Trade Integration for the Americas: What Can Economic Analysis ...

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10Second, as simulated by the PUCP and IDB models, total Peruvian exports increase withthe FTAA by roughly similar amounts. Third, as expected, exports increase more with theFTAA than with the US-Peru FTA. The opening of Latin American markets is importantfor expanding Peruvian exports, and this of course is not provided with the bilateral FTAwith the US. Fourth, the net welfare gains to Peru (as represented by GDP growth) areseen as greater under the IDB model simulations as opposed to the PUCP simulations.The explanation for this is the inclusion of some dynamic effects into the IDB CGEmodel.Andean Community. The headquarters of the Andean Community has recentlyundertaken an analytical effort to assess the impact of different regional tradearrangements on the Andean Community countries. This effort has involved contractingan international consultant to undertake some CGE model based simulations. 10 The CGEmodel used is based upon the GTAP5 framework and database, employing 10 productivesectors and with separate breakouts for the Andean Community countries (althoughEcuador and Bolivia are lumped together for data availability reasons). The simulationsare first made of the effects of the ATPDEA (which, as expected, show positive netbenefits in terms of consumption and welfare, along with expanded trade flows) for bothPeru and Colombia, as well as for the Andean Community as a whole. There aredifficulties in assessing the results for the ensuing FTAA simulations, however. Thosesimulations are based upon an initial equilibrium with the ATPDEA effects incorporatedin the base. In reality, there is no sequential choice for the Andean Community countriesbetween sticking with ATPDEA or joining the FTAA. The ATPDEA provisions, grantedby the US government, are time bound, with expiration scheduled for 2006. In addition,even if the ATPDEA benefits were unilaterally extended by the US, there is no guaranteethat they would be permanent. The US could withdraw them at any time, whereas eitheran FTA or the FTAA would reduce this uncertainty with stipulated treaty commitments.B. Sectoral StudiesSector studies of trade policy effects, building upon partial equilibrium analysis,complement and extend in greater detail the indicative results from CGE models. Bothtypes of approaches are useful in assessing the impact stemming from alternative tradepolicy arrangements, such as a RTA. In most Latin American countries there are variedindividual sector studies available for different sectors, but these studies are seldomfocused on the impact of possible trade liberalization or other changes in trade policyarrangements. Indeed, some common special features and characteristics are central ifsector studies are to be useful to policy-makers in the discussion and negotiation ofdiverse RTAs.Questions that should be posed in such analytical work involving specific sectorsinclude the following:10 Comunidad Andina, Analisis del Impacto del ALCA en la Comunidad Andina (Lima: Secretaria Generalde la Comunidad Andina, 2003).
111. What are the sector specific net welfare gains accruing to the country as a resultof adherence to the proposed RTA? What are the related production effects likelyto result from the RTA? Using partial equilibrium analysis, sector specificwelfare changes stemming from the RTA can be estimated. Trade creation anddiversion can be determined and quantified, along with changes in producersurplus, consumer surplus and tariff revenues. Significant sector knowledge andunderstanding – both in for the country in question and the prospective RTApartners – are required to model and quantitatively estimate these changes. Pricecomparisons in the work are critical, implying much greater ease of analysis formore standardized products. In the case of a FTA with the US, the analysis shouldinvolve the use of domestic prices, US prices and international prices. The pricechanges associated with the FTA can be simulated along with their production,trade, consumption and revenue effects. 112. For those sectors where output and/or export expansion are anticipated as aresult of the RTA, is it likely that there will be a supply response to either theincreased relative prices and a more competitive environment? What are theimpediments to the sector’s supply response? A properly done sector should beable to identify such impediments, which may be caused by market imperfections,domestic regulation, institutional rigidities, or other market distortions.Recommendations as to how to deal with such impediments to market supplyresponse would be an important component for the envisaged sector studies.3. What are the sectoral employment effects likely to result from the RTA? WhileCGE simulation models can provide some notions of the employment effects,further and more in-depth analysis may be necessary. CGE models are generallybased on perfect competition assumptions in labor markets, and also nodistinction is commonly made between labor – and skill – categories. In reality,there may be considerable labor market rigidities or peculiarities which can not becaptured in more aggregative analyses. Since employment is of central concern toany government entering into a RTA, more in-depth analysis at the sector levelmay provide important insights for policy-makers.4. What are the implications of the RTA for market structure for the sector inquestion? And how might the existing market structure influence the outcome?Most manufactured and nontraditional service sectors are characterized byimperfect competition. Sector studies are necessary to examine the relationshipbetween market structure and trade. A RTA, for example, may make for a morecompetitive sector market and either increase or diminish concentration. Analysiscan be useful for policy formulation.11 An illustrative case study is a sector study done recently by Gary Pursell for the Indian cement industry.See Gary Pursell, “Study of India-Bangladesh Trade and Trade Policies: Case Study Simulations ofEconomic Welfare Effects of a Free Trade Agreement,” World Bank working paper, December 2003.
Page 1 and 2: June 2006Trade Integration for the
Page 4 and 5: 4Aside from the proliferation itsel
Page 6 and 7: 6Table 3: Quantification of the Eff
Page 8 and 9: 8A Case Study Example of CGE Modeli
Page 12 and 13: 125. What are the likely effects of
Page 14 and 15: 14auspices of the World Bank 13 and
Page 16 and 17: 16will also be on the table. The Do
Page 18 and 19: 18access for its services and manuf
Page 20 and 21: 20countries deemed “excessive”
Page 22 and 23: 22other countries) to join NAFTA (p
Page 24 and 25: 24Glenn Harrison, Thomas Rutherford
Page 26 and 27: 26ANNEXAnnex Table A1: Major Region

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