The Impact of Free Trade Agreements in ASEAN Using the CEPT Scheme: Comparative Study of Thailand and the

Philippines

The Impact of Free Trade Agreements in

ASEAN Using the CEPT Scheme:
Comparative Study of Thailand and the Philippines
Areerat Todsadeea
Hiroshi Kameyamab
a
Graduate School of Agriculture, Kagawa University
b
Faculty of Agriculture, Kagawa University, Japan
todsadee@hotmail.com

Abstract
Recently, the Free Trade Agreement (FTA) networking in East Asia has been expanding. It has
been developing with ASEAN as its hub. Furthermore, ASEAN itself has attempted to strengthen
the integration by signing the ASEAN Trade in Goods Agreement (ATIGA) in 2008/2009 and by
establishing ASEAN Economic Community (AEC) targeted in 2015.
To assess the economic impact of FTAs, the comparative results of a simulation for Thailand
and the Philippines are presented in this paper, using computable general equilibrium (CGE)
model analysis. We used the global trade analysis project (GTAP) model with database version 7.
The reference year corresponds to the global economy in 2004. Assuming the tariff reduction
process as Common Effective Preferential Tariff (CEPT), some indexes such as GDP, term of
trade (TOT), equivalent variation (EV) and allocative efficiency are shown. Thailand and the
Philippines are both original members of ASEAN. The agricultural sector in both countries is
still contributing a large share, but the performance for industrial change has not been the same.
This paper analyzes the extent by which both countries can improve benefit of FTAs by reducing
or eliminating tariffs on all products and on non-agricultural products under a CEPT scheme.
Some changes are examined by linking overall welfare decomposition and industrial structure by
sectors.
Keywords: Free Trade Agreements; ASEAN; CEPT; GTAP; CGE

Introduction
The proliferation of free trade agreements (FTAs) has been one of most notable
phenomena in the world economy over the past 15 years. FTAs have become the
dominant form of international cooperation on trade policy for virtually all members of
the World Trade Organization (WTO), with the exception of Mongolia. The number of
FTAs that has been notified to WTO tripled from around 124 in 1994 to 370 by August
2008, more than half of which are currently in force. Interestingly, half of them are in
the Asia Pacific region, the center of global trade dynamism, which has far-reaching
implications, not only for the philosophy and operation of the multilateral trading
system, but also for the day-to-day conduct of cross-border trade.

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Areerat Todsadee and Hiroshi Kameyama

In general, FTAs involve liberalizing trade among the member-countries. However,

their actual impact on trade is not as straightforward as we usually expect from
multilateral and/ or unilateral liberalization. In fact, in the 1990s when the WTO was
being established with the subsequent reinforcement, the Asia-Pacific Cooperation
(APEC), ASEAN Free Trade Area (AFTA) (Adams and Park 1995, Kawasaki 2003,
Indira and Mangunsong 2006, Siriwardana 2007, Siriwardana and Yang 2008,
Kohpaiboon 2009), and South Asian Free Trade Area (SAFTA) were activated (Moktan
2008).
AFTA was selected for this study because it is one of the few South-South FTAs in
which tariff reduction programs were completed by 2003, and thus, sufficient time has
passed to assess their impacts. The ASEAN member governments have responded to the
joint CEPT scheme. The findings of this study would be directly relevant to this policy
debate.
Thailand and the Philippines are suitable cases of this study for two reasons. First,
Thailand and the Philippines are original members of AFTA. Second, the Philippines is
a newly-industrialized nation while Thailand has already been an industrialized nation.
However, they both still have economies with large agricultural sectors. The nonagricultural sectors follow the ASEAN agreement to create a common market by
reducing or eliminating tariffs under a Common Effective Preferential Tariff (CEPT)
scheme. This paper aims to evaluate the economic impact and welfare implications of
trade liberalization on CEPT scheme in Thailand and the Philippines.

