UNCTAD

BACKGROUND PAPER

Trans-Pacific Partnership Agreement (TPPA): Implications for

Malaysia's Domestic Value-Added Trade

Rashmi Banga
UNIT OF ECONOMIC COOPERATION AND INTEGRATION AMONGST DEVELOPING
COUNTRIES (ECIDC) UNCTAD

BACKGROUND PAPER NO. RVC-12

The views in this study are those of the author and not necessarily those of UNCTAD or its
member states. The designations, terminology and format employed are also those of the author.

Trans-Pacific Partnership Agreement (TPPA): Implications

for Malaysia's Domestic Value-Added Trade

Rashmi Banga1
UNIT OF ECONOMIC COOPERATION AND INTEGRATION AMONGST
DEVELOPING COUNTRIES (ECIDC) UNCTAD

January 2015
(Revised)

Unit of Economic Cooperation and Integration among Developing countries (ECIDC), UNCTADPalais des
Nations, CH-1211 Geneva 10 Switzerland Email: rashmi.banga@unctad.org The author is grateful for the comments
and suggestions received from participants of international conference on 'Mega Trading Blocs: Implications for
Developing Countries' organised by UNCTAD, Commonwealth Secretariat and Centre for WTO Studies on 15 th 16th December 2014

Trans-Pacific Partnership Agreement (TPPA): Implications for Malaysia's

Domestic Value-Added Trade

Rashmi Banga

Abstract: The paper critically examines the existing literature on evaluating the 'gains' and 'losses' of
entering any trade agreements, especially for developing countries. Most of the studies use Computable
General Equilibrium Analysis (CGE) for undertaking such an analysis. Highlighting the limitations of
CGE analysis, which mainly emerge from its inconsistent and unrealistic assumptions, the paper argues
that it is important to estimate the impact of entering trade agreements on member countries' domestic
value added (DVA) exports rather than on 'gross exports'. Given the rising importance of Global Value
Chains, many developing countries are experiencing a decline in their DVA exports, although their gross
exports are rising. This can lead to over estimation of production-linked gains from trade. Malaysia is
also experiencing a decline in its DVA exports. In this context, the paper estimates the impact of Trans
Pacific Partnership Agreement (TPPA) on DVA trade of Malaysia with other partner countries. The paper
suggests that an appropriate indicator to use for assessing net gains from TPPA is bilateral value-added
exports, which captures only direct domestic value-added trade between partner countries and reflects the
'net payment ' received in gross exports. The ratio used for Malaysia for estimating the impact of TPPA
with member countries is 'gross exports of Malaysia to partner country minus foreign value added of
partner country in Malaysia's gross exports'. This is different from 'exports of value-added' indicator
reported in OECD-WTO TiVA, which adds direct as well as indirect DVA exports of a country to its
partner country. Dynamic gravity model using 'bilateral trade in value added' instead of 'bilateral trade'
is estimated. The results of the model show that TPPA12 will result in rise in DVA exports of mainly three
countries, viz USA, Japan and New Zealand. Malaysia will experience a decline in its DVA exports of
USD 17 billion on an average per annum. This will lead to deterioration in its BOT with TPPA partner
countries.
The paper further estimates the impact of tariff liberalization among TPPA member countries on
Malaysia's sectoral trade. The analysis is undertaken using partial equilibrium analysis at a HS six-digit
disaggregated product classification in order to identify the products that may experience a change in
their trade post TPPA. Trade creation as well as trade diversion is estimated for these products along
with their source of imports and destination of exports. The results show that due to the existing FTAs
among TPPA member countries, the impact of tariff liberalisation will not be that much. Malaysias
balance of trade will worsen by around USD 1.5 billion per annum with imports rising by around USD 3
billion and exports by around USD 1.5 billion. Malaysian industries which will face a rise in imports
above USD 100 million per annum are vehicles, followed by iron and steel sector, mineral fuels, plastics
and articles, boilers and rubber and articles, aluminium and articles and tobacco. Most of the increase in
imports comes from USA and Japan.

Trans-Pacific Partnership Agreement (TPPA): Implications for Malaysia's

Domestic Value-Added Trade

1. Introduction

With the growing realisation that multilateral trade negotiations may take much longer time to
conclude than what was envisaged in the beginning of the Doha Development Agenda in 2001,
the focus of policymakers, especially from the developed countries, has shifted towards mega
free trade agreements (FTAs). These agreements are plurilateral in nature engaging developed as
well as developing countries. The motivations behind these mega FTAs include quick economic
as well as strategic gains. One such mega FTA is the Trans Pacific Partnership Agreement
(TPPA) engaging countries across different continents. TPPA negotiations began as Trans-Pacific
Strategic Economic Partnership Agreement in 2005 which included 4 countries namely
Brunei, Chile, New Zealand, and Singapore. In August 2014, the agreement was being negotiated
between 12 countries of the Asia pacific region. These include along with the original members,
Australia, Canada, Japan, Malaysia, Mexico, Peru Vietnam and United States of America (USA).
TPPA aims at expanding this initial group to include additional countries throughout the AsiaPacific region2.

TPPA stands out from other regional trade agreements in terms of its nature and scope. It goes
much beyond the existing trade agreements in the Asia pacific region and includes 29 chapters on
traditional as well as new issues, which include investments, services, financial services,
competition, government procurement, labor, Intellectual property, environment etc. Further, all
TPPA negotiating partners have entered into a confidentiality arrangement which makes any
analysis of the implications of TPPA on member countries extremely challenging until they
release the text.

While there exist a number of empirical studies that have examined the implications of TPPA on
the member countries, given the confidentiality in the negotiations, most of the analyses have
2

http://www.ustr.gov/about-us/press-office/fact-sheets/2011/november/united-states-trans-pacific-partnership

been limited to the impact of TPPA on trade. Most of the studies have used various versions of
Computable General Equilibrium Models (CGE) to simulate the impact of TPPA on exports and
imports of partner countries, including trade diversion and trade creation, thereby estimating the
impact on member countries' GDP, employment and welfare.

Studies using general equilibrium models like CGE for estimating the costs and benefits of TPPA
viz. Petri et al (2011), PIIE (2012), Cheong (2013), Xin (2014), Litkara (2014) Kenichi K. (2011)
etc. assess the likely impact on both- the participating and the non-participating countries and
regions- under different trade block scenarios, which are a-priori estimations using simulations.
These models have been heavily criticised for their unrealistic assumptions. These limitations are
elaborated in section 3 of the paper. However, one of the main limitations of these models is they
assume that exports arising from the enhanced market access due to FTAs like TPPA will
continue to originate from 'within' the country analysed, i.e., countries will continue to use the
same proportion of inputs from other sectors of their economy as they have been doing pre FTA.
The models accordingly estimate the rise in output and employment associated with increase in
exports.

However, in the emerging global scenario, with rising importance of the global value chains
(GVCs) and trade in intermediate products being 70% of the total trade (UNCTAD 2013), many
countries have large proportion of exports comprising of imports of intermediate products. In fact,
in many countries, linking into GVCs has actually declined the 'domestic value-added content' in
their exports (Banga 2014). Mega FTAs like TPPA, with liberal provisions on foreign direct
investments and trade in services, are more likely to increase the imports of inputs of member
countries which are used in their exports. This would imply that an estimated "rise in exports" by
models like CGE, may not be translated into rise in output and employment but may actually be
fed by imports from partner countries, declining the existing domestic value-added content of
exports of some member countries. This can have adverse implications for domestic production
and employment for some of the courtiers engaged in TPPA. This aspect has been completely
ignored by the existing literature.

In the case of Malaysia, it is found that like many other developing countries, Malaysia has been
experiencing a fall in domestic value added content in its exports to the world. This declined from
60% in 1995 to 58% in 2005, after which the domestic value added in exports rose to 62% in
2009. However, unlike its global trend, with respect to other TPPA partner countries, Malaysia's
Domestic Value Added Exports (DVA Exports) have been steadily declining over the years. This
decline has been experienced with respect to all major TPPA members like US, Mexico, New
Zealand, Singapore and Japan. Maximum decline in DVA exports of Malaysia has been with US,
where it has declined from 65% in 1995 to 42% in 2009. This implies that if Malaysia's exports
to US increase by $100, only $42 will be retained within Malaysia and the rest will trickle out of
the country. Only $42 will add to total production and generate production linked employment.
Studies therefore need to adjust accordingly the expected production-linked gains of exports. On
the other hand, DVA exports of most of the TPPA partner countries to Malaysia have increased
over the years. For example, US increased its DVA exports to Malaysia from 85% in 2005 to 89%
in 2009, for Singapore the respective increase was from 58% to 64%; New Zealand- 69% to 74%
and Canada- 55% to 58%3.

