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EFFECTS OF A FREE TRADE AREA OF THE AMERICAS:
EVALUATION BASED ON A DYNAMIC GLOBAL GENERAL
EQUILIBRIUM MODEL1
Madanmohan Ghosh
Carolyn Mac Leod
Strategic Investment Analysis
Micro-Economic Policy Analysis Branch
Industry Canada, Government of Canada
Abstract
In this paper we evaluate the effects of a Free Trade Area of the Americas (FTAA) on
Canada and other major players using a dynamic general equilibrium multi-sector, multi-region
model of global trade. The model is calibrated to GTAP version 5 Database benchmarked to
1997. We analyse the implications of a FTAA in which an arrangement like NAFTA is
extended to rest of the FTAA members. This is done both under competitive and imperfect
market structures. We show that the magnitudes of the effects of the FTAA differ under different
market structure. Our results suggest that there are modest gains in terms of welfare, defined as
Hicksian equivalent variation (EV), from the FTAA to the existing NAFTA members. However,
the rest of the FTAA members lose in the short run due to the adverse terms of trade effect.
Mexico, followed by Canada, is the biggest gainer. Instead of removing the differences in tariffs
instantly, phasing out tariffs over 10 years minimizes the short-term welfare losses for Mercosur
and Latin America.
Key words: FTAA, Dynamic general equilibrium, imperfect competition.
JEL classification No: C61, C68
Address for correspondence: Micro-Economic Policy Analysis Branch, Industry Canada, 235 Queen
Street, C.D. Howe Building, Ottawa, Ontario, K1A 0H5, Phone: 1-613-995-6939, 1-613-565-3698, Fax:
1-613-991-1261, E-Mail: ghosh.madanmohan@ic.gc.ca, macleod.carolyn@ic.gc.ca. We are grateful to
Lavoie Claude, Marcel Mérette and Mokhtar Souissi for their model code on which we build. We thank Ram
Acharya, Jean Mercenier, Someshwar Rao and John Whalley for discussions and comments. Views
expressed in this paper are those of the authors and do not necessarily reflect those of Industry Canada.
1
1
1. Introduction
In their Miami Summit in December 1994, the heads of state of the 34 (notable exception
of Cuba) Western Hemisphere democracies agreed to construct a Free Trade Area of the
Americas (FTAA) 2, negotiations for which are expected to be complete by 2005. The FTAA
would be the world’s largest free market with a combined gross domestic product (GDP) of $13
trillion and 800 million consumers. The FTAA aims at progressively eliminating the barriers to
trade and investment3. In this paper we analyze the potential effect of the FTAA on output,
employment, trade flows, investment and economic welfare in Canada, the United States (USA)
and other major regions using a dynamic multi-region, multi-sector general equilibrium model of
global trade. Particular attention has been placed on regions important to Canadian trade and
investment4.
The import-substitution model of development, followed since the Second World War in
the Latin American countries (LACs), collapsed during the 1980’s.
Although, in the 1970’s,
they enjoyed robust GDP growth, the decade of the 1980’s, often referred to as the "lost decade,"
was dreadful in economic terms for Latin America. The main reason for LAC’s poor economic
performance during this time was that substantial resources had to be devoted to servicing the
foreign debt, leaving little room for import growth or national investment. Structural adjustments
and economic policy reforms in trade, as well as, macro-economic policy thus became inevitable
(Little et al. (1993) and Alam et al. (1993)).
2
The list of countries in the agreements are Antigua and Barbuda, Argentina, Bahamas, Barbados, Belize, Bolivia,
Brazil, Canada, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada,
Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St.
Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, United States, Uruguay and Venezuela.
3
See http://www.ftaa-alca.org/alca_e.asp for the Miami Summit's Declaration of Principles and Plan of Action for
details.
4
A region may either be a single country or a composite region consisting of many countries, such as the European
Union. See Appendix 1 for an overview of population, per capita GNP, and trade between Canada and FTAA
countries.
2
Trade policy reform in the 1980s, for the LACs involved a shift from import substituting to
outward oriented trade regimes. Chile led the change, followed by most of the countries of the
hemisphere. Average tariff rates, in general, were reduced substantially and many countries
simplified their tariff structures. These brought about an increase in the degree of openness,
measured as the ratio of the sum of exports and imports to GDP, from a pre-reform level of 49%
to a post-reform 58% (1991) for the LAC’s on average (Alam and Rajapatiran (1993, Diao and
Somwaru (2001)). Reforms also prompted the LACs to adopt General Agreement on Tariffs and
Trade (GATT) consistent rules and to become members of the GATT, now World Trade
Organization (WTO). Trade and macroeconomic reforms in the 1990’s to date in the LAC’s
have resulted in recovered economic growth to more than 3% a year on average.
Parallel to unilateral tariff reductions and macroeconomic stabilization policies, regional
integration has become a vital part to Latin America’s economic performance5. Economic
integration arrangements are now flourishing in the hemisphere. Import barriers have come
down and emphasis has been put on attracting investment and promoting exports.
MERCOSUR, the second largest regional trade arrangement in the Western Hemisphere, was
established in 1991 by the Treaty of Assunción, signed by Argentina, Brazil, Paraguay and
Uruguay. It eliminated most trade barriers among its members and established a common
external tariff (CET) for most agricultural products by 1995, with longer transitions for a few
sensitive products (Diao, Sowaru 2001).
The North American Free Trade Agreement (NAFTA) between Canada, the USA and
Mexico in 1994 was another initiative in the Hemisphere aimed at virtual elimination of trade
barriers. Apart from these there are a multitude of trade arrangements that have been initiated or
5
For a discussions on why countries seek regional trade arrangements, See Ghosh (2002) and Whalley (1998).
3
re-activated during the last decade. About 40 of them are currently operating and perhaps a
dozen are under negotiation (U.S.D.A, 1998)6.
The FTAA is a more comprehensive and broader agreement. One key aspect of this
agreement is the elimination of tariffs on both industrial and agricultural products. It is expected
that elimination of tariffs would yield important welfare gains in the member countries. Despite
extensive unilateral liberalizations and tariff cuts negotiated during the Uruguay round, most
developing countries in the FTTA still apply relatively high tariffs. For example, the average
tariff rate in Latin America on imports of agricultural products is almost 3 times that imposed by
Canada7.
Trade contributes significantly to the growth of output and real income in Canada, as well
as in other countries. Estimates reveal that, between 1990 and 1999, increases in net exports
directly accounted for 15% of economic growth in Canada8. Indirect effects, via increased
specialization, technological spillovers and productivity growth, are some of the key elements of
economic growth in the modern world9. The FTAA is formed to facilitate this process. So far as
Canada is concerned, the importance of the American market increased dramatically while the
share of exports, both to Europe and Asia-Pacific, declined. The share of exports to Latin
America remained more or less constant with a tendency to fall in the late 1990’s.
In this paper we use a dynamic, computable general equilibrium (CGE) model of global
trade to analyze the implications of the FTAA for output, trade, investment and welfare in
Canada and other regions. Computable general equilibrium models are widely used, in part,
because they are very useful tools for analyzing the effects of trade policy changes. A change in
6
See Page (2000) for a review and a brief history of various regional trade arrangements covering the European
Union, CACM, the Andean Group, the Group of Three, CARICOM, MERCOSUR, NAFTA, FTAA, SACU, SADC,
AEC, ASEAN, SAARC, ANZCERTA, and APEC.
7
See Schott (2001) for a review of the progress made since the 1994 Summit of the Americas in laying the
groundwork for a FTAA and the challenges facing the FTAA talks if countries are to conclude the negotiations by
the summit-mandated deadline of January 2005.
8
The Trade and Investment Monitor, Fall-Winter, 1999-2000, MEPA, Industry Canada.
9
For a review, please see Ghosh (2002A).
4
trade policy, such as a change in tariff rates, alters the relative prices facing consumers and
producers.
The change in prices cause a chain of reactions in each country involving
adjustments in production and trade, not only in sectors directly affected by changes in
protection, but also in industries indirectly related.
Computable general equilibrium models
capture these interdependencies within and between economies by combining real world data
with rigorous assumptions about key behavioural parameters. The behaviour of economic agents
is modeled using utility/profit maximizing principles where price mechanisms play the role of
resource allocation.
To understand the potential impact of the FTAA on Canada and other regions we devise a
negotiating scenario. In which we assume that (a) Canada and the USA reduce tariffs on imports
from Latin American countries to the level of their tariffs on Mexican products if not already the
same or lower, (b) Mexico reduces tariffs on imports from Latin American countries to the level
of their current tariff on imports from the USA if not already the same or lower, (c) the Latin
American members of FTAA reduce their tariffs on imports from Canada and USA to the same
level as current Mexican tariffs on imports from Canada and USA if not already the same or
lower, and (d) Intra-NAFTA tariffs remain unchanged. Depending upon when these objectives
are achieved we formulate two cases, Case 1 - all the above are instantly implemented and Case
2 – commitment to tariff reductions are phased out over 9 years. We run these two simulations
using both the static and dynamic versions of the model. Simulations using the dynamic model
