets. Similar consequences are derived for Japan and
the Republic of Korea at MEI 2020 and Malaysia, Philippines and other ASEAN in
ASEAN+3 at 2020.
5.8 Effects on Factor Returns
Besides the effects on output, export and import, FTAs also have some impact on
factor returns. As regional integration makes trade easier, it tends to raise the returns
on at least some factors of production (Winters, 1996). A simple application of
the Heckscher–Ohlin model might lead us to expect ASEAN’s returns to capital
to fall since ASEAN is capital-scarce relative to its partner countries in East Asia
(Japan and Korea). Since international trade tends to increase the returns to the
abundant factor and reduce those to the scarce factor, assuming protection against
capital intensive goods from the partner countries in East Asia, increased trade with
ASEAN might be expected to reduce the returns to capital in the new members.
However, there are a number of reasons to believe that the basic Hecksher-Ohlin
model is too simple for our purpose. First, the standard Heckscher–Ohlin model
5.8
Table 5.18 The effects of terms of trade in different trade scenarios (percentage change)
MEI 2020 ASEAN+3 2020

Effects on Factor Returns
World price Export price Import price Total TOT World price Export price Import price Total TOT
effect effect effect effects effect effect effect effects
China −0.066 −0.220 0.163 −0.448 −0.107 −0.473 0.377 −0.956

Japan −0.092 −0.019 −0.013 −0.099 0.121 1.200 0.264 1.057
Republic of Korea −0.079 −0.093 0.016 −0.187 −0.064 1.230 0.042 1.124
Indonesia −0.010 1.043 0.164 0.870 −0.281 0.424 0.169 −0.026
Malaysia 0.100 1.122 0.201 1.021 −0.083 0.281 0.461 −0.263
Philippines 0.003 0.614 0.154 0.463 −0.176 0.444 0.352 −0.084
Singapore −0.011 1.366 0.151 1.205 −0.016 0.444 0.064 0.364
Thailand −0.032 1.500 0.137 1.331 0.114 2.539 0.326 2.327
Vietnam 0.164 0.894 0.170 0.888 0.202 2.373 0.240 2.336
Other ASEAN 0.314 −0.418 0.696 −0.799 −0.072 0.384 0.680 −0.368

127
applies only to a so-called square model with equal numbers of factors of production
and goods, and there is no indication that this is the way the real world is. The
GTAP six database identifies five factors of production: land, unskilled labor, skilled
labor, capital, and natural resources and 57 commodities. Second, the Heckscher–
Ohlin model presumes homogeneous products, whereas experience suggests that
many markets are better represented by differentiated products and intra-industry
trade. The GTAP model assumes the so-called Armington assumption18 with the
goods being differentiated by country of origin. In addition, the substitutability of
domestic and foreign goods also becomes very important. Third, integration might
affect the rate of return on capital through the price of intermediate and capital
goods. A reduction in tariffs and trading costs on the imports of capital equipment
reduces the prices which industry has to pay for investment goods (Fukase & Martin,
1999).
Table 5.19 shows the results of the simulation for the changes in returns on the
factors of production. The measure reflects the changes in factor prices relative to
the price index for private consumption expenditure. It does not, however, take into
account the effects of changes in the revenue position of the Government and its
ability to redistribute tax revenues to individuals, either through transfers or through
the provision of public goods.
If we compare the scenarios, then MEI 2020 showed a favourable return in the
countries participating in RTAs (except China, Japan and the Republic of Korea)
Table 5.19 Real returns on the factors of production in different trade scenarios (percentage
change)
MEI 2020 ASEAN+3 2020

UnSkilled Skilled UnSkilled Skilled
labour labour Capital labour labour Capital
China 0.519 0.558 0.599 1.04 1.072 1.026

Japan 0.004 0.015 0.029 0.259 0.139 0.176
Republic of 0.199 0.139 0.136 0.765 0.093 0.448
Korea
Indonesia 1.737 1.574 2.113 −0.277 −0.419 −0.504
Malaysia 5.185 4.44 4.793 2.022 1.898 2.067
Philippines 2.077 2.407 3.504 0.802 0.837 1.502
Singapore 2.582 2.261 2.074 1.16 0.904 0.342
Thailand 4.079 3.247 4.26 0.271 −0.315 −1.896
Vietnam 11.883 5.758 9.084 10.067 4.511 8.195
Other 0.35 0.366 0.362 −0.312 −0.203 −0.304
ASEAN
Rest of −0.136 −0.112 −0.068 −0.132 −0.101 −0.072
OECD
NAFTA −0.038 −0.038 −0.032 −0.037 −0.032 −0.041
ROW1 −0.195 −0.179 −0.213 −0.447 −0.37 −0.42
ROW2 −0.105 −0.073 −0.099 −0.105 −0.083 −0.127

5.9 Poverty Implications 129
for three factors: skilled labour, unskilled labour and capital. It seems that high
tariff reductions are not beneficial to achieve good factor returns in the ASEAN
region. In ASEAN, Vietnam had good factor returns, followed by Malaysia, in MEI
2020, which reflects the wider scope of Vietnam’s liberalization, which is likely
to induce its industrialization. Further, the concept of comparative advantage is
supported by the case of Vietnam because unskilled labour returns were compara-
tively higher than capital returns. On the contrary, the comparative advantage theory
is not supported in the case of Indonesia and Thailand. Though they are labour-
intensive countries, the capital return is likely to increase more under the MEI 2020
scenario.
5.9 Poverty Implications
An attempt is also made to capture the poverty implication from the study. The
analysis of links between trade reform and poverty is in its infancy, but consider-
able progress has been made in recent years (McCulloch, Winters, & Cirera, 2001;
Winters, 2002).
U and y define the per capita utility of aggregate household expenditures and
regional household income respectively (Table 5.20). Both are positive for China
and most of other countries under the two scenarios. This implies that overall coun-
tries household expenditures and incomes have increased. While for Japan and the
Republic of Korea, these values of the variables are reduced in MEI 2020. The
impact on the unskilled labour impact is further analyzed to investigate the poverty
aspect of the analysis. Results for the MEI scenario indicate that the unskilled labour
return is higher than GDP growth for most of the economies. This reflects the
reduction in poverty. But for ASEAN+3, opposite results are obtained (Table 5.20).
Though, the household expenditures and incomes improved for these regions, this
improvement will not make a significant impact on the poorer section of the pop-
ulation. Thus, if ASEAN+3 scenario materializes it will not be helpful for poverty
alleviation of the countries, even though the economies are expected to be benefited
overall.
In summary, countries who participate in the economic integration are better off
because of increased economic growth, industrial output that occurs because of the
integration. Countries that are not part of the economic integration have lower indus-
trial output compared to the BAU scenario. The economic benefit varies with the
different countries involved in the integration. Japan is predicted to experience pos-
itive economic impacts under the ASEAN+3 and MEI 2020 economic integration
scenarios, however, under DEI 2020 it is expected to have a negative economic
impact. In the DEI 2020 scenario, Japan experienced negative industrial output
growth, along with a reduction in both export and import shares as compared to
BAU 2020. The Republic of Korea will have positive economic impacts with DEI
2020 and ASEAN+3, while negative economic impacts with MEI 2020 as compared
to the BAU 2020 scenario. Though it experienced negative economic growth with
Table 5.20 Poverty scenario (percentage change)
ASEAN+3 2020 MEI 2020

Unskilled Unskilled
wages VGDP U Y wages VGDP U Y
China 1.04 –0.032 0.37 0.02 0.52 0.069 0.1 0.08

Japan 0.26 1.034 –0.04 1.04 0.004 –0.071 0.04 –0.1
Republic of 0.77 2.948 0.8 3.16 0.20 –0.227 –0.03 –0.24
Korea
Indonesia –0.28 0.716 0.25 0.8 1.74 1.678 0.8 1.78
Malaysia 2.022 0.541 1.20 0.686 5.185 3.16 3.96 3.66
Philippines 0.802 0.110 0.30 0.134 2.077 1.59 1.143 1.75
Singapore 1.16 1.215 0.90 1.439 2.582 4.24 2.55 4.88
Thailand 0.27 5.998 4.4 7.4 4.08 4.979 3.5 6.0
Vietnam 10.07 11.542 4.76 11.9 11.88 7.803 3.85 8.19
Other –0.312 0.532 0.30 0.602 0.35 –1.155 0.159 –1.13
ASEAN
MEI, its exports increased marginally but imports reduced compared to the BAU
scenario. For China, the real growth in output is insignificant with the various eco-
nomic integration scenarios, however, it shows positive for all agreement phases. Its
export and imports shares would likely to increase marginally compared to the BAU
scenario. The other countries involved in the agreement are expected to be benefited
from increased industrial output as a result of the economic integration. The coun-
tries that benefited the most were Vietnam and Thailand. These countries experience
greater industrial output growth as well as export and import growth with higher
tariff reductions. This is expected for these countries because the greater the tariff
reduction, i.e. the greater the trade liberalization, the larger the opportunities for
these countries. The real output growth will be increasing for Malaysia, Philippines,
Singapore, while Other ASEAN will be deriving a very insignificant growth due to
economic integration.
High export and import share are observed for all the agreement countries due
to trade agreement. Further, the direction of trade for the countries that are part
of the economic integration is concentrating within the region. ASEAN exports to
other countries of the World (NAFTA, rest of OECD, ROW1 and ROW2) will be
declining due to the trade agreement between ASEAN and CJK. The export will
be away from other countries of the World to the region especially for ASEAN+3
integration at 2020. But China’s export to other countries of the world will not be
impacted much like ASEAN and Japan and the Republic of Korea. Thus, trade
moves into the region between the countries that are part of the economic inte-
gration and away from those regions that are not part of the agreement. Welfare
implication shows a mixed result in different integration scenarios. In MEI 2020
scenario, China, Malaysia and Thailand are the countries that experienced the great-
est welfare increase, while the Republic of Korea faced rather a decline in total
5.9 Poverty Implications 131
welfare. In ASEAN+3 2020 scenario, China, Republic of Korea and Thailand show
a gain, while Japan is expected to decline in welfare. From these two scenarios,
China and Thailand appeared to gain the most welfare from trade liberalization in
the region. The highest factor returns are observed for Vietnam. The factor returns
to rest of ASEAN countries is also encouraging.
The rank of the six sectors output growth differs depending upon the trade agree-
ment phase and the country. New industrial sectors entered the top six sectors due
to the trade agreement scenarios when compared to BAU. The percentage shares
of the top sectors fluctuate, but the sectors themselves remain constant from BAU
to ASEAN+3. The top six sectors in both exports and imports are common in most
cases. This is due to intra industry trade. Shares are sensitive to high tariff reductions
in Thailand and Vietnam. In China, Japan, and the Republic of Korea, the changes
in the sectoral performance of exports and imports are insignificant except for a few
cases (electrical equipment in China, and ferrous metals in Japan and the Republic
of Korea).
The sectoral performance reflects that the composition of trade is likely to deepen
during the various phases (2001–2010, 2015 and 2020) of the economic integration
for almost all countries in South and SouthEast Asia. The change in trade may likely
to move from agriculture and light industries towards heavy industries except for
Japan and the Republic of Korea. This result appeared in all of the scenarios ana-
lyzed. These sectoral impacts from the various trade scenarios helped in the analysis
of the environmental implications of the economic integration in Chapter 6.
Chapter 6
Environmental Impact of Economic Integration
6.1 Introduction
In the earlier chapter (Chapter 5) we have seen that trade pattern influences
the composition and scale of exports that ultimately change the industrial out-
put growth, export and import growth which, it is expected, will impact the
environment.
The chapter evaluates how the changes in the aggregate level of output, com-
position of that output, and inputs and technologies used, as a consequence of
trade liberalization are likely to impact the environment of countries in the agree-
ment. The analyses focus on air pollution (CO2 , N2 O, and CH4 ), water pollution
(BOD, COD, and Suspended Solids), and industrial waste for these countries. This
chapter also uses the decomposition analysis to find the factors responsible for
changes in pollution. The study deals with the likely impact of different trade
scenarios till 2020. In that case the period is subdivided into three years-2010,
2015, and 2020. For the assessment of environmental impact we need to esti-
mate the projected environmental coefficient for the years, 2010, 2015 and 2020
on the basis of historical environmental coefficient trend. It should be noted
that the environmental coefficients are likely to change over time with techno-
logical improvement. Keeping this in mind, we have updated the environmental
coefficients for the years 2010, 2015 and 2020. These updated coefficients are
applied to estimate the volume of pollution in each scenario. The estimation pro-
cedure for the up-dating of the environmental coefficients has been outlined in
Chapter 4.
6.2 Environmental Impact in BAU and Trade Scenarios

In this section, we discuss the impact of air pollution mainly GHG emission, water
pollution restricted to BOD, COD and SS and industrial waste for BAU and trade
scenarios.
K. Mukhopadhyay, P.J. Thomassin, Economic and Environmental Impact of Free 133

Trade in East and South East Asia, DOI 10.1007/978-90-481-3507-3_6,

134 6 Environmental Impact of Economic Integration
6.2.1 Air Pollution

Tables 6.1, 6.2 and 6.3 report the total GHG emissions (CO2 , CH4 and N2 O)
across the countries during 2001 and 2020. In the business as usual period, the
growth of CO2 emission is higher for China followed by Vietnam, Indonesia, and
Malaysia while the lowest growth is achieved by Japan. Since the economy of China
and ASEAN countries are projected to grow significantly from 2001 to 2020 (in
Chapter 5), this finding is not surprising. Carbon emission is increased by 331%,
methane by 341% and N2 O by 211% for China at BAU 2020.
The trend of CH4 growth is almost same like CO2 . CH4 emission is high for
China, Vietnam and Indonesia, while the lowest is achieved by the Republic of
Korea and Japan. Due to the paucity of data we could not include Malaysia and
Other ASEAN in discussion. N2 O emission is highest for Indonesia followed by
China, Vietnam, the Republic of Korea and Singapore. Japan is on the lower end.
This emission and growth shows the business as usual growth, i.e. the growth
of GHG emission at BAU 2020. The growth rate of GHG emission clearly reveals
that the developing East and South East Asian countries are likely to generate more
GHG emission compared to developed nations like Japan and Republic of Korea.
Table 6.1 CO2 growth in business as usual period (Gg)
CO2 BAU 2001 BAU 2020 % change
China 2603783 11235245 331.50

Japan 859206.9 1070769 24.62
Indonesia 222079.3 773033.2 248.09
Thailand 155830.4 404056.8 159.29
Vietnam 43986.8 161078.2 266.20
Malaysia 107196.6 337332.9 214.68
Philippines 61375.5 182821.6 197.87
Singapore 53453.7 145413.2 172.03
Other ASEAN 15510.78 78721.41 407.52
Source: Result from the study.
Table 6.2 CH4 growth in business as usual period (Gg)
CH4 BAU 2001 BAU 2020 % change
China 36892.05 162926.11 341.63

Japan 816.85 1135.00 38.95
Indonesia 7163.03 21239.75 196.52
Thailand 4377.19 10744.41 145.46
Vietnam 3087.39 11631.87 276.75
Philippines 1236.74 3546.47 186.76
Singapore 16.89 31.75 87.93

6.2 Environmental Impact in BAU and Trade Scenarios 135
Table 6.3 N2 O growth in business as usual period (Gg)
N2 O BAU 2001 BAU 2020 % change
China 2032.05 6330.58 211.54

Japan 62.26 87.31 40.23
Korea 34.98 74.27 112.31
Indonesia 110.50 388.91 251.97
Thailand 25.74 58.77 128.29
Vietnam 23.01 54.35 136.22
Philippines 29.38 53.31 81.49
Singapore 3.09 6.98 125.76
Let us discuss about GHG emission growth behaviour in different trade liber-
alisation scenarios in 2020. Here we try to compare the growth in BAU 2020 and
medium and deep integration at 2020. It will reflect the extra amount of emission
generated due to trade liberalisation in various economic integration scenarios.
Tables 6.4, 6.5 and 6.6 provide estimates of the volume of CO2 (Gg), CH4
and N2 O (Gg) in both the BAU 2020 and the economic integration scenarios in
2020. The percentage difference shows the pollution generated either increases
or decreases due to economic integration across the countries. For CO2 emission,
Thailand has the largest growth in MEI integration at 2020 followed by Vietnam and
Indonesia, while Japan, the Republic of Korea and the Philippines having nominal
change in MEI scenario at 2020 compared to BAU 2020 while Singapore, China,
Malaysia and Other ASEAN show a minor decline in emission.
Table 6.4 CO2 growth in different trade scenarios at 2020 (Gg)
MEI- DEI- ASEAN+3

BAU BAU DEI-BAU
2020 % 2020 % 2020 %
CO2 BAU 2020 MEI 2020 change DEI 2020 change ASEAN+3 change
China 11235245 11156248 −0.70 11167295 −0.60 11016997 −1.94

Japan 1070769 1075495 0.44 1075555 0.45 1080315 0.89
Korea 590379.4 593815 0.58 597662 1.23 593271 0.49
Indonesia 773033.2 789774 2.17 792247 2.49 800801 3.59
Thailand 404056.8 419526 3.83 420166 3.99 423065 4.70
Vietnam 161078.2 165212 2.57 167125 3.75 187888 16.64
Malaysia 337332.9 336784.6 −0.16 341547.8 1.25 361028.4 7.02
Philippines 182821.6 183697.6 0.48 184851.9 1.11 186668.4 2.10
Singapore 145413.2 144006.5 −0.97 141634.6 −2.60 142203 −2.21
Other 78721.4 78361.3 −0.46 77698.0 −1.30 76658.7 −2.62
ASEAN

Table 6.5 CH4 growth in different trade scenarios at 2020 (Gg)
MEI- DEI- ASEAN+3

BAU BAU DEI-BAU
2020 % 2020 % 2020 %
CH4 BAU 2020 MEI 2020 change DEI 2020 change ASEAN+3 change
China 162926.11 163189.70 0.16 162936.35 0.01 160856.89 −1.27

