Brazil and Mexico—Partners in sowing a free trade area of the Americas

The second half of 2000 brought renewed interest to the Free Trade Agreement of the Americas (FTAA). This hemispheric economic integration initiative presents numerous opportunities and challenges for each of the 34 countries involved in unifying markets across the Americas. The North American Free Trade Agreement (NAFTA) and Mercosur, the region's two largest trading blocs, play a vital role in any attempt to integrate Latin American markets. Integration under Mercosur has strengthened the position of member countries—especially Brazil, which is a choice location for foreign direct investment and has realized a significant growth in extra‐Mercosur trade. The newly elected Mexican president, Vicente Fox, has demonstrated a strong desire to bring Mexico to the forefront of hemispheric trade negotiations and brings a new dynamic to integration of Latin American markets and to the FTAA initiative. This article elaborates on the role of the two largest Latin American economies and the United States in the creation and solidification of a hemispheric trading bloc in the Americas. © 2002 Wiley Periodicals, Inc.     

In Search of Optimised Regional Trade Agreements and Applications to East Asia

We quantitatively analyse the trade effects of enhanced trade facilitation with extended gravity equations. Our findings confirm that RTAs comprised of countries equipped with better trade facilitation are more likely to be trade‐creating, less likely to be trade‐diverting, and are thus more likely to lead the world economy toward global free trade. We also find that (i) the traditional gains from shallow integration through eliminating tariff barriers will be greater for South‐South RTAs in East Asia such as an ASEAN‐China RTA, provided that the tariff‐reducing schedule is strictly fulfilled, (ii) the gains from deeper integration through enhancing trade facilitation will be greater for North‐North RTAs in East Asia such as a Japan‐Korea RTA, and (iii) the gains from a combined trade liberalisation strategy through tariff reductions and enhanced trade facilitation will be greater for North‐South RTAs in East Asia such as a China‐Korea and an ASEAN+3 RTA.     

What's the Point of Reciprocal Trade Negotiations? Exports,Imports, and Gains from Trade

This paper explains why trade‐policy makers may prefer reciprocal trade negotiations (RTN) to unilateral tariff reductions (UTR) for economic reasons. It answers puzzles like ‘Why WTO reciprocity?’ and strengthens the unnecessarily weak case made for the WTO by those who downplay or dismiss benefits from foreign tariff reductions (FTR). RTN is superior to UTR because it provides economic benefits that UTR cannot – namely, FTR benefits which are clearer than potentially important UTR benefits: Whereas each policy offers efficiency gains, any terms‐of‐trade effect of UTR generally detracts from these gains, while any terms‐of‐trade effect of FTR is typically beneficial (especially for a small price‐taking country) with this benefit augmenting FTR's efficiency gains. Moreover, benefits from reductions in foreign barriers may come from several sources; they are not solely the result of terms‐of‐trade improvement – or economies of scale (the two benefits already noted in the literature, though often dismissed). For example, with foreign NTB elimination, possible home benefits are shown even with rising costs and terms‐of‐trade deterioration. RTN is also superior to UTR because, by eliminating protection in either NTB or tariff form, RTN provides an escape from not only a terms‐of‐trade prisoners’ dilemma, but many other previously unrecognised prisoners’ dilemmas, including one in international rent transfers, and several others with no economies‐of‐scale or terms‐of‐trade motivation. Of course, if superior RTN is not an option, UTR may well be desirable. If reciprocity is an option, but only in a narrower CU or FTA form, such reciprocity may still be superior to UTR, or it may be inferior; theory cannot unambiguously rank these.     

An extension of Bale's labor displacement cost estimates

Bale (1976) failed to extend his labor displacement cost estimates to the more interesting question of whether these costs outweigh gains from trade liberalization. This note addresses that question by applying Bale's estimates to Magee's (1972) study of the welfare effects of U.S. trade restrictions. Our results indicate that gains far outweigh costs of tariff removal on imports directly competing with U.S. production.     

The Economic Impacts of Turkish Accession to the European Union

Half a century has passed and Turkey is no further toward achieving EU membership. Under the mandate of the Barcelona Declaration, EU–Turkish industrial tariffs will be abolished, whilst agro‐food protectionism remains largely intact. Consequently, the direct impacts from a hypothetical EU accession scenario will be concentrated in agro‐food sectors, whilst their share of economic output in Turkey implies ‘secondary’ macro impacts. To this end, a computable general equilibrium (CGE) framework is employed to quantitatively reassess full Turkish accession. Unlike previous CGE studies, agriculture, fishing and food sectors are disaggregated, whilst significant advancements to the ‘standard’ model code are incorporated to capture the vagaries of agricultural factor, input and product markets. In addition, a realistic ‘baseline’ scenario is constructed including ‘up to date’ trade and domestic agricultural policy reforms prior to Turkish entry to the EU. The results show that trade‐led gains in Turkey are moderated due to tariff liberalisation prior to EU entry, whilst Turkey receives significant budgetary transfers from the CAP budget, which are ‘mirrored’ as EU‐27 costs. With additional migration effects, Turkish (EU‐27) production possibilities fall (rise), whilst real income per capita rises (falls).     

