China's trade policies.

• Author: Whalley, John

Recent developments in China's trade policy include discussions of the possibility of joining the Trans-Pacific Partnership, exploration of mega trade deals with a number of trade partners, and enactment of a China-Korea free trade agreement. My research program applies numerical simulation methods to various economic models of China and its trading partners to analyze the potential impacts of such changes. The work draws on the output of two research efforts by young Chinese scholars that intensively examined a broad range of Chinese economic topics. (1)

China and the TPP

The Trans-Pacific Partnership (TPP) is a proposed regional arrangement among 13 countries; China is not a participant. Chunding Li and I assess the potential effects of the TPP on China and other countries. (2) We use a numerical five-country global general equilibrium model which incorporates trade costs and a monetary structure that incorporates inside money and thereby allows for impacts on trade imbalances. Trade costs are calculated using a method based on gravity equations. Our simulation results show small negative effects of the TPP on China and other non-TPP countries.

We also find that total world production and welfare will increase under a TPP regional free trade initiative and TPP will benefit member countries significantly. Smaller TPP countries gain proportionally more than the U.S. because of their substantial intra-Pacific trade. These results appear to be reasonably robust to changes in key model parameters, such as price elasticities of demand.

We use our model to simulate the effects of Japan joining the TPP and find that this would be a beneficial step for Japan and all other TPP countries, but that this action would have negative effects on China and the rest of the world. We evaluate the effect of China joining the TPP, and find that China and other TPP countries would all gain, while non-TPP countries would be hurt. In our model, the effects of TPP are different from those of global free trade. Global free trade benefits all countries, but TPP benefits only member countries. Moreover, the positive effects of global free trade are considerably higher than those of TPP.

China and Mega Trade Deals

Li, Jing Wang, and I explore potential impacts on China and other major countries of mega trade deals beyond TPP.3 These include the Regional Comprehensive Economic Partnership (RCEP), China-Japan-South Korea Free Trade Agreement, China-TPP, and possible China-U.S. and China-India free trade agreements. We also use numerical general equilibrium simulation methods, but introduce two important novelties. First, we divide trade costs into tariff and non-tariff barriers and again calculate trade costs between countries empirically using gravity-model methodology. This allows exploration of free-trade agreement effects from both tariff and non-tariff reduction. Secondly, we use an inside money structure to form an...