The Real Economic Impact of the EU-Japan EPA ? d Bruegel, Oct 3, 2018 Gabriel Felbermayr 1 The Real Economic Impact of the EU-Japan EPA ? d Bruegel, Oct 3, 2018

Gabriel Felbermayr https://ies.keio.ac.jp/upload/pdf/en/DP2018-015.pdf http://www.cesifo-group.de/de/w/3rVXUkYfr

AGENDA Quantifying the EU-Japan EPA: Caveats Gabriel Felbermayr 3 3 3 AGENDA Quantifying the EU-Japan EPA: Caveats Lessons from the EU-Korea FTA Results from the ifo-Keio study

THE „REAL“ ECONOMIC IMPACT OF FTAs Gabriel Felbermayr 4 THE „REAL“ ECONOMIC IMPACT OF FTAs Ex post evaluation of trade agreements: better methods and data Ex ante assessments: advances in quantitative trade models: better integration of theory, data, and estimation. BUT: Modeling choices and quality of data matter greatly Scenario uncertainty: assumptions needed; ceteris paribus nature of exercises No dynamics: underestimation of long-run real gains, but disregard of short-run adjustment costs Neglect of MNEs may overestimate gains of EU-JPN EPA Complex and potentially surprising effects through interactions with „distortions“

ONE CERTAINTY: EU-JPN EPA IS BIG Gabriel Felbermayr 5 ONE CERTAINTY: EU-JPN EPA IS BIG

AGENDA Quantifying the EU-Japan EPA: Caveats Gabriel Felbermayr 6 6 6 AGENDA Quantifying the EU-Japan EPA: Caveats Lessons from the EU-Korea FTA Results from the ifo-Keio study

EU TRADE: JAPAN, KOREA, THE WORLD Gabriel Felbermayr 7 EU TRADE: JAPAN, KOREA, THE WORLD 2011Q1=100

Gabriel Felbermayr 8 EU-KOREA LESSONS Findings from an ifo Evaluation for EU Commission (www.eukorea-eval.com) Source: http://www.eukorea-eval.com/

Gabriel Felbermayr 9 EU-KOREA LESSONS Findings from an ifo Evaluation for EU Commission (www.eukorea-eval.com) Source: http://www.eukorea-eval.com/

Gabriel Felbermayr 10 EU-KOREA LESSONS Findings from an ifo Evaluation for EU Commission (www.eukorea-eval.com) Inception of EU-Korea FTA triggers substantial trade growth from 2011 onwards Initial asymmetries have been quickly overcome Strong horizontal effects; strong implicit effects Trade diversion is relatively low A success story, to be replicated by the EU-Japan EPA? Source: http://www.eukorea-eval.com/

AGENDA Quantifying the EU-Japan EPA: Caveats Gabriel Felbermayr 11 11 11 AGENDA Quantifying the EU-Japan EPA: Caveats Lessons from the EU-Korea FTA Results from the ifo-Keio study

SIMULATION OF LIKELY EFFECTS Gabriel Felbermayr 12 SIMULATION OF LIKELY EFFECTS Based on ifo trade model (Aichele et al., 2016) Setup Scenarios 56 sectors, 130 countries (GTAP data, updated to 2018) New generation general equilibrium trade model Careful modeling of value added networks Very good fit of status quo data S I: Tariffs + NTB cost reduction as in EU-KOR FTA S II: S I under Brexit (Chequers) S III: S I under CPTPP [S IV: S I plus FTAs with US] [S V: S I plus US isolationism] Source: Aichele et al., 2016; http://www.eukorea-eval.com/

EFFECTS ON JAPAN‘S EXPORTS Gabriel Felbermayr 13 EFFECTS ON JAPAN‘S EXPORTS Source: Felbermayr et al., 2018.

EFFECTS ON JAPAN‘S IMPORTS Gabriel Felbermayr 14 EFFECTS ON JAPAN‘S IMPORTS Source: Felbermayr et al., 2018.

LIKELY MACROECONOMIC EFFECTS Gabriel Felbermayr 15 LIKELY MACROECONOMIC EFFECTS Long-run GDP gains in bn. US-Dollars and % of 2014 baseline % Source: Felbermayr et al., 2018.

LIKELY MACROECONOMIC EFFECTS Gabriel Felbermayr 16 LIKELY MACROECONOMIC EFFECTS Long-run GDP gains in % of 2014 baseline, Scenario II (conservative) Source: Felbermayr et al., 2018.

EFFECTS ON VALUE ADDED, bn USD Gabriel Felbermayr 17 EFFECTS ON VALUE ADDED, bn USD Source: Felbermayr et al., 2018.

SUMMARY OF SIMULATION RESULTS Gabriel Felbermayr 18 SUMMARY OF SIMULATION RESULTS F All EU memberstates win, third party losses are minor Sectoral gains and losses follow structure of comparative advantage and of initial protection Additionally … Possible CO2-savings through trade diversion away from CO2- intensive producers (China) despite additional transportation No systematic bias against low-wage workers in EU and Japan To be watched: effects of US trade policy on gains from EU-Japan EPA

The Real Economic Impact of the EU-Japan EPA ? d Bruegel, Oct 3, 2018 Gabriel Felbermayr 19 The Real Economic Impact of the EU-Japan EPA ? d Bruegel, Oct 3, 2018

TWO DIFFERENT BUSINESS MODELS Gabriel Felbermayr 20 TWO DIFFERENT BUSINESS MODELS Investment vs. exports-driven models; current account (bn. US-Dollar) Japan Germany 400 300 200 100 -100 -200 400 300 200 100 -100 -200 Current account Current account Net trade Income Income Net trade Source: Felbermayr et al., 2017, Figure 3.

TWO DIFFERENT BUSINESS MODELS Gabriel Felbermayr 21 TWO DIFFERENT BUSINESS MODELS ) Simple average MFN tariffs (%) Japanese companies rely more strongly on FDI into Europe than on exports to Europe EU firms rely more strongly on exporting This reflects slight asymmetries in trade barriers Lower trade barriers through the EU-Japan EPA will not undo this grown patterns Source: Felbermayr et al., 2017, Figure 13.