Japan 1135.00 1131.92 −0.27 1056.25 −6.94 1248.33 9.99
Korea 1211.56 1207.50 −0.34 1224.90 1.10 1301.30 7.41
Indonesia 21239.75 20766.42 −2.23 20652.75 −2.76 20641.73 −2.82
Thailand 10744.41 10016.49 −6.77 9249.58 −13.91 8345.87 −22.32
Vietnam 11631.87 11803.98 1.48 11584.65 −0.41 11651.31 0.17
Philippines 3546.47 3449.24 −2.74 3269.33 −7.81 3196.46 −9.87
Singapore 31.75 31.69 −0.19 31.41 −1.07 31.58 −0.54
Table 6.6 N2 O growth in different trade scenarios at 2020 (Gg)
MEI- DEI- ASEAN+3

BAU BAU DEI-BAU
2020 % 2020 % 2020 %
N2 O BAU 2020 MEI 2020 change DEI 2020 change ASEAN+3 change
China 6330.58 6321.42 −0.14 6306.59 −0.38 6261.07 −1.10

Japan 87.31 87.28 −0.03 87.03 −0.32 87.45 0.16
Korea 74.27 73.07 −1.62 73.56 −0.96 74.99 0.97
Indonesia 388.91 388.34 −0.15 379.79 −2.35 377.71 −2.88
Thailand 58.77 55.90 −4.88 51.14 −12.98 48.91 −16.78
Vietnam 54.35 56.74 4.40 56.25 3.50 53.87 −0.88
Philippines 53.31 52.37 −1.76 50.77 −4.76 50.54 −5.20
Singapore 6.98 7.45 6.73 8.14 16.62 7.77 11.32
In DEI integration, for most of the countries emission growth has increased com-
pared to MEI integration at 2020 except Japan which continues the same minor
positive emission growth and China remains with minor negative growth. While
Singapore and Other ASEAN show further decline in emission compared to MEI
integration at 2020.
Further in ASEAN+3 integration at DEI 2020, Vietnam achieves significant
emission growth compared to other scenarios. Other countries like Malaysia,
Thailand and Indonesia also show an increase in CO2 emission growth compared
to MEI integration at 2020.
Singapore, Other ASEAN and China record a less emission compared to BAU
2020. It implies that the higher tariff reduction is not increasing these countries CO2
emission growth rather decline in emission is found compared to BAU 2020.
The emission growth of Japan shows a marginal rise in ASEAN+3 at 2020 but
for the Republic of Korea the higher CO2 growth is expected in DEI 2020 compared
to MEI 2020 and ASEAN+3 at 2020.
Overall Vietnam’s CO2 emission growth is still high in all of the economic inte-
gration scenarios compared to other countries. While Singapore shows a negative
CO2 growth in various scenarios compared to BAU 2020. Japan’s CO2 growth
is modest compared to other countries and CO2 growth in economic integration
scenarios is insignificant compared to BAU 2020.
CH4 emission growth in different trade scenarios reveals a completely differ-
ent picture compared to CO2 emission growth. The behaviour of CH4 emission is
fluctuating across the countries. Negative emission growth is achieved by Thailand,
Indonesia, the Philippines and Singapore in three scenarios at 2020 compared to
BAU 2020. Vietnam’s emission is expected to increase at MEI 2020 and ASEAN+3
integration at 2020 and decline at DEI 2020 compared to BAU 2020, while for
Republic of Korea most of scenarios show a positive emission growth except MEI
2020 compared to BAU 2020. The CH4 emission growth in Japan fluctuates sig-
nificantly in different integration scenarios. A minor decline is observed in MEI,
and almost 7% decline in DEI 2020 while approximately 10% increase is observed
in ASEAN+3 at 2020 compared to BAU 2020. Japan and Korea have the largest
growth in CH4 emission in ASEAN+3 scenario compared to BAU 2020.
We can relate this result of Japan with the sectoral importance in as discussed
Chapter 5. Ferro alloys and mining sector will be dominating at 2020 in different
scenarios. And it is well known that mining sector releases CH4 emission. The high
CH4 growth is expected in Japan probably due to the increased importance of the
mining sector. Vietnam has significant increases in CH4 in MEI and ASEAN+3
scenario. Increased production in the Paddy rice sector is a major contributor to
this high growth. As we know that agricultural sectors mainly release CH4 emis-
sion, Thailand reduced its CH4 growth in all of the economic integration scenarios
compared to the BAU situation reflecting that Thailand is losing its position in the
international market in the context of agricultural production. The reasons behind
this fluctuating behaviour across the countries in different trade liberalisation sce-
narios will be explored in sectoral analysis. The data for CH4 is not available for
Malaysia and Other ASEAN.
The largest N2 O growth is observed in Vietnam under MEI and DEI 2020
integration scenarios compared to BAU 2020, but a minor decline is noted in
ASEAN+3 at 2020. Thailand shows a significant decline in N2 O emission due to
tariff reduction followed by the Philippines, Indonesia and China having with a
minor decline compared to BAU 2020. Japan and Korea show a decline in emission
growth in DEI and MEI 2020 but record small rise in emission growth in ASEAN+3
integration at 2020.
Thus, the analysis of the growth of the three GHG emissions across the countries
under BAU 2020 and different trade liberalization scenarios shows that Vietnam is
affected environmentally for most of the GHG indicators, while Japan and Korea
will face a marginal change, though trade liberalization promotes output growth of
these two economies. Highest GHG emitters in this region will be China in BAU
2020, however, the liberalization impact will not add further to GHG emissions.
For Thailand, trade liberalization under different scenarios is growth inducing
and pollution reducing in terms of CH4 and N2 O (except CO2 ). There are various
reasons behind this phenomenon. Firstly, the growth of the CO2 intensive sectors has
increased. Secondly, the growth of the agricultural sector, which is more CH4 and
N2 O intensive, has declined rapidly since the 1990s and also is reflected in BAU
2001 to 2020 and different trade liberalization scenarios. Thus, freer trade would
likely to push Thailand away from agricultural activities towards the industry, thus
affecting the environment differently (Mukhopadhyay, 2007).
The results for GHG indicator especially for CO2 in East and South East Asian
countries are not encouraging. As GHG emission is transboundary in nature, the
volume of CO2 generation in this region at 2020 will likely to be significant. If
the emission growth trend continues and tight measures are not adopted, the goal
of achieving Kyoto target will remain unfulfilled for Japan and Korea belonging
to Annex 1 countries. And Japan and Republic of Korea will be penalized even
though the CO2 growth is less compared to China and ASEAN countries at BAU
2020(China and ASEAN countries under Annex 2, are not included in the bindings
of Kyoto Protocol).
6.2.2 Water Pollution
Now we are discussing water pollution growth under the BAU and different trade
scenarios across the countries in South and South East Asia.
6.2.2.1 BOD
Figure 6.1 illustrates the growth in BOD (tons) in the BAU and the economic inte-
gration scenarios. China’s BOD growth is likely to be largest at 2020 compared to
BAU 2001 followed by Vietnam and Indonesia among the countries under study. But
250
200
150
100
50
0
China Japan Korea Indonesia Thailand Vietnam
BAU2001–2020 BAU2001–MEI2020
BAU2001–DEI2020 BAU2001–ASEAN+3 2020
Fig. 6.1 BOD growth from 2001 to 2020 in Different Scenarios (%)
the generation of BOD for these countries show a minor decline in MEI, DEI and
ASEAN+3 scenario compared to BAU 2020. Korea’s BOD growth has increased
slightly in BAU 2020, and continues to be same in different integration at 2020.
While Japan shows a negative growth in BOD in BAU 2020 and MEI, DEI and
ASEAN+3 at 2020 compared to BAU 2001. It is interesting to note that BOD growth
shows a decline in all economic integration scenarios compared to BAU growth at
2020. This is the result of the positive technological effect. The drastic fall in BOD
growth (68% in BAU, 2020 to 33.63% in ASEAN+3 at 2020) in Thailand occurred
because of the decrease in output from sectors such as paddy rice and textile in the
ASEAN+3 agreement. We will discuss this effect in sectoral analysis.
6.2.2.2 COD
Figure 6.2 shows the COD growth under various trade liberalization scenarios at
2020. COD growth is highest for China and lowest for Japan (negative growth). For
the Republic of Korea and Thailand the growth remains almost same in different
scenarios except ASEAN+3 at 2020. On the other hand, COD growth has increased
for Indonesia and Vietnam in different scenarios at 2020 compared to BAU 2020.
6.2.2.3 Suspended Solid (SS)

We observed almost similar growth trend for SS, like COD. Interesting to note that
SS growth of Thailand has increased under all trade liberalization scenarios com-
pared to BAU 2020. But for other countries especially for Japan the growth rate has
declined compared to BAU 2020 (Fig. 6.3).
400
350
300
250
200
150
100
50
–50
BAU2001–2020 BAU2001–MEI2020 BAU2001–DEI2020 BAU2001–ASE AN+3 2020
Fig. 6.2 COD growth from 2001 to 2020 in Different Scenarios (%)
400
350
300
250
200
150
100
50
–50
BAU2001–2020 BAU2001–MEI2020 BAU2001–DEI2020 BAU2001–ASEAN+3 2020
Fig. 6.3 Suspended solid growth from 2001 to 2020 in Different Scenarios (%)
Though the features of the water pollutants like BOD, COD and SS are almost
same, it is expected that growth of these pollutants will also be similar. But we
receive a mixed growth pattern across the countries except Japan (which shows
negative for the three water pollutants). Due to trade liberalization some pollutants
are getting increased from the BAU 2020 level for some countries. Among them
Suspended Solid is for Thailand and COD for Indonesia and Vietnam. For BOD on
the other hand, significant increment is not observed for most countries under trade
liberalization scenarios compared to BAU 2020.
6.2.3 Industrial Waste

Industrial waste is increasingly becoming a major environmental problem in both
developing and developed world, especially in our study area. As a result of trade
liberalization in this region, industrial waste would likely to increase. Figure 6.4
depicts the growth of the industrial waste of the six countries (detail in Chapter 4)
during 2001−2020 under BAU and various trade liberalization scenarios.
The growth of the industrial waste is highest for China and least for Japan
among the six countries under the study. The rising trend of industrial waste
growth is noted for all the six countries under various trade scenarios compared to
BAU 2020.
700
600
500
400
300
200
100
0
China Japan Korea Indonesia Thiland Vietnam
BAU 2001–2020 BAU 2001–MEI2020 BAU2001–DEi2020 BAU 2001–ASEAN+3 2020
Fig. 6.4 Industrial waste growth from 2001 to 2020 in Different Scenarios (%)
If we evaluate the total seven pollutants including air, water and industrial waste
it is observed that China is leading in BAU for all the pollutants (except N2 O), but
trade liberalization does not show any additional impact on the country’s emission
(except industrial waste).
On the other hand, Vietnam and Indonesia will rank second and third in BAU.
And in these two countries emission is likely to increase further due to trade liberal-
ization for most of the pollutants (primarily CO2 ). Overall, for Korea and Japan, the
two developed countries of the study area, emission growth is reasonable (except
industrial waste). Thailand provides a mixed outcome. The emission growth of
CO2 , SS and Industrial waste is expected to increase while growth of the other
environmental indicators tends to decline in trade liberalization scenarios.
The growth rate of each environmental indicator varies by country, economic
integration scenario, and the BAU. Among all the environmental indicators, the
CH4 is likely to have the most significant response to the different trade scenarios
compared to the BAU scenario. The other environmental indicators show relatively
insignificant changes in the economic integration scenarios compared to BAU sce-
nario. The overall change in the environmental indicators depends on the sectoral
performance of a particular country. The environmental indicators varied by sec-
tor and by country. As a result, the environmental impact of a change in industrial
output of the same sector in two different countries could result differently. This
can occur for several reasons including: different technology used in different coun-
tries, the age of the infrastructure, or the existing domestic regulations. Further the
analysis of each of these emission growth at sectoral level is presented in the next
Section 6.3.
6.3 Sectoral Analysis in BAU and Trade Scenarios

We are exploring the most important (affected) sectors19 in case of different
environmental indicators under BAU and different trade scenarios.
6.3.1 BAU Scenario
When total change in emission of seven pollutants is examined by sectors more

insight emerges. The overall change depends on the sectoral performances. In this
context, we need to explore the pollution intensive sectors for each indicator (CO2 ,
CH4 , N2 O, BOD, COD, SS and industrial waste) across the countries under study.
The sectoral rank of CO2 , CH4 , N2 O, water pollutants and industrial waste
depends on the pollution intensity (environmental coefficient) and the sectoral pol-
lution share in total volume of pollution. While the volume of pollution is influenced
by the sector’s output growth in different BAU scenarios—2010, 2015, and 2020 and
the sectoral pollution intensity, we observed that almost same pollution intensive
sectors are players in different BAU scenarios in each country till 2020.
Table 6.7 identifies the six most CO2 intensive sectors for each country. Even
though the top sectors differ across countries, the most important sectors are chemi-
cal, rubber, plastic products, and mineral products nec, ferrous metal, petroleum and
coal products being major contributors to CO2 emissions.
The rank of the emission for the sector is to some extent influenced by the coun-
try’s economic structure, technological development, output growth, comparative
advantage of the sectors and behaviour of economic drivers for future development.
For example, petroleum and coal products are identified as CO2 intensive sector
in ASEAN countries among top six. ASEAN is a strategic international market and a
major supplier of energy and raw materials to the PPRD (The Pan Pearl River Delta
region). In the first half year of 2005, the PPRD purchased finished oil, liquefied
petroleum, gas and coal valued at 530, 160 and 150 million US$, respectively, from
ASEAN countries (NEWSDG, 2005). This indicates the possibility of supply of
energy from ASEAN countries in future.
On the other hand mineral product is identified as CO2 intensive sector in the top
six list for China, Japan and Korea, while Ferro alloys in China and Korea. As we
know that China is a major supplier of mineral products and ferrous and non-ferrous
metals to the world and due to trade liberalisation its export is likely to increase.
As we have seen that CO2 emission is released from the 57 sectors but CH4 and
N2 O emission is restricted to few selected sectors. Agricultural sector and mining
are the main source of CH4 and N2 O emissions.
Of the mining sector, oil and gas production and coal production and handling
are the important CH4 contributors, while transport and stationary combustion
emits N2 O.
The categories of methane emissions in different stages of production can be
identified as: CH4 emissions from oil industries involve mainly the venting and
6.3
Table 6.7 CO2 intensive sectors for the ten countries at BAU 2020
China Japan Korea Indonesia Thailand Vietnam Malaysia Philippines Singapore Other ASEAN
Mineral Mineral Mineral Oil Petroleum, Metals nec Petroleum, Mineral Petroleum, Petroleum,
products products products coal coal products coal coal
nec nec nec products products nec products products
Ferrous Machinery Chemical, Petroleum, Mineral Manufactures Mineral Oil Gas Chemical,
metals and rubber, coal products nec products rubber,
equipment plastic products nec nec plastic
nec products products
Chemical, Paper Ferrous metal Machinery Machinery Petroleum, Ferrous metal Petroleum, Chemical, Mineral
rubber, products, and and coal coal rubber, products
plastic publishing equipment equipment products products plastic nec
products nec nec products
Sectoral Analysis in BAU and Trade Scenarios
Coal Chemical, Textile Manufactures Forestry Mineral Manufactures Fishing Electronic Ferrous
rubber, nec products nec equipment metals
plastic nec
products
Oil Metals nec Fishing Ferrous Chemical, Electronic Electronic Ferrous Mineral Ferrous
metals rubber, equipment equipment metals products metals
plastic nec
products
Machinery Fishing Paper Electronic Minerals nec Paper
and products, equipment products,
equipment publishing publishing
nec

143
flaring of the associated gas from oil production; CH4 emissions from gas indus-
tries are mostly from gas production and gas transportation; CH4 emissions from
coal production and handling-it may be underground and surface coal produc-
tion. Methane is released mostly as by-product of coal production, whose quantity
depends on many factors. Methane is emitted as well during handling, prepara-
tion, storage, transportation and end-use, but generally these emissions are small
(less than 10% of total methane emissions from coal production). Generally,
methane emissions are distinguished between underground and surface mining.
Approximately 90% of emissions of this category are due to underground mining
activities.
In agriculture, CH4 emissions arise principally as a by-product of the digestion
of feedstuffs by farm animals via a process known as enteric fermentation. So it
is expected that the agriculture based economy is likely to emit more CH4 . N2 O
emission is primarily released from sectors based on agriculture and transport. It is
completely dominated by those arising from nitrogen (N) in animal wastes and syn-
thetic fertilisers deposited on to agricultural soils. There are two principal sources
of nitrogen (N) substrate in grazed pastoral systems; recycled dietary N and applied
synthetic fertilisers. Ruminants are relatively poor converters of ingested dietary
N into products, and the retention of N in meat, wool or milk ranges from 3 to
25% of the N ingested (Whitehead, 1995). As a result, large quantities of N are re-
cycled via excreta deposited directly onto pastures by grazing livestock. The relative
importance of these two sources of N substrate to nitrous oxide production is likely
to vary markedly from country to country (MAF, 2004). Besides that transport and
stationary combustion are also important emitters of N2 O emission.
The results show that livestock is the main CH4 emitter in Japan and Korea. Apart
from that gas sector and underground mining activities are also responsible for this
emission growth in Japan. The important sectors for CH4 emissions by country are
given in Table 6.8. Paddy rice, and animal products are found to be important across
the countries for CH4 emission.
The important sectors for N2 O emissions are given in Table 6.9. Vegetables, fruits
and nuts and transport nec are the two common sectors considered as important N2 O
emitting sectors almost for all the countries. In particular, transport nec is found
to be the top ranked sector in Japan, Korea, and Vietnam during the BAU 2020
scenario while livestock product is a major contributor of N2 O among other ASEAN
countries.
BOD emissions are assumed to be determined by the quantity of waste water.
BOD provides information on the biologically-convertible proportion of the organic
content of a sample of water. This leads to the consideration of these materials in
terms of their susceptibility to oxidation by the use of oxygen. BOD indicates how
discharges to water bodies deplete their oxygen levels, and is widely accepted as a
broad measure of water pollution. A high BOD indicates a high content of easily
degradable, organic material in the sample.
BOD values are generally determined and evaluated in association with other
parameters (e.g., COD) and this makes them more useful in formulating predictions.
BOD detects only the destructible proportion of organic substances and as a general
6.3
Table 6.8 CH4 intensive sectors for the eight countries at BAU, 2020
China Japan Korea Indonesia Thailand Vietnam Philippines Singapore
Coal Paddy rice Paddy rice Animal products Bovine cattle, Paddy rice Paddy rice Animal Products
nec sheep and
goats, horses
Paddy rice Animal products Animal products Bovine cattle, Paddy rice Gas Animal Products Gas
sheep and
goats, horses
Animal products Coal raw milk Paddy rice Sugar cane, Animal products Bovine cattle Bovine cattle
sugar beet nec
Cereal grains Raw milk Coal Cereal grains Gas Sugar cane, Cereal Grains Oil
sugar beet
Gas Gas Bovine cattle, Gas Animal products Raw milk Sugar cane and Raw Milk
sheep and nec sugar beet
goats, horses