Rise in DVA exports is important for a country in order to get the commensurate productionlinked gains of exports. The gains from any regional trade agreement to a country will come not
from increased exports per se, but from increased domestic value-added exports. Further,
there can be no employment gains if DVA exports actually declines after the trade agreement. It
has therefore become increasingly important for developing countries to focus more on
'producing more' and not 'exporting more'. All regional and bilateral FTAs should be analysed
with respect to their contribution to DVA exports and not gross exports. Accordingly, the
analysis in this paper is based not on 'trade' but on 'trade in domestic value-added content'. The
paper estimates the impact of TPPA12 on its member countries, focusing on DVA exports. The
analysis is undertaken in greater detail for Malaysia, given its trend of declining DVA exports.

To measure the net domestic value-added created by trade in TPPA, a new dataset is used which
has been made available by WTO-OECD. This database uses harmonized input-output (I/O)
tables of different countries. Analyses based on input-output tables provide a useful alternative to
3

Source- WTO-OECD Trade in Value Added database

trade data. An important advantage of I-O tables is that they classify goods according to their use
(as input into another sectors production or as final demand); and include information on inputs
of/in services sectors, allowing for the analysis to include services trade. This database, released
in 2013 on Trade in value-added (TiVA), covers 58 countries (including all OECD countries;
BRICS countries; Newly Industrialised Countries Tier-1 (NICs1); NICs2, Cambodia, Brunei
Darussalam and Rest of the world) for the years 1995, 2000, 2005, 2008 and 2009 using
harmonized input-output tables of these countries.

Using data on domestic value-added exports and domestic value-added imports of all TPPA
member countries (12), the paper estimates the impact of TPPA12 on Malaysia's domestic value
added exports, further on its balance of trade. To undertake this analysis, the paper deviates from
the existing literature using CGE for impact analysis of TPPA and estimates a dynamic gravity
model, using existing bilateral domestic value-added trade of member countries and gravity
variables. Gravity models are being increasingly used for estimating impact of regional FTAs 4.
Given the various provisions of TPPA, which aim at removing various restrictions and
regulations among the TPPA member countries, predicted bilateral trade in domestic value-added
based on gravity model, will be much closer to post TPPA reality as compared to the other trade
models. Further, the paper estimates the impact of tariff liberalisation on different sectors of the
Malaysia.

The rest of the paper is organised as follows: section 2 briefly examines the provisions of TPPA;
section 3 reviews the literature on impact analysis of TPPA on Malaysia and provides a critique
of CGE models; section 4 reports the methodology and data used; section 5 examines the existing
trends in Malaysia's bilateral domestic value added trade with TPPA partner countries; section 6
presents the results of the Trade-in-Value-Added Gravity Model (TiVA-Gravity) for all TPPA
member countries; section 7 estimates the impact of tariff liberalisation on Malaysia's trade with
TPPA member countries including sectoral estimations based on partial equilibrium analysis;
section 8 summarises and concludes.

See Bergstrand and Egger (2011) for developments of gravity models since1960s and their use in explaining the
impact of regional FTAs. http://www3.nd.edu/~jbergstr/Working_Papers/Gravity_Survey.pdf

2. TPPA Provisions: Brief Review

The TPPA is a potential free trade agreement aimed at creating a platform of economic
integration across the Asia Pacific region. This is an expansion of the 2005 Trans-Pacific
Strategic Economic Partnership Agreement (TPPA) that included originally 4 countries namely
Brunei, Chile, New Zealand, and Singapore. In August 2014, the agreement was being negotiated
between 12 countries of the Asia pacific region. Other countries such as South Korea, Taiwan,
Philippines, Laos, Colombia and Indonesia, Cambodia, Bangladesh, Thailand and India have also
expressed their interest to be a member of the TPPA. Though most of the countries involved in
the agreement are already into some sort of trade agreements, either bilateral or multilateral, for
years the present partnership treaty goes beyond the existing partnership agreements in terms of
its scope.

The text of the negotiation is based on 29 chapters which cover both the traditional areas in FTAs
and the new issues. Of the 29 draft chapters only eight deal with traditional trade issues. The
traditional issues in TPPA chapters cover the market access, technical barriers to trade, sanitary
and phytosanitary measures, rules of origin, customs cooperation, investment, services and legal
and institutional aspects of the negotiation. The new FTA issues include government
procurement, competition, intellectual property, labour and environment issues. The negotiation
covers the legal texts which prescribe rules and disciplines on the subject areas; and market
access which confers access opportunities for goods, services, procurement and investment. The
legal texts cover all aspects of commercial relations among the TPPA countries are virtually
complete except in some areas where the differences remain. In the later stage, further
negotiations and discussions are required on specific issues that still remain sensitive.
The first round of negotiations on TPPA commenced in March 2010 and the original participants
countries were Australia, Brunei, Chile, New Zealand, Peru, Singapore, United States and Viet
Nam. During the third round at Brunei Darussalam, Malaysia joined the negotiations and in
December 2012, at the 15th Round, Mexico and Canada were accepted as members to TPPA.
Similarly, Japan joined in the 18th round held in Malaysia.
Given the confidentiality agreement between the partner countries, provisions in most of the
chapters have remained out of the public domain. Some of the leaked chapters include investment
8

chapter. TPPAs investment text emphasizes a substantive legal protection to the investment and
the investors of each TPPA country in its TPPA partner countries. The TPPA envisages elevating
individual foreign firms to equal status with the sovereign nations. The negotiations aim at
providing the investors a non-discriminatory and a minimum standard of treatment and restrict
performance requirements for foreign investments. The text aims to include provisions for
expeditious, investor-state dispute settlement. Though the investment chapter has not been
officially released by the trade negotiators but the leaked document reveals that TPPA would
restrict the signatories from regulating foreign firms operating within their boundaries.

The TPPA would expand on the investor privileges found in the North American Free Trade
Agreement (NAFTA) and subsequent NAFTA-style deals. The leaked documents claim that
TPPA includes the provisions to acquire land, natural resources, factories without adequate
government review and the right to move capital without limits for foreign investors. Risks and
costs of offshoring to low wage countries are reduced and special guarantees are provided for
"minimum standard of treatment" for relocating firms. Under this regime, foreign investors can
directly sue the host government before tribunals of three private sector lawyers operating under
World Bank and UN rules to demand taxpayer compensation for any domestic law that investors
believe will diminish their "expected future profits." Similarly, on cross border services the
TPPA partner countries have agreed on most of the cross border service text that is likely to
include a open market for services trade. On goods negotiations, although not much is in public
domain, it is expected TPPA will include a 'yarn forward' rule of origin, which is a standard
USFTA requirement. This rule requires the TPPA nation to use a member-produced yarn in
textiles in order to receive duty-free access.
3. Critical Review of Existing Empirical Literature on Implications of TPPA on Malaysia

Although the confidentiality clause in the negotiations of TPPA has severely limited the
researchers in estimating more accurately the likely impacts of TPPA on participating countries,
there are a growing number of studies which estimate the likely impact of the TPPA on trade in
both participating as well as non-participating members. Majority of these studies use the
Computable General Equilibrium (CGE) model with Global Trade Analysis Projects (GTAP)
9

database for the quantitative assessments. These studies analyse various scenarios with possible
trade blocs and implications for member countries of TPPA under different scenarios. Some of
these studies include Petri et al (2011), PIIE (2012), Cheong (2013), Xin (2014), Litkara (2014)
and Kenichi K. (2011).

Although, CGE models continue to be popular models for analysing implications of regional
FTAs on 'included' and 'excluded' countries, there exists a growing literature with consensus on
the limitations of CGE modelling and its unrealistic assumptions which invariably lead to 'overestimation' of gains, especially for small developing countries. We trace this growing literature
on critique of CGE models listing the limitations of CGE models highlighted in this literature.

1. CGE models are designed in such a manner that liberalization will always lead to increase
in 'overall gains'
According to Taylor and Arnim (2006), most of the CGE models assume (i) fixed or full
employment of labour and capital is maintained everywhere in the world (ii) each countrys trade
deficit (or surplus) stays constant after liberalisation; and (iii) completely flexible taxes on
households enable each countrys internal economy to adjust smoothly. This implies that the
models are designed in such a way that 'the price system' will always respond to liberalisation in
a way that it leads to increases in overall well-being. These assumptions are made in most of the
studies assessing implications of TPPA including the PIIE (2012). These assumptions can have
some important implications as follows:
The assumption of 'full employment' would imply that as liberalisation takes place and
tariffs decline, more competitive sectors will expand and absorb all the resources
including labour which are released from the contracting and less competitive sectors.
However, this is never the case in real world where the less competitive sectors contract at
a much faster rate as compared to the expansion of competitive sectors. Given the sectorspecific labour requirements of skills, etc., much of the labour remains unabsorbed
leading to large scale unemployment. All this is assumed away by the model assumption
of 'full employment'. According to Raza et al (2014) models that assume full employment
will always produce positive gains in GDP.