are performed under two market environments, in one where all sectors are perfectly competitive
and the other where there is a mix of perfectly and imperfectly competitive sectors.
First, we find that Canada, along with the USA and Mexico, experiences modest gains in
terms of welfare from the FTAA in all simulations. Second, in the short run all other regions
lose due to adverse terms of trade (TOT) effects. Sensitivity analyses suggest that the smaller
members of the FTAA also gain from the FTAA if the elasticity demand for goods is higher in
5
bigger regions. Third, while intra-NAFTA trade falls marginally, there are substantial increases
in trade between NAFTA member countries and rest of FTAA countries. Fourth, the effects of
tariff reductions are larger when market structure is incorporated in the model. In general, effects
from models that incorporate market structure are bigger by 20-30% not only in terms of welfare
but also with respect to other key variables of the model. This is because tariff reductions in noncompetitive market conditions enhance competition, reduce market power of the monopolistic
firms and force them to improve efficiency. In subsequent sections, the model and data will be
explained in further detail.
Then, a discussion of the results will follow, ending with a
presentation of sensitivity analyses and concluding remarks.
6
2. A Dynamic Multi-Sector, Multi-Region Model of World Trade
We use a multi-sector, multi-region, intertemporal CGE model of world trade10. It is an
enlarged version of the prototype model developed by Lavoie, Mérette and Souissi (2001). In
many ways, this model draws upon the contributions of dynamic CGE modeling by Mercenier
(1995). There are two types of agents in the model, households and firms. Both the households,
as well as, the firms exhibit forward-looking behaviour with certainty. The modeling of behavior
suggests that a regional trade arrangement would affect responses to savings, investment, capital
accumulation and, international lending and borrowing activities. The households have access to
world capital markets where they can lend or borrow at a constant rate of interest. There is no
explicit representation of government as an optimizing agent in the model. The government’s
role, in this model, is to collect tariff revenues that are transferred to the household in a lumpsum manner. In the following sub-sections, a non-technical description of the model is provided.
Interested readers can consult Appendices 2-4 for a detailed algebraic structure of the model.
The households
We assume that in each region a representative, infinitely lived household owns all
primary factors and financial assets including the equity of the firms11. While the endowment of
labour is assumed fixed and supplied inelastically to the firms, the supply of capital is augmented
through investment in each region. The representative household receives income from the
supply of labour and capital to the firms, dividends from the firms and lump-sum transfers from
the government.
The households derive utility from the consumption of a basket of goods and services in
every period; it does not value leisure. The objective of the representative household in each
10
This an Arrow-Debreu model with complete markets and no money.
Since our objective is to examine the efficiency rather than the distributive impact of the FTAA, a single, rather
than a multi-household formulation, is used.
11
7
region is to maximize an intertemporally additive utility function discounted by a constant rate of
time preference subject to an intertemporal budget constraint and capital accumulation
equation12. The solution to this problem is derived as first order conditions of optimization that
gives an optimal time path of consumption13. This equation expresses the consumption growth
rate as a function of the discount rate, which is equal to the world rate of interest, and the growth
rate of the price of aggregate consumption. Combining this equation with the budget constraint
and the transversality condition, the level of consumption in each period can be determined.
Once the level of consumption is determined the level of investment in each period can be
determined from the budget constraint and capital accumulation equation. Aggregate spending
on consumption in each period is then distributed over commodities that are either produced
domestically or imported14.
The details about expenditure allocations in each period are laid out in Figure 1. In each
period, households follow a multi-stage budgeting procedure with respect to the allocation of
aggregate expenditure across commodities (Level 1 in Figure 1). First, composite demand for
each individual commodity is derived from a Cobb-Douglas demand function (Level 2). The
composite bundle consists of an Armington (1969) preference specification for the competitive
sector and of an Ethier (1982) preference specification (with product differentiation at the firm
level) for the non-competitive sectors.
In the perfectly competitive case, therefore, each good
competes with foreign goods while, in the imperfectly competition case, goods from each firm
compete, not only with other firms in the same country, but also with other firms in other regions
of the model.
Once composite consumption expenditure of individual commodities is
determined, households determine how much to buy from each of the domestic and foreign firms
by using CES demand functions (Level 3).
12
See Equations (1) – (7) in Appendix 2. In the actual implementation of the model we assume, however, that these
adjustment costs are zero due to lack of data.
13
See Equation (8) in Appendix 2.
14
See Equations (9) – (11) in Appendix 2.
8
Figure 1
The Structure of the FTAA Model
Households
Firms
Level 1
Composite Consumption
Savings
Level 2
Competitive (sector s )
Noncompetitive (sector ss)
Level 3
Level 3
Sector s
Region 1
Sector s
Region 2
Sector s
Region i
Sector ss
Firm 1
Region 1
Sector ss
Firm 1
Region 2
Sector ss
Firm 2
Region 1
Sector ss
Firm 2
Region 2
Sector ss
Firm n
Region i
9
Along the lines followed by Abel (1980) and Hayashi (1982), investment expenditures
include acquisition costs as well as adjustment costs. Adjustment costs are assumed to be
quadratic in investment and depreciation15. The long-run rate of return to investment net of
adjustment cost and depreciation is equalized across regions in the model since households are
permitted to borrow and lend internationally at the exogenously given world rate of interest. The
aggregate spending on investment in each period is distributed over commodities that are either
produced domestically or imported similar way as aggregate consumption in each period
described above16.
Firms
Firms in the model behave similarly to the households, as laid out in Figure 2. Instead of
maximizing utility, the firm’s objective is to maximize profits. In each region, there are both
competitive and non-competitive sectors.
In the competitive industries, firms operate with
constant returns to scale technology (Cobb-Douglas) and are price takers both in the product, as
well as, in the factor markets. Labour and capital are assumed to be homogeneous and mobile
across sectors within national boundaries, but immobile internationally. This implies that the
wage-rental rates are the same across sectors within a region, but they could differ across
regions17. Composite intermediate inputs are CES functions of commodities differentiated by
industries and regions and by firms under imperfect competition. The firms choose the optimal
levels of labour, capital and intermediate inputs to maximize output, which is constrained by the
cost of the inputs used. The solution to this problem is derived as a first order condition of
maximization from which optimal quantities of each factor and commodities are derived18.
15
See the last term, right hand side of Equation (2) in Appendix 2.
See Equations (12) - (14) in Appendix 2.
17
We, however, assume that capital is firm specific in the first period. Therefore, rental rates are not equalized in the
first period.
18
See Equations (15) – (21) in Appendix 2.
16
10
Figure 2: Firms
Output
Cobb-Douglas Function
Labour
Capital
Composite intermediate inputs
Same as the composite consumption case in the
schematic representation of the household decisions
in Figure 1
11
In most applied general equilibrium works it is assumed that markets are perfectly
competitive. However, it is often argued that in reality markets are imperfectly competitive and
firms exhibit market power in many industries. To overcome this criticism we assume that some
of the industrial sectors in the model exhibit an imperfectly competitive market structure. This is
modeled such that firms in these industries produce differentiated output and incur fixed costs in
the production of their respective goods. The fixed costs are represented as wage and rental
payments toward a fixed number of workers and capital that are maintained by the firms
irrespective the level of output produced. The two types of strategic behaviour modeled are noncooperative Bertrand and Cournot. In the Bertrand case, the firm chooses the price at which it
will sell and lets the market determine the resulting quantity. It is the opposite in the Cournot
case. Firms choose the quantity and let the market determine the unit price19.
Equilibrium
Intra-temporal equilibrium requires that three conditions must hold in each time period20.
First, in each region, demand for primary factors equals their supply. Second, total global
demand for each sectoral good equals to total supply and third, the sum of global lending and
borrowing, which is aggregate household savings, equals zero. Inter-temporal equilibria are
further constrained by the requirement that in the steady-state (i) profits of the non-competitive
firm are zero due to entry and exit of firms, (ii) investment just covers the depreciation and
adjustment cost so that the stock of capital remains constant and finally, (iii) accumulation of
foreign asset must be constant implying that the future trade deficits must be covered by interest
earnings on foreign assets held21.
19
See Equations (15) – (26) for details about the analytics of the firms’ behaviour in Appendix 2. See Equation (25)
in particular for the resulting prices charged by the Bertrand and Cournot firms.
20
See Equations (28) – (33) in the Appendix 2.