Methodology
To analyze the economy-wide impact of trade liberalization, a CGE model of global
trade was employed for model simulations. A CGE model numerically simulates the
general equilibrium structure of the economy, and is used for the analysis of Free Trade
Agreements (FTAs). It is built on the Walrasian general equilibrium system, in which
the central idea is that market demand equals supply for all commodities at a set of
relative prices. Moreover, a CGE model has solid micro-foundations that are
theoretically transparent. Functional forms are specified in an explicit manner, and
interdependencies and feedback are incorporated. Therefore, the model is an effective
framework for assessing the effect of policy and structural changes on resource
allocation by clarifying who gains and who loses.
These characteristics differentiate it from the partial equilibrium model, which is
not economy-wide, the macroeconomic model, which is not multisectoral, and inputoutput model, in which economic agents do not respond to changes in prices. Moreover,
the multi-country model is required to analyze international economic affairs such as
trade and investment policies, which affect not just one but a number of economies.

September 2010 Legazpi City, Philippines

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The Impact of Free Trade Agreements in ASEAN Using the CEPT Scheme: Comparative Study of Thailand and the
Philippines

Other database and the standard version of model by the Global Trade Analysis
Project (GTAP) are utilized as a basis of simulation experiments. The GTAP1 model is
a standard CGE model, which depicts the behavior of household, governments and
global sectors across each economy in the world. It is composed of regional models,
which are linked through international trade. Prices and quantities are simultaneously
determined in factor and commodity markets by accounting relationships, and by the
structure of international trade. The model includes three main factors of production:
labor, capital and land. Land and capital are used by all industries, but land is used only
in agricultural sectors. Capital and intermediate input are trade, while labor and land are
not traded between regions.
Several key assumptions for the standard GTAP model are as follows. First, there is
perfect competition, and therefore there is a constant return to scale. Second, there is the
presence of the imperfect substitution in goods and services between the home economy
and those abroad and among different origins of economies, following the Armington
parameter 2. Third, the amount of total labor-one factor endowment-is fixed. This means
that the model assumes full employment and no unemployment. The amount of total
capital is also fixed in the standard GTAP model.

Data and Aggregation

The source of the data for simulation is GTAP version 7. It covers 113 regions, 57
commodities or sectors, and five primary sectors. The database corresponds to the world
economy based on 2004 benchmark.
The original GTAP dataset was aggregated down to 9 regions and 14 sectors,
respectively (AFTA regions: Indonesia, Malaysia, Singapore, Thailand, the Philippines,
Vietnam, Las PDR, Myanmar and Cambodia, 14 sectors: agriculture and food, fishery
and forestry, mining, wood and paper, mineral products, textile and apparel, electronic
machinery, transport equipment, other manufacturing, construction, trade, transport and
communication, public services and other services).

The GTAP model was applied to the analysis of the economic impact of the Uruguay Round
Agreement by the Secretariat of the General Agreement on Tariff and Trade (GATT) for that
day as seen in GATT (1994). And later in 1997, it was also utilized in the assessment of the
economic impact of the Manila Action Plan by the APEC Economic Committee. At present,
this model and database are widely used by international organizations and researchers on
international affairs. Hertel (1997) describes the GTAP.

The basic framework of the trade model is guided by the comparative advantage theory by
Hecsher-Ohin. However, the original theory of comparative advantage cannot explain such
aspects as the two-way trade seen in actual trading behavior. This is because the theory makes
no distinctions between the same goods from different areas of production. Therefore, the
general equilibrium model introduces heterogeneity into the same goods according to their
production areas, namely, imperfect substitutes of goods between home and aboard, the socalled Armington assumption (Armington 1969).

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Areerat Todsadee and Hiroshi Kameyama

Table1. Average CEPT rates by countries in AFTA in 1993-2010 (in percent).