10

 'Constant trade balance' is assumed which implies that the budget deficit of the
government is assumed constant. If revenues change due to tariff reduction or other trade
policies, government expenditures must adjust endogenously to satisfy the fixed budget
deficit. However, in real world this is never the case.
Completely flexible taxes on households are assumed or as stated in PIIE (2012) and Petri
et al (2011), "any changes in government budget are automatically compensated by
income tax rates on households". This assumption along with the above two assumptions
ensures that the two most important and variable indicators of macroeconomic
performance do not change in any country. This will automatically generate gains in the
long term.
According to Charlton and Stiglitz (2005), CGE models do not capture persistence
unemployment in developing countries. Trade liberalization can simply move workers
from low productivity protected sectors into unemployment, lowering country's GDP and
increasing poverty. CGE models fail to capture this effect because of its unrealistic
assumptions.

2. 'Armington Assumption' in CGE Models is unrealistic and underplays displacements of

domestic production due to trade policies
Many studies are pointing out the inconsistency in assumptions of CGE models. One particular
study in this context is by Arvind Panagariya and Duttagupta (2001), who argue that CGE
models which show 'gains' for a country from its own preferential liberalization are able to do so
by using internally inconsistent assumptions. 'Armington assumption' used in all CGE models,
including Petri et al (2011), implies that there exists 'product differentiation' which implies that
no country, howsoever small, produces something which is also produced by another country in
the world. In other words, domestic and foreign products are imperfect substitutes. This
assumption is not only unrealistic but can have far reaching implications on calculation of
welfare effects in CGE models. For example,
The Armington assumption implies that home and foreign goods are imperfect substitutes
so that if the price of one goes down, more of it will be consumed (and less of the other
product will be consumed) but there will never be complete substitution. This will imply
11

that CGE models underestimate the extent of domestic displacement that can take place
due to imports of cheaper products.
According to Tokarick (2005), this assumption implies that each country has some degree
of market power (even for bulk commodities) and if prices change, no country can ever
shift from exporting to importing a commodity. Further, it has to be pointed out that in
real world product differentiation may not be location-specific but is producer-specific,
for example, cars produced by Honda in Japan will be similar to cars produced by Honda
in any other country. This is not allowed in the CGE modeling. Cars produced by Honda
will differ by country of origin.
According to Arnim and Taylor (2007), higher the Armington elasticites assumed higher
will be the welfare gains in CGE models. If the fiscal deficit is assumed to be fixed, then
a tariff reduction must be offset by higher income taxes which will induce a drop in
consumption. Consumption should increase, on the other hand, because import prices fall.
The Armington assumption, however, forces the pass-through of tariffs into supply prices
to be less than 100%. Cutting tariffs thereby reduces consumption, a thoroughly nonintuitive result. As it turns out, the consumption crunch is lower (and welfare gains
higher), the higher the Armington elasticity of substitution.

3. CGE models estimate 'static gains' or 'long-term gains', ignoring short-term 'adjustment
costs' and therefore overestimate the 'total gains'
Most of the CGE models provide static results, i.e., change 'before' and 'after' a tariff change or a
tariff simulation. Recent models have estimated 'dynamic gains' which are generally long-term.
Petri et al (2011) provides results for 'long term' i.e., after ten years; automatically assuming away
the displacements that may take place in terms of employment losses through contraction in
domestic production. Further studies have pointed out that CGE models ignore important costs to
the economy while estimating gains and losses. Some of these costs are:
According to Raza et al (2014), the costs of 'regulatory changes' are never estimated by
CGE models. The reduction of Non-tariff measures (NTMs) will invariable entail both
short term adjustment costs and long term social costs, which are completely neglected,
overestimating the gains from removal of NTMs. Some of the important macroeconomic
12

adjustment costs include (i) changes to the current account balance, (ii) losses to public
revenues, and (iii) changes to the level of unemployment.
The 'tariff equivalent' used for estimating the impact of removing NTMs is often
controversial. Most of the gains in CGE modeling arise due to removal of NTMs, if
NTMs are modeled into the simulations. Bertram and Terry (2014) have highlighted the
problems in some of the studies like Petri et al (2011) which use NTMs to model the
overall gains to the participating members of TPPA.
4. CGE models do not capture 'vertical intra-industry trade' and therefore are unable to
capture change in 'domestic value-addition' in 'likely increases in exports'
Majority of the studies using CGE models suggest that the TPPA agreement will benefit the
smaller economies like Vietnam, Peru and Malaysia. PIIE (2012) shows that for Malaysia's
exports, following TPPA, will rise by US$ 16 billion. The study uses CGE and Release 8 of
GTAP dataset (with 2007 database) and corresponding increase in GDP is estimated to be around
4.7%; Cheong (2013) using CGE model and Release 8 of GTAP (2007 database) estimates that
GDP in Malaysia with TPPA12 will rise by 0.7%. Both the studies use Armington assumption of
similar products of different countries being imperfect substitutes leading to difference in their
prices. They also use nested CES production function in the production technology in each sector.

While different studies arrive at different results using different assumptions, although using
same models and GTAP dataset, one of the major limitations of all these studies is that their
assumptions take into account the change in horizontal intra-industry trade across countries but
fail to take into account the change in vertical intra-industry trade. These assumptions imply that
producers can decide whether to sell their products in domestic markets or exports and consumers
can similarly decide whether to use domestic products or imported products. However, these do
not take into account the 'imports of intermediate products' that may be needed for 'increased
exports' in each sector, especially post FTA. Given the rising importance of Global Value Chains,
the studies grossly overestimate the related results of rise in exports with respect to change in
GDP and resulting change in employment.

This paper takes an alternative approach and estimates the maximum potential 'domestic valueadded trade' that can take place between TPPA 12 member countries, if no restrictions exist and
13

trade takes place only with respect to pure gravity variables, which include existing trade costs
due to physical distance and relative purchasing power of the importer economic distance
between the member countries, the paper estimates potential bilateral trade in value-added as well
as potential bilateral exports which can take place between TPPA 12 member countries. One of
the benefits of this approach is that the model is able to estimates trade in 'domestic value-added'
and predicts impact of TPPA on domestic value-addition because of change in exports. It is able
to provide a picture of balance of trade which may result for Malaysia due to TPPA. Given that
TPPA goes much beyond trade and will also remove other non-tariff barriers and restrictions,
gravity model provides a better fit than CGE models.

4. Methodology and Data Used

The paper uses theoretically justified Gravity model to estimate the implications of regional FTA
on member countries' total and bilateral trade in domestic value-added. This is, to the best of our
knowledge, the first paper to use Trade in Value-Added Gravity model (TiVA Gravity) for
estimating the impact of TPPA. One of the main reasons for lack of literature in this area has
been lack of data on bilateral trade in value-added. This paper uses WTO-OECD dataset on Trade
in Value-Added (TiVA) which provides information on bilateral value-added trade for 58
countries (including all OECD countries; BRICS countries; NICs1; NICs2, Cambodia, Brunei
Darussalam and Rest of the world) for the years 1995, 2000, 2005, 2008 and 2009 using
harmonized input-output tables of these countries.

Gravity models are extensively being used for estimating the impact of regional FTAs and
predicting bilateral and regional trade along with estimating trade creation and trade diverting
impacts of FTAs. Originally proposed by Tinbergen (1962) for international trade, the gravity
model predicts bilateral trade flows between any two countries as a positive function of their size
and negative function of the distance between them, where distance is a proxy for trade costs.
Studies use gravity model to explain bilateral trade, regional trade and impact of regional FTAs,
particularly whether these will result in trade creation or diversion. More recently, gravity models
are being used to estimate welfare effects of RTAs .

14

This study estimates Dynamic TiVA Gravity Model for the period 1995-2009 for 24 countries5
using panel data estimations (GMM-Arellano and Bond 1991). Most of the earlier studies have
used static model, which may result in biased results as trade is a dynamic process6. Use of panel
data and country-pair fixed effects in the model account for the endogeneity of the integration
effects and the existence of dynamic effects 7 . Dynamic models using GMM for estimating
gravity models are also found to be more robust (Martnez-Zarzoso et al, 2009).
Two specifications are estimated, using 'bilateral trade in value-added' (bilateral TiVA) as
dependent variables. These are with and without including the impact of tariff liberalisation on
bilateral TiVA. The data on size variables have been extracted from the World Development
Indicators. Distance variable is extracted from CEPII. The bilateral value-added data is used from
WTO-OECD TiVA. The growth rate of bilateral value added exports between two distinct
periods is applied to arrive at the continuous series of value-added trade for the period 19952009.