145
146
Table 6.9 N2 O intensive sectors for the eight countries at BAU 2020
China Japan Korea Indonesia Thailand Vietnam Philippines Singapore
Sugar cane, Vegetables, fruit, Chemical rubber

Crops nec Transport nec Transport nec Paddy rice sugar beet Transport nec nuts and plastic
Bovine cattle,
Chemical rubber Chemical rubber sheep and Sugar cane,
Paddy rice and plastic and plastic Cereal grains goats, horses sugar beet Paddy rice Transport nec
6
Vegetable fruits Plant-based Animal products

Transport nec Animal products Animal products and nuts fibers nec Animal Products Cops nec
Vegetable fruits Cereal grains Vegetables, fruit,
and nuts Raw milk Raw milk Transport nec Transport nec Crops nec nec nuts
Cereal grains Vegetable fruits Vegetables, fruit, Sugar cane and
nec and nuts Paddy rice Plant based fibre Paddy rice nuts sugar beet Animal products
Plant-based Paddy rice Vegetable fruits Animal products Vegetables, fruit, Paddy rice Cops nec Bovine cattle
fibers and nuts nuts

6.3 Sectoral Analysis in BAU and Trade Scenarios 147
Table 6.10 BOD intensive sectors for the six countries, BAU 2020
Textiles Chemical, Animal Leather Animal Fishing

rubber, products products products nec
plastic nec
products
Food Ferrous metals Bovine cattle, Wood Food products Sugar
products sheep and products nec
nec goats,
horses
Vegetable oils Petroleum and Paper Bovine cattle, Gas Chemical,
and fats coal tar products, sheep and rubber,
products publishing goats, plastic
horses products
Chemical, Wearing Textiles Vegetable oils Bovine cattle, Textile
rubber, apparel and fats sheep and
plastic goats, horses
products
Animal Paper products, Chemical, Textiles Crops nec Leather
products publishing rubber, products
nec plastic
products
Electronic Bovine cattle, Ferrous Beverages Wool, Manufacturing
equipment sheep and metals and silk-worm nec
goats, horses tobacco cocoons
products
principle is therefore lower than the COD value, which also includes inorganic
materials and those materials which cannot be biologically oxidized.
The most important sectors for BOD emissions differed by country (Table 6.10).
It is found that the most common sectors that release BOD include textiles; Bovine
cattle, sheep and goats, horses; animal products nec; and chemical, rubber, plastic
products; and paper and pulp across the countries investigated (three ASEAN and
CJK). Sugar appears only for Vietnam while paper and paper products for Korea
and Japan. Textile is the most important sector for China, the Republic of Korea,
Vietnam and Indonesia while wool silk cocoons and wearing apparel are important
BOD intensive sectors for Thailand and Japan respectively.
The presence of agricultural and industrial sectors is in the top six COD intensive
sectors across the countries (except Vietnam). The leading sectors in agriculture are
animal products nec; bovine cattle, sheep and goat, horses; vegetable fruits and nuts;
while chemical rubber and plastic sector is primarily dominating for all the countries
(Table 6.11).
Suspended solids refer to small solid particles which remain in suspension in
water as a colloid or due to the motion of the water. It is used as an indicator to
measure water quality. Suspended solids are important as pollutants and pathogens
Table 6.11 COD intensive sectors for the six countries, BAU 2020
Pulp and Paddy rice Forestry Chemical, Textiles Manufactures

paper rubber, nec
industries plastic
products
Chemical, Bovine cattle, Paddy rice Leather Electronic Chemical,
rubber, sheep and products equipment rubber,
plastic goats, horses plastic
products products
Food Chemical, Bovine cattle, Wood Paddy rice Oil
products rubber, sheep and products
plastic goats,
products horses
Beverages Animal Vegetables, Vegetable oils Chemical, Beverages and
and products nec fruit, nuts and fats rubber, tobacco
Tobacco plastic products
products
Textile Crops nec Crops nec Animal Motor vehicles Mineral
products and parts products nec
Ferrous metal Vegetables, Animal Meat Crops nec Transport
fruit, nuts products products equipment
nec nec nec
are carried on the surface of particles. The smaller the particle size, the greater the
surface area per unit mass of particle, and so the greater the pollutant load that is
likely to be carried. Textile, chemical, leather, pulp and paper and mining are the
important contributors of suspended solids. These sectors appear in the list of top
six sectors for some countries (Table 6.12).
The waste discharges are normally from the mining, smelting and energy indus-
tries. These discharges are typically in the form of liquid effluent, solid waste and
air emissions. It is well known that the industrial waste prone sectors are pulp
and paper, petroleum products, construction industry, petroleum refinery and fer-
tilizer, electronic equipment, motor vehicle and parts, different metal industries and
minerals. Table 6.13 shows that Korea’s top sectors for industrial waste are quite
different from those of other five countries. Metal products, minerals and transport
sector belong to the top in this respect. On the other hand Ferrous metal, electronic
equipment, and Chemical rubber and plastics are found to be common for China,
and Thailand; paper products and publishing is common for Japan, Indonesia and
Vietnam; Petroleum, coal products is for Indonesia, Thailand and Vietnam. Already
it is observed that these industrial waste prone sectors are found to be common in
the top ranking sector of output and export and likely to dominate in different trade
scenarios at 2020.
Table 6.12 Suspended solid intensive sectors for the six countries, BAU 2020
Paper products, Chemical, Forestry Bovine cattle, Chemical, Manufactures

publishing rubber, sheep and rubber, nec
plastic goats, plastic
products horses products
Chemical, Ferrous metals Vegetables, Leather Textiles Fishing
rubber, fruit, nuts products
plastic
products
Ferrous metals Petroleum, coal Paddy rice Chemical, Paper products, Chemical,
products rubber, publishing rubber,
plastic plastic
products products
Minerals nec Bovine cattle, Crops nec Textiles Electronic Oil
sheep and equipment
goats, horses
Food products Wearing Bovine cattle, Raw milk Beverages and Beverages and
nec apparel sheep and tobacco tobacco
goats, products products
horses
Beverages and Paper products, Animal Animal Food products Mineral
tobacco publishing products products nec products nec
products nec
Table 6.13 Industrial waste intensive sectors for the six countries, BAU 2020
Minerals nec Ferrous metals Mineral Motor Petroleum, coal Paper products,
products vehicles products publishing
nec and parts
Ferrous metals Paper products, Metal Paper Ferrous metals Vegetable oils
publishing products products, and fats
publishing
Chemical, Chemical, metal nec Petroleum, Electronic Mineral
rubber, rubber, coal equipment products nec
plastic plastic products
products products
Metals nec Minerals nec Transport nec Metals nec Metal products Petroleum, coal
products
Mineral Construction Wood Manufactures Metals nec
products nec products nec
Electronic Metal Chemical,
equipment products rubber,
plastic
products

6.3.2 Trade Liberalization Scenarios

Now let us see which sectors are relatively sensitive to trade liberalization scenarios.
As we have seen that the growth rate of each pollutant is not the same in the trade
liberalization scenarios and BAU. Among three GHG indicators CO2 responded
strongly under the different trade scenarios compared to BAU. But other indica-
tors have shown relatively moderate response in trade agreement scenarios. Due to
trade liberalization some sectors reduce and other sectors increase their output level.
Some sectors are sensitive for some environment indicator in one country, but the
same will not hold for the other country.
The volume of CO2 emission for some sectors increased during the trade agree-
ment scenarios. Here we identify the sectors which responded significantly in each
scenario (Table 6.14). And also we like to see how far the ranking of the sectors
in BAU scenario prevails in the trade liberalization scenarios. For CH4 and N2 O,
similar sectors are found to dominate in each trade liberalization scenario across the
countries but for CO2 the variation is noted for some countries. For China, the Gas
sector replaces manufacturing equipment in the top six sectors list in ASEAN+3
integration along with other common sectors identified in BAU scenarios. For Japan
and Indonesia, no as such changes are observed. Three new sectors—motor vehi-
cle, transport equipment, and food products are added in the top six sectors’ list in
the Republic of Korea in ASEAN+3 scenario at 2020. For Thailand and Vietnam,
sugarcane and sugar beet sector entered in the top six sectors’ list in ASEAN+3 at
2020.
These sectoral rankings in trade liberalization scenarios and business as usual
differ due to the following reason. The increase in sectoral output may push up the
ranking of the sectors for each pollutant. This will happen due to the rise in demand
for a particular sector in the region under a RTA. For example, Sugar cane and sugar
beet is likely to be produced more by Thailand, Vietnam, and so also the gener-
ation of CO2 emission under ASEAN+3 integration at 2020. For Malaysia, wood
products sector is expected to be important emitter. Motor vehicle sector is likely to
create more emission in Philippines and Other ASEAN in ASEAN+3 integration.
The output growth of these sectors may drive up the emission for these economies.
Singapore maintains almost the same sectors in BAU and trade integration scenarios
except machinery and equipment (ASEAN+3 2020) instead of electronic equipment
(BAU 2020).
The sectoral ranking for ASEAN+3 at 2020 and BAU 2020 for the environmental
indicators is likely to be influenced by the sectoral share in total emission. If the
share is high, the sector will have a higher rank. We have already seen that the
sectoral ranking of CO2 differs in BAU 2020 and ASEAN+3 2020. But the highest
percentage change in emission across the sectors for different pollutants in trade
liberalization scenarios compared to BAU 2020 is worth checking in this context.
From Table 6.14, it has been observed that few sectors for some countries differ in
ASEAN+3 integration at 2020 compared to BAU 2020 in the top sectors’ rank list.
Here an attempt has been made to identify the sectors with highest percentage
changes in emission in ASEAN+3 at 2020 compared to BAU 2020.
6.3
Table 6.14 CO2 intensive sectors for the ten countries at ASEAN+3, 2020
Other
China Japan Korea Indonesia Thailand Vietnam Malaysia Philippines Singapore ASEAN
Coal Mineral Mineral Oil Petroleum, Metals nec Machinery Petroleum, Gas Motor vehicle
products products coal and coal and parts
nec nec products equipment products
nec
Oil Machinery Textile Petroleum, Machinery Manufactures Petroleum, Ferrous metal Petroleum, Petroleum,
and coal and nec coal coal coal
equipment products equipment products products products
nec nec
Gas Paper Motor vehicle Machinery Mineral Petroleum, Mineral Paper Mineral Manufactures
products, and products coal products products, products nec
publishing equipment nec products nec publishing nec
nec
Mineral Chemical, Transport Manufactures Forestry Paper Minerals nec Motor Chemical, Ferrous
products rubber, equipment nec products, vehicles rubber, metals
nec plastic publishing and parts plastic
products products
Sugarcane
Wood
Ferrous Fishing Fishing Ferrous Sugar cane Chemical, and sugar Machinery Paper
products
metals metals and sugar rubber, beet and products,
beet plastic equipment publishing
products nec
Chemical, Metals nec Food Electronic Chemical, Sugar cane
rubber, products equipment rubber, and sugar
plastic plastic beet
products products

151
In China, 31% increase in CO2 emission is expected from sugar sector, 18% from
electronic equipment, 9% from gas sector and 6% from wearing apparel, respec-
tively. So the gas is the common sector that falls under the top six sectors’ rank in
ASEAN+3 2020 and also contributes highest emission in China due to tariff reduc-
tion. Though the sectors like electronic and wearing apparel do not appear in top
six sectors’ rank but it is expected to emit more emission in ASEAN+3 integration.
Similarly for Japan and the Republic of Korea where metal nec and motor vehi-
cle are common in both BAU and integration scenario responsible for highest CO2
emission. Metal nec (9.97%), meat products (7.98%) and ferrous metal (7.15%) are
likely to add CO2 emission in Japan. While for the Republic of Korea the sectors
are leather products, metal nec and motor vehicles, which may increase the CO2
emission. For Indonesia, chemical rubber and plastic, manufacturing equipment,
electronic equipment and textile and for Philippines only motor vehicle sector are
the leading contributor of CO2 emission at ASEAN+3 2020 compared to BAU 2020.
For Thailand, sugar cane and beet, sugar, transport equipment and chemical rubber
and plastic are expected to increase the volume of CO2 emission at ASEAN+3 2020
scenarios compared to BAU 2020 (Table 6.15). The principle sectors for Vietnam
are chemical rubber and plastic, textile, wearing apparel and wood products. For the
other economies like Singapore, Malaysia, and Other ASEAN, sectoral variation is
observed.
These CO2 intensive sectors will help us to evaluate the environmental perfor-
mance of the economy, how it would be if the economic integration materialises.
Further, the sectors that will be major actors in the country’s economy in 2020
throw some light on the development pattern of the country’s economy under free
trade. The question here is whether at all Japan and the Republic of Korea push the
ASEAN economy away from agriculture to non agriculture/emerging economies
through the economic integration. The developed economies might be influencing
the neighbouring nations through various tariff reforms. For example, sugar cane
and sugar beet is an agricultural commodity. Apart from traditional use, this sector
Table 6.15 Sectoral CO2 growth in ASEAN+3 integration at 2020 compared to BAU 2020 (%)
Sector China Sector Japan Sector Korea Sector Indonesia Sector Thailand
24 sug 30.96 36 nfm 9.973 29 lea 39.01 33 crp 24.16 24 sug 17.307
40 ele 18.26 20 omt 7.98 36 nfm 18.64 40 ele 20.67 6 c_b 13.56
17 gas 8.96 35 i_s 7.15 38 mvh 10.82 41 ome 19.82 39 otn 10.65
28 wap 5.77 27 tex 19.03 33 crp 7.29
Other
Malaysia Philippines Singapore Vietnam ASEAN
27 tex 53.34 3 8mvh 59.45 24 sug 62.45 33 crp 45.00 9 ctl 14.43
28 wap 43.98 41 ome 42.65 20 omt 43.94 28 wap 32.54 8 ocr 9.87
29 lea 35.65 33 crp 39.30 23 pcr 41.65 27 tex 16.28
21 vol 29.56 28 wap 29.84 26 b_t 35.77 29 wap 12.06

can be used as bio-fuel and exported to the neighbouring region. Through the eco-
nomic integration the demand for this commodity would likely to be enhanced in
Thailand and Vietnam.
It has been observed that few selected sectors are releasing CH4 emission
and these sectors are almost similar in BAU and trade liberalisation scenario
(Table 6.16).
It has been observed that sectors which generate BOD and COD in BAU and
trade scenarios are mostly common for some countries as identified in Tables 6.17
and 6.18.
For industrial waste, the identified sectors in the BAU 2020 continue to be impor-
tant in the trade scenarios across the countries. The electronic equipment is expected
to generate more waste in Thailand and China, while metal and minerals are likely
to add more waste in Japan and Republic of Korea in ASEAN+3 2020 (Table 6.19).
For Vietnam, chemical rubber and plastic and textile are likely to add more waste in
the country in ASEAN+3, 2020.
Due to trade liberalization some sectors increase their output level so also emis-
sion and other sectors reduce. Some sectors are sensitive for some pollutant in one
country, but the same does not hold for the other country. Among three GHG indica-
tors, CO2 responded strongly under the different trade scenarios compared to BAU.
But other GHG indicators responded moderately in trade agreement scenarios.
Water pollution would likely to increase in some ASEAN countries but industrial
waste in all the countries under RTAs.
Increase in emissions offsets the reduction in emissions for some sectors in
China, Japan and the Republic of Korea so the environmental impact will not be
unfavourable except industrial waste tariff reduction under different scenarios. For
the rest of the countries the environmental impact will not be too encouraging espe-
cially for Vietnam and Indonesia (except BOD) due to trade liberalization. Thailand
shows a mixed result, however.
Many environmental groups would claim that adverse resource depletion and
environmental degradation effects of trade policy reforms will be substantial, but
very few empirical studies have sought to investigate this (Chapter 2). On environ-
mental degradation, the following section suggests a way to examine the factors
responsible for changes in pollution. Changes in the scale of output, in tastes, in the
relative size of sectors, and in inputs and production technologies associated with
economic growth and market reform would likely to affect the level of pollution.
Table 6.16 CH4 growth in ASEAN+3 integration at 2020 compared to BAU 2020 (%)
17 gas 8.96 1 pdr 32.24 1 pdr 24.39 6 c_b 2.51 6 c_b 13.56 1pdr 4.65
6 c_b 3.57 17 gas 1.11 6 c_b 2.69 9ctl 2.11
3 gro 3.13 16 oil 0.43

154
Table 6.17 BOD growth in ASEAN+3 integration at 2020 compared to BAU 2020 (%)
Sectors China Sectors Japan Sectors Korea Sectors Indonesia Sectors Thailand Sectors Vietnam
24 sug 30.96 36 nfm 9.97 29 lea 39.01 33 crp 24.16 24 sug 69.30 21 vol 96.03
6
40 ele 18.26 35 i_s 7.15 36 nfm 18.64 27 tex 19.03 33 crp 57.29 33 crp 44.23
28 wap 5.77 34 nmm 3.17 30 lum 6.80 35 i_s 10.23 28 wap 39.54
27 tex 16.28
29 lea 12.06

6.4 Decomposition Analysis 155
Table 6.18 COD growth in ASEAN+3 integration at 2020 compared to BAU 2020 (%)
China Thailand
Wearing apparel 5.77 Electronic equipment 43.98

