Assessing the economic impact and welfare effects of RCEP: A case study of Malaysia's progress in the ASEAN-China Free Trade Agreement

Abstract

This paper employs the WITS-SMART model to analyze the potential impacts of the Regional Comprehensive Economic Partnership (RCEP) on specific industries in Malaysia and China. By modifying the Armington elasticity and the parameter ‘a’ in the Swiss formula, five distinct scenarios are established to simulate the effects of various tariff reduction schemes. The analysis reveals positive and significant overall trade effects. In a scenario of complete tariff elimination, Malaysia experiences higher trade and welfare effects compared to China, addressing the longstanding trade deficit between the two countries. Finally, recommendations are made to gradually reduce tariffs in stages and sectors, prioritize tariff reduction on specific goods, implement zero tariffs in China first, focus on products with international competitiveness, and address potential asymmetric industrial output effects.

KEYWORDS:

• RCEP
• tariff reduction
• trade effects
• welfare effects
• Malaysia
• China

JEL CLASSIFICATION:

• F13

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 Laird and Yeats (1986) The Trade Creation Equation.

2 The Armington substitution elasticity is an index that measures the degree of substitution between goods. It reflects the degree of change in the proportion of money spent on one good by consumers when the price of another good changes. If the Armington elasticity between two goods is high, it indicates that they have a strong substitutability, and consumers are more likely to switch to another good when the price changes. Conversely, if the Armington elasticity is low, it indicates that the substitutability between the two goods is weak, and consumers are less likely to change their purchases due to price changes (Bajzik, et. al., 2020).

3 The Swiss formula is a mathematical formula used in multilateral trade negotiations to calculate the gradual reduction of tariffs. It is designed to promote trade liberalization by lowering tariffs for each country on a certain product over a certain period of time (Francois and Martin 2003).

Z = a X / (a+X)

where: X = initial tariff rate

a =  coefficient and to be determined through negotiation

Z =  resulting lower tariff rate (end of period)

4 At present, most scholars adopt the commodity classification method of HS (Harmonized System) to study WITS-SMART model. But in fact, SITC classification focuses more on the industrial classification and economic analysis of goods, and the result is easier to compare and analyze the trade of different industries and sectors. It is mainly used in international trade statistics and macroeconomic analysis. It is widely used in international organizations, research institutions, economists and other trade analysis and research.

5 The asymmetric industrial output effects in a free trade area refer to the uneven growth of industries in different countries or regions under the trade liberalization environment created by the free trade area. It is primarily influenced by factors such as differences in industrial competitiveness, industrial complementarity, and market size.