The Welfare Analysis of a Free Trade Zone: Intermediate Goods and the Asian Tigers

Abstract

We analyse trade reform among the ASEAN countries, which recently began removing all mutual trade barriers. The standard method to avoid complete specialisation in traded goods is to distinguish goods both by physical type and place of origin (the so-called Armington assumption). This methodology is not suitable for the sort of intermediate goods produced by the ASEAN countries. We develop a computational approach in the context of a non-Armington dynamic general equilibrium model. Analysing the results of a calibrated version of the model, we find that trade liberalisation is generally welfare improving for the ASEAN countries.