Indonesia CRP 57.29
CRP 24.8 Motor vehicle 7.39
Wood prod 6.8 Korea
Japan Paddy rice 24.39
Paddy rice 32 Vietnam
Beverages and tobacco 49.77
6.4 Decomposition Analysis
To understand further the different factors that might have contributed to the envi-
ronmental effects of growth and structural changes in ASEAN countries and CJK,
a decomposition analysis has been attempted. The environmental effects of trade
policy changes across the environmental indicators can be explained by the scale
(the change in the level of aggregate economic activity), composition (the change
in the contribution of each sector to output), and technology effect (the change
in production technology) (Strutt & Anderson, 2000). The decomposition devel-
oped here is similar to the ‘scale’, ‘composition’ and ‘technique’ effects of income
growth on the level of environmental emissions discussed by Dean (1996, 1998)
and Beghin, Dessus, Roland-Holst, and Van der Mennsbrugghe (1997), Beghin,
Bowland, Dessus, Roland-Holst, and Van der Mennsbrugghe (1998).
This decomposition analysis is useful for finding the causes of changes in
environmental impact.
6.4.1 Methodology of Decomposition Analysis
Following Strutt and Anderson (2000), the total change in pollution (P) can be
defined as the sum of the changes in pollution in each sector (Pj ):

n
P= Pj
j=1
The change in pollution in each sector j is the sum of the aggregate activity
effect (Ajo), the intersectoral composition effect (Cjo), and the technology effect
(Tj ). Thus,
Pj = Ajo + Cjo + Tj
156
Table 6.19 Industrial waste growth in ASEAN+3 integration at 2020 compared to BAU 2020 (%)
China Japan Thailand Vietnam Indonesia Korea
Mineral 2.08 Ferrous metal 7.15 Electronic 43.98 Chemical, rubber, 32.00 Vegetable oils 96.22 Metal nec 18.64
6
products nec equipment plastic products and fats

Oil 0.49 CRP 2.28 Ferrous metal 10.23 Wearing apparel 29.54
Electronic 18.26 Mineral 3.17 Textiles 16.28
equipment products nec
Leather products 12.06

Activity Effect
In the aggregate activity effect, increased economic activity results in increased
demand for all goods and services and therefore increased emissions. The change
in output due to the aggregate activity effect is the proportional change in aggregate
real output in the economy (w) multiplied by the initial output in each sector (Xj ).
From this we get the change in the scale of output in each sector with all sectors
growing at the aggregate growth rate of the economy. The change in the scale of
output in each sector is then multiplied by the initial environmental coefficient for
each sector (Eoj). This will provide the change in environmental emissions in each
sector due to the aggregate activity effect.
This can be written as
Ajo = Xj × w × Eoj
Composition Effect
Because some sectors are more polluting than others, changes in the composition
of output will change pollution, even if aggregate output does not change. The
intersectoral effect is measured by allowing the composition of output to change
while maintaining aggregate output at its initial level. Some sectors contract while
others do expand. The change in sectoral output due to the intersectoral composition
effect is obtained by multiplying the initial output in each sector by the difference
between the proportional change in output in that sector (xj ) and the aggregate pro-
portional change in output in the economy (w) to provide the change in the relative
size of each sector. This change in the contribution of each sector is then multiplied
by the initial environmental coefficient for each sector so that we can get sector’s
change in environmental emissions due to the intersectoral composition effect. This
can be expressed as
Cjo = Xj × (xj − w) × Ejo
Technology Effect
The technology effect is modeled using past behaviour of the environmental param-
eters and also considering anticipated changes in production methods. Changes
in technology will change the amount of degradation caused by each unit of out-
put in each sector. Total emissions with the new coefficients are then compared to
total emissions with the old environmental coefficients in place. This effect can be
written as
Tj = {(Ajn − Ajo) + (Cjn − Cjo)} + {Xi × (Ejn − Ejo)}

where
Ajn = Xj × w × Ejn
and
Cjn = Xj × (xj − w) × Ejn
The first square bracketed term of the above equation reflects the new environ-
mental coefficient (Ejn) applied to both the aggregate activity and the intersectoral
composition components of changes in output. The second square bracketed part
of the equation reflects the idea that the initial output in each sector will also be
produced using the new technology and will therefore contribute to a change in
emissions.
However, for policy changes such as trade reforms where we start from the appro-
priate updated database, it is assumed that the new technology is in place and that
the trade liberalization itself does not change the environmental coefficients (Strutt
& Anderson, 2000).
Here we analyse the decomposition of the GHG emissions (CO2 , CH4 , and N2 O)
and BOD effects to give a more precise indication of the relative magnitudes of
the aggregate activity, the intersectoral composition and the technology effects. As
we know that, the aggregate output effect increases each sector’s output, while the
technology and intersectoral composition effects may add to or dampen the impact
of increased aggregate output on emissions.
6.4.2 GHG Indicators at BAU 2020
The decomposition of air pollution suggests that the aggregate activity effect is the
main driving force behind the increase in projected emissions. But the intersectoral
composition effects of structural change add to that effect for some GHG indicators
across the countries. This is because there is a relatively high increase in the con-
tribution to output of high air polluting sectors such as electricity, chemical rubber
and plastic, manufacturing and transport sector.
While the aggregate activity effect, and to a much lesser extent the intersec-
toral composition effect, increase air pollution in 2020, many sectors’ emissions
of carbon, methane and nitrogen dioxide grow less rapidly than output because of
improvements in energy efficiency. This is shown by the technology effect which is
negative in China, Japan, Republic of Korea, Singapore and Vietnam for CO2 and
NO2 ; and Japan and Republic of Korea for CH4 . This reflects that the improved tech-
nologies are expected to become available in 2020. On the other hand, for rest of the
countries, the positive sign on technology effect over the period implies that techno-
logical improvement would not be possible for the CO2 and other GHG indicators
(Tables 6.20, 6.21, 6.22).
Table 6.20 Decomposition effect of CO2 , BAU 2020 (Gg)
BAU 2020 Activity effect Composition effect Technology effect Total changes
China 12035458 −172787 −3231209 8631462

Japan 428251.6 8911.385 −225601 211562.4
Korea 523823.3 −65246.4 −183865 274712.3
Indonesia 482134 −86238.4 155058.4 550953.9
Thailand 317998.7 −88501.9 18729.61 248226.4
Vietnam 128411.8 10903.51 −22223.9 117091.4
Malaysia 178442.4 −16599.7 68293.54 230136.3
Philippines 83415.29 −5001.98 43032.77 121446.1
Singapore 71938.1 −6173.3 −26195 39570.2
Other ASEAN 21667.68 −516.364 42059.31 63210.63
Table 6.21 Decomposition effect of CH4 , BAU 2020 (Gg)
BAU 2020 Activity effect Composition effect Technology effect Total change
China 170526.04 −82397.49 37905.51 126034.1

Japan 407.14 −31.77 −57.23 318.14
Korea 1246.78 −624.65 −161.92 460.217
Indonesia 15550.93 −4103.49 2629.28 14076.72
Thailand 8932.41 −6918.20 4353.01 6367.21
Vietnam 9013.10 −2795.17 2326.56 8544.48
Philippines 1268.654 −365.915 1420.442 2323.18
Singapore 13.73997 −4.40939 8.977639 18.30
Table 6.22 Decomposition effect of N2 O, BAU 2020 (Gg)
China 9392.734 −4703.39 −390.82 4298.53

Japan 31.03 −1.08 −4.91 25.05
Korea 58.04 −17.55 −1.21 39.29
Indonesia 239.88 −150.75 189.28 278.41
Thailand 52.53 −38.30 18.79 33.03
Vietnam 67.163 −10.88 −24.95 31.34
Philippines 27.15 −9.91 7.80 25.04
Singapore 5.32 0.82 −1.85 4.30
It is important to note that for most of the developing countries and also for the
Republic of Korea, composition effect is negative for the CO2 indicator under BAU
2020. Japan and Vietnam have positive results in BAU 2020. This implies that the
CO2 intensive industries are expected to expand in Japan and Vietnam in 2020.
On the whole, the scale or activity effect is positive for all the countries
in BAU, 2020.
Table 6.23 Decomposition Effect of BOD, BAU 2020 (tons)
China 68053052 −18106465.2 −15729812 34216775

Japan 1007504 11080.2281 −1169669.8 −151085
Korea 3577600 −1534733.94 −1615555.7 427310.6
Indonesia 2553348 142550.487 −941807.02 1754091
Thailand 5548998 −2220819.14 −1470930.7 1857248
Vietnam 431891 −57154.07 −127133.5 247603.5
6.4.3 GHG Indicators in Trade Liberalisation Scenarios
In the trade scenarios, in which economic growth is assumed to be boosted by trade

liberalization, some sectors reduce and other sectors increase their output level
because of trade reforms. We therefore can expect the composition effects to be
much stronger relative to the aggregate activity effects in these reform cases, in
contrast to the growth and structural change scenarios. The decomposition anal-
ysis shows that the aggregate activity effect adds to air pollution (CO2 ) but the
change in the intersectoral composition of output reduces air pollution to some
extent (Table 6.24). This phenomenon is not being observed for all the countries.
The negative composition effect is found in MEI and DEI 2020 for all the
countries under study except Japan, Republic of Korea and Indonesia for CO2 emis-
sion. But China, Thailand, Philippines, Singapore and other ASEAN show negative
composition effect for ASEAN+3 at 2020 also. The rest of the countries (Japan,
Korea, Indonesia, Vietnam and Malaysia) record positive composition effect under
ASEAN+3 at 2020. It highlights the fact that both the developed and developing
countries under the study are likely to increase CO2 intensive industries as a result
of trade liberalisation. This mixed evidence neither supports nor contradicts the
pollution haven hypothesis.
The composition effect of N2 O and CH4 is negative for all the countries in dif-
ferent trade scenarios (except Japan and the Republic of Korea) (Tables 6.25 and
6.26). However, the exceptions are found for Japan and the Republic of Korea under
ASEAN+3 at 2020 and the Republic of Korea at DEI 2020 in case of CH4 .
6.4.4 Decomposition Effect on BOD in BAU

and Trade Scenarios
It has been observed from the study that aggregate activity effect is positive for
emissions of BOD (Table 6.23). However, emissions rise is significantly less than
the proportional increase in total output in all the countries. This is mainly due
to the improved technology assumed to be available in BAU 2020. The negative
technology effect is observed for all the countries in BAU 2020. The intersectoral
Table 6.24 Decomposition effect of CO2 under different scenarios (Gg)
MEI 2020 Activity effect Composition effect Total changes
China 25484.49 −104481.81 −78997.32

Japan 412.92 4313.10 4726.02
Korea −1212.68 4648.15 3435.48
Indonesia 10064.06 6676.99 16741.04
Thailand 21455.34 −5986.61 15468.73
Vietnam 10505.08 −6371.01 4134.07
Malaysia 2828.25 −3376.51 −548.26
Philippines 1803.80 −928.39 875.41
Singapore 2496.55 −3903.18 −1406.64
Other ASEAN 102.84 −462.92 −360.08
DEI 2020
China 24767.06 −92717.17 −67950.11
Japan −572.84 5358.67 4785.83
Korea 906.82 6375.80 7282.62
Indonesia 15211.77 4001.85 19213.62
Thailand 31548.08 −15438.60 16109.49
Vietnam 13551.55 −7504.65 6046.90
Malaysia 8710.67 −4495.73 4214.95
Philippines 5070.42 −3040.06 2030.36
Singapore 4970.09 −8748.62 −3778.52
Other ASEAN 198.33 −1221.69 −1023.36
ASEAN+3 2020
China 27562.96 −245810.85 −218247.90
Japan 85.85 9459.78 9545.63
Korea 1817.53 1074.11 2891.64
Indonesia 17808.21 9959.48 27767.70
Thailand 27812.88 −8804.28 19008.60
Vietnam 21884.97 4925.28 26810.26
Malaysia 12319.47 11376.04 23695.51
Philippines 4329.44 −482.24 3847.20
Singapore 3118.80 −6328.99 −3210.19
Other ASEAN 108.34 −2171.01 −2062.67
composition effect for BOD is positive for Indonesia and Japan due to the increased
relative significance of the polluting industries in BAU 2020. But for the other
countries it turns out to be negative. This was due to the fact that the technology
would be improved and coefficients reduced in 2020.
The assumed technology effect offsets the aggregate activity effect for BOD in
BAU 2020. The technology effect is sufficiently strong to dampen the positive aggre-
gate activity and intersectoral effects to produce a net reduction in pollution for BOD
in Japan.
For trade agreement scenarios the composition effect for BOD is positive for
Japan and the Republic of Korea in MEI 2020 and DEI 2020, while it is negative
for other countries. The activity effect is positive for all the countries except Japan
Table 6.25 Decomposition effect of CH4 under different scenarios (Gg)
China 369.56 −105.98 263.58

Japan 0.44 −3.51 −3.08
Korea −2.49 −1.57 −4.06
Indonesia 276.52 −749.85 −473.33
Thailand 570.53 −1298.45 −727.92
Vietnam 758.60 −586.49 172.11
Philippines 38.06 −135.29 −97.24
Singapore 0.60 −0.65 −0.05
DEI 2020
China 359.16 −348.92 10.23
Japan −0.61 −78.14 −78.75
Korea 1.86 11.48 13.35
Indonesia 417.96 −1004.96 −587.00
Thailand 838.91 −2333.73 −1494.83
Vietnam 978.59 −1025.82 −47.22
Philippines 106.98 −384.12 −277.14
Singapore 1.19 −1.53 −0.33
ASEAN+3 2020
China 399.70 −2468.93 −2069.23
Japan 0.09 113.25 113.34
Korea 3.73 86.01 89.74
Indonesia 489.30 −1087.32 −598.02
Thailand 739.58 −3138.12 −2398.54
Vietnam 1580.37 −1560.93 19.44
Philippines 91.34 −441.36 −350.02
Singapore 0.75 −0.91 −0.17
(DEI 2020) and the Republic of Korea (MEI 2020). It is also evident from the out-
put growth in Table 5.3. The total effect shows negative for all the countries except
Japan and Korea in these two scenarios (Table 6.27). For ASEAN+3 2020, the dif-
ference in the contribution of the effects have been observed. The activity is adding
a little to total change in BOD in Japan, while composition effect contributes sig-
nificantly to total change. But composition and activity effect are positive for Japan,
Korea and Indonesia in all economic integration scenarios. The rest of the countries
had negative composition effects, similar to the CO2 . This reflects that pollution
intensive industries expanded in Japan, Korea and Indonesia.
Thus the decomposition analysis throws insight into the role of different factors
responsible for pollution changes of the countries under the BAU and various trade
scenarios. The contribution of factors on the pollution change varies across countries
and scenarios.
Table 6.26 Decomposition effect of N2 O under different scenarios (Gg)
China 14.36 −23.51 −9.15

Japan 0.03 −0.07 −0.03
Republic of Korea −0.15 −1.04 −1.19
Indonesia 5.06 −5.63 −0.57
Thailand 3.12 −5.99 −2.87
Vietnam 3.54 −1.15 2.39
Philippines 0.58 −1.52 −0.94
Singapore 0.11 0.36 0.47
DEI 2020
China 13.96 −37.94 −23.99
Japan −0.05 −0.24 −0.28
Republic of Korea 0.11 −0.82 −0.71
Indonesia 7.65 −16.77 −9.12
Thailand 4.59 −12.22 −7.63
Vietnam 4.57 −2.67 1.91
Philippines 1.63 −4.18 −2.54
Singapore 0.22 0.94 1.16
ASEAN+3 2020
China 15.53 −85.04 −69.51
Japan 0.01 0.13 0.13
Indonesia 8.96 −20.16 −11.20
Thailand 4.05 −13.91 −9.86
Vietnam 7.38 −7.86 −0.48
Philippines 1.40 −4.16 −2.77
Singapore 0.14 0.65 0.78
Overall, the decomposition of total pollution shows that activity effects play a
significant role across pollutants and among countries. The role of technology and
composition effects fluctuated.
In conclusion, the values of the composition effect for different environmental
indicators seem to contradict or at least not to support the pollution haven hypothe-
sis. It is observed that the composition of the industries in the developing countries
tends to become cleaner with trade liberalization while the opposite happens in the
industrialized countries. Also given the MEI and DEI scenarios, Thailand benefits
the most in term of negative composition effect. On the other hand, the composi-
tion effect becomes positive for Japan in case of CO2 and BOD. However, with
the adoption of trade liberalization among all countries under the ASEAN+3 sce-
nario, results indicate that all countries benefit with increased economic growth and
a slight decrease in environmental damage when compared to the BAU. This may
provide a further incentive to pursue greater trade liberalization among the countries
in the study.
Table 6.27 Decomposition effect of BOD under different scenarios (tons)
China 111007.79 −257116.87 −146109.08

Japan 721.24 9151.31 9872.55
Korea −5306.15 48264.37 42958.22
Indonesia 38148.14 −61776.72 −23628.58
Thailand 243008.61 −698806.65 −455798.04
Vietnam 25796.39 −40308.83 −14512.44
DEI 2020
China 107882.71 −309220.77 −201338.06
Japan −1000.57 12933.05 11932.48
Korea 3967.86 21063.23 25031.10
Indonesia 57660.69 −67885.80 −10225.11
Thailand 357321.55 −816574.58 −459253.02
Vietnam 33277.34 −46347.10 −13069.77
ASEAN+3 2020
China 120061.35 −807253.48 −687192.13
Japan 149.96 20608.09 20758.05
Korea 7952.73 −16898.67 −8945.94
Indonesia 67502.60 −131895.80 −64393.20
Thailand 315015.69 −1257565.65 −942549.96
Vietnam 53740.99 −67458.02 −13717.03

Chapter 7
Strategies for Green Trade
7.1 Introduction
In Section 3.3 of Chapter 3 we have reviewed the environmental problem of the