21
See Equations (3) and (7) in Appendix 2.
12
Tariff and trade policy simulations in the model
The tariff creates a wedge between the prices paid by domestic users of imported
commodities and the prices the exporters charge (or receive) gross of transportation cost22. A
tariff reduction, therefore, implies a fall in the domestic price of imported goods. This means,
everything being equal, there will be a substitution away from domestic to imported goods due to
tariff reductions. This results in a fall in demand for domestic goods and hence a downward
pressure on the price of domestic goods. This implies that the immediate impact would be a
contraction in output in the sectors that are heavily protected. But since domestically produced
goods are also sold internationally and other parties simultaneously reduce tariffs on imports of
domestic goods elsewhere internationally, the net effect would depend on the relative strengths
of these effects and finally on the relative efficiency of producing sectors in partner countries.
We abstract from the ‘rules of origin’ issues in this paper.
22
Transportation costs in shipping goods between regions is assumed to take the form of Samuelson’s “iceberg”.
While importing from one region to another, each unit of goods shipped loses a fraction (τ < 1) by the time it
arrives at its destination. Both the value of this faction and tariff rates are provided exogenously to the model.
13
3. Data, Parameters and Calibration of the Model
The principal data source, including the values for the elasticities of substitution between
imports and domestic goods, is the Global Trade Analysis Project (GTAP) version 5 Data Base23.
This database reflects value added, output, trade flows and tariff rates for 1997. The market
power value for Canada, the USA and the European Union (EU) used in the calibration are taken
from OECD estimates24. The value of the Herfindahl index used in calibrating the number of
firms for Canada and the USA comes from Statistics Canada. Estimates for the values of these
parameters are not available for other regions in the model. We, therefore, use the same values
of market power for all regions in the model. Some sensitivity tests are performed for these
values in order to examine the robustness of the findings25.
The GTAP data available for 65 aggregated countries/regions and 54 aggregated
industrial sectors are further aggregated into 7 regions and 8 sectors (Appendix 5). Since the
focus of the study is studying the impact of the FTAA from the Canadian perspective, the
hemispheric region is disaggregated into regions that are particularly important for Canada.
These are Canada, the USA, Mexico, Mercosur and the rest of Latin America, Europe and the
rest of the world (ROW). In this paper, we refer to Latin America as that which excludes the
countries of Mercosur. There are 8 production sectors, namely, (1) agriculture, (2) food
processing, (3) resource-intensive industries, (4) textiles, (5) manufacturing, (6) automotive, (7)
machinery and electronics and (8) services. Each of these sectors produces a single composite
commodity.
Value added by labour and capital in each sector, output, exports, imports,
intermediate inputs, consumption and investment by countries are derived from the GTAP
database for computing a benchmark steady-state equilibrium of the model.
23
Global Trade Analysis Project (GTAP) Database, maintained at the Purdue University is a multi-country database
compiled from national sources of each country and also other international sources of data.
24
Martins and Scarpetta (1999).
25
However, we do not include those in this version due to space constraint.
14
Services, closely followed by manufacturing dominate in all the regions in terms of its
share in value added (Table 1). There is a clear delineation between the developed and less
developed regions as per the technology sector. Technology, as a share of value added, ranks
lower in Latin American countries than in North America and Europe. The contribution of
agricultural, food and textile sectors in aggregate value added are relatively higher in the ROW,
Mexico, Mercosur and Latin America compared to other regions. Interestingly, the share of the
automobile sector in total value added in Mexico is close to that of Canada. What seems to
differentiate between Mersosur and Latin America is the resources sector. Resources makes up
7.5% of total value added in Latin America while it only makes up 2% in Mersosur.
Table 1
Sectoral Shares (%) in Value Added
Industries
Agriculture
CAN
2.0
USA
1.2
MEX
8.3
MER
9.9
LAT
13.0
EUR
2.2
ROW
6.2
Resources
Food
Textiles
Manufacturing
Technology
Automotive
Services
Total
4.4
2.6
1.1
11.9
4.0
2.6
71.4
100.0
0.9
2.2
0.9
8.4
5.4
1.9
79.0
100.0
6.4
5.4
3.4
11.7
5.6
2.7
56.5
100.0
2.0
5.3
4.2
13.5
3.6
1.9
59.7
100.0
7.5
6.7
3.6
12.0
2.0
1.2
58.4
100.0
1.1
3.2
1.3
15.0
5.2
2.1
74.4
100.0
4.7
3.5
2.3
16.0
5.9
1.9
64.9
100.0
Source: Computed from GTAP version 5 data base
In Appendix 6 we report on the shares of intermediate inputs and the two primary factors
in gross output. The share of intermediates is large in all sectors except agriculture, resources
and services. In agriculture, however, there are large differences in the shares of factor uses by
region. For example, the share of intermediates in gross output of agriculture was over 60 % in
Canada and the U.S.A where it is about 1/3rd for all of Latin America.
In Table 2 we report on the regional composition of aggregate exports and imports. The
USA and the EU are the top export destinations for all the regions in this model. Seventy-two
percent of Canada’s exports are destined for the USA, while 61 % of Canada’s imports are from
the USA. The rest of the FTAA members absorb only 2 to 3 % of Canada’s exports.
It should
15
be noted, as well, that while 40% of Latin America’s exports go to the USA, only 18% of
Mercosur’s exports are destined for the USA. A similar pattern can be observed for imports.
Table 2
Regional Shares (%) in Total Exports and Imports
CAN
USA
MEX
MER
LAT
EUR
ROW
TOTAL
CAN
Exp Imp
72
61
1
2
1
1
1
1
11
17
15
18
100 100
USA
Exp Imp
16
16
8
8
3
1
5
4
29
25
40
45
100 100
MEX
Exp Imp
3
1
75
66
2
1
5
2
8
15
8
14
100 100
MER
Exp Imp
2
2
18
25
2
2
14
6
30
37
35
28
100 100
LAT
Exp Imp
3
2
40
33
2
5
6
8
27
24
23
28
100 100
EUR
Exp Imp
3
3
24
25
1
1
4
2
3
3
65
66
100 100
ROW
Exp Imp
3
3
38
30
1
1
2
2
3
2
53
62
100 100
Source: GTAP Data Base
The average, trade-weighted bilateral tariff rates reported in Table 3 do not include
equivalents for non-tariff barriers (NTBs). Although documentation on NTB's is available at the
UNCTAD, tariff equivalents of these barriers are not readily available. It appears that Canada
had the lowest average tariff rate (1.9%) followed by the USA (2.3%) and the EU (4%).
Average tariff rates in Latin America are the highest (10%) among all the regions in this model.
Table 3
Trade weighted average tariff rates (%)
(importing country in first column)
CAN
USA
MEX
MER
LAT
EUR
ROW
CAN
0.8
0.5
5.6
4.1
3.3
4.2
USA
0.4
0.5
5.0
6.3
1.9
3.2
MEX
8.6
1.8
10.0
9.3
6.4
8.4
MER
6.7
10.0
14.5
6.6
9.8
9.0
LAT
11.2
10.9
10.3
11.4
7.8
10.2
EUR
3.1
2.6
3.2
9.4
7.0
4.2
ROW
11.7
7.9
5.1
17.6
7.8
7.8
-
Average
1.93
2.34
3.76
9.45
9.99
3.97
8.17
Source: GTAP Data Base
It is evident that tariff rates facing Canadian exports in the USA and Mexico, and vise
versa, are already low due to the North American Free Trade Agreements (NAFTA). But the
tariff rates imposed by other regions are substantially higher. The tariff rates in Mercosur and
Latin America are higher than those in Canada and the USA. This suggests that the proposed
FTAA would imply a bigger change in the economies of Latin American countries.
16
In Table 4, we report on each region’s average, trade-weighted tariff rates by commodity.
Although average bilateral tariff rates across regions are low, in the range of 0.5% to 18%
(reported in Table 3), there is wide dispersion among the average tariff rates across commodities.
Agriculture and food have the highest tariff rates, ranging from 4% to 42%, followed by textiles
and manufacturing. If across the board tariff reductions are pursued, it is expected that these two
sectors would be the most affected.
Table 4
Average Trade weighted tariff rates by commodities by regions in the Model
CAN
USA
MEX
MER
LAT
EUR
ROW
AGRI
3.8
11.1
17.3
7.9
10.5
10.9
41.8
RESO
0.0
0.3
3.9
3.6
6.6
0.1
2.3
FOOD
28.9
11.1
31.6
17.0
16.9
37.2
37.3
TEXT
10.6
11.2
4.7
18.5
17.7
10.4
14.5
MANU
1.1
2.0
2.5
10.3
9.9
3.5
7.5
TECH
0.6
1.4
2.6
14.0
9.3
3.7
6.1
AUTO
0.7
1.3
2.6
23.1
14.6
5.3
8.8
SERV
2.2
0.2
Source: GTAP Data Base
The variance in tariff rates is remarkable if bilateral tariff rates are broken down further
(Appendix 7).
For example, the USA imposes a tariff of 4.4% on agricultural imports from
Canada but a rate of 15% on the imports from the ROW. Similarly, the tariff rate imposed by the
ROW on imports of agriculture from Canada is 66%. Mexico imposes a tariff of 34%, on
average, against imports of agricultural goods from Canada in contrast to 17% from the USA.
Given these discrepancies, it is expected that regions in the model would be affected differently
by tariff cuts due to the FTAA.
Data on costs of transport of goods between regions are derived from the GTAP database.
These are derived as the difference between the cif value of imports at the destination and the fob
value of exports at the country of origin.
The cost of transportation is passed on to the
17
consumers of the respective goods. These costs lie in the range of 5% to 20% depending upon
the commodities and distance between the trading partners26.
The basic source for the value of elasticity parameters is the GTAP data base version 5
(see Table 5). These elasticity values lie in between the central tendency values used in Piggot
and Whalley (1985) and the extreme values generated by Panagariya et al (2001). According to
the literature survey in Piggot and Whalley, central tendency values for these elasticities lie in
the neighbourhood of one. Contrary, the elasticity estimates in Panagariya et al. (2001) are as
high as 50. The values we use are in the range of 4 and 7. Nevertheless, sensitivity analyses are
performed on the elasticity values available from GTAP to verify the robustness of the results.
Values for intertemporal elasticities of substitution, rate of time preferences and the
