Mega-regional trade agreements and Asia: An application of structural gravity to goods, services, and value chains

We use a flexible estimation and simulation platform built on the standard structural gravity model to analyze the trade and welfare implications of mega-regional trade agreements for Asian countries. Our counterfactuals suggest that all current mega-regional scenarios have the potential to generate significant export gains for Asian economies, but that welfare improvements are much lower relative to baseline. This finding suggests a political economy problem, as trade-related reallocations of labor and capital would have to be justified politically on the basis of relatively small improvements in real GDP. Second, our simulations show that market size matters for mega-regionals: FTAAP has larger trade and welfare effects than other agreements. Finally, we show that mega-regionals have significant potential to deepen value chain trade in the Asia-Pacific: FTAAP could see Japan and China increase their shares of intermediates in total goods and services exports at a rate equivalent to around five years of value chain deepening, taking the average rate of change observed worldwide.