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

ASEAN

1993

3.78

1994

2.64

1995

Vietnam

Lao Myanmar ASEAN 10

17.27

10.79

12.45

0.01

19.85

11.44

17.27

10.00

11.37

0.01

19.84

10.97

2.54

15.22

9.21

10.45

0.01

18.16

10.00

1996

2.02

10.39

4.56

9.55

0.01

14.21

7.15

0.92

7.03

1997

1.61

8.53

4.12

9.22

12.91

6.38

4.59

6.32

1998

1.37

7.06

3.46

7.22

10.24

5.22

3.95

5.00

2.39

4.91

1999

1.55

5.36

3.2

7.34

9.58

4.79

7.11

7.54

4.45

5.01

2000

1.26

4.76

3.32

5.18

6.12

3.64

7.25

7.07

4.43

4.43

2001

1.17

4.27

2.71

4.48

5.67

3.22

6.75

7.08

4.57

4.11

2002

0.96

3.69

2.62

4.13

4.97

2.89

6.92

6.72

4.72

3.84

2003

1.04

2.17

1.95

3.82

4.63

2.39

6.43

5.86

4.61

3.33

2004

0.89

1.86

1.67

3.27

3.97

0.66

5.51

5.02

3.95

2.07

2005

0.76

1.59

1.43

2.81

3.40

0.57

4.72

4.31

3.39

1.77

2006

0.65

1.37

1.23

2.41

2.92

0.49

4.05

3.69

2.90

1.52

2007

0.56

1.17

1.05

2.06

2.50

0.42

3.47

3.16

2.49

1.30

2008

0.48

1.00

0.9

1.77

2.14

0.36

2.97

2.71

2.13

1.12

2009

0.41

0.86

0.77

1.51

1.84

0.31

2.55

2.32

1.83

0.96

2010

Source: For 1993 to 2003 by ASEAN Secretariat (1998, 2002, 2005)

Note: For 2004 to 2010 by authors calculation by linear interpolation.

We separated the individual country/region to the maximum extent possible so as to

distinguish the welfare and trade effect of policy changes by country/region and sectors
based on similarities in factor shares and characteristics. The regional analysis focuses
on Thailand and the Philippines.
Simulation procedure and policy scenarios
Our simulation procedure takes into account the membership in intra-AFTA from
2004 to 2010. It is not a one time shock, so it should be done by using dynamic GTAP
fundamentally. As in our preliminary study, we used the following steps. We eliminated
the tariff in AFTA members in the first year and saved it. Then, we used it as the base
data in the second year and repeated the same steps until the end recursively. This is a
comparative-static model that could be used to analyze the reactions of the economy at a
specific time point.

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17

The Impact of Free Trade Agreements in ASEAN Using the CEPT Scheme: Comparative Study of Thailand and the
Philippines

Our analysis places a special focus on the reduction of average CEPT rates in
AFTA countries, before and after the CEPT scheme established. Table 1 provides an
overview of the average CEPT tariff rates from 1993-2010 in the ASEAN6 and ASEAN
10 countries. In Thailand, the tariff level was relatively high compared with the
Philippines.
We carried out two simulations. These two simulation scenarios may reflect the
options that were discussed by the two parties at different stages of negotiations.
Scenario 1: all bilateral tariffs in Thailand and the Philippines, all tariff rates that
appear in Table1 will be reduced to zero.
Scenario 2: non-agricultural sectors in Thailand and the Philippines.
Simulation Results
This section reports the results from the GTAP simulation of AFTA particularly the
macroeconomic effect, trade performance, welfare decomposition and total trade
bilateral export from Thailand.
The Macroeconomic Impact
The simulation outcome on the macroeconomic impact of the AFTA is shown in
Table 2. The economic growth in Thailand and the Philippines are shown loser, trading
with old member of AFTA in both scenarios. This finding indicates that the AFTA has a
negative impact on both countries, especially in the case of the Philippines. However,
the imports from the ASEAN countries increased more steadily than exports, import
excess export in both countries. On the other hand, as far as exports are concerned, the
Philippines has more exports than Thailand in non-agricultural sectors. Thailands
exports are generally deteriorating with ASEAN countries. The rate of change in terms
of trade in both countries deteriorated which could be explained by the less capacity to
import, especially in Thailand.