On the European Responsibility in the Agricultural Multilateral Trade Negotiations: Modelling the Impacts of the Common Agricultural Policy

The present round of multilateral trade negotiations is still deadlocked over agricultural trade. The European Union (EU) is urged by its trading partners to open its agricultural markets. Economic evaluations of trade liberalisation scenarios unanimously conclude that a substantial opening of agricultural markets is required for a successful (welfare‐improving) Doha Round. In this paper, we perform new evaluations to identify precisely the contributions of the European farm policy and to examine the robustness of these evaluations in the representation of this complex policy. Using the same specifications as in major previous studies, our first simulations show that the EU has a major responsibility in delivering significant gains to the developing countries. On the other hand, when we conduct the same experiments with a more relevant calibration and modelling of the European farm policy instruments, the gains that these developing countries may reap from the EU liberalisation are considerably reduced. Accordingly the current charge against the EU is simply inopportune.     

Multilateral,Regional and Bilateral Trade‐Policy Options for the United States and Japan

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the United States, Japan, and other major trading countries/regions of the Doha Round of WTO multilateral trade negotiations and a variety of regional/bilateral free trade agreements (FTAs) involving the United States and Japan. We estimate that an assumed reduction of post‐Uruguay Round tariffs and other barriers on agricultural and industrial products and services by 33 per cent in the Doha Round would increase world welfare by $686.4 billion, with gains of $164.0 billion for the United States, $132.6 billion for Japan, and significant gains for all other industrialised and developing countries/regions. If there were global free trade with all post‐Uruguay Round trade barriers completely removed, world welfare would increase by $2.1 trillion, with gains of $497.0 billion (5.5 per cent of GNP) for the United States and $401.9 billion (6.2 per cent of GNP) for Japan. Regional agreements such as an APEC FTA, an ASEAN Plus 3 FTA, and a Western Hemisphere FTA would increase global and member country welfare but much less so than the Doha multilateral trade round would. Separate bilateral FTAs involving Japan with Singapore, Mexico, Chile and Korea, and the United States with Chile, Singapore and Korea would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some non‐member countries for both the regional and bilateral FTAs analysed. The welfare gains from multilateral trade liberalisation are therefore considerably greater than the gains from preferential trading arrangements and more uniformly positive for all countries.     

Privatisation and the unusual case of Belarusian accession to the WTO

The accession negotiations of Belarus to the WTO are unusual since, due to its obligations in the Eurasian Economic Union, WTO accession is not expected to impact its tariffs or formerly substantial trade‐distorting agricultural subsidies. Nonetheless, we estimate that WTO accession will increase welfare by 9.9% of consumption in Belarus. We show that inclusion of: (i) foreign direct investment; (ii) reduction in non‐discriminatory barriers against services providers; and (iii) our model with imperfect competition and endogenous productivity effects together produce estimated gains eleven times larger than a model of perfect competition with only cross‐border trade in services. Our analysis is enabled by our production of a data set on both discriminatory and non‐discriminatory barriers in services and their ad valorem equivalents. Based on a new data set on labour productivity by sector and type of ownership, in our central model, we estimate that privatisation will increase welfare by 35.8% of consumption. We find substantial variance in the estimated gains from privatisation depending on model assumptions, but all the estimates of the impacts of privatisation indicate substantial welfare gains.     

Income distribution and unequal gains from trade

This paper studies welfare gains from trade in a tractable model with a nonhomothetic preference over product quality. We show that the welfare changes due to trade shocks are unequal across consumers and derive a parsimonious formula to measure these welfare changes as in Arkolakis et al. (2012, American Economic Review, 102, 94–130). We find that the welfare changes are larger for consumers with lower income. Moreover, this paper shows that the welfare implications are different between a change in (iceberg-type) variable trade cost and a change in tariff when tariff revenue matters. More importantly, we show that the difference varies across consumers with different income levels.     

EU Anti‐dumping and Tariff Cuts: Trade Policy Substitution?

The world trading system in its current form aims at reducing multilateral trade barriers across the board. Indeed, the last successfully concluded multilateral trade negotiations led to substantial tariff concessions on the part of most developed economies. What, however, happened to other forms of import protection? Have substantial tariff concessions subsequently been replaced by the use of alternative forms of import protection? In this paper we empirically investigate the relationship between negotiated external tariff cuts and the subsequent use of anti‐dumping actions by the EU. Evidence is found for larger Uruguay Round tariff cuts increasing the probability of subsequent anti‐dumping investigations.     