world rate of interest used in the model calibration are also reported in Table 5. These numbers
are already used in applied general equilibrium modeling work such as Diao et al. (1999). For
other parameter values we use the calibration procedure described in Mansur and Whalley
(1984), under which the model is first used to solve for parameter values given an initial (or base
case) equilibrium represented by the data.
Table 5
Central-Case Value of Elasticity of Substitution in Consumption
and Some Key Parameter
AGRI
RESO
FOOD
TEXT
MANU
TECH
4.54
5.6
4.71
6.78
4.6
5.6
World rate of interest
12%
Rate of time preference
12%
Inverse of intertemporal elasticity of substitution 1.51
Source: GTAP Data Base and authors assumptions.
SERV
3.85
26
Studies reveal that after September 11, 2001 the customs procedure has delayed the Canada-USA cross border
traffic significantly. A KPMG Survey of Cross-Border Carriers released in August 21, 2002 reveals a 20 % increase
in border delays crossing southbound and 12 % northbound since September 11, 2001. The survey results also
highlight that border delays pose a significant and real cost to those directly and indirectly linked to transportation in
Canada. It is expected that this border delay will adversely affect trade between Canada and USA. Analysis of the
cost of border delays is, however, beyond the scope of the present study but is reserved for future study.
18
4. Simulation Results
We have used the model and its associated 1997 calibration-based and exogenously
specified parameter values to compute a base case, steady-state equilibrium of the model. The
transitional dynamics are studied in a discrete time framework for a period of 40 years into 5
time intervals of 0, 4, 9, 17 and 4027. The model is numerically solved both for static and
dynamic cases and with perfect and imperfect market structures. While the static version of the
model consists of a single period and, therefore, capital endowments of each region are assumed
fixed, the dynamic version uses a multi-period set up that takes investment and capital
accumulation into account.
In light of our experiences with the NAFTA we can assume that although the FTAA calls
for complete elimination of tariffs between countries on the American continent, this is not likely
to occur in full. NAFTA aimed at complete removal of intra-NAFTA barriers to trade but
although reduced substantially over the last ten years, tariffs still persist, particularly on
agriculture and food. In order to formulate a more realistic outcome to FTAA, we simulate
NAFTA-like tariff reductions. In this scenario, (a) Canada and the USA reduce tariffs on imports
from Latin American countries to the level of their tariffs on Mexican products if not already the
same or lower, (b) Mexico reduces tariffs on imports from Latin American countries to the level
of their current tariff on imports from the USA if not already the same or lower, (c) the Latin
American members of FTAA reduce their tariffs on imports from Canada and the USA to the
same level as current Mexican tariffs on imports from Canada and the USA if not already the
same or lower, and (d) Intra-NAFTA and other tariffs remain unchanged. From now on, this
scenario will be referred to as NAFTA-type tariff reductions within the FTAA.
Depending upon the time frame these objectives are achieved two cases are formulated,
Case 1 is where all the above are implemented in the first period and Case 2 is where
27
See Mercenier and Michel (1994) for dynamic aggregation methodology.
19
commitment to tariff reductions are phased out over 9 years28. These two simulations are run
using both the static and dynamic versions of the model. The dynamic version of the model is
solved assuming that all sectors are perfectly competitive, as well as, for cases in which some
sectors are imperfectly competitive. The main analyses are, however, based on the results from
the dynamic perfectly competitive version of the model. We use the Generalized Algebraic
Modeling System (GAMS) optimizing software to solve the model29. Results are reported for
both the transitional and the new steady-state equilibria.
We also analyse the welfare
consequences in terms of the Hicksian equivalent variation (EV) index as used in Devarajan and
Go (1998) and, Mercenier and Yeldan (1997)30.
Table 6 reports on the welfare effects of the of NAFTA-type tariff reductions within the
FTAA for both the cases in the short run (0-9 years), long run (10-40 years) and for the entire
period (0-40 years). All the members of NAFTA experience modest gains and other FTAA
members lose from FTAA in terms of welfare in both cases - ‘with’ and ‘without’ tariff phasing.
The losses are minimized with tariff phasing for both Mercosur and Latin America and for nonmembers, namely Europe and the rest of the World. In the long run, all the regions gain but
taking a 40 year time horizon and after appropriate discounting the long run gains are not enough
to compensate for the short run losses in welfare for Mercosur and Latin America. There is a
overall loss for these regions. However, it may be postulated that, if a longer time horizon is
taken, Mercosur and Latin America would gain from the FTAA.
Mexico followed by Canada has the highest welfare gain. The welfare gain, interpreted as a
percentage increase in the lifetime consumption profile over 40 years for the representative
household, in Mexico is 0.1 % as against 0.03 % and 0.02 % for Canada and the USA. Given that
Mexico’s exports to Mercosur and Latin America don’t face substantially different tariff rates
28
Appendix 8 displays the resulting cuts in tariff rates across regions as a percentage of the benchmark.
This software is originally developed at the World Bank. For a documentation of this software see Brooke et al.
(1996).
30
See Equation (34) in Appendix 2 for details.
29
20
than Canada or the USA’s exports, these welfare differences need some explanation. There are
two contributing factors to it. First, the NAFTA members’ shares of trade with the Latin
American countries vary (Table 2). For example, only 2 % of Canada’s exports are destined for
Latin America as against 7 % of Mexican exports. Moreover, there is also variation in terms of
the contribution of trade to GDP. For example, the contribution of trade to GDP in Canada and
Mexico is larger than that of the USA.
Table 6
Welfare Effects of the NAFTA-like tariff Liberalization between NAFTA
and Other FTAA members: With and Without Tariff Phasing
Short-term (0 – 9 years)
Long-term (10-40 years)
Overall (0-40 years)
CAN
USA
MEX
MER
LAT
EUR
ROW
No tariff
phasing
0.024
0.016
0.089
-0.064
-0.090
-0.005
-0.008
With tariff
phasing
0.020
0.015
0.065
-0.076
-0.090
-0.006
-0.008
No tariff
phasing
0.047
0.039
0.205
0.089
0.244
0.009
0.006
With tariff
phasing
0.005
0.005
0.042
0.228
0.393
0.013
0.014
No tariff
phasing
0.028
0.020
0.110
-0.038
-0.032
-0.003
-0.006
With tariff
phasing
0.017
0.013
0.061
-0.024
-0.006
-0.002
-0.004
Mercosur and Latin America lose in terms of welfare by 0.04 and 0.03 %, respectively.
This can be explained, in most part, by adverse terms of trade effects (Table 7). The average
price of exports, for Mercosur and Latin America, falls more sharply than the price of imports
due, to a great extent, to relatively higher pre-FTAA tariffs.. Mercosur and Latin American
exports increased by 24 and 30 % while their imports increased by only 15 and 19 %
respectively (Table 7).
Table 7 also reports on the impact of the NAFTA-type tariff cuts among the FTAA
members from Case 1 and Case 2 on other aggregate variables. Exports, imports, value added,
gross output and consumption increase in all the regions of the model, with the exception of
Europe and the ROW. As expected, Mercosur and Latin America experienced the largest
increases in both exports and imports. This result is quite obvious as the tariff reductions by
these smaller regions of the
21
Table 7
Long run Effect of NAFTA-like Tariff Cuts between NAFTA and Other FTAA Members:
Aggregate Output, Value added, Trade, Income, Consumption and Prices*
(Dynamic Model) % Change over the Base Case
Regions
Exports
Imports
Value
added
CAN
USA
MEX
MER
LAT
EUR
ROW
0.98
3.22
5.06
23.62
29.46
-0.24
-0.37
1.31
3.25
5.42
14.67
19.29
-0.10
-0.22
0.34
0.41
1.58
-0.69
3.03
-0.02
-0.04
CAN
USA
MEX
MER
LAT
EUR
ROW
1.11
3.60
6.00
21.38
28.32
-0.30
-0.46
1.21
2.96
5.04
16.54
19.85
-0.06
-0.18
0.24
0.29
1.36
-0.34
3.09
-0.05
-0.07
Output
Consumption
Investment
Tariff reductions achieved in the first period
0.19
0.14
-0.01
0.10
0.12
0.06
1.27
0.62
0.97
0.89
0.27
1.58
4.78
0.74
5.87
-0.02
0.03
-0.01
-0.04
0.02
-0.03
Gradual tariff reductions**
0.19
0.10
1.31
0.86
4.66
-0.03
-0.04
0.02
0.02
0.12
0.72
1.22
0.04
0.04
-0.02
0.04
1.00
1.55
5.66
-0.01
-0.04
Income
Terms
of trade
Price of
cons.
Price of
invt.
0.33
0.37
1.54
-1.10
1.30
-0.02
-0.04
0.14
0.39
0.49
-1.76
-1.68
-0.01
-0.04
0.26
0.28
0.68
-1.61
-1.50
-0.02
-0.02
0.29
0.30
0.57
-2.11
-2.41
-0.01
-0.02
0.23
0.26
1.31
-0.74
1.36
-0.05
-0.07
0.11
0.33
0.36
-1.39
-1.52
-0.01
-0.03
0.18
0.19
0.48
-1.29
-1.38
-0.04
-0.05
0.20
0.21
0.39
-1.83
-2.33
-0.04
-0.04
Note: * - Canada and USA reduce tariffs on imports from Latin American countries to the level of their tariffs on
Mexican products if not already the same or lower. Mexico reduces tariffs on imports from Latin American
countries to the level of their current tariff on imports from the USA if not already the same or lower. The Latin
American members of FTAA reduce their tariffs on imports from Canada and USA to the same level as current
Mexican tariffs on imports from Canada and USA if not already the same or lower. Intra-NAFTA tariffs remain
unchanged.
**
- Phasing out the tariff differences over 9 years; year 1=25% reduction, year 4=25% reduction, year
9=50% reduction.
FTAA are substantial, starting from a base rate as high as 37%. The base at which these regions’
level of trade begins is also lower thus implying a higher trade elasticity originating from the
CES demand function. (Appendix 7). On the other hand, the level of tariffs in larger regions,
such as the USA and Canada, were already low, in the range of 0 and 13%. The expansion of
trade experienced by these regions is, therefore, small, in the range of 4 and 5%.
The effects of tariff reductions on bilateral trade are reported in Table 8. There is some