TiVA Gravity model is estimated, using relative GDPs and relative populations (or per capita
incomes). Relative distance is used to capture bilateral trade costs. Following Baier and
Bergstrand (2007), country-pair dummies are used to account for typical time invariant
regressors, such as common language or border. Likewise time dummy is used to correct for
potential trends in world trade. Similar model is estimated to explain bilateral trade by Bun and
Klassen (2002). Impact of Tariffs in partner country is also estimated. TPPA member dummy is
introduced. Arellano-Bond test for zero Autocorrelation in first differenced error has been
undertaken. The model estimated is as follows:

ln TiVAijt 0 1 ln TiVAijt 1 2 ln( POPit POPjt ) 3 ln(GDPit GDPjt )

4( Distancei j ) 5 ln Tariffjit ij eijt

Where, TiVAijt is bilateral trade in domestic value added between i and j in year t; GDP it = GDP
of country i at point t, GDPjt = GDP of country j at point t; POPit = population of country i at

12 TTPA member countries are included with two of their major trading partners who are not members of TPPA.
Countries are selected for which domestic value added data is available are included.
6
For detailed discussion see Eichengreen and Irwin 1997 and Bun and Klassen (2002)
7
See Baier and Bergstrand 2007 and Baldwin and Taglioni, 2007

15

point t; Pop jt = Population of country j at point t; Tariffjt is the simple average of tariffs in the
importing country; Distance ij measures the great-circle distance between the capital cities (or
economic centers) of country i and ij is the country pair dummy; and eijt = error term.

5. Existing Trends in Domestic Value Added Trade (DVA) in TPPA12

5.1 What Indicators to use for Bilateral Value-Added Trade for assessing gains and losses in
FTA?

Gross exports may rise or fall with a partner country but what matters is the extent to which a
country will gain bilaterally in terms of value-added trade, especially in a FTA with the partner
country. To estimate the bilateral value-added trade between two countries it is important to use
the right indicator. OECD-WTO TiVA estimates and reports 'exports of value-added' from one
country to another8. This includes both direct domestic value-added exports from one country to
its partner country and indirect exports of domestic value added from one country to the partner
country, which reaches the partner country via its exports of intermediaries to some third
country. This indicator may not be a useful indicator when estimating bilateral trade, especially
under a FTA. For example, if Malaysia's direct domestic value-added exports to USA is USD
100 million and it exports intermediaries to some African country, which is not a part of TPPA,
of USD 40 million. This African country uses the intermediate products imported from Malaysia
in its exports to USA. Then the indicator used by TiVA would show export of domestic value
added of Malaysia to USA as USD 140 million. However, in TPPA it should be only 'direct net
bilateral domestic value-added trade between USA and Malaysia' that should be considered as
indirect exports will continue with or without FTA since the preferential tariffs and other nontariff agreements do not include indirect exports. A better indicator which would reflect the net
bilateral value-added trade of Malaysia with USA would be 'Gross Exports of Malaysia to USA
minus Foreign Value Added of USA in Malaysia's Exports'. This would reflect the 'net
payments' which Malaysia receives from its value-added exports to USA.
8

OECD-WTO TiVA defines this as "Value-Added embodied in Foreign Final Domestic Demand shows how
industries export value both through direct final exports and via indirect exports of intermediates through other
countries to foreign final consumers (households, charities, government, and as investment). It can most readily be
interpreted as 'exports of value-added'.

16

On similar lines, the 'participation index' estimated and reported by TiVA as an indicator of the
extent of participation of a country in Global Value Chain may not be the right ratio to estimate.
According to this ratio, the extent of participation of USA in global value chains is found to be
lower than countries like Saudi Arabia or India. A better ratio that could be used as an indicator is
the share of a country in total value added created by global trade, as suggested by Banga in her
article "Linking into Global Value Chains Is Not Sufficient: Do You Export Domestic Value
Added Contents?" Journal of Economic Integration, Vol.29, No.2: 267-297.

Using the suggested ratio of 'gross exports of Malaysia to partner country minus partner country's
foreign value added in gross exports of Malaysia' bilateral value-added exports of Malaysia to 12
partner countries in TPPA is estimated.

It is important to note that Malaysia has been experiencing a rise in both its exports and imports
but has maintained a favourable balance of trade over the years. BOT increased from $16.4
billion in 2009 to $21.2 billion in 2012, although it declined thereafter to $19.9 billion in 2013.

5.2 Trends in Malaysia's Bilateral Value-Added Exports to TPPA Member Countries

With respect to TPPA member countries, Malaysia's gross exports to USA increased from USD
23 billion in 1995 to USD 34 billion in 2005 and further declined to USD 30 billion in 2008. In
2009, the gross exports declined to USD 23 billion. This trend of rising gross exports of Malaysia
is found for almost all TPPA member countries (Figure 1).

17

Figure 1 Malaysia's Gross Exports to TPPA Member Countries: 1995-2009

Source: WTO-OECD TiVA

However, foreign value-added by partner TPPA member countries in Malaysia's gross exports
has also been rising in this period (Figure 2). This rise has been much faster than the rise in
Malaysia's gross exports to them, which would imply a fall in 'net payments' to Malaysia from
partner countries for its gross exports. Foreign value added by USA in Malaysia's Gross Exports
increased from USD 6.8 billion in 1995 to USD 15 billion in 2008. In 2009 it declined to USD
13.5 billion. If this is subtracted from Malaysia's gross exports to USA in 2009, it is found that
'net payment' to Malaysia from USA for its gross exports would be around USD 10 billion (USD
23.4 billion minus USD 13.5 billion). Foreign value added (FVA) by Japan in Malaysia's gross
exports increased from USD 7.5 billion to USD 9.5 billion in 2008. FVA of Singapore and
Mexico in Malaysia's exports more than doubled in this period, while that from Vietnam
increased by more than 20 times (snapshot from the OECD-TiVA is presented in Appendix Table
A.1).

18

Figure 2: Foreign Value-Added by TPPA member countries in Gross Exports of Malaysia

Source: WTO-OECD TiVA

These two trends show that Malaysia's net payments for its value-added exports to TPPA partner
countries have been declining over the years. This decline in domestic value added exports has
been experienced for all major TPPA members like USA, Mexico, New Zealand, Singapore and
Japan. Maximum decline in Domestic Value Added exports of Malaysia has occurred for USA
where it has declined from 65% in 1995 to 42% in 2009 (Figure 1). This implies that even if
Malaysia's gross exports to USA rise, Malaysia will not gain 100% from it in terms of rise in
production and employment. Only 42% of exports to USA will lead to related rise in domestic
production. The rest will go back to USA as payments for its foreign value-added in Malaysia's
gross exports. Studies estimating the impact of rise in exports of Malaysia to USA on output and
correspondingly on employment need to adjust the gains from exports and lower them by at least
58%.

Using the ratio 'gross exports of Malaysia minus foreign value added in its exports by partner
countries in TPPA', as an indicator of its net gains from TPPA, we arrive at Malaysia's bilateral
domestic value added exports with TPPA member countries.

19

Figure 3: Malaysia's Bilateral Domestic Value-Added Exports to TPPA Members

Source: WTO-OECD TiVA

Using the same indicator, we estimate the share of different countries in Malaysia's total domestic
value-added exports to the world. It is found that share of USA has declined steadily from around
20% in 1995 to around 7% in 2009 (Figure 4). All TPPA members together have a share of not
more than 40% in total value added exports of Malaysia, while their share in Malaysia's total
exports is around 60%. The importance of exporting to these countries for raising Malaysia's
domestic production should be accordingly downsized.
Figure 4: Share of TPPA members in Malaysia's Global Domestic Value Added Exports

While Malaysia's bilateral DVA exports to TPPA members have been steadily declining, the
TPPA's member countries foreign value added in Malaysia's exports has been rising. Malaysia is
therefore becoming an important destination for the exports of these countries, especially USA.
Bilateral domestic value added exports of USA to Malaysia (Gross exports of USA to Malaysia

20

minus foreign value-added by Malaysia's in gross exports of USA) is around 89% while that of
Japan is 85% (Figure 5).

Figure 5: Share of TPPA Members in Malaysia's Domestic Value Added Imports

Source: WTO-OECD TiVA

In the context of falling bilateral DVA exports of Malaysia to TPPA partner countries, which
reflects declining net payments for its exports to these countries, we estimate the gravity model to
assess the implications of TPPA on Malaysia's DVA trade with TPPA member countries.

6. Estimations of 'Trade in Value-Added' Gravity Model (TiVA Gravity Model)

6.1 Estimated TiVA Gravity Model

Table 1 reports the results for the estimated TiVA Gravity model for bilateral trade in valueadded. The results show that the first lag of TiVA is statistically significant and robust indicating
that trade is a dynamic process and therefore dynamic panel data estimates are better than static
estimates of gravity model. Distance and relative sizes in terms of GDP and population (or per
capita income) are found to be statistically significant and of the right signs. Distance, as a proxy
of trade costs, has a negative impact on bilateral DVA exports while higher relative purchasing
power increases bilateral DVA trade. Preferential tariffs between bilateral pairs in TPPA may
lead to on an average, an increase of around only 1% in bilateral DVA trade. Most of the

21

TPPA12 countries are already enjoying tariff preferences with their partners under some or the
other FTAs.

