A Research On The Industry Structure Effects Of Free Trade Areas

Based on the Footloose Capital Vertical Linkage Model of the New Economic Geography,the method of general equilibrium analysis of the New Economic Geography model has been applied to the industrial structure.This thesis innovatively analyzes the domestic industry structure and international industry structure between the internal members by the liberalization of trade facilitation and investment within the Free Trade Area.Different from the previous model which take the iceberg transportation cost as the only differences for Free Trade Agreement,by taking the Rules of Origin into the Footloose Capital Model,this paper provides a new method to analyze the changes of the industry stuctrue in the process of international regional economic integration.The main conclusions of this paper are summerized as follows:(1)On the basis of Footloose Capital Model,this paper build a new economic geography model which has taken full account of the production process of enterprises in order to ensure the production of the domestic value(including the value of labor factor,the value of capital factor and the value of domestic intermediate goods)of the input process to follow the requirements of minimum value of the content raised by the Rules of Origin.Capital intensive industries and technology intensive industries could select intermediate goods betweet domestic and foreign in the production process to enjoy zero tariff Through the equilibrium analysis,it finds that the Free Trade Area would affect the industry structure of the member countries significantly,and this change is closely related to the characteristics and nature of the member countries of the Free Trade Area.According to different tendencies,the industry structure effects of Free Trade Area could be summed up as Upgrading Effect,Neutral Effect and Lock-in Effect.(2)The theoretical model shows that the Free Trade Area has significant effect on the industry structure.Under the influence of Free Trade Area,the effective business scope expanded,the production location choice would be changed;location choice of international investment is also facing new considerations.The different scale,development level and industry related members of the Free Trade Area would reshape the domestic industry structure in the region and member of the international industry structure by changing the enterprise optimal choice of the international investment and international trade.Especially under the condition of open econonry,it could show obvious cumulative cycle effect also,which has important practical significance in the transformation and upgrading of regional industry structure.However,the effects of the Free Trade Area on the industry structure have not received enough attention yet.(3)According to the analysis of the theoretical model,the Free Trade Areas have a significant effect on upgrading of the industry structure for the bigger country.The Free Trade Area shows Lock-in Effect on industry structure of small countries.In fect,it reveals the failure of the regional economic integration in Africa of 90s twentieth Century.Due to the adjustment of channels in the Free Trade Area of the industry structure mainly rely on the factor flow and product trade,the comparative advantage is closely related to the host country.The differences in the comparative advantage between countries have formed the differences of factor scarcity and the difference of returns.The similarity of the comparative advantage is not conducive to the long-term healthy operation for those regional integration organizations.(4)There are significant differences in the impact of the establishment of the Free Trade Area on the industry structure with different stages of development and type of country.With the establishment of the Free Trade Area,the comparative advantage and relative factor endowments will be strengthened for the member states of Free Trade Area through the industrial competition in the region,the international investment outside the country and the members of the domestic trade and foreign trade.Therefore,the forming of Free Trade Areas with different types and characteristics of member countries are conducive to the formation and promotion of the domestic industry structure through the differences of comparative advantage.As a developing country,China should pay attention to sponsor Free Trade Areas with developing countries,highlighting the relative advantages of China’s capital and technology intensive industries,and promote the development of these industries.At the same time,China should also Give priority to establish Free Trade Areas with the developed countries which are rich in capital and advaced technology to gain more spillover effect of technology intensive industries.(5)The empirical analysis shows that the industry structure upgrading effects of China-ASEAN Free Trade Area are significant and have formed a Win-win pattern.On the whole,the CAFTA shows Upgrading effect significantly for both China and ASEAN in the industry structure.Compared to the results of the theoretical simulation,all countries belonging to the agreement experience obvious Upgrading Effect,although the great power tend to enjoy more notable effect than the ASEAN countries.This inconsistency comes from the foregoing theorical model of taking the division of labor as a gradual process,if not,the development process of labor-intensive industry from the low level to a higher level of participation in the division of labor could be considered as a upgrading process.As illustrated in the regression results,the coefficient of the comparative advantage(labor capital ratio)keep significantly negative,and the absolute value of the coefficient is greater than the regression coefficient of other variables.This is consistent with traditional international trade theories.It is worth mentioning that the industry adjustment is a long-term gradual process,while the data used is limited by the input-output data.Although the empirical results of industry structure effect of Free Trade Area of are significant,but it would have underestimated its long-term impact yet.Especially with the complexity of the world economic environment and the rise of protectionism,the proportion of trade within the Free Trade Areas would rise,which would make the establishment of the Free Trade Areas form more obvious impacts on the member states.As a major developing country depending on the global market heavily,China should devote to participate in more high-quality Free Trade Areas to promote the transformation and upgrading of industry structure with the advantages of domestic market scale.