degree of trade diversion away from existing NAFTA and significant trade creation with rest of
the FTAA members. For example, Canada’s exports to the USA fall by 0.14 % and the exports
of the USA to Canada fall by 0.11 %. At the same time Canada’s exports to Mercosur and Latin
22
America increased by 30 % and 97 % , respectively31. This is due to the reduction of barriers to
trade between NAFTA and rest of FTAA while intra-NAFTA barriers remain unchanged, due to
previous free trade agreements between Canada, the USA and Mexico32.
Imports of textiles followed by autos, in Canada increases the most, by 5 %. In the USA,
imports of agriculture, food and textiles increase the most, in the range of 9 to 16 % (Table 9).
For Mercosur and Latin America imports of textiles, manufacturing, technology and autos
increased sharply, by as high 95 %.
Table 8
Effect of NAFTA-like Tariff Cuts Between NAFTA and Other FTAA Members:
On Aggregate Bilateral Trade: Long Term
(% change in supply of goods and services by regions over benchmark)
CAN
USA
MEX
Export/importing region
CAN
-0.03
-0.14
3.57
USA
0.41
-0.11
2.42
MEX
-0.61
-2.26
0.47
MER
32.31
35.22
114.49
LAT
25.45
54.11
63.06
EUR
1.68
1.44
4.28
ROW
1.50
0.89
3.87
Note: Same region cells represent domestic supply.
MER
LAT
EUR
ROW
30.02
57.09
283.35
-0.02
35.20
-11.64
-9.87
96.59
51.57
52.14
69.80
0.95
-10.68
-20.11
-1.43
-1.65
-3.27
8.79
7.06
-0.01
-0.03
-1.46
-1.67
-3.27
8.36
7.66
-0.01
-0.01
Table 9
Effect of NAFTA-like Tariff Cuts Between NAFTA and Other FTAA Members:
On Imports by Sector : Long Term
(% change over benchmark)
CAN
USA
MEX
MER
LAT
EUR
ROW
AGRI
0.35
10.39
2.95
-5.56
0.95
1.08
-0.21
RESO
1.73
2.71
27.02
0.40
23.26
0.28
1.78
FOOD
0.97
8.95
3.11
-5.42
-2.10
1.57
0.73
TEXT
4.64
16.45
10.56
29.51
92.26
0.21
0.01
MANU
0.94
2.35
6.05
12.82
21.82
0.06
-0.05
TECH
0.50
1.47
2.09
17.64
13.38
-0.51
-0.52
AUTO
2.67
2.20
17.18
94.42
24.83
-0.28
-0.69
SERV
1.16
1.52
4.39
-5.13
0.66
-0.33
-0.32
The impacts on inter-regional trade at a detailed sectoral level are reported in Appendix
9. Imports of agriculture, resources and food from Mercosur and Latin American countries to
NAFTA increase at the cost of falling intra-NAFTA trade. Exports of textiles, manufacturing,
31
This is however, from a very low base.
Results for exports by nature of use namely, final consumption, intermediate use and investment are also obtained
from the model simulation but not reported here. Can be made available on request.
32
23
technology, and autos from NAFTA members to Mercosur and Latin America increased heavily
although they started from a low base.
Export of automobiles from Mexico to Mercosur increased by several hundred %. These
results need to be interpreted carefully. The base level Mexican export of automobiles to Mexico
is very low. In CES demand functions, although the base case values of elasticity parameters
specified are in the range of 4 to 8, the effective import elasticities are very high due to the their
small shares in total demand and the compounding role of cross price elasticities.
The overall effect on value added by sector and region is reported in Table 10.
As
expected, value added in agriculture, resources, food and textiles in Canada contracted partly due
to reduction of tariffs on imports from Mercosur and Latin America. The other reason is that the
remaining sectors in Canada find increased opportunities in the markets of Mercosur and Latin
America due to reduction of tariff barriers. These two effects draw factors of production ,such as
labour, from agriculture, resources, food and textiles into manufacturing, technology and autos.
This is clearly seen in panel 2, Table 10 under the heading labour demand. Output in
manufacturing, technology and autos therefore increases in Canada.
Factor allocation and labour and productivity
Clear patterns can be observed in terms of changes in factor allocations at the sectoral
and regional levels (Table 10). Canada, the USA and Mexico observe movements of labour
towards the higher value added sectors, like manufacturing, technology and autos. Mercosur and
Latin America experience increases of labour in the agricultural, resource, food and textile
sectors. Labour in the textile industry increases by 27% while it falls by 13 % in autos in Latin
America. In Mercosur employment in resources increased by more than 3 % while it falls by 4
% in autos.
When coupled with changes in value added, productivity improvements become
apparent.
All regions, except Europe and the ROW, experience productivity increases by the
24
year 40 (Table 11). Trade liberalization in highly protective industries is associated with higher
productivity growth. This result makes intuitive sense – withdrawal of barriers to entry in highly
protected sectors requires a substantial increase in productivity in order to survive in a more
competitive regime.
Latin America seems to have experienced the largest productivity
improvements in the auto sector, although Latin America is the clear winner in terms of across
the board improvements in productivity growth rates.
Table 10
Effect of NAFTA-like Tariff Cuts Between NAFTA and Other FTAA Members:
Value added, Labour Demand and Labour Productivity
(% change over benchmark)
Value added
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
Labour demand
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
Labour productivity
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
AGRI
RESO
FOOD
TEXT
MANU
TECH
AUTO
SERV
-0.83
-1.19
-0.61
2.13
5.22
-0.14
-0.04
-0.52
-0.83
-0.74
4.34
7.88
-0.13
-0.07
-0.32
-0.47
0.21
1.40
4.46
-0.05
-0.04
-3.14
0.25
-2.86
2.63
34.32
-0.44
-0.94
0.14
0.40
1.42
1.12
4.08
-0.05
0.01
0.71
0.82
0.26
-1.52
1.40
-0.09
0.18
4.44
1.34
19.47
-2.80
-8.24
-0.27
-0.69
-0.06
-0.01
0.54
0.69
2.16
0.03
0.02
-0.91
-1.32
-1.18
1.26
1.84
-0.14
-0.03
-0.60
-0.93
-1.58
3.45
3.24
-0.11
-0.05
-0.41
-0.64
-0.63
0.60
0.43
-0.05
-0.03
-3.47
-0.26
-3.68
1.68
27.00
-0.44
-0.92
0.03
0.26
0.39
0.20
-0.49
-0.04
0.02
0.61
0.71
-0.72
-2.70
-3.30
-0.07
0.21
4.32
1.19
18.10
-4.46
-13.25
-0.26
-0.67
-0.12
-0.08
-0.18
0.00
-1.21
0.04
0.04
0.08
0.14
0.58
0.86
3.32
0.00
-0.02
0.08
0.10
0.85
0.87
4.50
-0.02
-0.02
0.09
0.17
0.85
0.80
4.01
0.00
-0.02
0.34
0.51
0.85
0.93
5.76
0.00
-0.01
0.11
0.14
1.02
0.92
4.60
-0.01
-0.02
0.10
0.11
0.99
1.21
4.85
-0.02
-0.03
0.12
0.14
1.16
1.73
5.77
-0.01
-0.02
0.06
0.07
0.72
0.69
3.41
-0.01
-0.02
25
Capital Flows
Table 11 reports on the stock of foreign assets on the net over time by regions under the
FTAA. Period 1 reflects the position in the benchmark. The sum of borrowing across regions in
each period is zero. A negative sign implies the region has a net claim on foreign assets, i.e.,
lending exceeds borrowing. In the base case, in period 1, Canada had a net claim of US$124
billion worth of foreign assets or current account surplus. Contrarily, Mercosur and Latin
America both had current account deficits.
Changes in current account balances can be interpreted as capital inflows or outflows.
For example, Canada’s current account surplus fell to US$123 billion in period 2 and then to
US$122 billion in period 5 (i.e. by theyear 40). This implies a net inflow of capital in Canada
compared to benchmark. The USA also experiences a net inflow of capital by the last year.
Mexico, Mercosur and Latin America all witness a net outflow of capital.
In general, the countries that have the largest drops in tariffs also saw their balance of
payments change most drastically. In particular, Latin America experiences a fall in debt from
US$160 billion to US$119 billion. This implies capital outflow compared to the benchmark.
When coupled with the value of Latin American exports to the value of imports, the capital
outflow is apparent. As the total value of exports vis-à-vis the total value of imports increases
over time, the claim of Latin America on the other regions increases, implying more and more
capital outflow. It is possible that high trade barriers in the pre-FTAA could have augmented the
returns to capital. When these barriers come down, so does the return to capital resulting in
capital outflows (Table 12).
Investment and Capital accumulation
As expected, investment in each period, for all of the FTAA members, is higher than the
benchmark, whereas it is slightly lower than the benchmark for the non-FTAA regions (Table
12).
The growth rate of investment, however, falls overtime until it reaches a steady-state
26
equilibrium.
Latin America sees its investment increase the most, by about 12% in the first
period and then stabilizes at about 6% higher than the benchmark level.
The increase in
investment is due to increased efficiency gains due to the removal of tariff distortions and
increased market opportunities.
Imperfect competition
So far our analyses have been based on the assumption that all markets are perfectly
competitive. Simulations are also performed for cases in which firms in some sectors, namely
manufacturing, possess market power33. The results indicate that effects are as much as 20% to
30% higher (Table 13). These results make intuitive sense. Tariff reductions in non-competitive
market conditions enhance competition, reduce market power of the monopolistic firms and
force them to improve efficiency.
Table 11
Stock of Foreign Assets
CAN
USA
MEX
MER
LAT
EUR
ROW
33
Period 1
-124.4
1495.6
-104.4
236.5
160.0
-982.0
-681.3
Period 2
-123.0
1507.2
-107.3
230.2
133.1
-972.2
-668.0
Period 3
-122.5
1512.3
-109.7
227.3
122.5
-967.8
-662.2
Period 4
-122.3
1514.5
-111.4
226.2
118.9
-966.1
-659.8
Period 5
-122.3
1514.8
-111.7
226.1
118.5
-965.9
-659.5
Here we report results from the Bertrand case only. The work on Cournot is in progress.
27
Table 12
Investment, Capital Accumulation and, Wage and Rental Rates Due to NAFTA type Tariff
reductions between NAFTA and other FTAA members1
Period 1
Period 2
Period 3
Period 4
Period 5
0.999
1.000
1.021
1.025
1.120
0.999
0.999
1.000
1.001
1.017
1.019
1.076
1.000
1.000
1.000
1.001
1.013
1.016
1.061
1.000
1.000
1.000
1.001
1.010
1.016
1.058
1.000
1.000
1.000
1.001
1.010
1.016
1.059
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
0.999
1.000
1.004
1.009
1.038
1.000
1.000
1.000
1.000
1.007
1.014
1.053
1.000
1.000
1.000
1.001
1.009
1.016
1.058
1.000
1.000
1.000
1.001
1.010
1.016
1.059
1.000
1.000
1.004
1.005
1.013
0.990
1.012
1.000
1.000
1.004
1.004
1.014
0.991
1.021
1.000
1.000
1.004
1.004
1.015
0.991
1.024
1.000
1.000
1.004
1.004