Table 1: Results of Dynamic Panel Data Estimations of Trade in Value-Added Gravity Model
(TiVA- Gravity Model)

Variables
Bilateral Trade in
Value-Added (Lag1)
Bilateral Trade
(Lag 1)
Relative Per Capita
Income
Relative Distance
Tariff in Importing
Country
Country pair Dummy
Constant
prob> Wald chi2
Number of
observations

Bilateral Trade in ValueAdded

(1)
Coefficient
(t-stat)
0.51***
(77.3)

Bilateral Trade in ValueAdded

(3)
Coefficient
(t-stat)
0.70***
(97.0)

0.31***
(92.7)

0.16***
(52.2)

-0.93***
(-20.5)

-0.91***
(-18.5)
-0.01***
(-14.58)
YES
0.64***
(13.4)
0.00
6220

YES
1.47***
(23.8)
0.00
7100

Note: A two-step Dynamic Arellano- Blundell-Bond estimations are carried out. Panel data consists of 24 countries
including 12 TPPA member countries for the period 1995-2009. Arellano-Bond test for zero autocorrelation in firstdifferenced errors is performed for all specifications. No autocorrelation is found in the above specifications. Peru
and Brunei were dropped from estimates due to significant gaps in their data.

6.2. Potential Trade in Domestic Value-Added of TPPA Members using TiVA Gravity Model

Using the estimated dynamic TiVA gravity model, bilateral trade in DVA is predicted between
TPPA12 member countries. As discussed, this model is estimated using panel data for the period
1995-2009. The model estimates the maximum potential of trade that 12 TPPA member countries
can have in terms of Domestic Value Added, based just on gravity. This model is a closer fit to
reality given the TPPA provisions. These provisions aim at removing all restrictions and

22

regulations with respect FDI and trade in services; and remove all existing non-tariff and tariff
barriers9.

Studies may point out that TPPA will be a win-win situation for all countries in terms of rise in
exports, but it is important to estimate the change in domestic value-added in exports post TPPA
in order to reach to any conclusions about rising exports and related gains in terms of production
and employment. The results are reported in Table 2. The first three columns report the existing
exports, imports and balance of trade (BOT) in 2013. These show that the exports of TPPA12
member countries in 2013 are around USD ($) 1.8 trillion. Of this, USA has the largest share of
$588 billion, followed by Canada ($366 billion), Mexico, Japan and Singapore. The rest of the
countries' export less than $100 billion. In 2013, Malaysia exports around $93.7 billion to other
TPPA12 member countries and imports around $73.8 billion. It therefore has a positive balance
of trade (BOT) vis--vis TPPA member countries of around $19.8 billion. BOT of US is found to
be negative with respect to TPPA countries. This is of the amount $278 billion in 2013 implying
that USA imports much more from TPPA countries than it exports to them.

Existing DVA exports, DVA exports as a percentage of Total Exports and Predicted DVA
exports per year post TPPA are reported in columns 4, 5 and 6. It is found that DVA exports to
TPPA partner countries as a proportion of total exports are as high as 80% in many of the TPPA
countries. But in USA, Malaysia and Singapore it is much lower at around 50%. In Vietnam it is
around 75%. Post TPPA, predicted DVA exports per annum increase in USA, Japan and New
Zealand. USA has a potential to increase its exports of domestic value added to TPP12 countries
by around $155 billion. (52% of its existing DVA exports); while Japan's potential increase in
DVA exports is $ 87 billion (49% of its existing DVA exports).

TPPA will provide new market access for Made-in-America goods and services, strong and enforceable labor
standards and environmental commitments, ground breaking new rules on state-owned enterprises, a robust and
balanced intellectual property rights framework, and a thriving digital economy. It will also include commitments
that will improve the transparency and consistency of the regulatory environment to make it easier for small- and
medium-sized businesses to operate across the region. By opening these new markets to American products, TPPA
will help ensure that we are not left behind by our competitors in a vital region of the
worldhttp://www.ustr.gov/TPPA

23

Table 2: Results of Dynamic Gravity Model on Potential Domestic Value Added Trade in TPPA12
Members

Exports to TPPA
Imports 2013
countries in 2013 (USD
(USD '000)
'000)

United States
Australia
Canada
Chile
Japan
Mexico
Malaysia
New Zealand
Singapore
Vietnam

Domestic Value
Balance of
Added (DVA)
Trade in 2013
Exports in 2013
(USD '000)
(USD '000)

588'022'109

866'456'611

-278'434'502

59'183'792

79'278'324

-20'094'532

366'910'069

290'596'827

76'313'242

23'669'310

25'173'043

-1'503'732

208'720'414

221'692'156

-12'971'743

318'409'018

225'915'853

92'493'165

93'727'339

73'889'475

19'837'864

15'142'569

10'901'781

4'240'788

124'895'701

111'967'839

12'927'862

57'324'332

34'258'772

23'065'560

Percentage
DVA Exports as a
Change in
Percentage of
Predicted DVA
Predicted DVA
Total Export in
Exports (USD '000)
exports Post
2013 (USD '000)
TPPA (USD '000)

297'594'585
50'691'678
312'736'706
18'844'895
178'534'468
249'929'963
54'449'405
12'134'276
60'664'577
42'752'994

51
86
85
80
86
78
58
80
49
75

453'359'888
43'739'436
231'259'350
16'670'559
265'793'217
179'666'617
36'818'591
12'571'410
55'105'381
34'930'880

52
-14
-26
-12
49
-28
-32
4
-9
-18

DVA exports
minus Imports in Predicted DVA Change in DVA
2013 (DVA BOT) BOT (USD '000) BOT (USD 1000)
(USD '000)
-568'862'026 -413'096'723
-28'586'646 -35'538'888
22'139'879
-6'328'148
-43'157'688
24'014'110
-19'440'070
1'232'495
-51'303'262
8'494'222

-59'337'477
-8'502'484
44'101'061
-46'249'236
-37'070'884
1'669'629
-56'862'458
672'108

155'765'303
-6'952'242
-81'477'356
-2'174'336
87'258'749
-70'263'346
-17'630'814
437'134
-5'559'196
-7'822'114

Source: COMTRADE and Gravity Model Estimations Note: Peru and Brunei were dropped from gravity model
estimations due to significant gaps in their data.

Predicted DVA exports post TPPA decline in Malaysia by around $17 billion reducing its
domestic value added content in exports by 32% of existing DVA exports. This is not surprising
if viewed with respect to the declining trend in Malaysias DVA exports to TPPA12 over the
years as elaborated in the earlier section. Decline in DVA exports can have severe employment
implications in export sectors. Estimating the implications for BOT, it is found that for Malaysia
in 2013, DVA exports minus imports were minus $19 billion. This has a potential to worsen to
around minus $37 billion per year. BOT when estimated in terms of DVA exports and imports is
found to worsen for all countries except USA, Japan and New Zealand. These three countries will
be the net 'gainers' post TPPA in terms of DVA exports.

Given the provisions of TPPA which removes all restrictions to FDI and trade in services, this is
not very surprising. Most of the value in manufactured exports come from pre-manufacturing
and post-manufacturing services embedded in manufacturing products. Developed countries have
competitive advantages in these services and therefore would gain
more in terms of DVA exports in any trade agreement with developing countries which include
complete services liberalisation10.
10

See Banga (2014) for distribution of gains in GVCs.

24

7. Implications of Tariff Preferences in TPPA on sector-specific Trade and BOT

7.1 Existing Tariff Profiles of TPPA12 Countries

Although TPPA goes much beyond tariff liberalisation, there is always an interest in examining
the sectors which will gain and those which will lose in terms of tariff liberalisation. What is
intriguing about TPPA is that all the countries are already in FTAs with most of the TPPA partner
countries (Table 3). This is especially true for countries like Chile and Singapore. However, it is
important to note that the existing FTAs have exclusion lists. If TPPA aims at a higher scope of
tariff liberalisation with smaller scope for excluding tariff lines, it will be important to examine
the impact of tariff liberalisation.
Table 3: Existing FTAs among TPPA member countries in 2013
Australia
Australia
Brunei

Canada
Chile

Japan
Malaysia
Mexico
New Zealand

Peru
Singapore
USA

Vietnam

Brunei

Canada

Chile

Japan

Malaysia Mexico

New Zealand
Peru

Singapore USA

Vietnam

Table 4 reports the existing tariff profiles of TPPA12. It can be seen that the average applied
MFN tariffs are quite low for some countries like Singapore and New Zealand. But these could
differ widely across sectors. Canada, Malaysia, Mexico and Vietnam have average MFN applied
tariff as high as 16% in agriculture sector while Mexico and Vietnam have around 8% applied
tariffs in non-agriculture sector.

25

Table 4: Average Applied MFN Tariffs (%)

Total
Australia
Brunei
Canada
Chile
Japan
Malaysia
Mexico
New Zealand
Peru
Singapore
USA
Vietnam

Agriculture
2.7
2.5
4.3
6
4.6
6.5
7.8
2
3.7
0.2
3.4
9.5

Non-Agriculture
1.2
0.1
16.2
6
16.6
11.2
16.1
1.4
4.1
1.4
4.7
16.1

2.9
2.9
2.4
6
2.6
5.8
8.4
2.2
3.6
0
3.2
8.4

These variations become even more evident when product level tariffs are observed in some sectors and in
some countries. Table 5 provides highest tariffs by product category in TPPA countries. These products
include dairy, clothing, beverages, tobacco, sugar and electrical machinery.