East and South East Asian countries. We also discuss the policies adopted by the
respective government.
In Chapter 6, we estimate the impact of RTA scenarios on the environment among
ASEAN and China, Japan and the Republic of Korea for the year 2020. The RTA
scenarios developed among ASEAN and Japan, the Republic of Korea and China for
2020 reveal positive outcomes for most of the countries in terms of economic growth
and welfare, but deterioration in the environment has also been noted for some coun-
tries. The environmental impact depends on the country’s output growth due to trade
liberalisation and technological development. Overall, the environmental impact is
found to be marginal in Japan and the Republic of Korea due to the economic inte-
gration. The environmental quality is likely to decrease in other countries, however.
This is particularly observed for Vietnam and Indonesia (except BOD). Thailand
shows mixed results concerning the environmental impact.
East and South East Asia experienced remarkable economic growth over the last
two decades or more. However, this economic progress has created serious envi-
ronmental consequences (detail in Chapter 3). Market-based instruments, such as
pollution charges, green taxes, tradeable permits, and penalties for the infringement
of environmental regulations, are common tools to internalize externality costs into
the market prices. Many Asian countries have traditionally relied on rigid command-
and-control (CAC) approaches. With the poor environmental performance of such
approaches and the cost and complexity associated with their implementation, more
and more countries in this region are shifting from current reliance on CAC reg-
ulations to market-based policy instruments (Zhang, 2008). The added pollution
charges will be imposed on polluting companies as a simple cost of doing busi-
ness that can be reduced by cutting pollution. This is seen to increase not only cost
effectiveness but also flexibility in complying with the set of environmental regula-
tions. For example, some Provinces in China raised charges for SO2 emissions from
current level of 0.6 to 1.2 Yuan per kilo of pollution equivalent from July 1, 2007
(People Net, 2007; Sinanet, 2007). Economic instruments such as pollution charges
increase the costs of production, and thus provide positive incentives to abate


166 7 Strategies for Green Trade
emissions. Inspite of good economic reasons these economic instruments do not

work to their full potential, however. Normally the pollution is tolerated up to the
point where the expected penalty for pollution becomes greater than the cost of con-
trolling emissions. However, if the charges and fines are set too low as have been the
case in many developing countries, many polluting firms consider their compliance
costs higher than the fines, and accordingly choose to pay the fines rather than to
reduce their pollution (Zhang, 2008).
Now we are turning to the discussion of the policies for the selected pollutants
derived from the analysis of the findings of the study. The chapter also assesses the
feasibility of the suggested policies to achieve sustainable development.
For that, the impacts of alternative environmental policy packages are estimated
on the economic growth, environment and welfare of the study areas.
In order to address the environmental concerns that resulted from the economic
integration a number of environmental policies are introduced into the analysis.
This is done using trade related environmental policies (TREMS) and environment
related trade measures (ERTM). The integration of TREMS and ERTM into the
analysis is expected to achieve the objective of benefiting from the gains from trade
while protecting the environment.
Several environmental policy scenarios are investigated to analyze their impact
on the economy and environmental indicators. Since the scenarios are expected to be
materialised at 2020, the policy implementation is also framed on 2020 scenarios. It
should be mentioned that the experiment has been carried out considering only one
environmental indicator, CO2 .
The policies introduced into the analysis are:
(1) A multiple sector tax is imposed across countries depending on the CO2 emis-
sion level. This scenario is introduced for two cases—moderate and drastic,
taking into account different tax rates.
(2) The electricity sector is found to be a major source of CO2 across all the coun-
tries and indirectly responsible for other pollution intensive sectors (see note
19). Therefore, a tax on the electricity sector is introduced into the model to
tackle the pollution generated directly from this sector as well as indirectly from
other sectors.
(3) Finally, a tax on high polluting primary energy inputs is also introduced. This
tax is applied on coal and oil as a measure to control the pollution from these
inputs.
Such application of economic instruments is one way of promoting more eco

efficient production and consumption which, in turn, will promote sustainable
development.
7.2 Multiple Sector Tax
A set of sectors are targeted for a tax after assessing one to one correspondence
between exports of the ASEAN region and Japan, China and the Republic of Korea
7.2 Multiple Sector Tax 167
under the economic integration scenarios and the most pollution intensive sectors for
each economy. DEI 2020 and MEI 2020 are the two economic integration scenarios
that are considered for the tax implementation. Moderate and drastic measures are
attempted under this strategy.
7.2.1 Assessment of Moderate Multiple Sector Tax
The weight of the tax is determined by the extra pollution (percentage increase),
generating from each trade scenario compared to BAU 2020. The range of tax
weights on DEI and MEI varies from 2 to 60% and varies by industrial sectors
(Table 7.1).
A mixed outcome is observed from both trade scenarios (Table 7.2). The imple-
mentation of the tax is expected to reduce output in all countries marginally except
the Republic of Korea. The tax is likely to decrease CO2 in all countries except
Vietnam and China under DEI scenario and Vietnam, China and Thailand under
MEI scenario. It is interesting to note that welfare is likely to be improved for most
of the countries in both the scenarios (MEI and DEI) except China, Indonesia and
Table 7.1 Multiple sector

tax (moderate) Countries Sectors
China Electronic equipment

Gas
Japan Ferrous metals
Mineral products nec
Republic of Korea Ferrous metals
Textile
Motor Vehicle
Animal products
Indonesia Machinery and equipment
Wood products
Electronic equipment
Textile
Thailand Chemical rubber and plastic
Machinery and equipment
Sugarcane and beet
Vietnam Leather products
Textile
Transport equipment
Chemical rubber and plastic
Malaysia Textile
Wearing Apparel
Leather products
Vegetable oils and fats
Philippines Chemical rubber and plastic
Wearing Apparel
Motor vehicle
Singapore Mineral products nec
Table 7.2 Impact of multi-sector tax (moderate) in different scenarios
Multi-Sector tax for DEI scenario

Output Changes (mUSD) −16753.2 −192.77 829.96 −2256.35 −1671.38 −1637.87
CO2 reduction (Gg) 17027.34 −1651.15 −2459.02 −7796.32 −8499.44 5175.04
Welfare (mUSD) −713.52 318.32 785.69 −459.09 899.4 1871.32

Output Changes (mUSD) −1489 −1062 −545
CO2 reduction (Gg) −2765 −953 −827
Welfare (mUSD) 1806.78 −1715.82 2000.09
Multi-Sector tax for MEI scenario

Output Changes (mUSD) −16911.6 −225.94 136.93 −1719.02 −694.04 −1673.02
CO2 reduction (Gg) 17395.66 −1446.44 −2644.33 −6277.4 −5941.13 4986.88
Welfare (mUSD) −55.72 −10.27 94.32 11.09 95.5 −509.49
Output Changes (mUSD) −1356 −1178 −967
CO2 reduction (Gg) −2190 −1021 −1103
Welfare (mUSD) 5.24 78.98 −71.97
the Philippines in DEI scenario and China, Vietnam, Singapore and Japan in MEI
scenario.
7.2.2 Assessment of Drastic Multiple Sector Tax
In this scenario the tax rate is determined by setting the pollution target to the
amount of pollution generated in the 2010 BAU scenario. Setting the volume of
pollution at this level requires a much larger tax than in the previous scenario, and
thus is labelled ‘drastic’. This is done for the intensive pollution industries across
the countries and directed mainly at CO2 emissions. The 2010 target is then com-
pared with the DEI and MEI scenario. The multiple sector tax weights varied from
5 to 70% across the sectors (Table 7.3).
The results indicate that the implemented tax would likely to decrease industrial
output in all countries except Japan in the DEI scenario. It is also expected to reduce
CO2 emissions across all countries (Table 7.4). For the MEI scenario, all countries
would likely to have decreased industrial output with the implementation of the tax
except Japan. Japan has positive output growth. The tax is expected to decrease
CO2 emissions in all countries including Japan under this scenario (Table 7.4). The
7.3 Tax on Electricity 169
Table 7.3 Multi-sector tax

(drastic) Countries Sectors
China Ferrous metals

Mineral products nec
Gas
Japan Textile
Paper products
Chemical rubber and plastic
Republic of Korea Ferrous metals
Textile
Motor Vehicle
Transport Nec
Indonesia Machinery and equipment
Petroleum and coal tar products
Electronic equipment
Oil
Thailand Mineral products nec
Petroleum and coal tar products
Machinery and equipment
Vietnam Petroleum and coal tar products
Manufactures nec
Metals nec
Malaysia Petroleum and coal tar products
Mineral Products Nec
Wood products
Philippines Motor vehicle
Ferrous metal
Singapore Petroleum and coal tar products
Mineral Products Nec
welfare is expected to reduce in China, Indonesia and Vietnam. But the rest of the
countries will increase marginally in DEI scenario. In MEI scenario, all the countries
will reduce welfare except Japan, Thailand and Singapore.
7.3 Tax on Electricity
Another policy option is to implement a tax that would bring the CO2 emissions
of the electricity sector to 2010 level. Different tax weights (e.g. China 48%, Japan
5.5%) are implemented on electricity across the countries on the basis of the per-
centage changes in the volume of pollution compared to BAU 2010. This experiment
is applied to both DEI and MEI scenarios. The results of the experiment are reported
in Table 7.5.
Though the output reduced marginally for the sector itself and total output for
almost all the countries, it reduced CO2 emissions substantially, especially in China
and Japan under both the scenario. However, there is no change observed for the
electricity sector in Indonesia, but total output increased along with a CO2 reduc-
tion under DEI scenario. For Thailand, a marginal decline in CO2 emission in the
Table 7.4 Impact of multi-sector tax (drastic) in different scenarios
Multi-sector tax for DEI scenario 2020 based on 2010 emissions

Output changes (mUSD) −9481.32 5045.51 −10141.3 −12340.6 −4612.57 −874.95

CO2 Changes (Gg) −8359.75 −6271.7 −36726.5 −95058.2 −71187.4 −32762
Welfare (mUSD) −295.54 73.4 70.03 −61.14 4.17 −39.24
Output changes (mUSD) −4907 −3745 −438
CO2 Changes (Gg) −13612 −10536 −8987
Welfare (mUSD) 0.36 1.53 10.63
Multi-sector tax for MEI scenario 2020 based on 2010 emissions
Output changes (mUSD) −9480.2 5620.413 −9771.15 −11950.9 −4035.37 −831.461
CO2 Changes (Gg) −7255.41 −6462.92 −36247.5 −93259.1 −65975.3 −31735.2
Welfare (mUSD) −453.6 103.2 −278.3 −591.4 10.25 −193.26
Output changes (mUSD) −6034 −4076 −345
CO2 Changes (Gg) −12831 −9576 −9541
Welfare (mUSD) −45.39 −97.33 31.22
electricity sector is observed but total CO2 emission for the country increased under
both scenarios. It is interesting to note that the tax on electricity sector affects the
other sectors indirectly. A marginal welfare improvement has been possible for most
of the countries except China, Indonesia and Vietnam under both scenarios.
7.4 Tax on Coal and Oil
The major inputs used by the electricity sector are primarily coal and oil. Other
sectors use coal and oil as inputs besides the electricity sector. A tax is implemented
on coal and oil sector. For example, Thailand, the Republic of Korea and Japan used
coal and gas as the major input into their electricity sector and only oil marginally.
China, Malaysia and the Philippines used coal and oil, but gas only marginally.
Vietnam and Indonesia are mainly using coal for the electricity sector while gas and
oil marginally. Since the coal sector is already taxed in Japan and Republic of Korea
these countries are not included in this tax scenario. For other countries tax weight
is used similar to the electricity tax. A tax is not implemented on gas because it is a
cleaner input relative to coal and oil. The results of the experiment are produced in
Table 7.6.
The result from this tax scenario indicates that sectors such as coal and oil are
expected to reduce their output marginally except Indonesia, Thailand and Vietnam
7.4 Tax on Coal and Oil 171
Table 7.5 Impact of electricity tax in different scenarios
Electricity tax on DEI

Output changes for −2512.41 −563.929 6.490 0 −22.67 −9.34

electricity (mUSD)
CO2 reduced (Gg) −63293.5 −897.025 11.11 0 −75.84 −36.33
Total output changes −803.626 −343.809 −77.66 18.39 −3.05 −86.22
(mUSD)
Total CO2 reduced −72518.8 −1014.91 237.44 −189.074 119.422 −870.95
(Gg)
Welfare (mUSD) −302.28 103.02 98.79 −62.71 12.26 −41.3
Output changes for −91.80 −81.45 −37.64
electricity (mUSD)
CO2 reduced (Gg) −205.23 −191.12 −127.92
Total output changes −231.66 −321.41 −134.75
(mUSD)
Total CO2 reduced −494.33 −380.41 −298.39
(Gg)
Welfare (mUSD) 8.69 1.56 10.35
Electricity tax on MEI

Output changes for −2509.72 −563.172 6.41 2.069 −12.30 −19.62
electricity (mUSD)
CO2 reduced (Gg) −63225.8 −895.822 10.98 5.75 −41.16 −76.3001
Total output changes −837.957 −313.022 −31.8417 36.66 −18.52 −81.32
(mUSD)
Total CO2 reduced −72242.8 −1008.49 326.4269 −139.204 115.35 −870.357
(Gg)
Welfare (mUSD) −227.31 123.33 76.77 −47.26 11.41 −28.63
Output changes for −121.80 −56.45 −23.65
electricity (mUSD)
CO2 reduced (Gg) −185.23 −101.12 −104.10
Total output changes −262.12 −189.34 −178.23
(mUSD)
Total CO2 reduced −394.33 −217.41 −314.19
(Gg)
Welfare (mUSD) 9.37 1.13 8.08

Table 7.6 Tax on coal and oil in different scenarios
Coal, oil tax on DEI

Coal sector China Indonesia Thailand Vietnam Malaysia Philippines
Output changes (mUSD) −20.222 −5.59 −0.209 −0.28 −3.325 −4.67

CO2 changes (Gg) −2670.85 −0.00015 −9E-05 −0.0056 −10.456 −10.953
Oil sector China Indonesia Thailand Vietnam Malaysia Philippines
Output changes (mUSD) −134.487 1.512 0.046 0.566 −10.524 −9.358
CO2 changes (Gg) −9610.18 31.422 6.81E-05 5.13E-07 −39.309 −28.34
Total output changes China Indonesia Thailand Vietnam Malaysia Philippines
Output changes (mUSD) 1535.682 51.211 17.786 −32.0442 −42.36 −29.65
Total CO2 Changes (Gg) −14153.4 4.3712 −77.2361 −57.664 −92.42 56.71
Coal, oil tax on MEI
Coal sector China Indonesia Thailand Vietnam Malaysia Philippines
Output changes (mUSD) −19.99 −5.67 −0.25 −0.29 −9.327 −4.231
CO2 changes (Gg) −2640.23 −0.00015 −0.00011 −0.005 −100.23 −76.23
Oil sector China Indonesia Thailand Vietnam Malaysia Philippines
Output changes (mUSD) −134.438 1.53 0.050 0.580 −23.346 −12.43
CO2 changes (Gg) −9606.67 31.9 7.39E-05 5.26E-07 −269.45 −136.12
Total output China Indonesia Thailand Vietnam Malaysia Philippines
Output changes (mUSD) 1510.748 50.85 9.66 −34.66 −61.73 −45.31
CO2 changes (Gg) −14118.2 0.825 −79.481 −79.66 −349.34 −196.14
for oil under both scenario. The total output is reduced for Vietnam, Malaysia and
the Philippines under both scenarios while it has increased for other countries. CO2
emissions are likely to be reduced significantly for China under both scenarios. This
is expected to occur because China uses more coal to generate electricity than any
other country under the agreement.
As we have seen from the environmental impact in Chapter 6 that CO2 is an
important pollutant, but the other pollution indicators also cannot be ignored.
7.5 Policy Option for Industrial Waste
The discussion of the results of Chapter 6 suggests that industrial waste is likely to
increase in 2020 and will be a matter of concern for the East and South East Asian
countries in future. Chapter 5 also reveals that waste generated sectors are expected
to be prominent in BAU and various trade liberalisation scenarios at 2020. Though
Japan, the Republic of Korea already implemented several industrial policies to con-
trol industrial waste (as briefed in Chapter 3), however, not reflected from the result
of Chapter 6. The industrial waste management is weak in the ASEAN countries.
7.5 Policy Option for Industrial Waste 173
In this context, we can suggest few common best practices particularly for
ASEAN countries to manage the effective disposal of industrial waste, to reduce the
volume of waste generated, and to promote the development of waste minimization
technology (ASEANSEC20 ).
The following practices can be thought of for application.
Waste disposal and collection—Provision of adequate and appropriate munic-

ipal waste disposal facilities (e.g. incineration plant, landfill) to handle the
refuse generated, and a “cradle to grave” system to manage and dispose of
industrial and toxic wastes and a comprehensive waste collection system.
Legislation and enforcement—Policy and prospective plan for enhancement
and conservation of national environmental quality and performance-based
legislation with effective and transparent enforcement system to regulate
waste collectors and curb illegal dumping and open burning of waste.
Waste reduction—Adoption of disposal fees/tax based on polluter-pays princi-
ple and incorporation of costs for waste collection and disposal in a combined
bill to reflect full cost of disposal and discourage excessive waste generation.
Recycling technology—National/City Recycling Programme; 3R Programme
(Reduce, Reuse and Recycle) and creation of a conducive environment and
market to attract a diversified scope of recycling companies (e.g. horticultural
waste, food waste, paper, copper slag, construction and demolition waste,
etc) in the recycling market.
Waste minimisation—Programmes/measures to encourage minimal packaging
for consumer products, for e.g. to minimize excessive distribution of plastic
bags, introduction of take-back scheme for certain products.
Awareness and education—Introduction of formal and informal environmental
education programmes to increase awareness and inculcate environmental
responsibility on waste minimisation and recycling, to implement eco-
labelling as a means for encouraging green awareness and raising public
awareness on the proper management and disposal of waste.
Several environmental policies are suggested and applied in the analysis. These
include different environmental taxes to assess their impact on the economy and
the environment. Among all the tax scenarios, the electricity tax is found to be
most effective in reducing CO2 emission for most of the countries. Thus the chap-
ter demonstrates the possibility of the application of market based instruments in a
multi regional general equilibrium framework. The chapter also outlines few policy
options for industrial waste.
Chapter 8
Summary and Conclusion
‘The natural benchmark for thinking about international economic integration is to

consider a world in which markets for goods, services, and factors of production
are perfectly integrated’ (Rodrik, 1999). Economic integration among the East and
South East Asian countries has been an important agenda item for the academic and
policy communities in recent years.
As we have seen in Chapter 3 that most of the East and South East Asian
countries have broadly similar growth pattern. The region has been bestowed with
human and natural resources essential for rapid development. Many common chal-
lenges call for mutual beneficial cooperation and exchange in different fields such
as economic, political, environmental, social and cultural. The financial crisis of
1997–1998 which affected these economies had made them aware of the necessity
to institutionalize their cooperation and consolidation to cope with their problems
(Hasmi & Lee, 2008). These economies have started to pursue trade liberalization
policies, to enhance and strengthen economic cooperation for achieving economic
prosperity.
Towards that direction, the current book evaluates the impacts of regional eco-
nomic integration in East and South East Asian countries. In particular, the study
estimates the economic and environmental impacts of trade liberalization in these
countries by the year 2020 using a GTAP framework. The environmental impacts
are estimated with a number of environmental indicators-air pollutants (CO2 , CH4 ,
and N2 O), water pollutants (BOD, COD, and SS) and industrial waste. The impact
of alternative environmental policy packages is also evaluated.
The book consists of eight chapters.
Chapter 1 contains the research problem of the study. It presents a thorough
overview of the regional economic integration around the world with particular
attention on East and South East Asian integration.
Chapter 2 makes an extensive literature survey in the field of regional economic
integration covering different frameworks attempted. The review analyzes studies
related to the economic effects of RTAs and its sectoral and regional implications
as well as environmental and poverty implications. To address these impacts the
empirical research identifies different methods to evaluate these. One relies on a
simulation approach based on global general equilibrium models to analyze the


