A Comparative Analysis of Shallow and Deep Integration of China and India into the Global Economy: A Research Agenda and First Application of the Disaggregated "Tapes" Partial Equilibrium Model to China

“New trade theory” and the theory of “new regionalism” suggests that there may be significant gains arising from deeper regional and global economic integration that are much greater than the shallow integration covered by standard international trade theory. The potential chain of relations linking deep integration to economic performance is: shallow integration → deep integration → expanded trade → externalities and scale economies → productivity increases → improved economic performance. Note that, shallow integration is probably a necessary precursor to successful deep integration. Some of the links and consequent externalities are likely to be commodity/sector specific, whereas others will be broader. Deep integration poses a set of major challenges to modellers. This exploratory paper sets out a research agenda for modelling some key aspects of deep integration and reports on some preliminary findings for China. The first is a radical disaggregation of model datasets which is essential to capture trade in intermediates, a hall­mark deep integration. Second, it is argued that indices of Intra Industry Trade (IIT) could provide a useful summary indicator of the degree to which firms and sectors have undergone deep integration. Third, the high degree of disaggregation chosen (HS4) with nearly 1200 commodities dictates the use of a partial equilibrium model. This means that in the absence of readily obtainable estimates of domestic production at this level of disaggregation, only import demand is modelled on the import side. Standard tariffs and estimates of the ad valorem equivalents are included in the protective structure on the import and export demand side. The first results for China are based on the TAPES partial equilibrium model using HS4 imports and exports with applied tariffs used on the import side and for partner countries on the export side. 10 regions are defined (including China and India). Importable and exportable production is not included. Advalorem equivalents of NTBs could not be included on this round. The data are averaged across three years 2003­2005. Four sets of experiments are reported, for a 50% across the board tariff cut in all regions, a China­EU FTA, a ChinaNAFTA FTA and a China­ East Asia FTA. Welfare is measured by changes in apparent consumption (absorption). The results are presented in aggregate and for an aggregation of the results to Broad Economic Categories (BEC). The main findings are: · The main message of our findings so far is that China's integration into the regional and global economy is more of the shallow integration variety and not of the deep integration variety if the results of the trade policy experiments are to be believed. The simulation results show very modest changes in IIT.· Qualification of our finding on shallow vs deep integration needs the historical evidence on changes in intermediate inputs and IIT for which we do not yet have secure results to report.· These preliminary findings suggest a comparative advantage story for trade in intermediates and IIT. Inherently, PE models are good at capturing this. The question that follows is this: can a PE model be extended to better capture deep integration, or do we need to develop our measures of deep integration from historical statistics? The answer is: probably both. · My own instinct (presenter) is to suggest that the Tapes model would be better run at the 6 digit level with improved disaggregation of the BEC categories for reporting and analysis to capture trade in various types of intermediates. The greater degree of disaggregation of the Tapes model would also require the use of a statistical package for presenting and analysing results.