Mega-regional free trade agreements in the Asia-Pacific: How do productivity gains, cost mitigations and agricultural policy reforms affect the results?

Asia-Pacific countries are currently negotiating two mega-regional free trade agreements (FTAs), namely Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP). The objectives of this paper are twofold. First, by using a dynamic applied general equilibrium model with several plausible sequences of region-wide FTAs, we offer results that are highly policy relevant. Second, we examine additional effects of mega-regional FTAs, including the positive impact on productivity, reductions in compliance costs associated with rules of origin, and FTA-induced agricultural policy reforms in Japan. When the mega-regional FTAs are assumed to exerts a positive effect on productivity, the magnitudes of welfare gains for all the member countries increase significantly. When implementations of these FTAs are assumed to lead to reductions in compliance costs associated with rules of origin, it would also boost welfare gains of the member economies. Finally, when Japan’s agricultural policy reforms would result in an increase in productivity of its agricultural sectors, the extent of output contraction of agricultural and processed food sectors in the country would be reduced significantly except for dairy products.