1.015
0.992
1.025
1.000
1.000
1.004
1.004
1.015
0.992
1.026
1.000
1.000
1.004
1.004
1.013
0.992
1.013
1.000
1.000
1.004
1.004
1.010
0.984
0.989
1.000
1.000
1.003
1.003
1.008
0.981
0.980
1.000
1.000
1.003
1.003
1.006
0.979
0.977
1.000
1.000
1.003
1.003
1.006
0.979
0.976
1.000
1.000
Investment
Canada
United States
Mexico
MERCOSUR
Latin America
Europe
Rest of the World
Capital Stock
Canada
United States
Mexico
MERCOSUR
Latin America
Europe
Rest of the World
Wage Rate
Canada
United States
Mexico
MERCOSUR
Latin America
Europe
Rest of the World
Rental Rate
Canada
United States
Mexico
MERCOSUR
Latin America
Europe
Rest of the World
Note:
1
- Base case level values are normalized to 1.
28
Table 13
Sensitivity of Model Results with respect to Static/Dynamic and competitive/noncompetitive Market Structures due to NAFTA-like Tariff reductions between NAFTA and
other FTAA Members on Some Key Variables
% Change over the Base Case
Regions Exports
Imports Value
added
CAN
USA
MEX
MER
LAT
EUR
ROW
1.00
3.14
3.85
21.52
22.82
-0.20
-0.29
1.21
2.88
5.09
14.49
18.68
-0.28
-0.38
0.38
0.42
1.17
-1.11
0.68
0.01
0.00
CAN
USA
MEX
MER
LAT
EUR
ROW
0.98
3.22
5.06
23.62
29.46
-0.24
-0.37
1.31
3.25
5.42
14.67
19.29
-0.10
-0.22
0.34
0.41
1.58
-0.69
3.03
-0.02
-0.04
CAN
USA
MEX
MER
LAT
EUR
ROW
1.60
3.27
5.97
25.84
32.52
-0.13
-0.47
1.34
0.29
3.77
0.41
5.50
1.58
16.58
-0.56
22.04
4.12
-0.29
-0.05
-0.27
-0.06
Output Consumption Investment
Income Terms of Price of
trade
cons.
Perfect competition – Static
0.19
0.08
0.00
0.37
0.08
0.06
0.00
0.39
0.55
0.35
0.00
1.13
0.10
-0.09
0.00
-1.51
1.34
0.05
0.00
-0.98
-0.02
-0.01
0.00
0.01
-0.02
-0.02
0.00
0.00
Perfect competition - Dynamic
0.19
0.14
-0.01
0.33
0.10
0.12
0.06
0.37
1.27
0.62
0.97
1.54
0.89
0.27
1.58
-1.10
4.78
0.74
5.87
1.30
-0.02
0.03
-0.01
-0.02
-0.04
0.02
-0.03
-0.04
Imperfect competition (Bertrand) - Dynamic
0.25
0.18
-0.16
0.19
0.07
0.16
0.07
0.40
1.39
0.65
0.96
1.50
0.94
0.33
1.70
-0.96
5.50
0.58
8.21
3.11
-0.01
0.04
-0.06
-0.09
-0.05
0.04
-0.05
-0.07
Price of Welfare
invt.
0.12
0.31
0.66
-1.51
-0.69
-0.06
-0.08
0.31
0.33
0.92
-1.28
-0.74
0.02
0.01
0.33
0.34
0.78
-1.86
-1.82
0.02
0.02
0.028
0.019
0.119
-0.030
0.017
-0.003
-0.006
0.14
0.39
0.49
-1.76
-1.68
-0.01
-0.04
0.26
0.28
0.68
-1.61
-1.50
-0.02
-0.02
0.29
0.30
0.57
-2.11
-2.41
-0.01
-0.02
0.028
0.020
0.109
-0.038
-0.032
-0.003
-0.006
0.10
0.43
0.42
-1.77
-1.46
-0.05
-0.05
0.21
0.30
0.61
-1.60
-1.37
-0.05
-0.04
0.24
0.025
0.31
0.027
0.51
0.116
-2.11 -0.017
-2.30
0.017
-0.04 -0.006
-0.03
-0.006
Sensitivity analyses
The sensitivity of impacts on key variables and welfare from trade liberalization to the
values of elasticities are reported in Table 1434.
As expected, the higher the elasticity of
substitution, the higher is the level of welfare from tariff liberalization as higher elasticity
implies greater degree of transmission of price changes35.
34
35
Results at further disaggregated levels are not reported but can be made available on request.
See McDaniel, Balistreri (2002) for a discussion on Welfare and Armington trade substitution elasticities.
29
In Table 14, the upper panel reports results from trade liberalization across FTAA regions
in the central case specification of the model. The middle panel displays results when the
elasticity of substitution for the rich regions (Canada, the USA and Europe) increased by 1/3rd.
The third panel results are from cuts in values of the elasticity parameters by 1/3rd. The results
are intuitive. One interesting point is that welfare changes in Latin America become positive
when the values of elasticity of substitution are increased by 1/3rd for all regions. But it does not
do so for Mercosur. Both Latin America and Mercosur benefit from expanding trade with the
rest of FTAA members. But they benefit disproportionately as their share of trade with the
FTAA members vary quite significantly. While more than 50 % of exports and 48 % of imports
of Latin American are from the FTTA, only 36 % of Mercosur’s export is destined for the FTAA
and 35 % of imports are from the FTAA. Since tariff rates other than FTAA member regions
remain unchanged a bulk of Mercosur trade does not get the benefits of tariff reductions.
30
Table 14
Sensitivity of Model Results of NAFTA-like Tariff reductions between NAFTA and other
FTAA Members with respect to Elasticity of Substitution in Preferences
on Some Key Variables
% Change over the Base Case
Regions Exports
Imports Value
added
Output Consumption Investment
Income Terms of Price of
trade
cons.
Price of Welfare
invt.
Perfect competition – Dynamic – central case results
CAN
USA
MEX
MER
LAT
EUR
ROW
0.98
3.22
5.06
23.62
29.46
-0.24
-0.37
1.31
3.25
5.42
14.67
19.29
-0.10
-0.22
0.34 0.19
0.14
-0.01
0.33
0.14
0.41 0.10
0.12
0.06
0.37
0.39
1.58 1.27
0.62
0.97
1.54
0.49
-0.69 0.89
0.27
1.58
-1.10
-1.76
3.03 4.78
0.74
5.87
1.30
-1.68
-0.02 -0.02
0.03
-0.01
-0.02
-0.01
-0.04 -0.04
0.02
-0.03
-0.04
-0.04
Perfect competition – Dynamic – Elasticity values increased by 33 %
0.26
0.28
0.68
-1.61
-1.50
-0.02
-0.02
0.29
0.30
0.57
-2.11
-2.41
-0.01
-0.02
0.028
0.020
0.109
-0.038
-0.032
-0.003
-0.006
CAN
USA
MEX
MER
LAT
EUR
ROW
1.50
4.59
8.82
36.37
42.36
-0.37
-0.58
1.94
4.54
9.33
22.93
28.65
-0.16
-0.36
0.34 0.26
0.17
-0.04
0.33
0.15
0.41 0.10
0.14
0.04
0.37
0.41
2.15 1.94
0.82
1.37
2.13
0.70
-0.64 1.00
0.33
1.99
-1.10
-2.04
4.37 6.00
0.92
7.28
2.48
-1.49
-0.03 -0.03
0.04
-0.01
-0.03
-0.02
-0.06 -0.05
0.03
-0.04
-0.06
-0.05
Perfect competition – Dynamic – Elasticity values reduced by 33 %
0.27
0.28
0.90
-1.80
-1.26
-0.03
-0.04
0.30
0.31
0.74
-2.37
-2.34
-0.02
-0.03
0.032
0.021
0.157
-0.034
0.041
-0.004
-0.007
CAN
USA
MEX
MER
LAT
EUR
ROW
0.58
2.02
2.71
14.12
18.83
-0.13
-0.19
0.82
2.12
3.00
8.47
11.72
-0.03
-0.10
0.25
0.27
0.52
-1.51
-1.83
-0.01
-0.01
0.27
0.28
0.45
-1.95
-2.58
0.00
0.00
0.025
0.018
0.077
-0.040
-0.101
-0.002
-0.004
0.33
0.39
1.18
-0.78
1.64
-0.02
-0.03
0.13
0.10
0.83
0.78
3.65
-0.01
-0.02
0.12
0.10
0.49
0.22
0.56
0.02
0.01
0.02
0.08
0.69
1.25
4.51
-0.01
-0.02
0.32
0.36
1.13
-1.14
0.06
-0.01
-0.02
0.13
0.37
0.35
-1.60
-1.96
0.00
-0.02
31
5. Conclusion
In this paper we evaluate the effects of a Free Trade Area of the Americas (FTAA) on
Canada and other major players using a dynamic general equilibrium multi-sector, multi-region
model of global trade in both under a competitive and non-competitive market environments.
We analyze the welfare effects of NAFTA-type FTAA arrangements in which the rest of FTAA
members enjoy the same tariffs as currently exist in intra-NAFTA trade. We also analyze the
effects on output, trade and investment by sector and region of the model. We find that the
magnitudes of the effects of the FTAA differ under various market structures. The effects are
larger under the imperfect market environments.
Our results suggest that there are modest gains from the existing NAFTA members while
the rest of FTAA members tend to lose. Mexico followed, by Canada, is the biggest gainer.
Mercosur and Latin America lose due to adverse terms of trade effect. The loss for Mercosur and
Latin America are lower if differences in tariff rates between that which exist within NAFTA
and the rest of FTAA are phased out rather than eliminated instantly. We also find that trade
between NAFTA and rest of FTAA in agriculture, resources, food and textiles increases at the
cost of reduced intra-NAFTA trade. In general exports of manufacturing, technology and autos
from NAFTA to the rest of FTAA increase and imports of agriculture, resources, food and
textiles from the rest of the FTAA into NAFTA increase due to NAFTA-type FTAA
arrangements. This suggests that, while existing NAFTA members move towards production of
high value added products, the rest of FTAA members produce more of the low value added
products.
32
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34
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35
Appendix 1: GDP and Trade of the FTAA Member Countries’ Trade with Canada (1997)
Population Per Capita
Exports
Imports
(Million)
GNPa
Total
%
Total
%
$USA
$USA
Total
$USA
Total
(000’s)
Export
(000’s)
Import
a
6.8
0.003
0.9
0.000
Antigua and Barbuda
0.067
36
8570
295.5
0.137
168.2
0.085
Argentina
15.6
0.007
5.8
0.003
Bahamas
26.9
0.012
10.0
0.005
Barbados
7.1
0.003
9.2
0.005
Belize
8
950
22.8
0.011
11.3
0.006
Bolivia
164
4720
1222.8
0.568
953.5
0.484
Brazil
30
19290
Canada
15
5020
283.5
0.132
235.4
0.119
Chile
38
2280
341.6
0.159
226.5
0.115
Colombia
4
2640
53.6
0.025
133.8
0.068
Costa Rica
1.3
0.001
1.0
0.001
Dominica
8
1670
60.6
0.028
80.9
0.041
Dominicans Republic
12
1590
62.6
0.029
102.1
0.052
Ecuador
6
1810
15.6
0.007
32.2
0.016
El Salvador
2.4
0.001
0.8
0.000
Grenada
11
1500
59.6
0.028
96.4
0.049
Guatemala
7.7
0.004
146.9
0.075
Guyana
7
330
19.6
0.009
3.1
0.002
Haiti
6
700
12.0
0.006
39.3
0.020
Honduras
3
1560
63.5
0.030
186.1
0.094
Jamaica
95
3680
922.6
0.429
5071.7
2.573
Mexico
5
410
7.9
0.004
7.1
0.004
Nicaragua
3
3080
30.1
0.014
33.0
0.017
Panama
5
2010
8.0
0.004
2.4
0.001
Paraguay
25
2460
225.2
0.105
97.2
0.049
Peru
1.5
0.001
3.2
0.002
St Kitts & Nevis
St. Lucia
2.9
0.001
0.1
0.000
St Vincent & the
Grenadines
4.7
0.002
18.2
0.009
Suriname
1
4230
74.1
0.034
19.1
0.010
Trinidad and Tobago
268
28740
176160.5
81.822
133201.9
67.564
United States
3
6020
17.3
0.008
48.0
0.024
Uruguay
23
3450
688.8
0.320
702.3
0.356
Venezuela
180724.6
83.942
141647.7
71.848
Sub-Total
34572.8
16.058
55501.4
28.152
Others
215297.4
100.000
197149.1
100.000
Total
Source: Column 1 and 2 World Development Report, 1998/99. a Preliminary estimates. Trade
data obtained from Statistics Canada and the USA. Census Bureau (U.S. Department of
Commerce). a in 2001(est.).
36
Appendix 2: List of Equations in the Model
Note: Unless otherwise stated subscripts, i and j stand for regions, s and sd represent industrial sectors
and t symbolizes time dimensions of the model. Full abbreviations of the acronyms are provided in
Appendices 3 and 4.
Households
TCi1,−t θ i
∞
∫
Maximize U i = e −ψ i .t
1 − θi
0
(θ i > 0, ψ i > 0),
dt
(1)
subject to
Accumulation of foreign asset/debt – Balance of payment constraint
DEBTi ,t +1 − DEBTi ,t = r. DEBTi ,t + INCi ,t − TCi ,t . P _ TCi ,t − TI i ,t . P _ TI i ,t
(
2
− TI i ,t . P _ TI i ,t . ADJ i . TI _ Ri ,t − δ i
2
(2)
)
Steady-state condition
r. DEBTi ,T + INCi ,T − TCi ,T . P _ TCi ,T − TI i ,T . P _ TCi ,T = 0
T = terminal year )
(3)
Equation of motion for aggregate capital stock


