Endnotes

¹See United Nations Conference on Trade and Development (2008). The PRC's share of developing world stock of FDI grew from 3.9% to 7.7% over the same period.

²See OECD (2007) for a discussion on the possible negative effects related to the natural resource specialization in Latin America.

³The share of intraregional trade was 31.8% in 2007 when the US was included.

⁴Anderson (1979) and Anderson and van Wincoop (2003) suggested that the gravity equation can be derived from a model of product differentiation and monopolistic competition. Deardorff (1998) derived a gravity model from a Heckscher-Ohlin framework, and Eaton and Kortum (2002) derived a gravity model from a Ricardian type trade model with homogeneous goods.

⁵See Appendix I [ PDF 12.4KB | 1 page ] for a list of the countries that are included in the dummies.

⁶In our preliminary analysis, we also estimated the model with two bilateral dummies for the PRC's exports to LAC, i.e., CHN_CAC and CHN_SA. Because the quantitative regression results of both specifications were quite similar, we decided to report only the results of a single dummy for the PRC's exports to LAC here.

⁷This is from the World Bank's Doing Business Index Database reported in Table 3. As suggested by Helpman, Melitz, and Rubinstein (2008), these costs affect the firm-level fixed costs of trade.

⁸Appendix III [ PDF 9.6KB | 1 page ] summarizes the model specification. See Zhai (2008) for a detailed description of the structure of the model.

⁹Another important trade bloc, the EU, is not considered in this scenario.

¹⁰The model assumes that there are no fixed costs for the trade of agricultural and mining products.

¹¹Zhai (2006) analyzed factors behind the welfare losses of the PRC due to the formation of an East Asia-wide FTA. One reason is the terms of trade effect. Given its role as an importer of intermediate goods from Asian neighbors and an exporter of final goods to the US and EU, the PRC's bilateral trade liberalization with its regional trade partners raises the relative price of intermediate parts and components to the final goods, resulting in a deterioration in the PRC's terms of trade. Moreover, because the intra-industry trade in intermediate goods accounts for a large proportion of Asian intra-regional trade, the liberalization toward an East Asia-wide FTA would further raise the prices of intermediate goods, inducing a larger deterioration in the PRC's terms of trade and welfare. Another factor contributing to the PRC's welfare reduction under an East Asia-wide FTA is the changes of sectoral composition of production resulting from trade liberalization. Japan and the Republic of Korea are important markets for the PRC's agricultural exports, even though they are highly protected. Their trade liberalization with the PRC would result in expansion of the PRC's agricultural sector, diverting resources from the industrial sectors. As a consequence, the industrial sectors would contract. Since industrial sectors are assumed to be operated under increasing returns to scale technology, their contraction would have negative welfare implications because of the loss of agglomeration and variety effects.

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