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4th Asian Rural Sociology Association (ARSA) International Conference September 2010

Areerat Todsadee and Hiroshi Kameyama

Table 2. Macroeconomic impact in Thailand and Philippines (in percent).

Scenario 1
Thailand
real GDP

2004

2005

2006

2007

2008

2009

2010
0.02

-0.03

-0.03

0.04

0.00

0.00

0.00

import volume

2.16

2.25

-0.66

0.26

0.07

0.25

1.73

export volume

0.12

0.11

-0.01

-0.03

-0.04

-0.03

-0.28

trade balance

-0.02

-0.02

0.01

-0.00

-0.00

-0.00

-0.02

terms of trade

0.20

0.20

0.00

0.10

0.04

0.05

0.40

-0.02

-0.00

0.11

-0.00

0.00

-0.00

-0.01

import volume

0.31

0.05

-0.05

0.13

-0.01

0.12

0.77

export volume

0.08

0.02

0.26

0.05

0.00

0.05

0.32

trade balance

-0.00

-0.00

0.00

-0.00

0.00

-0.00

-0.00

terms of trade

0.18

0.01

-0.20

0.03

-0.00

0.03

0.19

2004

2005

2006

2007

2008

2009

2010

Philippines
real GDP

Scenario 2
Thailand
real GDP

-0.04

-0.00

0.04

0.00

0.00

0.01

0.02

import volume

1.45

0.09

-0.64

0.25

0.04

0.11

1.79

export volume

-0.08

-0.01

-0.00

-0.03

-0.03

-0.03

-0.27

trade balance

-0.01

-0.00

0.01

-0.00

-0.00

-0.00

-0.02

terms of trade

0.12

0.02

-0.03

0.05

0.02

0.04

0.36

-0.01

-0.00

0.00

0.00

-0.00

0.00

-0.01

0.15

0.04

-0.55

0.11

-0.01

0.11

0.67

Philippines
real GDP
import volume
export volume

0.09

0.02

-0.20

0.04

0.00

0.04

0.24

trade balance

-0.00

-0.00

0.00

-0.00

0.00

-0.00

-0.00

terms of trade

-0.02

0.01

-0.15

0.03

-0.00

0.03

0.18

Source: GTAP simulation

Finally, the term of trade (TOT) has improved in Thailand because the consumers
pay less money for the imported products. That is, it has to give up fewer exports for the
import it receives. But Thailands consumers pay money much when Vietnam joined in
2004 in both scenarios, whereas the Philippines TOT deteriorated because of the social
welfare in both sectors. This means that, in all commodity sectors, the Philippines
consumers pay much money for the imported products and non-agricultural sector as
well, when the new members came in, Vietnam in 2006 and Laos and Myanmar in 2008
and also on non-agricultural sector as well.

September 2010 Legazpi City, Philippines

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The Impact of Free Trade Agreements in ASEAN Using the CEPT Scheme: Comparative Study of Thailand and the
Philippines

Trade performance results of the FTAs

The projection of the equivalent variation (EV) is a measure of the welfare impact
of the FTAs. The EV is an absolute monetary measure of change in welfare in terms of
income that eventuates from the fall in import prices when tariffs are eliminated. The
EV estimates follow the same pattern of change in real GDP. The change in real
consumption which is regarded as an alternative measure of welfare outcome also
confirms this finding (Table 3).
As a result, Thailand is shown to gain in improvements in welfare which can be
attributed to the gains from trade creation in both scenarios--all commodities and nonagricultural sectors.
However, the comparative analysis of the benefit to welfare in both scenarios shows
that, in scenario 2 the Philippines welfare loss by EV in the first year 2004, is -16.79 US
million $. It is quite a large drop down and accounts for (- 49.9 %) of total EV in 2004 2010. Accordingly, the CEPT scheme had a new membership in 2006 2010. Thailand
lost welfare more than original member countries except in 2010. When nine countries
joined and tariffs are eliminated, Thailand increased its welfare.
The Philippines lost welfare in both sectors in both scenarios. Especially when a
new member, Vietnam spreads in the range of 9.29 and 72.49, in 2006. However, the
negative EV in the Philippines on both scenarios means that they need to be
compensated at the original prices to have the same level on consumer welfare as the
price falls.
Welfare decomposition
The decomposition of the welfare measured in terms of changes in the equivalent
variation (EV) to the ASEAN countries among Thailand, the Philippines and AFTA
countries is shown in (Table 4). As a result, Thailand has gained in terms of trade
effects by reciprocal trade liberalization with ASEAN countries while the Philippines
has incurred losses. On the other hand, Thailand lost benefits when new member,
particularly Vietnam, joined the CEPT scheme, in both scenarios - all commodities and
non-agricultural sectors in 2006.
The effect of allocative efficiency shows a greater loss in the Philippines than
Thailand, especially in Scenario 2. In comparison to those terms of trade effects with
other sources of welfare impacts, it is also shown that Thailand will gain largely more
than the Philippines in terms of trade effects.

