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

13reasons, it is not surprising to find greater trade between neighbors than those located at agreater distance. On the basis of these simple contentions and observations, gravitymodels of international trade have been developed. The basic notion (and equation) positsthat trade between countries is a function of distance and GDP, i.e., the smaller thedistance between markets and the larger the market size (as measured by GDP), thegreater will be the trade flows between them. Empirically, the gravity models measuringbilateral trade in terms of variations of the distance and market size variables are veryrobust. 12 There is indeed a tendency for neighbors to trade more with each other than withthird, and more distant, parties.Gravity model estimation typically posits trade flows as a function of five basicexplanatory variables: market size, per capita incomes, distance, common borders andcommon languages. In general, in studying the formation of RTAs ex post, RTAaffiliation accounts for a positive factor beyond the five basic explanatory variables in theequation. This is taken to imply benefits from RTA formation.The limitations of gravity models to examine trade policy choices are fairlyevident. The models are best suited for examining bilateral trade and more difficultlyadapted for examining RTAs. The models measure trade flows, which are inherently lessinteresting than economic welfare, which is not measured. Moreover, gravity modelmeasurements are ex post rather than ex ante and therefore have little predictive value.For these reasons, gravity models, while capable of providing important insights, are notwidely used for examining the potential impact of different trade policy options orarrangements, including RTAs.IV. Some General Findings and Implications for the AmericasA. The FTAA Option Once Again: Anything New?Ever since the Free Trade Association of the Americas (FTAA) was firstproposed in the early 1990s, it has been surrounded by controversy, mostly of a politicaland/or ideological nature. This political discussion has most frequently dominated theeconomic discussion. But there are important economic dimensions as well. What, forexample, can be expected to happen to the economic welfare for the prospective membercountries? Will Country X be better off or worse off? There is indeed some evidencefrom economic analysis, which, predictably enough, is largely ignored by the politicalactors.The evidence regarding the most relevant economic effects – those for economicwelfare – has been developed with the use of CGE models. Some illustrative evidence ispresented in Table 5. The results for two different studies are reported: (a) a study byHarrison, Rutherford, Tarr and Gurgel (hereafter termed HRTG) undertaken under the12 For a solid analysis of gravity models, along with a development of the implications for RTAs, seeFrankel (1997).