δi
=
TI
−
TK
.


i
t
i
t
,
,
2
2
r .(1 + 2. ADJ i . δ i ) + δ i 
r .(1 + 2. ADJ i . δ i ) + δ i

TKi ,t +1 − TKi ,t
(4)
Arbitrage condition
(1 + r ). P _ TI i ,t −1 .  1 + 3. ADJ i . TI _ Ri ,t −1
{
2
2
− ADJ i . δ i  =

}
 RENT . r.(1 + 2. ADJ . δ 2 ) + δ + 2. ADJ . P _ TI . TI _ R . TI _ R 2 
i ,t
i
i
i
i
i ,t
i ,t
i ,t


(5)
2
2
+ (1 − δ i ). P _ TI i ,t .  1 + 3. ADJ i . TI _ Ri ,t − ADJ i . δ i 


where TI _ Ri ,t (rate of investment)
TI _ Ri ,t =
(
2
TI i ,t r.(1 + 2. ADJ i . δ i ) + δ i
TKi ,t
)
(6)
Steady-state condition
37
TI i ,T =
δi
. TKi ,T
r.(1 + 2. ADJ i . δ 2 ) + δ i
( T = terminal year )
(7)
Consumption
The time path of aggregate consumption is given by
1
TCi ,t −1
TCi ,t
 P _ TCi ,t (1 + ψ i )  θi
=

 P _ TCi ,t −1 (1 + r ) 
(8)
Price of aggregate consumption
(
) ∑ρ
log P _ TCi ,t =
i ,s
s
(
.log P _ FCi ,s ,t
)
(9)
Consumption demand for goods from each firm
Ci , j ,s ,t


P _ FC j ,s ,t


=  β _ FCi , j ,s . 

 Pi , j ,s ,t . 1 + TARi , j ,s ,t

(
)




σ j ,s


ρ j ,s . TC j ,t . P _ TC j ,t 


P _ FC j ,s ,t
(10)
Price of composite final consumption
( P_ FC )(
1− σ j , s
)
j , s ,t
=
∑ NF
i , s ,t
[
(
. β _ FCi , j ,s . Pi , j ,s,t . 1 + TARi , j ,s,t
i
)]
(1−σ )
j ,s
(11)
Investment
Price of aggregate investment
(
) ∑γ
log P _ TI i ,t =
s
i ,s
(
.log P _ FI i ,s ,t
)
(12)
Price of investment goods by sectors
(
P _ FI j ,s ,t
)
(1− σ )
j ,s
=
∑
i
[
(
NFi ,s ,t . β _ FI i , j ,s . Pi , j ,s ,t . 1 + TARi , j ,s,t
)]
(1−σ )
j ,s
(13)
Investment demand for goods from each firm
I i , j , s ,t


P _ FI j ,s ,t


=  β _ FI i , j ,s . 