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4th Asian Rural Sociology Association (ARSA) International Conference September 2010

Areerat Todsadee and Hiroshi Kameyama

Table 3. Trade performance results in Thailand and Philippines.

Scenario 1
2004

2005

2006

2007

2008

2009

2010

EV ($US Million)

Thailand

200.2

239.3

18.6

65.4

54.9

61.1

506.4

GDP change (%)

0.33

0.36

-0.07

0.10

0.10

0.10

0.76

Consumer Expenditure (%)

0.16

0.18

0.01

0.05

0.04

0.05

0.38

Philippines

GDP change (%)

77.
54
0.3
5

Consumer Expenditure (%)

0.1

EV ($US Million)

5.79

-9.29

16.22

-1.27

14.88

86.53

0.02

-0.42

0.06

-0.01

0.06

0.36

0.01

-0.01

0.02

-0.01

0.02

0.11

Scenario 2
Thailand
EV ($US Million)
GDP change (%)
Consumer Expenditure (%)

20
04
79.
1
0.2
2
0.0
7

2005

2006

2007

2008

2009

2010

16.6

25.9

56.8

29.9

57.7

417.9

0.03

-0.05

0.09

0.04

0.08

0.71

0.01

0.02

0.05

0.02

0.05

0.34

5.66

-72.49

16.23

-1.25

14.93

87.39

0.02

-0.30

0.07

-0.01

0.06

0.37

0.01

-0.10

0.02

0.00

0.02

0.11

Philippines

EV ($US Million)

GDP change (%)

Consumer Expenditure (%)

16.
79
0.0
4
0.0
2

Source: GTAP simulation

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The Impact of Free Trade Agreements in ASEAN Using the CEPT Scheme: Comparative Study of Thailand and the
Philippines

Table 4. Welfare decomposition in Thailand and Philippines.

(Million US dollars)
Scenario 1
2006
72.52
-55.79
1.91
18.64

2007
3.84
68.14
-6.53
65.45

2008
3.40
56.19
-4.74
54.85

2009
3.47
63.84
-6.23
61.09

2010
26.94
528.71
-49.27
506.38

92.46
-105.04
3.29
-9.29

-0.34
17.00
-0.44
16.22

-0.01
-1.27
0.03
-1.25

-0.59
15.89
-0.41
14.88

-9.87
98.92
-2.51
86.53

Thailand
2004
2005
2007
2008
alloc
-60.27
-0.03
5.34
5.22
tot
144.26
18.35
57.14
28.09
IS
-4.89
-1.75
-5.66
-3.38
Total
79.11
16.57
56.83
29.93
Philippines
alloc
-9.00
-0.38
2.21
0.33
-0.01
tot
-9.43
6.20
-76.75
16.34
-1.27
IS
1.64
-0.16
2.04
-0.43
0.03
Total
-16.79
5.66
-72.49
16.23
-1.25
Source: GTAP simulation
Notes: alloc: allacative efficiency, tot: terms of trade, IS: saving -investment