176 8 Summary and Conclusion
economic effects of policy changes due to the formation of a RTA. The other method
applies econometric techniques to historical trade data and assesses the impacts of
the formation of a RTA on bilateral trade flows. The review critically addresses
all these literatures. The chapter continues by evaluating trade impact on the envi-
ronment, particularly addressed by those studies that use the general equilibrium
framework. This provides a picture of the gap on trade and environment literature
using different methods in East and South East Asian countries.
The economic and environmental status of the East and South East Asian
economies since the 1990s is portrayed in Chapter 3. This chapter provides the
background material for the model building and the subsequent empirical experi-
ments to trace the direction of the future development of these economies to achieve
both their economic and environmental goals.
Chapter 4 describes the economic and environmental framework used in the
book. The GTAP database is augmented with environmental database to produce
a model that is used to evaluate the impact of economic integration in the region.
The book uses a CGE global model which includes households, industry, gov-
ernment and global sectors across countries. Countries and regions in the world
economy are linked together through trade. Prices and quantities are determined
through factor and commodity markets.
Apart from the theoretical framework, the chapter also includes detailed data
description of GTAP, data for macro projections (collected from various sources),
and environmental data sourced for East and South East Asian countries. The detail
regional aggregation scheme of GTAP data is also presented. This aggregation
includes 9 individual countries in East and South East Asia (Indonesia, Thailand,
Vietnam, Malaysia, the Philippines, Singapore, China, Japan, and the Republic of
Korea) and five other regions (Other ASEAN, NAFTA, Rest of OECD, ROW 1 and
ROW2) in the world. Further, the chapter provides various scenarios for the regional
trade agreement. The scenarios developed are based on regional scope (for exam-
ple: Within ASEAN or ASEAN-CJK or ASEAN+3), timing of tariff reductions (for
example: the reduction implemented at 2010 or 2015), degree of tariff reduction
(for example: 80 or 100% import tariff reduction and export subsidies), and the
nature of the commodities-agricultural versus non agricultural. Three major inte-
grations have been structured on the basis of tariff reduction policy, timing of tariff
and regional agreement. Deep integration (DEI) considers the early tariff reduction,
while medium integration (MEI) as late tariff reduction and business as usual (BAU)
is based on tariff structure in GTAP V6 of 2001.
Chapter 5 analyses the result on the economic impact of regional economic inte-
gration at 2020. The result shows that the East and South Asian economic integration
would increase output growth among the participating countries in the agreement.
Other countries will have a marginal negative growth. Among the participating
countries, Vietnam is estimated to achieve the highest output growth followed by
Thailand. The lowest positive growth is attained by Japan and the Republic of Korea.
China’s real output growth was not significantly affected with the different economic
integration scenarios, but China would gain in all of the trade agreement scenar-
ios. Among different regional agreement ASEAN+3 is favourable for most of the
8 Summary and Conclusion 177
countries under RTAs compared to the other scenarios. It reflects that if an economy
moves to a higher tariff reduction scenario (e.g. a deeper trade integration scenario),
output growth will increase for the participating countries, while non-agreement
countries decrease industrial output growth and are losers in all scenarios. The
model predicted a marginal increase in the total world exports and imports between
2001 and 2020 but a significant increase among the ten economies in the agreement
when compared to BAU. This was especially true for Vietnam, Indonesia, Thailand,
and Other ASEAN. It reflects that trade creation is likely to occur due to integra-
tion. Moreover, the direction of trade for member countries in each agreement under
various scenarios is concentrated within the region under the agreement which pre-
dicts a trade diversion movement (i.e. trade is diverted away from non- agreement
countries).
The percentage share of the top six sectors’ output fluctuate depending upon the
trade agreement scenarios across the countries but the sectors themselves remain
more or less constant from BAU to ASEAN+3, 2020. Some new sectors have
entered in the top six sectors, list due to the trade agreement scenarios compared
to BAU. The top six sectors in both exports and imports are common in most cases.
This is due to intra industry trade. Shares are sensitive to high tariff reduction in
Thailand, Vietnam and Indonesia. In China, Japan, and the Republic of Korea, the
changes in the sectoral performance of exports and imports are fairly small except
for a few cases (Electrical equipment for China, Ferrous for Japan).
The gains in welfare are mainly attributed to the countries belonging to the
ASEAN+3 region involved in the trade liberalization, while the rest of the regions
face a loss in welfare. Yet, not all the welfare gains are distributed evenly among the
ten economies involved in trade agreement. In the MEI scenario, China, Malaysia
and Thailand are the countries that experience the greatest welfare increases by
2020, while the Republic of Korea faces rather a decline in total welfare. In the
ASEAN+3 scenario, China, the Republic of Korea, and Thailand are the gainers by
2020. From these two scenarios, China and Thailand appear to gain the most welfare
from trade liberalization in the region.
Though medium economic integration at 2020 may likely to help reduce the
poverty but the ASEAN +3 agreement would not be helpful for poverty alleviation
in the region.
The region specific analysis shows that Vietnam’s performance is significant
compared to other countries in our scenario analysis. This is also reflected from the
recent ADB country report. Vietnam’s economy is robust and continues to expand
rapidly with GDP growth of 8.3% in 2007, and 8.5% in 2008. The country indeed
has been making a good progress in its economic development and reforms. Buoyant
investment and consumption pushes high economic growth. Rising investment led
to a steep 30.4% increase in merchandise imports in the first half of 2007, and
imports of capital goods increased by 46.5%. Imports of raw materials and inter-
mediate goods were also strong. With regard to exports, following WTO accession,
textiles and clothing rose by 25.9% in the first half of the year after the abolition
of quotas, and wooden furniture exports also increased by 23% (ADB, 2007). Our
current research also supports this. In the current study, wearing apparel (10.29%)
at BAU 2001 is the important export item under top six sectors’ list of Vietnam.
But ASEAN+3 agreement at 2020 will increase the share to 16% together with
textile.
In this context we can compare our results with those of other literatures which
have considered the regional integration in East and South East Asia. The current
study supports Urata and Kiyota (2003), Scollay and Gilbert (2001), Lloyd and
MacLaren (2004) and Thierfelder et al. (2007) in respect of gain achieved by the
regions under the agreement, while the regions outside agreement are the losers.
The study also supports the view of Ando and Urata (2006) and Park (2006) in
respect of highest growth achieved under ASEAN+3. The current results are also in
the same tune of JETRO (2003) regarding Thailand’s welfare and growth. JETRO
(2003) further finds that the East Asian FTA will boost the exports of IT products
along with synthetic rubber and plastic and steel within the region. It also supports
our results. It is observed that the composition of trade would likely to change dur-
ing the course of the period (2001–2010, 2010–2015 and 2015–2020) almost for all
countries under the agreement moving from agriculture and light industries towards
heavy industries except Japan and Republic of Korea.
Chapter 6 of the book analyses the environmental impact of the regional eco-
nomic integration. It also exercised the decomposition analysis to explore the major
factors behind the changes in pollution.
The results show that a high CO2 growth is likely to be in BAU period and differ-
ent trade scenarios. Highest GHG emitters in this region will be China in BAU 2020,
however, the liberalization impact will not add further to GHG emissions in China.
Due to high macro growth in output, export and import, it is expected that the air pol-
lution growth will also be high and also its technological improvement is not at the
desired level to reduce emission. Other GHG indicators like CH4 and N2 O growth
are marginal in various trade scenarios across the countries compared to BAU 2020,
except Vietnam. Thailand’s impact is favourable relative to Vietnam at ASEAN+3,
2020. BOD growth is not unfavourable in the different economic integration. The
key point to draw from these results is that the air pollution effect (particularly for
CO2 ) of trade liberalization is small for China, Japan and the Republic of Korea and
fairly large for Vietnam, Indonesia and Thailand.
Overall, the growth of GHG indicators especially CO2 in East and South East
Asian countries is alarming. As GHG emission is transboundary in nature, the vol-
ume of pollution will likely to increase in this region by 2020. Unless any strong
measures are taken, the goal of achieving Kyoto target may not be fulfilled for Japan
and the Republic of Korea (Annex 1 countries).
As with air pollution, findings on BOD and SS show that trade reforms will at
most add only a tiny amount to water pollution, associated with the general expan-
sion of the economies under the study overtime. But COD will contribute relatively
high due to economic integration except Japan. On the other hand, the growth of
industrial waste will add a considerable amount to the environmental degradation in
different scenarios at 2020 for six countries in East and South East Asia. Interesting
to note that Japan and Korea will not be affected much by air pollution due to trade
liberalization rather in a win-win situation. This finding implies that freer trade will
8 Summary and Conclusion 179
not always be environment unfriendly for most of the countries under the agree-
ment (except industrial waste). While for Vietnam and Indonesia, the impact is not
too encouraging. Further, industrial waste will be a serious concern for all the par-
ticipating countries in BAU and various trade scenarios. It needs attention from
the policy makers for regional economic integration. With the adoption of trade
liberalization under the ASEAN+3 scenarios at 2020 we observe that most of the
countries under study tend to gain environmentally (except COD and industrial
waste). Overall, economic integration had a moderate impact on the environment
except for a few specific sectors across countries.
The decomposition analysis of total pollution change shows that activity effects
play a significant role across pollutants and countries at BAU scenario. Technology
effect is negative for Japan, Republic of Korea and Singapore for the GHG indicators
and Japan and Korea for BOD. For other countries under study, technology effect
is negative for BOD and varies for GHG indicators. Further, composition effect is
negative for all countries studied for CO2 (except Japan, Vietnam) and BOD (except
Japan, Indonesia).
An interesting result has been found for the composition effect under different
trade liberalisation scenarios. The negative composition effect is shown in MEI
and DEI 2020 for all the countries under study except Japan, Korea and Indonesia
for CO2 emission. But China, Thailand, Philippines, Singapore and other ASEAN
show negative composition effect for ASEAN+3 at 2020 also. Rest of the countries
(Japan, Korea, Indonesia, Vietnam and Malaysia) in ASEAN+3 at 2020 record a
positive composition effect. It highlights the fact that both the developed and devel-
oping countries are likely to increase CO2 intensive industries as a result of trade
liberalisation. This mixed evidence neither supports nor contradicts the pollution
haven hypothesis.
Chapter 7 suggests the strategies for green trade. Several environmental policies
for a specific pollutant, CO2 are applied in the analysis. These include different envi-
ronmental taxes to assess their impact on the economy and the environment. Among
all the tax scenarios, the electricity tax is found to be most effective-instrument for
most of the countries. Thus this chapter demonstrates the possibility of the applica-
tion of market based instruments in a multi regional general equilibrium framework.
The chapter also outlines the policy option for industrial waste, an emerging concern
for the East and South East Asian economies.
At the beginning, the book raised the issue of trade and environment debate. Now
the question is at the end how far the book contributes to the debate. We have seen
from the analysis that trade liberealisation is not too unfavourable for the environ-
ment especially for Japan, Republic of Korea and some ASEAN countries. Among
the entire environmental indicators studied, industrial waste is a serious concern in
this region. It is reflected from the increased importance of the sectors like electronic
equipment, metal products, mineral, motor vehicles, chemical rubber and plastic
across the countries. It has also been found that ASEAN+3 integration tends to be
beneficial for the participating countries. However, it is not easy to generalize the
impact of trade liberalisation on the environment covering ten ASEAN countries
and China, Japan and the Republic of Korea. It is well known that the impact on the
environment depends on various factors-degrees of economic integration, features

of the economy, and sensitive sectors in individual country and so on.
Thus the study provides a further insight in pursuing a concrete multilateral
trade liberalization policy (combining ASEAN and other countries in East Asia)
and throws more light on the ongoing trade environment debate.
The novelty of the current study lies with the comprehensive and integrated anal-
ysis of economic and environmental impacts of a regional trade agreement of East
and South East Asia using a global model.
Regional economic integration has emerged as a major policy alternative for
countries trying to overcome the impediment of a small domestic market. How far
they will be successful by joining a regional economic integration to gain access
to regional market which will enable them to face the competition from the devel-
oped countries is a matter of empirical research. The book has attempted to make a
careful assessment of this through a comprehensive analysis.
The book estimates the detailed environmental implications of RTAs focusing
on air, water, and waste pollution. This is rarely attempted in the literature. Further,
the sector specific analysis of individual countries that include ASEAN along with
China, Japan, and the Republic of Korea is minimal. Moreover, the present study
provides a detailed sectoral analysis that is used to identify those sectors that
had the largest impact on the environment. This approach is unique in the trade
environment literature. In addition, the study also evaluated the economic and envi-
ronmental impacts caused by implementing strategic environmental policies (taxes
etc). Further, the study applies recursive updating process of the GTAP simulation
that integrates a time dimension into the analysis. This is a valuable addition to the
literature.
Rapid economic growth has enabled significant economic and social progress in
East and South East Asia but the goal of sustainable development remains elusive
(UNESCAP, 2006). Developing economic growth patterns which do not compro-
mise environmental sustainability is an urgent global priority and most relevant
to the dynamic East and South East Asian region. Environmentally sustainable
growth or green growth is a new policy focus aimed at resolving the current con-
flict between liberalization of trade and environmental sustainability—i.e. to build
synergies between economic growth and environmental sustainability (UNESCAP,
2006).
The current research can be extended further using a dynamic general equilib-
rium model in the analysis. A more detailed investigation of the environmental
coefficients over time is required. Moreover, economic integration scenarios should
be exercised to incorporate existing and negotiated tariff reductions.
Endnotes
1. The original Andean Pact was signed in 1969 by Bolivia, Chile, Colombia,
Ecuador and Peru. In 1973, Venezuela joined as a sixth member. In 1976, how-
ever, its membership was again reduced to five when Chile left. Venezuela
withdrew in 2006, reducing the Andean Community to four member states
only. Recently, with the new cooperation agreement with Mercosur, the Andean
Community gained four new associate members: Argentina, Brazil, Paraguay
and Uruguay.
2. Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Macedonia, Moldova,
Romania, Serbia and Montenegro and UNMIK/Kosovo.
3. The CAFTA-DR was signed on August 5, 2004. The agreement took effect
for El Salvador and the United States on March 1, 2006, for Honduras and
Nicaragua on April 1, 2006, and for Guatemala on July 1, 2006. Costa Rica and
the Dominican Republic will be joining soon.
4. Japan has FTAs with Singapore and Malaysia; one signed with the Philippines;
and it is negotiating with Indonesia, the Republic of Korea, Thailand as well as
ASEAN.
5. The Chiang Mai Initiative (CMI) is under the ASEAN+3 framework. Its
objective is to create a network of Bilateral Swap Arrangements (BSAs)
among ASEAN+3 countries. This initiative was started after 1997 Asian
Financial Crisis to manage regional short-term liquidity problems and to
facilitate the work of other international financial arrangements and orga-
nizations like IMF. In May 2007, CMI further progress was agreed upon.
(http://en.wikipedia.org/wiki/Chiang_Mai_Initiative)
6. ASEAN+3 comprises the 10 ASEAN members plus China, Japan and the
Republic of Korea. ASEAN+4 includes ASEAN members plus China, Japan,
the Republic of Korea and India. ASEAN+6 covers the East Asia Summit
group, comprising ASEAN+3, Australia, New Zealand and India.
7. At the Ninth ASEAN Summit in Bali in October 2003, ASEAN leaders
agreed to establish an ASEAN Economic Community (AEC) by 2020. AEC
is one of three pillars (the other two being the ASEAN Security Community
and the ASEAN Socio-cultural Community) that make up the ASEAN