Mavericks and free trade: Chile's pivotal role in the formation of the FTAA

Bilateral and regional trade agreements are gaining importance as the World Trade Organization's negotiations sputter. The future of regional integration agreements (RIAs) depends not only on large countries such as the United States and Brazil, but also on small mavericks like Chile. This article examines the generic roles played by different players in the game to form the Free Trade Area of the Americas (FTAA), including Chile's pivotal role in helping the United States advance its objective of creating the FTAA in the face of Brazilian resistance. Managers need to understand the effect of realignment of trade arrangements on their sources of competitive advantage and adopt strategies to preempt their erosion. Other small countries that exist in the shadows of large hegemons that dominate developing‐country RIAs might benefit from lessons provided by Chile. © 2004 Wiley Periodicals, Inc.     

Tariff Preferences,WTO Negotiations and the LDCs: The Case of the ‘Everything But Arms’ Initiative

By assessing the impact of the recently adopted ‘Everything But Arms’ (EBA) initiative of the EU on the Least Developed Countries (LDCs) and by showing how further multilateral trade liberalisations erode the EBA preferences and impact the LDCs, this paper attempts to uncover the LDCs’ difficult positions in the WTO trade negotiations. Due to its limited product coverage and previous preferences granted by the EU, welfare impacts of the EBA on the LDCs are shown to be small and the bulk of these gains are associated with the ‘sensitive’ products that are subject to gradual liberalisations. Moreover, these small gains are likely to disappear if the EU conducts trade policy reforms in fulfilling its WTO obligations, resulting in an actually worse‐off situation for the LDCs. Extending the analysis to a multilateral trade liberalisation scenario reinforces the above results that the LDCs may well lose due to preference erosion and higher world market prices. It concludes that other development assistance measures from developed countries should be made available to the LDCs to ease their dependency on trade preferences and to foster their supply capacities. The LDCs themselves should attempt to integrate the duty and quota‐free market access status contained in the EBA into a binding WTO agreement to secure a stable trading environment. But more importantly, in order to solve the difficulties at the root these countries should actively engage in reforming their own trade policies.     

Regional Trade Agreements versus Global Trade Liberalisation: Implications for a Small Island Developing State

This study undertakes an empirical investigation of the macroeconomic and sectoral impacts of two forms of regional trade agreements vis‐à‐vis global trade liberalisation on a small island country, using Fiji as a case study. In order to capture the feedback effects of such a complex set of policies, we employ a dynamic computable general equilibrium model of the Fijian economy to investigate (i) the impact of the Pacific Island Countries Trade Agreement (PICTA), (ii) the impact of PICTA, the Pacific Agreement for Closer Economic Relations (PACER), and the Economic Partnership Agreements (EPAs), (iii) the impact of full tariff liberalisation (i.e. tariff removal only), and (iv) the impact of full trade liberalisation, with removal of both tariff and non‐tariff barriers. While PICTA consistently provides the least benefits across a range of macroeconomic indicators including real output, welfare, trade volumes and employment, full trade liberalisation involving the removal of tariff and non‐tariff barriers provides the greatest benefits compared to the other scenarios in terms of real output. However, the latter scenario is outperformed by PICTA, PACER, the EPAs and full tariff liberalisation in terms of welfare effects, trade volumes and employment. The policy implications hold important lessons for developing countries considering trade liberalisation.     

The Effect of Aggregation Bias: An NTB‐modelling Analysis of Turkey's Agro‐food Trade with the EU

We explore how different data aggregation levels affect the gravity estimates of non‐tariff barriers (NTBs) in the agro‐food sector, and we examine their related impacts on policy simulations of an expansion to the European Union (EU) that would include Turkey. We calculate two sets of ad valorem equivalents (AVEs) of NTBs using the gravity approach to disaggregated and aggregated Central Product Classification data for 15 Global Trade Analysis Project (GTAP) agro‐food sectors. We find that the AVEs of NTBs vary substantially across products and that using aggregated data primarily results in greater effects of NTBs. In a second step, we incorporate the AVEs of NTBs into the GTAP model to evaluate Turkey's EU membership and conclude that aggregation bias has considerable effects on both the estimation of NTBs and the general equilibrium simulation results. Utilising different data aggregation levels leads to a great variability of trade costs of NTBs and, hence, to misleading trade and welfare effects.     