Table 5: Highest tariffs by product in TPPA countries

Country
Australia
Brunei
Canada
Chile
Japan
Malaysia
Mexico
New Zealand
Peru
Singapore
USA
Vietnam

Product
Clothing
Electrical machinery
Dairy Products
Most Products
Dairy Products
Beverages and Tobacco
Sugar and confectionary
clothing
clothing
Beverages and tobacco
Dairy
Beverages and tobacco

Average Applied MFN Tariffs

8.9
(%)
13.9
246.8
6.0
178.5
119.7
59.3
9.6
13
2.4
19.1
43.6

Source: WTO Tariff profile 2012 and Williams (2013), CRS Report for Congress in USA

7.2 Implications of Tariff liberalisation under TPPA

To estimate the impact of tariff reduction in TPPA12, SMART simulations are used which are
based on Partial equilibrium. One of the advantages of this approach is that it allows estimation
of tariff reduction at a much disaggregated level, for example, implications of removing tariffs on
broken rice (at HS six digit disaggregation). Such a disaggregated product level estimations of
tariff liberalisation is not possible in any other model. SMART simulations are appropriate to use
for TPPA 12 analysis as only few products have high tariffs in member countries and
26

implications for removing these tariffs on exports, imports, trade creation and trade diversion
should be estimated. This also resolves a number of aggregation biases. However, it needs to
be remembered that this result of partial equilibrium analysis applies to only that product/sector
and ignores inter-sectoral linkages.

Using SMART simulations, we first estimate the impact of removal of all six digit product level
tariffs in TPPA12 countries. Existing applied tariffs are used and all tariffs among TPPA12
countries are brought down to zero. The simulation results are reposted in Table 6. The results
show that post tariff liberalisation, Malaysias exports may rise to TPPA partner countries from
$93.7billion to $95.2 billion, but imports will rise from $73.8 billion to $76.8 billion resulting in
adverse BOT of around $1.4 billion per annum. Malaysia's BOT post TPPA will deteriorate the
most with respect to Japan, followed by USA, Australia and Singapore. Malaysia gains with
respect to Vietnam in terms of improving its BOT by $ 460 million.
Table 6: Tariff Liberalization in TPPA 12 post TPPA
Malaysia's
Malaysia's
Malaysia's Estimated
BOT in 2013 (1000
Imports in 2013 Exports in 2013
Imports post TPPA
USD)
(1000 USD)
(1000 USD)
(1000 USD)
Australia
Brunei
Canada
Chile
Japan
Mexico
New Zealand
Peru
Singapore
United States
Vietnam
TPPA11

5'241'604
329'924
1'001'993
416'529
17'913'423
329'916
872'309
75'373
25'459'926
16'204'454
6'044'023
73'889'475

9'259'055
821'963
802'325
163'815
25'318'759
1'294'655
1'383'086
117'571
31'872'411
18'461'304
4'232'394
93'727'339

4'017'451
492'039
-199'668
-252'714
7'405'337
964'738
510'777
42'198
6'412'485
2'256'850
-1'811'629
19'837'864

5'490'744
344'866
1'029'746
422'283
19'395'128
351'549
900'841
77'003
25'519'103
16'882'749
6'425'155
76'839'166

Estimated
Change in BOT of
Malaysia Post
TPPA (In
1000USD)
3'774'704
-242'748
502'415
10'376
-203'355
-3'686
-237'063
15'652
6'058'656
-1'346'681
981'588
16'850
487'396
-23'381
47'802
5'604
6'354'228
-58'257
1'956'778
-300'073
-1'349'755
461'874
18'373'395
-1'464'469

Malaysia's
ESTIMATED BOT
Estimated Exports
Post TPPA (1000
post TPPA(1000
USD)
USD)
9'265'447
847'281
826'391
185'220
25'453'784
1'333'137
1'388'237
124'805
31'873'331
18'839'527
5'075'400
95'212'561

To identify the sectors for which the imports will rise the most, sector-wise tariff liberalisation
between TPPA12 countries is undertaken. Existing applied tariffs are used in the simulation with
rest of the world. Table 7 reports the sector-wise results. Results are reported only for the sectors
where imports will rise by more than $10 million because of tariff removal post TPPA. Industries
27

which will face a rise in imports more than $100 million pa are vehicles, followed by iron and
steel sector, mineral fuels, plastics and articles, boilers and rubber and articles, aluminium and
articles and tobacco. Trade creation implies that as import tariffs reduce in partner countries,
varieties of products produced by the partner country becomes cheaper and consumers buy new
varieties from partner countries. Trade diversion on the other hand would imply that imports
coming from non TPPA countries divert to TPPA partner countries. In vehicles, $470 million will
be new imports entering per annum in Malaysian markets post TPPA.

Table 7: Change in Malaysia's Imports Post TPPA: Sector-specific Results of Tariff liberalization
HS CODES

Change in imports
Trade creation or
Post TPPA from TPPA New Imports (1000
countries (1000 USD) USD)

Trade Diversion Percentage

(1000 USD)
of DVA in
Exports

87 -- VEHICLES OTHER THAN RAILWAY OR TRAMWAY ROLLING STOCK, AND PARTS

THEREOF
552'533AND ACCESSORIES
470'293
-82'240
56
72 -- IRON AND STEEL
496'815
277'627
-219'187
33
73 -- ARTICLES OF IRON OR STEEL
339'385
219'065
-120'320
33
27 -- MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION;222'243
BITUMINOUS SUBSTANCES;
139'129MINERAL WAXES
-83'113
33
39 -- PLASTICS AND ARTICLES THEREOF
208'164
155'847
-52'317
63
84 -- NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES;
PARTS THEREOF 113'688
181'563
-67'875
73
85 -- ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND
RECORDERS AND REPRODUCERS,
TELEVISION
RECORDERS AND
136'532
85'155
-51'377IMAGE AND SOUND
48
40 -- RUBBER AND ARTICLES THEREOF
114'364
40'995
-73'368
63
76 -- ALUMINIUM AND ARTICLES THEREOF
110'038
82'532
-27'505
63
24 -- TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES
106'765
90'983
-15'782
84
70 -- GLASS AND GLASSWARE
64'616
43'616
-20'999
33
71 -- NATURAL OR CULTURED PEARLS, PRECIOUS OR SEMI-PRECIOUS STONES,62'268
PRECIOUS METALS, METALS
72'325CLAD WITH PRECIOUS
10'057 METAL, AND
33 ARTICLES THEREOF; I
48 -- PAPER AND PAPERBOARD; ARTICLES OF PAPER PULP, OF PAPER OR OF PAPERBOARD
61'340
38'545
-22'794
69
10 -- CEREALS
51'228
33'712
-17'516
84
22 -- BEVERAGES, SPIRITS AND VINEGAR
50'610
29'672
-20'939
84
35 -- ALBUMINOIDAL SUBSTANCES; MODIFIED STARCHES; GLUES; ENZYMES 45'322
48'253
2'932
63
32 -- TANNING OR DYEING EXTRACTS; TANNINS AND THEIR DERIVATIVES; DYES,
PIGMENTS AND OTHER
COLOURING MATTER;
43'160
36'744
-6'415 PAINTS AND
63VARNISHES; PUTTY AND
21 -- MISCELLANEOUS EDIBLE PREPARATIONS
40'472
21'906
-18'567
84
74 -- COPPER AND ARTICLES THEREOF
36'097
23'599
-12'499
33
28 -- INORGANIC CHEMICALS; ORGANIC OR INORGANIC COMPOUNDS OF PRECIOUS
30'646 METALS, OF RARE-EARTH
15'507 METALS,
-15'139
OF RADIOACTIVE63
ELEMENTS OR OF ISOTOP
38 -- MISCELLANEOUS CHEMICAL PRODUCTS
26'146
19'266
-6'880
63
83 -- MISCELLANEOUS ARTICLES OF BASE METAL
15'614
10'926
-4'688
33
18 -- COCOA AND COCOA PREPARATIONS
13'624
4'575
-9'049
84
93 -- ARMS AND AMMUNITION; PARTS AND ACCESSORIES THEREOF
12'659
2'457
-10'202
50
82 -- TOOLS, IMPLEMENTS, CUTLERY, SPOONS AND FORKS, OF BASE METAL; PARTS
11'030THEREOF OF BASE METAL
8'351
-2'679
33
62 -- ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, NOT KNITTED OR CROCHETED
9'461
2'980
-6'481
77

Note: HS combined codes are reported at 2-digit disaggregation

28

Table 8 reports the partner TPPA countries from where imports increase into Malaysia in the top
importing sectors. We find that most of these imports come from USA and Japan with share of
Japan being as high as 97% in rise in imports of vehicles and 90% in iron and steel. US share in
increased imports of electrical machinery post TPPA is around 60%.

