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

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4Aside from the proliferation itself of preferential trade arrangements two trendsare apparent: (a) the proportional increase in the number of cross-regional RTAs; and (b)the gradual emergence of continent-wide regional trading blocs. These trends, due in partto a fading international leadership for multilateralism, have adverse implications for anopen, transparent and nondiscriminatory multilateral system of tradeThe remainder of this paper discusses the appeal and economic effects of regionaltrade agreements in Section II. Section III examines the measurement and evaluation ofthose effects, followed by a presentation in Section IV of some general analyticalfindings and implications for the Americas.II. Economic Effects of Regional Trade AgreementsThe primary motivations for seeking entrance into RTAs may not be economic,but rather political in nature. Country governments are driven by security considerations– both intraregional and extraregional. Such considerations frequently weigh heavily asreasons to enter into an RTA. The most obvious example is the impetus behind Europeaneconomic integration following World War II. Similarly, a country’s internationalbargaining power may be increased with its entrance into a RTA, and such an associationmay also enhance its prospects for obtaining cooperation on such things as commonprojects and environmental concerns. Moreover, the entrance into a RTA may provide abasis for a country government to lock in policy reforms; such an incentive is exemplifiedby the Mexican quest for a FTA with the United States, which resulted in NAFTA.Economic advantages may also constitute an important appeal for a country toseek entrance into a RTA. On the trade side, the benefits from trade creation are offsetby the welfare costs of trade diversion. New markets may become accessible as a resultof an RTA, but losses may be incurred from diverting imports from the lowest costprovider to RTA partners. Assessing the balance between trade expansion and diversioneffects, amply discussed in the theoretical literature, has driven much of the empiricaleconomic analysis on RTAs. In addition to trade creation/diversion effects, a country’sterms of trade may also be affected by adhering to a RTA; those effects are a matter ofprice elasticities for the country’s products and its traded goods. The RTA’s impact on acountry’s economic welfare will depend inter alia on whether the terms of trade improveor deteriorate as a result of entry into the RTA. Less apparent, but equally important, arethe indirect effects relating to changes in demand, supply and prices across sectors in theeconomy, All of these static effects impact the country’s economic welfare.A RTA may also bring positive pro-competitive effects, including economies ofscale, greater efficiency and increased productivity. Increased inducements forinvestment may exist with a larger and more competitive market, and foreign directinvestment (FDI) may also increase. Indeed, one of the major effects for Mexicoderiving from NAFTA has been an increase in FDI. Similarly, greater (or lesser) marketcompetition may bring about changes in market structure and industrial organization. By
5the same token, but for reasons of sectoral production changes, changes in industriallocation and regional effects may also accompany a RTA (or, for that matter, trade policyliberalization or de-liberalization).III. Assessing the Impact of Regional Trade ArrangementsA. Computable General Equilibrium (CGE) ModelsIn assessing the effects of different trade policy arrangements, including regionaltrade agreements, three different, but complementary, types of economic analyses areappropriate and well suited. They involve the use of (a) computable general equilibrium(CGE) models and, secondly (b) sectoral studies founded on partial equilibrium analysis,undertaken to go beyond the insights afforded by CGE work and provide greater sectoraldetail and understanding. A third analytical tool – gravity models – also is pertinent andwill be discussed below. Quantification of the effects of trade policy changes is desirablein order to best assess the magnitudes of effects, the trade-offs and benefits/costs todifferent policy alternatives. The use of CGE models and sector studies complement eachother in terms of their quantitative results. (See Table 3 below.) Some important effectsof RTAs however are essentially non-economic or political, as indicated above. Theseeffects can not be quantified.Major Features of CGE Models. Over the past twenty years the use of CGEmodels has become commonplace in order to assess the effects – both direct and indirect– of economic shocks or policy changes. Advances in computational techniques havefacilitated the use of such models. The basic idea underlying a CGE modeling exercise isrelatively simple. It involves: (a) the construction of a mathematical model of aneconomy; (b) the collection of data for a time period for those variables for which dataare available; (c) calibration and solution of the model mathematically to establish theinitial equilibrium values; (d) imposition of a shock to the initial equilibrium in the formof some exogenous event, such as a policy change; and (e) the observation of simulationsderived from the introduction of the shock on various variable values.CGE models are founded on Walrasian general equilibrium theory in whichmarket prices and quantities are simultaneously determined. Economic agents comprisingfirms, households and government make economic decisions related to production andconsumption for different goods and services. Equilibrium conditions are established inthe multiple goods and services markets such that demand and supply conditionsdetermine prices and quantities. Factor markets – generally specified as land (foragriculture), capital and labor – are similarly specified. CGE models are general in thesense that they include all the economy’s sectors and economic agents. Consequently,upon solution all the effects – direct and indirect – of a given shock can be assessed.
Page 1 and 2: June 2006Trade Integration for the
Page 6 and 7: 6Table 3: Quantification of the Eff
Page 8 and 9: 8A Case Study Example of CGE Modeli
Page 10 and 11: 10Second, as simulated by the PUCP
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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