2009
12.51
51.17
-6.02
57.66

2010
26.02
433.02
-41.14
417.91

0.06
15.28
-0.40
14.93

-5.18
95.03
-2.46
87.39

Thailand
alloc
tot
IS
Total
Philippines
alloc
tot
IS
Total

2004
-42.21
264.34
-21.93
200.20

2005
-47.07
312.62
-26.22
239.34

-13.84
93.83
-2.46
77.54

-0.61
6.57
-0.17
5.79

Scenario 2
2006
58.70
-33.19
0.40
25.91

Effect of export goods from Thailand and the Philippines to ASEAN

Table 5 presents estimated percent changes by sector in Thailand and the
Philippines to AFTA being implemented in its fully liberalized form. The Philippines is
projected to experience more significant structural adjustments in terms of sectoral
output compared with Thailand. As regards the sectors that export all commodities
sectors (Scenarios 1), related goods, the Philippines emerge as key winner, whereas
non-agricultural sectors (Scenarios 2) that may face export composition become the
losers. The performance of sectors such as agricultural and food sectors is quite
exceptional. All other sectors deteriorated in both scenarios except for the mineral
product sectors in Thailand in Scenario 2 which showed a consistent positive output
response and also have the highest output growth among them, which is more than the
Philippines. Conversely, the same all commodities sectors (Scenarios1) in Thailand
appear to be the significant loser from the AFTA FTAs.

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4th Asian Rural Sociology Association (ARSA) International Conference September 2010

Areerat Todsadee and Hiroshi Kameyama

Table 5. Effect of export goods from Thailand and Philippines to ASEAN

Source: GTAP simulation

Conclusions
This study assessed the impact of the Economic of Free Trade Agreement (FTA) in
ASEAN on multilateral trade development of Thailand and the Philippines. This
experiment used a simulation analysis based on a GTAP/CGE model. The GTAP model
simulations help us to identify which region may benefit or may suffer losses, in other
words winner and loser aspect. A number of changes are expected to occur in bilateral
tariff with formation of FTAs. In order to quantify the effects of the proposed FTAs, we
examined two scenarios, all commodities and non-agricultural sectors.
There are three main simulation results. First, Thailand and the Philippines
imported large amount of value from other ASEAN countries. While considering the
level of import-export trade bilateral in the ASEAN, it was noticed that, basically,
Thailand experienced gains in tradable-mineral product sectors. Meanwhile, the
Philippines experienced gains in tradable-agricultural and food sectors.
Second, results from simulation in the different implications also confirm that the
AFTA-CEPT would affect Thailand and the Philippines because full reciprocity would
impact negatively on the Thailand and the Philippiness FTA, both in terms of GDP,
trade balance and allocative efficiency effect.

September 2010 Legazpi City, Philippines

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The Impact of Free Trade Agreements in ASEAN Using the CEPT Scheme: Comparative Study of Thailand and the
Philippines

Third, the implementation had positive results, in terms of welfare in Thailand and
the Philippines. Positive effect of ASEAN, which would benefit the consumer or
household in ASEAN countries, would have been weighed against these probable losses
in revenue.
As far as the economic impact of trade liberalization is concerned, it must be noted
that the estimated impact of AFTA varies on the degree of macroeconomic gains and
the direction of structural change according to the agreement partners. It is not certain
that regions and preferential trade liberalization would realize welfare improvement
with more efficient resource allocation given by global and non-discriminatory trade
liberalization.
From a practical point of view (Ando and Urata 2006), these results indicate that
Thailand obtains the greater benefit with the larger coverage membership. The potential
gain for the Philippines remains unclear. Indeed, the short-time impact would be more
significant for both countries within ASEAN countries. The competitive impact of
exports in agricultural and food quantitatively affects Thailand when the tariff rate is cut.
Furthermore, because there are more participants with various concerns, not just in
trade but also in other areas such as the environment, labor and development,
multilateral trade liberalization, etc., it has become much more difficult come up with
agreement. In addition, the costs and disadvantages of non-participation in FTAs can be
a political and diplomatic mater of concern.

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4th Asian Rural Sociology Association (ARSA) International Conference September 2010

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