Table 8: TPPA Partner countries Exporting to Malaysia Post TPPA: Top Sectors

Imports increase Post TPPA- Share of TPPA partner

countries in rising Imports of Malaysia
87 -- VEHICLES OTHER THAN RAILWAY
OR TRAMWAY ROLLING STOCK, AND
PARTS AND ACCESSORIES THEREOF
72 -- IRON AND STEEL

73 -- ARTICLES OF IRON OR STEEL

84 -- NUCLEAR REACTORS, BOILERS,

MACHINERY AND MECHANICAL
APPLIANCES; PARTS THEREOF

Japan (97%)
Japan (90%)
Australia (8%)
Japan (66%)
USA (24%)
Australia (6%)
USA(58%)
Japan (34%)
Japan (44%)

39 -- PLASTICS AND ARTICLES THEREOF

85 -- ELECTRICAL MACHINERY AND

EQUIPMENT AND PARTS THEREOF;
SOUND RECORDERS AND REPRODUCERS,
TELEVISION IMAGE AND SOUND
RECORDERS AND REPRODUCERS, AND
PARTS AND ACCESSORIES OF SUCH
ARTICLES

USA (29%)
Singapore (16%)
USA (61%)

Japan (31%)

Table 9 reports at further disaggregated level the items of increased imports from Japan post
TPPA. New varieties of medium sized cars and small sized cars will enter Malaysian markets
from Japan while more specialised electrical machinery would be imported from USA
29

Table 9: Main Products of Imports post TPPA from USA and Japan at HS 6-Digit

HS code

Product Description

Trade Total Effect New Imports or

Trade Diversion
( 1000 USD)
Trade Creation
Effect ( 1000 USD)
Effect (1000 USD )

Main Items of Imports from Japan

870323 Medium sized cars

268'509

142'575

125'935

870322 Small sized cars

150'215

128'578

21'637

60'680

54'394

870421 Trucks, with diesel or semi-diesel engine, g.v.w.<=5tons

115'074

721030 Flat-rolled products of iron or non-alloy steel, width>=600

91'418
mm, electrolytically
67'628 plated or coated
23'790
with zinc
720918 Flat-rolled products of iron or non-alloy steel in 90'005
coils, width>=600mm,56'896
thickness<0.5mm, cold-rolled
33'109
730419 Casing etc for oil & gas drill, iron nesoi & steel 83'240

54'923

28'318

711590 Other articles of precious metal or of metal clad with

71'579
precious metal 62'792

8'787

Main items of Imports from USA

853710 Boards, panels, consoles, desks, cabinets, etc with
35'490
electrical switching18'332
apparatus etc.

17'158

843143 Parts of boring or sinking machinery of subheading

27'754
8430.41 or 8430.4916'648

11'106

854442 nsulated electric conductors, fitted with connectors,

21'532
voltage<=80V 12'797

8'735

321511 Printing ink black

19'130

1'973

853690 Parts for electric motors, generators(including sets),

20'824
rotary converters10'361

10'463

350691 Adhesives Based On Rubber or Plastics (Including

20'566
Pratificial Resins) 19'170

1'396

321519 Printing Ink (Other than Black)

210690 Other food preparation

21'103

18'983

8'421

10'562

18'629

9'123

9'505

841480 Other air pumps, air or gas compressors, ventilating

18'347
or recycling hoods9'182
incorporating a fan 9'165
854420 Co-axial cable & other co-axial electric conductors
18'120

6'465

11'655

On the export side, Malaysia's exports rise by around $ 1.4 billion. Malaysia already has an
existing FTA with most of the TPPA countries; the only countries Malaysia does not have an
FTA with are Canada, Mexico, Peru and USA. While in terms of percentage change in existing
exports, post TPPA, Malaysia exports to TPPA partner countries rise the most to? Vietnam
followed by Chile, but in terms of share of countries in Malaysia' increased exports, the highest
share is of Vietnam followed by USA and Japan (Table 10).

30

Table 10: Rise in Malaysia's Exports to TPPA Partner countries post TPPA

Table 11 reports sectors where Malaysia's exports will rise to Vietnam post TPPA. These include
Electrical machinery (particularly in HS 852872, which is Flat Panel Television); vegetable oils
(HS 290321- palm oil); Mineral Fuels (HS 271019- other petroleum oils); Organic chemicals (HS
290321- Vinyl Chloride); boilers (HS 841510- air conditioning machines).

31

Table 11: Rise in Malaysia's Exports to Vietnam post TPPA: Sectoral Analysis

Product Code with Description

85 -- ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS
THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION
IMAGE AND SOUND RECORDERS AND REPRODUCERS, AND PARTS
AND ACCESSORIES OF SUCH ARTICLES
15 -- ANIMAL OR VEGETABLE FATS AND OILS AND THEIR CLEAVAGE
PRODUCTS; PREPARED EDIBLE FATS; ANIMAL OR VEGETABLE WAXES

Change in
Malaysia's Exports
to Vietnam post
TPPA

27 -- MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR

DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES
29 -- ORGANIC CHEMICALS
84 -- NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL
APPLIANCES; PARTS THEREOF
35 -- ALBUMINOIDAL SUBSTANCES; MODIFIED STARCHES; GLUES;
ENZYMES
39 -- PLASTICS AND ARTICLES THEREOF
48 -- PAPER AND PAPERBOARD; ARTICLES OF PAPER PULP, OF
PAPER OR OF PAPERBOARD
48 -- PAPER AND PAPERBOARD; ARTICLES OF PAPER PULP, OF
PAPER OR OF PAPERBOARD
Total

Share in Total
Change in
Exports of
Malaysia to
Vietnam

131'217

19.8

80'297

12.1

69'301
62'684

10.5
9.5

46'578

7.0

34'665
26'973

5.2
4.1

16'853

2.5

15'818

2.4
73.1

Since Malaysia does not have any existing FTA with USA, the simulations are undertaken to

capture the change in trade between the two countries post TPPA tariff liberalisation. Table 12
reports the sectors where Malaysia has favourable BOT with USA of more than $10 million pa
and sectors where it has negative BOT with USA of more than $10 million. It is seen that
Malaysia will have a worsening BOT of more than $25 million in with USA in boilers, tobacco,
articles of iron and steel, electrical machinery and glass and glassware, plastics. Favourable BOT
will appear in textiles and clothing, rubber articles, wood pulp and wood articles and
miscellaneous chemicals.

However, it needs to be noted that in textiles and clothing sector, the change in BOT is when all
tariffs in USA and Malaysia and all other TPPA12 countries go down to zero and there is no 'yarn
forward rule'. Effectively, Malaysia is free to buy its inputs from most competitive global seller.

32

Table 12: Malaysia's Trade with USA post TPPA

Change in BOT of Malaysia with US post TPPA (1000
USD)
84 -- NUCLEAR REACTORS, BOILERS, MACHINERY AND
MECHANICAL APPLIANCES; PARTS THEREOF

-95'325

24 -- TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES

-76'736

73 -- ARTICLES OF IRON OR STEEL

-74'267

85 -- ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS

THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION
IMAGE AND SOUND RECORDERS AND REPRODUCERS, AND PARTS
AND ACCESSORIES OF SUCH ARTICLES

-37'008

70 -- GLASS AND GLASSWARE

39 -- PLASTICS AND ARTICLES THEREOF

-27'357
-25'061

32 -- TANNING OR DYEING EXTRACTS; TANNINS AND THEIR

DERIVATIVES; DYES, PIGMENTS AND OTHER COLOURING MATTER;
PAINTS AND VARNISHES; PUTTY AND OTHER MASTICS; INKS

-22'661

48 -- PAPER AND PAPERBOARD; ARTICLES OF PAPER PULP, OF

PAPER OR OF PAPERBOARD

-21'582

76 -- ALUMINIUM AND ARTICLES THEREOF

-17'583

35 -- ALBUMINOIDAL SUBSTANCES; MODIFIED STARCHES; GLUES;

ENZYMES

-13'605

83 -- MISCELLANEOUS ARTICLES OF BASE METAL

-11'698

54 -- MAN-MADE FILAMENTS; STRIP AND THE LIKE OF MAN-MADE

TEXTILE MATERIALS
27 -- MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR
DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES
23 -- RESIDUES AND WASTE FROM THE FOOD INDUSTRIES;
PREPARED ANIMAL FODDER

10'396
11'055
11'440

44 -- WOOD AND ARTICLES OF WOOD; WOOD CHARCOAL

15'096

38 -- MISCELLANEOUS CHEMICAL PRODUCTS

42'186

47 -- PULP OF WOOD OR OF OTHER FIBROUS CELLULOSIC

MATERIAL; RECOVERED (WASTE AND SCRAP) PAPER OR
PAPERBOARD

45'349

62 -- ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, NOT

KNITTED OR CROCHETED

50'641

40 -- RUBBER AND ARTICLES THEREOF

80'916

61 -- ARTICLES OF APPAREL AND CLOTHING ACCESSORIES,

KNITTED OR CROCHETED

88'214

8. Summary and Conclusions

The paper estimates the impact of TPPA on its member countries. Deviating from the existing
studies, which largely focus on impact of TPPA on included and excluded countries' trade, the
paper estimates its impact on Domestic Value Added trade between TPPA member countries. It
is argued that the existing literature on impact analysis of TPPA largely uses Computable General
Equilibrium Analysis (CGE) to simulate the impact of TPPA on exports and imports of partner
33

countries, including trade diversion and trade creation, thereby estimating the impact on member
countries' GDP, employment and welfare. However, with the rising importance of global value
chains, mega FTAs like TPPA, with liberal provisions on foreign direct investments and trade in
services, countries are more likely to increase their imports of inputs which are used in their
exports. This would imply that an estimated "rise in exports" by models like CGE, may not be
translated into rise in output and employment but may actually be fed by imports from partner
countries, declining the existing domestic value-added content of exports of some member
countries. This can have adverse implications for domestic production and employment for some
of the countries engaged in TPPA. This aspect has been completely ignored by the existing
literature. They therefore tend to overestimate the production-linked gains like increase in GDP
and employment.

