Comparison of Deep Regional Integration in the Melitz, Krugman and Armington Models : The Case of The Philippines in RCEP
This paper estimates the impacts on The Philippines of deep integration in a modern mega-preferential trade agreement, the Regional Comprehensive Economic Partnership. The paper assesses how the results differ with three versions of market structur...
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| Language: | English |
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World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/926651537189809947/Comparison-of-Deep-Regional-Integration-in-the-Melitz-Krugman-and-Armington-Models-The-Case-of-The-Philippines-in-RCEP http://hdl.handle.net/10986/30440 |
| Summary: | This paper estimates the impacts on The
Philippines of deep integration in a modern
mega-preferential trade agreement, the Regional
Comprehensive Economic Partnership. The paper assesses how
the results differ with three versions of market structure:
(i) perfect competition, Armington style; (ii) monopolistic
competition Krugman style; and heterogeneous firms, Melitz
style. The paper develops a new numerical model of foreign
direct investment with heterogeneous firms where firms
produce in the host country and demand corresponds to the
“proximity burden,” and is the first to apply a
heterogeneous-firms model of foreign direct investment to
preferential trade analysis. It also develops an extension
of the Krugman model that allows small countries to impact
the number of varieties. Both of these model extensions, as
well as market structure, are crucial to the results. The
trade and foreign direct investment responses are held
constant across the three market structures. Lowering trade
costs is examined from: (i) the reducing non-tariff barriers
in goods; (ii) lowering barriers against foreign services
providers, from foreign direct investment and cross-border;
and (ii) facilitating trade. The results show that in all
three market structures, there are substantial gains from
deep integration, but virtually no gains from preferential
tariff reduction. Both Krugman and Melitz style models
produce significantly larger welfare gains than the
Armington structure, especially in the impacts of foreign
direct investment or with wider spillover effects on non-
Regional Comprehensive Economic Partnership regions. The
relationship between the welfare gains in the Krugman versus
Melitz models is complex. |
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