Trade in East and South East Asia, DOI 10.1007/978-90-481-3507-3,

182 Endnotes
Community, as declared by ASEAN leaders in the Bali Concord II (available

at www.aseansec.org/15159.htm). In line with the ASEAN Vision 2020, it is
envisaged that AEC will be a single market and production base with a free
flow of goods, services, investment, capital and skilled labour.
8. WorldScan is based on neoclassical theories of economic growth and interna-
tional trade. The core of the model is extended to include
(a) an Armington trade specification, explaining two-way trade and allow-

ing market power to determine trade patterns in the medium run, while
allowing Heckscher-Ohlin mechanisms in the long run;
(b) imperfect financial capital mobility;
(c) consumption patterns depending upon per capita income, and developing
towards a universal pattern;
(d) a Lewis-type low-productivity sector in developing regions, from which
the high-productivity economy can draw labour, enabling high growth for
a long period.
(e) two types of labour: low- and high-skilled.
9. The ORANI model is one of the early general equilibrium models that later
on known as Computable General Equilibrium (CGE) models. The CGE mod-
els have been treated as the operationalisation of the abstract Arrow-Debreu
general equilibrium model. The ORANI model applied the Johansen procedure
(Johansen, 1960).
10. As indicated in Brockmeier (2001), according to a Cobb–Douglas per capita
utility function, the regional income is distributed over the three forms of final
demand: private household expenditures; government expenditures; and sav-
ings. But the constancy of this proportionality between the three may sometimes
not be maintained because of the endogenous nature of the private expenditure
through its non-homothetic function.
11. GTAP 6 has 87 regions—more than six times the number in the original GTAP
1 database. All of these additions to the database have been provided by mem-
bers of the GTAP network. The regional sectoral data (57 sectors) draw heavily
on the source input-output tables from varying years. The GTAP 6 database
was constructed by combining the I–O tables with 2001 macroeconomic
data. Details are available in Dimaranan and McDougall (2006) and Hertel
(2006).
12. for details see, Vietnam Environment Monitor (World Bank, 2004), UNESCAP,
2006, World Bank (2001, 2002, 2003) for Thailand and Indonesia’s No. 1 waste
technology, management and solution event (2008) www.waste.indowater.com
13. Published BOD data was collected from the World Bank, Development Data
Group for China. The data collected from World Bank source only covered
industrial water pollution: organic water pollution. In this case we compared
the World Bank data with the data supplied by other countries under study.
The World Bank covers only 25% (approx.) of the reported BOD estimate from
Endnotes 183
other countries (Japan, the Republic of Korea and for other countries). For that
reason, data for China has been scaled up accordingly.
Unfortunately, the available source data is for total BOD only and the data
source does not provide a sectoral distribution of the BOD. For the agricultural
sector various options have been considered. We tried to incorporate additional
information into the BOD and COD emissions from the agriculture sector.
Harvest area of the various crops was used to estimate the BOD release from the
agricultural sectors (paddy rice, wheat, cereal grains nec, vegetables, fruit, nuts,
oil seeds, sugar cane and sugar beet, plant-based fibers, crops nec) in China. The
BOD and COD from the agriculture sectors in China was estimated by taking
the harvested area per crop times the BOD and COD release per hectare, using
the Thailand data for the latter relationship.
For the livestock sector some additional modifications were used. Instead of
harvested area we have considered the production quantity per BOD and COD
release for Bovine cattle, sheep and goats, horses and Animal products nec.
For the forestry and fishery sectors, we have estimated the BOD and COD
release on the basis of production quantity (ton).
The data was collected from the FAO statistics (Prodstat Foresstat and
Fishstat) for the year 2000. For the rest of the sectors BOD release was esti-
mated following Thailand pattern and COD collected from Environmental
Yearbook of China.
14. Due to the paucity of Industrial waste data for Indonesia, we use the average
environmental coefficient of Thailand and Vietnam.
15. Post-simulation utility is the level of utility obtained after the trade scenario
exercise is carried out.
16. Equivalent variation is a measure of how much more money a consumer would
pay before a price increase to avert the price increase. John Hicks is attributed
with introducing the concept of equivalent variation.
17. When a country participates in a free trade region, it may gain due to trade
creation and may either gain or lose due to trade diversion. The former has a
positive effect on welfare because the removal of tariffs within the region allows
the country to allocate its resources more efficiently in production. The country
can import the goods that it formerly produced inefficiently under tariff from
member countries that are more efficient producers (Caves & Jones, 1981).
18. The Armington assumption differentiates commodities by their country of ori-
gin. It takes the products of an industry which come from different countries to
be imperfect substitutes for each other. This has become a standard assumption
of international CGE models. These models generate smaller and more realis-
tic responses of trade to price changes than implied by models of homogeneous
products.
19. Electricity sector though identified an important sector in case of air and water
pollution for all the countries under the study is not included in the analysis of
the results. This sector is being used as an input by most of the sectors of all the
economies.
184 Endnotes
Percentage share of CO2 emission from electricity sector in total CO2 emission in different trade
scenarios at 2020
BAU 2020 MEI 2020 DEI 2020 ASEAN+3 2020
China 71.35 71.20 71.21 71.00

Japan 37.82 36.86 37.91 37.95
Korea 18.60 18.49 18.59 18.99
Indonesia 27.39 27.28 27.34 27.29
Thailand 29.55 26.36 27.41 27.26
Vietnam 18.52 20.08 19.76 20.64
Malaysia 32.13 34.64 37.01 36.44
Philippines 18.29 19.32 21.49 19.46
Singapore 30.08 31.20 32.82 32.88
Other ASEAN 10.50 10.48 10.68 10.98
20. ASEANSEC- Proposed List/Types of Best Practices—Clean Land http://www.

aseansec.org/files/bestpractice_clean_land.doc
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Annex
Annex 1 Sector listing of GTAP V6
Number Code Description
1. pdr Paddy rice

2. wht Wheat
3. gro Cereal grains nec
4. v_f Vegetables, fruit, nuts
5. osd Oil seeds
6. c_b Sugar cane, sugar beet
7. pfb Plant-based fibers
8. ocr Crops nec
9. ctl Cattle, sheep, goats, horses
10. oap Animal products nec
11. rmk Raw milk
12. wol Wool, silk-worm cocoons
13. frs Forestry
14. fsh Fishing
15. coa Coal
16. oil Oil
17. gas Gas
18. omn Minerals nec
19. cmt Meat: cattle, sheep, goats,horse
20. omt Meat products nec
21. vol Vegetable oils and fats
22. mil Dairy products
23. pcr Processed rice
24. sgr Sugar
25. ofd Food products nec
26. b_t Beverages and tobacco products
27. tex Textiles
28. wap Wearing apparel
29. lea Leather products
30. lum Wood products
31. ppp Paper products, publishing
32. p_c Petroleum, coal products
33. crp Chemical,rubber,plastic prods
197
198 Annex
Annex 1 (continued)
Number Code Description
34. nmm Mineral products nec

35. i_s Ferrous metals
36. nfm Metals nec
37. fmp Metal products
38. mvh Motor vehicles and parts
39. otn Transport equipment nec
40. ele Electronic equipment
41. ome Machinery and equipment nec
42. omf Manufactures nec
43. ely Electricity
44. gdt Gas manufacture, distribution
45. wtr Water
46. cns Construction
47. trd Trade
48. otp Transport nec
49. wtp Sea transport
50. Atp Air transport
51. cmn Communication
52. Ofi Financial services nec
53. Isr Insurance
54. obs Business services nec
55. ros Recreation and other services
56. osg PubAdmin/Defence/Health/Education
57. dwe Dwellings
Annex 2 Regional aggregation
GTAP code Country Region
aus Australia Rest of OECD

nzl New Zealand Rest of OECD
xoc Rest of Oceania ROW1
chn China China
hkg Hong Kong ROW1
jpn Japan Japan
kor Korea Korea
twn Taiwan ROW1
xea Rest of East Asia ROW1
idn Indonesia Indonesia
mys Malaysia Malaysia
phl Philippines Philippines
sgp Singapore Singapore
tha Thailand Thailand
vnm Vietnam Vietnam
xse Rest of Southeast Asia Other ASEAN
bgd Bangladesh ROW1
ind India ROW1
lka Sri Lanka ROW1
xsa Rest of South Asia ROW1
Annex 199
Annex 2 (continued)
can Canada NAFTA

usa United States NAFTA
mex Mexico NAFTA
xna Rest of North America ROW2
col Colombia ROW2
per Peru ROW2
ven Venezuela ROW2
xap Rest of Andean Pact ROW2
arg Argentina ROW2
bra Brazil ROW2
chl Chile ROW2
ury Uruguay ROW2
xsm Rest of South America ROW2
xca Central America ROW2
xfa Rest of FTAA ROW2
xcb Rest of the Caribbean ROW2
aut Austria REST OF OECD
bel Belgium REST OF OECD
dnk Denmark REST OF OECD
fin Finland REST OF OECD
fra France REST OF OECD
deu Germany REST OF OECD
gbr United Kingdom REST OF OECD
grc Greece REST OF OECD
irl Ireland REST OF OECD
ita Italy REST OF OECD
lux Luxembourg REST OF OECD
nld Netherlands REST OF OECD
prt Portugal REST OF OECD
esp Spain REST OF OECD
swe Sweden REST OF OECD
che Switzerland REST OF OECD
xef Rest of EFTA ROW2
xer Rest of Europe ROW2
alb Albania ROW2
bgr Bulgaria ROW2
hrv Croatia ROW2
cyp Cyprus ROW2
cze Czech Republic ROW2
hun Hungary ROW2
mlt Malta ROW2
pol Poland ROW2
rom Romania ROW2
svk Slovakia ROW2
svn Slovenia ROW2
est Estonia ROW2
lva Latvia ROW2
ltu Lithuania ROW2
rus Russian Federation ROW2
200 Annex
Annex 2 (continued)
xsu Rest of Former Soviet Union ROW2

tur Turkey ROW2
xme Rest of Middle East ROW2
mar Morocco ROW2
tun Tunisia ROW2
xnf Rest of North Africa ROW2
bwa Botswana ROW2
zaf South Africa ROW2
xsc Rest of South African CU ROW2
mwi Malawi ROW2
moz Mozambique ROW2
tza Tanzania ROW2
zmb Zambia ROW2
zwe Zimbabwe ROW2
xsd Rest of SADC ROW2
mdg Madagascar ROW2
uga Uganda ROW2
xss Rest of Sub-Saharan Africa ROW2
Annex 3 Revealed comparative advantages for ASEAN and CJK
Annex
China Japan Republic of Korea Indonesia Malaysia Philippines Singapore Thailand Vietnam Other ASEAN
1 pdr 0.418 6.841 0.002 0.027 0.241 0.033 0.014 3.266 2.232 0.583
2 wht 0.059 0.001 0.000 0.071 0.001 0.000 0.009 0.001 0.000 0.011
3 gro 0.933 0.000 0.002 0.043 0.015 0.013 0.012 0.418 0.107 0.782
4 v_f 0.805 0.011 0.211 0.363 0.210 2.086 0.107 0.801 2.446 6.004
5 osd 0.549 0.004 0.002 0.097 0.099 0.053 0.035 0.066 0.913 0.903
6 c_b 1.531 0.000 0.000 0.084 9.713 0.130 0.008 0.047 5.845 71.281
7 pfb 0.207 0.004 0.026 0.040 0.071 0.271 0.185 0.077 0.240 0.550
8 ocr 0.658 0.063 0.258 5.231 0.989 0.739 0.609 4.138 8.812 1.380
9 ctl 0.068 0.072 0.001 0.044 0.018 0.033 0.023 0.028 0.088 2.899
10 oap 1.737 0.111 0.126 0.637 0.726 0.281 0.104 0.568 1.774 0.573
11 rmk 0.328 0.002 0.004 0.011 0.012 0.009 0.000 0.010 0.017 0.004
12 wol 1.591 0.010 0.015 0.049 0.010 0.000 0.038 0.008 0.131 0.009
13 frs 0.200 0.012 0.016 3.162 3.841 0.149 0.145 0.088 0.425 26.928
14 fsh 1.187 0.256 0.544 3.061 0.728 1.414 0.748 1.431 2.845 1.551
15 coa 2.501 0.000 0.000 9.923 0.001 0.002 0.000 0.000 2.567 0.133
16 oil 0.057 0.000 0.000 1.515 0.543 0.000 0.000 0.007 4.178 3.782
17 gas 0.000 0.000 0.000 5.130 1.607 0.000 0.000 0.000 0.001 19.197
18 omn 0.489 0.056 0.047 6.214 0.100 1.252 0.184 0.124 0.598 0.516
19 cmt 0.050 0.019 0.019 0.122 0.029 0.042 0.034 0.022 0.005 0.027
20 omt 0.819 0.033 0.084 0.871 1.211 0.222 0.160 2.970 0.467 0.084
21 vol 0.125 0.032 0.015 8.763 10.255 4.069 0.583 0.496 0.370 0.030
22 mil 0.024 0.007 0.026 0.341 0.134 0.180 0.161 0.254 0.028 0.067
23 pcr 1.913 0.055 0.139 0.432 0.187 0.702 0.081 25.253 28.983 7.616
24 sgr 0.061 0.023 0.052 0.204 0.078 0.797 0.151 5.633 0.678 0.155
25 ofd 0.781 0.165 0.441 1.844 0.507 1.315 0.358 3.517 4.558 1.040
26 b_t 0.333 0.185 0.240 0.313 0.469 0.226 1.303 0.297 0.192 0.236
27 tex 2.195 0.706 2.695 2.269 0.446 0.688 0.308 1.426 1.025 4.670
28 wap 4.169 0.046 0.832 2.932 0.426 2.610 0.186 1.728 4.429 9.317
29 lea 6.402 0.050 0.985 3.309 0.135 0.923 0.168 1.808 13.516 1.652
201
202
Annex 3 (continued)
China Japan Republic of Korea Indonesia Malaysia Philippines Singapore Thailand Vietnam Other ASEAN
30 lum 1.810 0.065 0.115 4.874 1.886 0.891 0.127 1.176 2.159 1.821
31 ppp 0.401 0.270 0.565 2.245 0.198 0.195 0.530 0.482 0.145 0.032
32 p_c 0.579 0.151 1.699 0.792 0.455 0.297 2.285 0.832 0.000 0.154
33 crp 0.618 0.904 1.004 0.737 0.573 0.183 0.924 0.874 0.314 0.107
34 nmm 1.376 0.975 0.544 1.013 0.489 0.436 0.444 1.229 0.893 0.026
35 i_s 0.384 1.576 1.607 0.340 0.291 0.084 0.200 0.415 0.086 0.055
36 nfm 0.388 0.587 0.689 1.469 0.335 0.766 0.453 0.246 0.076 0.326
37 fmp 1.672 0.755 0.980 0.481 0.388 0.274 0.391 0.765 0.337 0.045
38 mvh 0.090 2.334 1.155 0.080 0.086 0.125 0.041 0.294 0.007 0.042
39 otn 0.518 1.250 1.833 0.139 0.111 0.195 0.512 0.201 0.203 0.206
40 ele 1.492 1.765 2.390 1.050 4.196 4.873 3.797 2.037 0.244 0.029
41 ome 1.018 1.762 0.784 0.373 0.411 0.647 0.758 0.832 0.348 0.039
42 omf 4.150 0.714 0.578 0.690 0.604 0.518 0.397 1.603 0.956 0.406
43 ely 0.224 0.000 0.000 0.000 0.000 0.000 0.000 0.066 0.000 0.205
44 gdt 0.000 0.001 0.001 0.314 0.945 0.000 0.002 0.190 0.134 0.001
45 wtr 0.634 0.135 0.660 0.356 1.586 1.227 0.460 1.156 0.722 0.842
46 cns 0.460 2.191 0.127 0.588 0.574 0.362 0.036 0.813 1.449 0.277
47 trd 0.829 0.633 0.335 0.230 1.342 0.261 1.573 0.628 0.438 0.633
48 otp 0.565 0.201 0.643 0.419 0.430 0.661 0.839 1.474 0.357 1.078
49 wtp 0.175 0.956 0.931 0.376 0.484 0.425 0.654 0.659 0.861 0.778
50 atp 0.163 0.721 0.613 0.391 0.543 0.444 0.478 1.694 0.661 1.069
51 cmn 0.227 0.343 0.587 0.134 0.447 1.464 0.105 0.381 1.473 0.648
52 ofi 0.220 0.474 0.379 0.454 0.182 0.133 0.146 0.078 1.047 0.265
53 isr 0.122 0.090 0.227 0.636 0.500 0.378 1.844 0.295 1.400 0.290
54 obs 0.115 0.490 0.615 0.263 1.814 0.131 1.909 0.430 0.685 0.545
55 ros 0.163 0.187 0.539 0.733 0.421 0.693 0.302 1.016 0.857 0.754
56 osg 0.406 0.230 0.839 0.171 0.112 0.198 0.528 0.200 1.264 0.784
57 dwe 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Annex
Annex 203
Annex 4 Aggregation scheme for Grubel–Llyod index
Agriculture
1 ∗ PDR∗ Paddy rice
2 ∗ WHT∗ Wheat
3 ∗ GRO∗ Cereal grains nec
4 ∗ V_F∗ Vegetables, fruit, nuts
5 ∗ OSD∗ Oil seeds
6 ∗ C_B∗ Sugar cane, sugar beet
7 ∗ PFB∗ Plant-based fibers
8 ∗ OCR∗ Crops nec
9 ∗ CTL∗ Bovine cattle, sheep and goats, horses
10 ∗ OAP∗ Animal products nec
11 ∗ RMK∗ Raw milk
12 ∗ WOL∗ Wool, silk-worm cocoons
13 ∗ FRS∗ Forestry
14 ∗ FSH∗ Fishing
Industry
15 ∗ COA∗ Coal
16 ∗ OIL∗ Oil
17 ∗ GAS∗ Gas
18 ∗ OMN∗ Minerals nec
19 ∗ CMT∗ Bovine meat products
20 ∗ OMT∗ Meat products nec
21 ∗ VOL∗ Vegetable oils and fats
22 ∗ MIL∗ Dairy products
23 ∗ PCR∗ Processed rice
24 ∗ SGR∗ Sugar
25 ∗ OFD∗ Food products nec
26 ∗ B_T∗ Beverages and tobacco products
27 ∗ TEX∗ Textiles
28 ∗ WAP∗ Wearing apparel
29 ∗ LEA∗ Leather products
30 ∗ LUM∗ Wood products
31 ∗ PPP∗ Paper products, publishing
32 ∗ P_C∗ Petroleum, coal products
33 ∗ CRP∗ Chemical, rubber, plastic products
34 ∗ NMM∗ Mineral products nec
35 ∗ I_S∗ Ferrous metals
36 ∗ NFM∗ Metals nec
37 ∗ FMP∗ Metal products
38 ∗ MVH∗ Motor vehicles and parts
39 ∗ OTN∗ Transport equipment nec
40 ∗ ELE∗ Electronic equipment
41 ∗ OME∗ Machinery and equipment nec
42 ∗ OMF∗ Manufactures nec
Index
A Basel Convention, 74, 79