The paper puts forward a further critique of studies using CGE models to assess the impact of
TPPA. Some of these studies include Petri et al (2011), PIIE (2012), Cheong (2013), Xin (2014),
and Kenichi K. (2011). There is a growing consensus on the limitations of CGE modelling and
its unrealistic assumptions which invariably lead to 'over-estimation' of gains, especially for small
developing countries. Literature argues that these models are designed in such a manner that
liberalization will always lead to increase in 'overall gains' as they use inconsistent and unrealistic
assumptions.
Using WTO-OECD Trade in Value Added database, the paper examines the trends in bilateral
domestic Value- Added (DVA) exports of Malaysia to TPPA partner countries. The indicator
used reflects the net payment which Malaysia receives from its gross exports to partner countries.
This is estimated as 'gross exports of Malaysia to partner country minus partner country's foreign
value added in Malaysia's gross exports.' It is found that like many other developing countries,
Malaysia has been experiencing a fall in its domestic value added content in its exports to the
world. This declined from 60% in 1995 to 58% in 2005, after which the domestic value added in
exports rose to 62% in 2009. However, unlike its global trend, with respect to other TPPA partner
countries, Malaysia's bilateral Value Added Exports has been steadily declining over the years, as
foreign value-added from these countries in Malaysia's exports has been rising. This decline has
been experienced with respect to all major TPPA members like USA, Mexico, New Zealand,
Singapore and Japan. Maximum decline in bilateral value-added exports of Malaysia has been
34

with USA, where it has declined from 65% in 1995 to 42% in 2009. But while Malaysia's
bilateral value-added exports to TPPA members have been steadily declining, the TPPA's
member countries value -added exports of to Malaysia have been rising.
Using data on bilateral domestic value-added exports and domestic value-added imports of all
TPPA member countries, the paper estimates the impact of TPPA12 on Malaysia's domestic
value added exports and on its balance of trade. To undertake this analysis, the paper deviates
from the existing literature using CGE for impact analysis of TPPA and estimates a dynamic
gravity model, using existing bilateral domestic value-added trade of member countries and
gravity variables. The results show that predicted DVA exports to TPPA member countries
decline in Malaysia by around $17 billion per annum post TPPA, reducing its domestic value
added exports to these countries by 32% of existing exports. This is not surprising if viewed with
respect to the existing declining trend in Malaysias bilateral DVA exports to TPPA12.
Estimating the implications for BOT, it is found that for Malaysia in 2013, bilateral DVA exports
minus imports (Value Added BOT) was minus 19 billion. This has a potential to worsen to
around minus $37 billion per year. BOT when estimated in terms of DVA exports and imports is
found to worsen for most of the countries except USA, Japan and New Zealand. These three
countries will be the net 'gainers' post TPPA in terms of DVA exports.
The estimated BOT in DVA for Malaysia worsen significantly with respect to Singapore, Japan
and Vietnam.
The impact of tariff liberalisation among TPPA member countries has been estimated using
partial equilibrium. WITS SMART simulations are undertaken at HS six-digit disaggregated
product level. The sectoral results show that post tariff liberalisation, Malaysias exports may rise
to TPPA partner countries from $93.7billion to $95.2 billion, but imports will also rise from
$73.8 billion to $76.8 billion resulting in worsening of Malaysias BOT of around $1.4 billion/
per annum due to the TPPA. Malaysia's BOT post TPPA will deteriorate the most with respect to
Japan, followed by USA, Australia and Singapore. Post tariff liberalisation by all TPPA member
countries, imports rise from Japan from $17.9 billion to $ 19.3 billion, leading to a negative
change in BOT. New varieties of medium sized cars and small sized cars will enter Malaysian
markets from Japan while more specialised electrical machinery would be imported from USA.
Malaysia gains with respect to Vietnam in terms of improving its BOT by $ 460 million.

35

On the export side, Malaysia's exports rise by around $ 1.5 billion. Malaysia already has an
existing FTA with most of the TPPA countries; the only countries where FTA does not exist are
Canada, Mexico, Peru and USA. While in terms of percentage change in existing exports,
Malaysia exports to TPPA partner countries rise the most in Vietnam followed by Chile, but in
terms of share of countries in Malaysia' increased exports, the highest share is of Vietnam
followed by USA and Japan. Malaysia's exports will rise to Vietnam post TPPA. These include
Electrical machinery (particularly in HS 852872, which is Flat Panel Television); vegetable oils
(HS 290321- palm oil); Mineral Fuels (HS 271019- other petroleum oils); Organic chemicals (HS
290321- Vinyl Chloride); boilers (HS 841510- air conditioning machines).

Malaysia does not have any existing FTA with USA. Results show that post TPPA Malaysia will

have a unfavourable BOT of more than $25 million per annum with USA each of the following
sectors- boilers, tobacco, articles of iron and steel, electrical machinery and glass and glassware,
plastics. Malaysias BOT would improve post TPPA in textiles and clothing, rubber articles,
wood pulp and wood articles and miscellaneous chemicals. However, it needs to be noted that in
textiles and clothing sector, the change in BOT is when all tariffs in USA and Malaysia and all
other TPPA12 countries go down to zero and there is no 'yarn forward rule'. Malaysia is therefore
free to buy its inputs from the most competitive global seller.
Overall, the paper argues that any estimation of 'gains' and 'losses' from a trade agreement must
take into account the implications for domestic value-addition in exports. If ignored, misleading
results may follow. It is wrong to assume that production linked gains from higher exports like
gains in terms of increases in GDP and employment will automatically follow. Many developing
countries like Malaysia are experiencing a fall in their domestic value added exports and a rise in
their imports of inputs which are used by their export sectors. In this scenario, policymakers
should focus more on 'producing more for trade' and not on just 'trading more'.

36

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37

APPENDIX

Table A.1: Snapshot from OECD-WTO TiVA May 2013

Time 2009
Industry TOTAL
Partner

Australia

C anada

C hile

Japan

Mexico

New
Zealand

United
States

Brunei Singapore Viet Nam

Darussala
m

Country
Malaysia

1614.5

545.7

220.7

7517.2

275.7

127.7

13586.4

44.5

3417.1

532

Data extracted on 31 Dec 2014 13:17 UTC (GMT) from OEC D.Stat
Indicator Foreign value added content of gross exports
Time 2008
Industry TOTAL
Partner

Australia

C anada

C hile

Japan

Mexico

New
Zealand

United
States

Brunei Singapore Viet Nam

Darussala
m

Country
Malaysia

2226.5

778.3

309.6

9504.5

291

218

15218.9

83

4051.3

673.3

Data extracted on 31 Dec 2014 13:17 UTC (GMT) from OEC D.Stat
Indicator Foreign value added content of gross exports
Time 2005
Industry TOTAL
Partner

Australia

C anada

C hile

Japan

Mexico

New
Zealand

United
States

Brunei Singapore Viet Nam

Darussala
m

Country
Malaysia

1682.8
776.6
210.2
7744.2
Indicator Foreign value added content of gross exports

171.5

96.7

13503.3

36.2

3314.6

425.7

Time 2000
Industry TOTAL
Partner

Australia

C anada

C hile

Japan

Mexico

New
Zealand

United
States

Brunei Singapore Viet Nam

Darussala
m

Country
Malaysia

1176.2
561
102.5
8313.5
Indicator Foreign value added content of gross exports

158.4

76.9

11863.9

22.4

2709.8

252.1

Time 1995
Industry TOTAL
Partner

Australia

C anada

C hile

Japan

Mexico

New
Zealand

United
States

Brunei Singapore Viet Nam

Darussala
m

Country
Malaysia

1036.1

277

137

7563

126.7

78.8

6818.8

9.3

1756.5

26.6

Source: OECD-WTO TiVA, May 2013

38