Productivity Versus Employment: Quantifying the Economic Effects of an EU–Japan Free Trade Agreement

The European Union and Japan recently entered into negotiations over a bilateral free trade agreement intended to stimulate growth and create wealth. Since customs duties are already low, the success of the liberalisation process hinges on the elimination of non‐tariff barriers. The purpose of this paper is to shed light on two possible liberalisation scenarios: a less ambitious liberalisation and a comprehensive liberalisation. In contrast to classic studies, our paper builds on the modern trade literature, accounting for the dominance of intra‐industry trade in both economies and the existence of heterogeneous firms. Furthermore, we model a search‐and‐matching labour market, allowing us to quantify employment effects of trade liberalisation. We find that a comprehensive liberalisation increases Japanese GDP by 0.86 per cent, whereas the EU experiences only an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms' efficiency gains, whereas unemployment is reduced by only a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.     

Establishment heterogeneity,exporter dynamics,and the effects of trade liberalization

We study the effects of tariffs and iceberg trade costs in a two-sector dynamic variation of the Melitz (2003) model extended to include a sunk cost of exporting, establishment-level uncertainty in productivity, capital accumulation, and material usage. We calibrate the model to match both cross-sectional and dynamic aspects of US producers related to export participation and the establishment lifecycle. We find a tariff equivalent of fixed export costs of 30 percentage points. We also find that a sizeable share of export profits is a return to the organizational capital from investing in export capacity rather than creating an establishment. We use the model to estimate the effect of reducing tariffs on welfare, trade, and export participation. We find that eliminating an 8 percent tariff increases the ratio of trade to GDP from 3.9% to 7.4% and raises welfare by 1.02%. Along the transition, consumption overshoots its steady state, even as trade and the capital stock grow gradually, so that the change in steady state consumption understates the welfare gain. Models without a dynamic export decision generate more gradual aggregate transition dynamics and smaller gains from trade. Capital accumulation and material usage are important sources of the welfare gains to trade.     

Establishment heterogeneity,exporter dynamics,and the effects of trade liberalization

We study the effects of tariffs and iceberg trade costs in a two-sector dynamic variation of the Melitz (2003) model extended to include a sunk cost of exporting, establishment-level uncertainty in productivity, capital accumulation, and material usage. We calibrate the model to match both cross-sectional and dynamic aspects of US producers related to export participation and the establishment lifecycle. We find a tariff equivalent of fixed export costs of 30 percentage points. We also find that a sizeable share of export profits is a return to the organizational capital from investing in export capacity rather than creating an establishment. We use the model to estimate the effect of reducing tariffs on welfare, trade, and export participation. We find that eliminating an 8 percent tariff increases the ratio of trade to GDP from 3.9% to 7.4% and raises welfare by 1.02%. Along the transition, consumption overshoots its steady state, even as trade and the capital stock grow gradually, so that the change in steady state consumption understates the welfare gain. Models without a dynamic export decision generate more gradual aggregate transition dynamics and smaller gains from trade. Capital accumulation and material usage are important sources of the welfare gains to trade.     

Measuring International Trade Costs

The costs of international trade have become an increasingly important item in trade negotiations (under the heading ‘trade facilitation’) and element of trade theory, but definition and measurement of trade costs remain in their infancy. This paper argues that the most conceptually appropriate measure is the gap between cost‐insurance‐freight (cif) and free‐on‐board (fob) values of traded goods, but that this must be measured on a consistent volume of trade. Such data are only available for a few countries. We calculate cif–fob gap values for the three largest trading nations that report such data (Australia, Brazil and the USA). These values provide plausible estimates of ad valorem trade costs for the three importing countries and for all countries’ exports. The estimates indicate that although trade costs have fallen over the last two decades, average trade costs now exceed the average tariff rate on imports into the USA and Australia. Country rankings by the cif–fob gap values differ significantly from those by commonly used proxies for trade costs, such as the indicators of time and cost in the World Bank’s Doing Business database, and analysis based on such proxies is likely to produce misleading results.     

Market Access Liberalisation in the Doha Round: Scenarios and Assessment

The modalities of negotiation on market access for agricultural and non‐agricultural products are an important item of the Doha Development Agenda. The dispersion of tariffs remains very large, translating into sizeable economic distortions. In particular, tariff peaks are numerous and highly protective. This is why the choice of a formula of reduction in tariffs is a sensitive issue. Using the MAcMaps database, we apply various formulas excluding or including peaks at the most detailed level of information on tariffs, considering preferential schemes conceded so far. The resulting changes in tariffs are introduced in a CGE exercise using Mirage . We find that trade and welfare gains are halved when excluding peaks from the negotiations.     

Tokyo round tariff reductions and the less developed countries

This paper presents new evaluations of the multilateral trade negotiations from the perspectives of (1) the objectives established by GATT signatories in the Tokyo Declaration, and (2) the LDCs’ goals for the negotiations. It also attempts to resolve some of the controversy over the gains and losses which MFN tariff reductions would generate for LDC exports, some but not all of which receive preferential access to advanced-country markets. The analysis indicates that even minor improvements in tariff preferences would have been superior to or have compensated for MFN tariff cuts.