Acid rain, 74 Bilateral swap arrangement (BSA), 12
Activity effect, 155, 157–158, 160–161 Bilateral trade agreements, 27–28
African Caribbean and Pacific (ACP) Bilateral trading, 12
countries, 6 Bio-fuel, 49, 76, 153
Agenda 21, 70–71 Biological oxygen demand (BOD), 79
Aggregation scheme, 21, 88–89, 123, 176 growth, 138–139, 154, 178
Agriculture based economy, 49, 55, 144 intensive sectors, 147
Air pollution, 19, 21, 38–39, 69, 71–72, 74–76, Biomedical manufacturing, 54
78, 82–83, 133, 158, 160, 178 BRIC economies, 43
Air quality guideline, 72 Buffer zones, 76
Air quality monitoring, see AQ monitoring Business as usual (BAU), 98, 176, 105
Anti-dumping tariffs, 49
AQ monitoring, 82–83
Aquaculture expansion, 47 C
Armington assumption, 128 Capital accumulation, 30–31, 48, 88, 101
Armington elasticity, 87 Capital-intensive products, 33
Arrow-Debreu, 182 Capital-scarce, 126
ASEAN+3, 11–13, 21, 29–32, 34, 59, 66, 92, Carbon leakage, 37–38
99–101, 103, 105–109, 114, 117–120, Caribbean Common Market (CARICOM), 4, 6
122–126, 129–131, 136–137, 139, Central American Common Market (CACM),
150–153, 155, 160, 162–163, 176–179 3, 6
ASEAN Central European Free Trade Agreement
-China Free Trade Area (ACFTA), 33 (CEFTA), 4
-CJK, 21, 31, 91, 98–99, 108, 126, 176 CEPII Mirage model, 23, 34
Economic Community (AEC), 18 CEPT scheme, 10
Free Trade Agreement (AFTA), 3 CES, see Constant elasticity of substitution
Free Trade Area (AFTA), 10 (CES)
Swap Arrangement (ASA), 12 CGE model, 25, 30, 34–36, 38–39, 85, 124
Asian Bond Market Initiative (ABMI), 12 CH4 emission
Asian Development Bank, 29 ASEAN+3 integration, 153
Asia-Pacific Economic Cooperation, 8, 68 intensive sectors, 145
Atmospheric Environment Regulation Areas, Chemical rubber and plastics, 118
76 Chlorofluorocarbons, 75
Avian influenza, 47, 49 Climate change, 18–19, 37, 74
Climate Change Convention, 80
B CLMV (Cambodia-Laos-Myanmar-Vietnam),
Baldwin capital accumulation, 34 17
Banking reforms, 57 Closer economic relations (CER), 26
205
206 Index
Closure, 88 Economic growth, 43–57

See also GTAP model agricultural sector, 46–50
CO2 emission, 38, 73, 75, 80, 82, 89–90, GDP growth, 43–46
134–137, 142, 150, 152, 160, 166, industrial sector, 50–53
168–170, 172–173, 179 manufacturing sector, 53–55
China, 73, 152 service sector, 55–57
Japan, 80, 152 Economic integration, 2–3, 6–18, 20–21, 24,
Korea, 75 26–27, 29, 32, 34, 41, 67, 88, 91–92,
Philippines, 152 95, 97–98, 101, 103, 105, 108, 116,
Singapore, 82 118–120, 124–125, 129–131, 133, 135,
Vietnam, 137 137–139, 141, 152–153, 162, 165–167,
CO2 growth, 134–135, 152, 175–180
CO2 intensive sectors, 138, 142–143, 151–152 FTA, 8–17
Coal, 170–172 Economic Integration Agreements (EIAs), 6
COD growth, 139, 155 Economic Partnership Agreement (EPA), 6, 28
COD intensive sectors, 147–148 Economic reform, 45
Cold-war, 24 EIA, see Economic Integration Agreements
Command and control (CAC), 165 (EIAs)
Common external tariff (CET), 3 Electricity tax, 169–170, 173, 179
Composition effect, 157–163, 179 impact of, 171
Computable general equilibrium (CGE) model, Electronic equipment, 30, 64, 66, 109, 113,
see CGE model 118–120, 148, 150, 152–153, 179
Constant difference elasticity (CDE), 86 Emission coefficient growth, 90
Constant elasticity of substitution (CES), Emission control, 77
86–87 Energy Economics Institute, Korea, 75
Customs Union (CU), 2–3 Enteric fermentation, 144
Environmental coefficient, 89–90, 133, 142,
D
157–158, 180
Decomposition, 155–164
updated, 90–91
BOD, 160–164
Environmental degradation, 18–19
CH4 , 159, 162
Environmental Impact Assessment (EIA), 70
CO2 , 159, 161
Environmental impact, 133–141
GHG indicators, 158–160
air pollution, 134–138
methodology, 155–158
N2 O, 159, 163 industrial waste, 140–141
Deforestation, 18 water pollution, 138–140
Department of Environment and Natural Environmental indicators, 20, 89–90, 141–142,
Resources, (DENR), 71 150, 155, 163, 166, 175, 179
DIW, 89 Environmental profile, 69–83
Doha round, 39 Cambodia, 72
Doi Moi, 45, 62 China, 73–75
Dominican Republic-Central American Free Indonesia, 72–73
Trade Agreement, 6 Japan, 80–82
Lao-PDR, 83
E Malaysia, 76–78
East Asia Free Business Area, 13 Philippines, 70–71
East–West trade agreements, 26 Republic of Korea, 75–76
E-commerce, 56 Singapore, 82–83
Economic and environmental status, 176 Thailand, 78–80
Economic and Monetary Community of Vietnam, 69–70
Central Africa (CEMAC), 4 Environmental Quality Act, 77
Economic and Monetary Union, 2–3 Environmental quality standard (EQS), 81
Economic crisis, 58–59 Environment related trade measures (ERTM),
See also Financial crisis 21, 166
Index 207
Environment status GHG emission, 37, 69, 71, 73, 75, 77, 80,
Cambodia, 72 89–91, 133–135, 137–138, 178
China, 74 coefficients for, 90
Indonesia, 73 GHG indicators, 137, 150, 153, 158, 178–179
Japan, 80 G–L index, see Grubel–Lloyd index
Malaysia, 77 Global Baltic, 25
Philippines, 71 Global Trade Analysis Project (GTAP), 20–21,
Republic of Korea, 75 25–28, 30–32, 34–35, 37–40, 85–86,
Singapore, 82 88–91, 93, 97, 113, 126, 128, 175–176,
Vietnam, 70 180
Equilibrium model, 20, 23–24, 27, 32, 34, Goldman Sachs projections, 43
38, 85, 87, 175, 180 Goods and services, 61
ERTM, see Environment related trade Greenhouse gas (GHG) emissions, see GHG
measures (ERTM) emission
European Free Trade Association (EFTA), Green tax, 165
4, 6 Gross domestic product (GDP), 1, 49
Export growth, 60, 102 Grubel–Lloyd index, 123–124
GTAP database, 20, 35, 38, 91, 113, 176
F GTAP-E, see GTAP model
Factor returns, 126–129 GTAP model, 26–28, 30–31, 34, 37–38, 85–86,
Factory Act, 79 88–89, 93, 97, 128
FDI, see Foreign direct investment (FDI) modifications of, 93
Ferro alloys, 113, 118, 120, 137, 142 theoretical framework of, 85–88
Financial crisis, 12, 45, 54, 58–59, 64, 66, 175 Gulf Cooperation Council (GCC), 6
See also Economic crisis Gulf of Thailand, 79
Fiscal policies, 81
H
Foreign direct investment (FDI), 1, 3, 8, 12–13,
Halon, 70
33, 59–69, 88, 95
Hazardous Substances Act, 79
China, 65–66
Heckscher–Ohlin model, 126–128
Indonesia, 66
High-yielding varieties, 48
intra regional trade trend, 66–67
Hub-and-spoke, 31
Japan, 59–62
Malaysia, 64 I
Myanmar, 65 ICT, 53, 58, 69
Philippines, 64 IMAGE, 39
Republic of Korea, 63–64 See also GTAP model
Singapore, 63 Indonesia–Japan FTA (IJFTA), 28
status, 67–69 Industrial pollution projection system, 39
Thailand, 62 Industrial waste, 21, 76, 79, 81, 89, 91, 133,
Vietnam, 62–63 140–142, 148, 153, 172–173, 175,
Fossil fuel consumption, 74 178–179
Free trade agreement (FTA), 2, 25, 33–34 growth, 141, 156
Free Trade Area, 2, 4, 11–16, 34 intensive sectors, 149
Free Trade Area of the Americas (FTAA), 4 policy option, 172–173
prone sectors, 148
G Inshore fisheries, 48
GDYN-E, 37 Intellectual property right, 1, 17
General Agreement on Tariffs and Trade International Finance Centres, 56
(GATT), 1, 68 Intra ASEAN direct investment, 68
General Agreement on Trade in Services Intra-industry trade, 27, 88, 120, 122–124, 128
(GATS), 2 horizontal, 122
General equilibrium model, 20, 23–24, 27, 32, vertical, 123
34, 38, 85, 87, 175, 180, 182 Intra-regional trade, 59, 66–67
208 Index
IT bubble, 60 National Strategy for Environmental Protection

IT-related goods, 59, 61 (NSEP), 70
Neoclassical theory, 122
J NEQA, see National Environment Quality
Japan-ASEAN Closer Economic Partnership Enhancement and Protection Act
(JACEP), 32 (NEQA)
Japanese carmakers, 17 Netherlands Environmental Assessment
Agency, 74
K New Trade Theory, 122
Kyoto Protocol, 37–38, 74, 80, 138 NIER, 89
Kyoto target, 138, 178 N2 O emission, 90, 134, 137, 142, 144
growth 135–136
L N2 O intensive sectors, 146
Layoffs, 58 Noise pollution, 69
See also Unemployment Nokia, 122
Liberalization timeframe, 18 Non-agricultural market access (NAMA), 26
Linear expenditure system (LES), 86 Non-tariff-measures (NTM), 25
North American Free Trade Agreement
M (NAFTA), 3
Maastricht Treaty, 3 Nuno Limao, 23
Macroeconomic variable, 93–95
Mae Moh valley, 79 O
Malaysia Industrial Development Authority, 52 Oil, 170–172
Malaysian Ambient Air Quality Guideline, 77 Openness index, 100–101
Marine aquaculture, 48 ORANI model, 85
Market-driven integration, 8, 12 Ozone depleting substances (ODS), 70
Marrakech Accords, 38 Ozone depletion, 18
Mass guidance scheme, 48
Mega cities, 19 P
Mekong Basin development, 14 Paddy rice, 109, 113, 137, 139, 144
Methane emissions, 75, 142, 144 Pan Pearl River Delta, 142
See also CH4 emission Partial Equilibrium (PE), 88
MFN, see Most favored nations (MFN) Particulate emissions, 69
Microeconomic theory, 85 Pollution Control Department (PCD), 78–79,
Millennium Development Goals, 59 82, 89
Ministry of Natural Resources, (MoNRE), 70 Pollutant standards index (PSI), 83
MOEJ 89 Pollution disposal cost, 39
Monopolistic competition, 25, 122 Population density, 42
MoNRE, see Ministry of Natural Resources, Poverty, 57–59
(MoNRE) See also Unemployment
Montreal Protocol, 70, 74 Poverty implications, 129–131
Most favored nations (MFN), 9, 16, 25, 33–35, PM10, 69–83
39 Preferential trade agreement, 3, 28
Multilateral regional trading, 18–19 Preferential trading areas (PTAs), 2
Multilateral trading, 1–2, 16–17 Product differentiation, 87
Multiple sector tax, 166–169 Proton car, 54
drastic, 168–169
moderate, 167–168 R
RCA, see Revealed comparative advantage
N (RCA)
Nargis cyclone, 65 Recycling programs, 71
National Environment Quality Enhancement Reduce, Reuse, and Recycle (3R), 81, 173
and Protection Act (NEQA), 79 Regionalism, 3, 7–8, 12, 29, 31, 68
Index 209
Regional trade agreements (RTAs), 2–3, 8, 26, Tradeable permits, 165

29–30, 40, 97–100, 105, 108 Trade and environment equilibrium analysis
Revealed comparative advantage (RCA), 109, (TEQUILA), 36
113, 119 Trade creation, 3, 24, 26, 28–29, 31, 33, 35,
Rice production, 48 103, 105, 107, 118, 177
See also Paddy rice Trade diversion, 3, 13, 24, 26, 28–30, 35, 103,
Rio Earth Summit, 70 105, 108, 118, 177
Riparian zone, 76 Trade liberalization, 1, 15, 19, 21, 23, 27, 30,
34–40, 43, 95, 100–101, 103, 124–125,
S 130–131, 133, 137–141, 150, 153, 158,
SAM, 39 160, 163, 175, 177–180
Samsung, 122 Trade reforms, 25, 39, 59, 124, 158, 160, 178
Second World War, 50 Trade related environmental policies
Sectoral analysis (TREMS), 21, 166
BAU, 142–149 Trade theory, 3
export, 117–119 Transatlantic market, 40
import, 119–122 Transition economies, 4
output, 108–109 Tropical fruits, 17
trade liberalization, 150–155 Tsunami, 52
Sectoral performance, 122, 131, 141–142, 177
Seoul metropolitan air quality, 76 U
Shallow integration, 3 Unemployment, 57–59
Silicon wafers, 55 UN Framework Convention of Climate Change
Socio-economic disparities, 18 (UNFCCC), 80
Sound material-cycle society (SMS), 81 United Nations Charter, 9
South Asian Free Trade Area (SAFTA), 7 Urbanization, 19, 70–71, 82–83
Southern Africa Customs Union (SACU), 4 Uruguay Round, 38–39
South–South trade liberalization, 39 US EPA, 82–83
Special atmospheric preservation measure
areas, 76
V
Square model, 128
‘Visit Laos Year’, 57
Statistic central agency, 72
Volcanic organic compound (VOC), 78, 81
Stockholm Convention, 70
Volume-based Waste Fee System, 76
Structural adjustment, 27
Structural change, 47, 155, 158, 160
Subregional haze, 78 W
Suspended solid, 149 WASEAN, 91, 126
Waste minimization technology, 173
T Welfare
Tariff barriers, 93 decomposition, 125
Tariff rate quotas (TRQ), 15 implication, 124–126
Tariff reduction, 10–11, 15, 21, 26, 30, 36–39, World Bank, 39, 45, 53, 59, 71, 72, 78, 94
91, 93, 98–101, 103, 105–108, 113, World development indicators, 94–95
118–119, 122, 124, 126, 129–131, World Food Program, 49
136–137, 152–153, 176–177, 180 World Health Organization (WHO), 72, 77,
Telecommunications, 1, 13, 32, 51, 53–57, 63 82–83
Terms of trade (TOT), 25, 124–127 Worldscan, 27
Terraces system of agriculture, 47 World Trade Organization (WTO), 1, 68
Total suspended particulates (TSP) monitoring,
83 Z
Tourism, 19, 50, 53, 55–57, 70 Zone of peace, freedom, and neutrality, 11

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Economic and Environmental Impact of Free Trade

in East and South East Asia

Economic and Environmental

Foreword by Hideyuki Mori and Mark Elder

ISBN 978-90-481-3506-6 e-ISBN 978-90-481-3507-3

Library of Congress Control Number: 2009942093

© Springer Science+Business Media B.V. 2010

Printed on acid-free paper

Springer is part of Springer Science+Business Media (www.springer.com)

a spectrum of results in terms of both economic and environmental impacts. This

Institute of Global Environmental Strategies (IGES) Hideyuki Mori

the framework of a regional trade agreement results in increased competitiveness of

This book is partially an outcome of the Research project “Promotion of Sustainable

encouragement, helpful comments, constructive suggestions and insights while

Department of Agricultural Economics Kakali Mukhopadhyay

6 Environmental Impact of Economic Integration . . . . . . . . . . . . 133

5.1 Export share of selected countries among the ten regions in

1.1 Notified RTAs in goods and services by date of entry into

4.3 Factor inputs, GDP, population projections (2010–2015):

1.1 Globalization and Regionalization

Globalization facilitates economic growth, improvement in resource allocation, and

K. Mukhopadhyay, P.J. Thomassin, Economic and Environmental Impact of Free Trade 1

1.2 Basic Issues of Regional Trade Agreements

1.3 Proliferation of Regional Trade Agreements

that go beyond multilaterally trade regulations. Third, the emergence of trade

Developed Developed Developing

Source: Fiorentino et al., 2007.

1.4 Global Development of RTAs

network under the Trans-Pacific Strategic Economic Partnership (SEP-4) which

1.5 Economic Integration in East and South East Asia

1.5.1 FTA in East and South East Asia—A Brief History

has 21 members–referred to as ‘Member Economies’. These economies account for

Table 1.2 Historical overview of ASEAN relations and agreements

Source: European Commission, 2008.

ASEAN Vision 2020

billion in 2002 (14.49% growth in trade). Bilateral trading arrangements between

1.5.2 Factors Affecting FTA Initiatives in East

1.5.3 Features of Existing RTAs in East and South East Asia

1.5.4 FTA Initiatives in East and South East Asia

1.5.4.3 Republic of Korea-ASEAN

1.5.4.4 ASEAN Countries FTA in East and South East Asia

1.5.5 Efforts and Time Frame for Economic Integration

For developing countries

APEC (voluntary and 2010 2020 2020

Source: Kawai & Wingaraja, 2008a.

1.6 Environmental Degradation

with various environmental problems as a result of rapid industrialization and trade

1.8 Structure of the Book

The process of globalization including trade liberalization generated a number of

K. Mukhopadhyay, P.J. Thomassin, Economic and Environmental Impact of Free Trade 23

2.2 FTAs/RTAs Around the World

2.3 FTAs/RTAs in East and South East Asian Region

A number of studies attempted to address Regional Trade Agreements (RTAs)

Implications of accession to the WTO are addressed by scholars [Lejour (2000),

blocs without incurring any significant impact on interregional trade. Furthermore,

2.4 Impact of FTAs and RTAs on the Environment

K. Mukhopadhyay, P.J. Thomassin, Economic and Environmental Impact of Free Trade 41

1990 2000 2007 1990–2000 2000–07 2005

The issue of population and economic growth is as old as economics itself