 Pi , j ,s ,t . 1 + TARi , j ,s ,t

(
)




σ j ,s


γ j ,s . TI j ,t . P _ TI j ,t 


P _ FI j ,s,t
(14)
38
Firms
Variable unit cost function
VUC j ,sd ,t =
1
A j ,sd
(W
j ,t
α L , j , sd
. R j ,sd ,t
α K , j , sd
. Π P _ I j ,s,sd ,t
α j , s , sd
sd
),
(15)
where,
(
A j , sd = α L ,sd
Pi , j ,sc ,t =
α L ,sd
.α K ,sd
VUCi ,sc ,t
Gi , j ,sc
α K ,sd
. Π α j ,s,sd
α j ,s ,sd
sd
) are constants
(16)
∀ sc = competitive sector
(17)
Demand for labour by sector
 α .VUCi ,s,t . Zi ,s,t

LDEMi ,s,t = NFi ,s,t .  L ,i ,s
+ LMIN i ,s 
Wi ,t


(18)
Demand for capital by sector
α

.VUCi ,s,t . Zi ,s,t
KDEM i ,s,t = NFi , s,t .  K ,i ,s
+ KMIN i ,s 
Ri ,s,t


(19)
Price of composite intermediates from sector s used in sector sd
[ P_ INT
j , s , sd ,t
](
1− σ j , s
)
=
∑ NF
i , s ,t
[
(
. β _ INTi , j ,s ,sd . Pi , j ,s ,t 1 + TARi , j ,s ,t
i
)]
(1−σ )
j ,s
(20)
Intermediate demand for goods from each firm
INTi , j ,s ,sd ,t


P _ INTj ,s ,sd ,t


=  β _ INTi , j ,s ,sd . 

 Pi , j ,s ,t . 1 + TARi , j ,s ,t

(
)




σ j ,s


α j ,s,sd .VUC j ,sd ,t . Z j ,sd ,t 


P _ INTj ,s ,sd ,t (21)
39
Imperfect Competition
The growth in the number of firms (under imperfect competition)


NFi ,nf ,t 0 
 NFi ,sn ,t −
t >1
t0

=
H
∑
NFi ,sn ,t +1 − NFi ,sn ,t
∑
where H =
∑T
t
− 1 , (time horizon)
(22)
t
Bertrand direct price elasticity of demand36
(
)
(
)
 σ j ,sn − 1 . Pk , j ,sn ,t . 1 + TARk , j , sn ,t . Ck , j ,sn ,t . Ci , j ,sn ,t 

ELBS k ,i , j , sn ,t = 


E i , j ,sn ,t . ρ j ,sn . TC j ,t . P _ TC j ,t


(
(
)
)
 σ j ,sn − 1 . Pk , j ,sn ,t . 1 + TARk , j ,sn ,t . I k , j , sn ,t . I i , j ,sn ,t 

+ 


E i , j ,sn ,t . γ j ,sn . TI j ,t . P _ TI j ,t


+
∑
ss
(
(
)
(23)
)
 σ j ,sn − 1 . Pk , j ,sn ,t . 1 + TARk , j ,sn ,t . NF j , ss,t . INTk , j ,sn , ss,t . INTi , j ,sn , ss,t 




E i , j ,sn ,t . α j ,sn ,ss .VUC j ,ss,t . Z j ,ss,t


Cournot direct quantity elasticity of demand37
∑ ( NF
k , sn ,t
− 1). ELBS k ,l , j , sn ,t . ELCSi ,k , j ,sn ,t − σ j ,sn . ELCSi ,l , j , sn ,t
k
(24)

1 
 =0
+ ELBS i ,l , j ,sn ,t .  ELCSi ,i , j ,sn ,t −
σ j ,sn 

Price charged by firm i at market j
Pi , j ,sn ,t −
VUCi ,sn ,t
Gi , j ,sn
Pi , j ,sn ,t
=
1
ELBS i,i, j,sn,t − σ j ,sn
= − ELCS
i ,i , j , sn ,t −
1
= Bertrand case
(25)
= Cournot case
σ j , sn
36
from country i, for good sn produced by firm j in country k a weighted sum of elasticities of demand for final
consumption, intermediates and investment.
37
from country i, for good sn produced by firm j in country k a weighted sum of elasticities of demand for final
consumption, intermediates and investment.
40
Profit equation
∑P
π i ,sn ,t =
i , j , sn ,t
j
[
. E i , j ,sn ,t − VUCi ,sn ,t . Zi ,sn ,t − Ri ,sn ,t . KMIN i ,sn + Wi ,t . LMIN i ,sn
]
(26)
Closure
Total income by region
∑α
INCi ,t =
w ,i , s .VUCi , s ,t . NFi , s ,t . Z i , s ,t
+ Wi ,t .
s
+
∑ NF
i , sn ,t .
∑ NF
i ,nf ,t . LMIN i , sn
sn
+
∑R
i , s ,t . KDEM i , s ,t
sn
(27)
π i ,sn ,t + REVi ,t
sn
Equilibrium conditions
REVi ,t =
∑ NF
j , s ,t . E j ,i , s ,t . TAR j ,i , s ,t . Pj ,i , s ,t
(28)
s, j
Capital market clearing condition
TKi ,t =
∑ KDEM
(29)
i , s ,t
s
L i ,t =
∑ LDEM
(30)
i , s ,t
s
Total demand for each firm’s product
E i , j ,s,t = Ci , j ,s,t + I i , j , s,t +
∑ INT
i , j , s , sd ,t
(31)
sd
Goods market clearing condition
Zi ,s ,t =
Ei , j , s ,t
∑G
j
(32)
i , j ,s
Rental rates are equalized across sectors in the Steady-state
RENTi ,t = Ri , s,t
(33)
41
Welfare index ( φ )
40
∑ (1 + ψ )
t =1
[TC$ .(1 + φ )]
1− θ
−t
t
1− θ
TCt 1−θ
= ∑ (1 + ψ )
1− θ
t =1
40
−t
(34)
Where TC$t and TCt are, respectively, the benchmark and new, post-shock composite
consumption streams. The welfare gains resulting from the policy change are equivalent to the
change in the reference consumption profile by φ %.
42
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12
13
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
Appendix 3: List of Variables of the Model
Variable Name
Variable unit cost of good s produced in region i at time t
Price of composite intermediate good s used in ss in region i at t
Net of tariff price in region j of good s produced in i, at t
Profit in sector s, in region i at time t
Number of firms in sector s in region i at t
Income in region i at time t
Price of aggregate consumption in region i at t
Aggregate consumption in region i at t
Price of aggregate investment in region i at t
Aggregate investment in region i at t
Rate of investment in region i at t
Price of consumption of composite good s, in region i at t
DD for good s produced by each firm in region i, by region j for final cons at t
Price of composite investment good s, in region i at t
Demand for good s produced by each firm in region i, by region j for invest at t
Price of composite intermediate good s, for use by sd in region i at t
Demand for good s, produced in i, for use by ss in region j at t
Total demand for each firm s product in region i from j at t
Gross output in sector s, in region i at t
Wage rate in region i at t
Rental price of capital in region i at t
Supply of capital
Demand for capital
Net borrowing by region i at t
Bertrand elasticity
Cournot elasticity
Notation
VUCi ,s ,t
P _ INTi ,s,ss ,t
Pi , j ,s,t
π i , s ,t
NFi ,s ,t
INCi ,t
P _ TCi ,t
TCi ,t
P _ TI i ,t
TI i ,t
TI _ Ri ,t
P _ FCi ,s,t
Ci , j , s,t
P _ FI i ,s,t
I i , j , s ,t
P _ INI i ,s,sd ,t
INTi , j ,s,ss,t
E i , j , s ,t
Z i , s ,t
Wi ,t
RENTi ,t
TKi ,t
KiD,s ,t
DEBTi ,t
ELBS k ,i , j ,s ,t
ELCS k ,i , j ,s ,t
43
Appendix 4: List of Parameters of the Model
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12
13
14.
15.
16.
17.
18.
Variable Name
World rate of interest
Rate of time preference in region i
Inverse of intertemporal elasticity of substitution in region i
Rate of depreciation in region i
Transportation cost between pairs of regions by sectors
Adjustment cost in investment in region i
Share of composite good s in total consumption in region i
Share of region j’s good in composite consumption good s in region i
Share of composite good s in total investment in region i
Share of region j’s good in composite investment good s in region i
Share of composite good s in total invest in region j used in sector sd
Share of region j’s good in composite invest good s in i used in sector sd
Share of labor in variable unit cost in sector s, region i
Share of capital in VUC of S
Share of intermediates in VUC of S
Scale of VUC of S
Different elasticity of substitution in final demands
Endowment of labour by region
Notation
r
ψi
θi
δi
Gi , j ,s
ADJ i
ρ i ,s
β _ FCi , j ,s
γ i ,s
β _ FI i , j ,s
α j ,s,sd
β _ INTi , j ,s,sd
α L ,i ,s
α K ,i ,s
α j ,s,sd
A j ,sd
σ j ,s
Li
44
Appendix 5: Mapping Scheme Followed in Aggregating Data
and Parameters of the Model
A. Regions of the Model
Regions/countries in GTAP database
Canada
Canada
USA
The United States of America
Mexico
Mexico
Latin America
Central America and Caribbean, Colombia, Peru, Venezuela, rest of
Andean Pact, Chile, rest of South America
Mercosur
Argentina, Brazil, Uruguay
Europe
Austria, Belgium, Denmark, Finland, France, Germany, United
Kingdom, Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spain, Sweden, Switzerland, rest of EFTA
Rest of the World
Australia, New Zealand, China, Hong Kong, Japan, Korea,
Republic of Taiwan, Indonesia, Malaysia, Philippines, Singapore,
Thailand, Viet Nam, Bangladesh, India, Sri Lanka, rest of South
Asia, Hungary, Poland, rest of Central European Associates, former
Soviet Union, Turkey, rest of Middle East, Morocco, rest of North
Africa, Botswana, rest of SACU, Malawi, Mozambique, Tanzania,
United Republic of Zambia, Zimbabwe, rest of southern Africa,
Uganda, rest of sub-Saharan Africa, rest of world
B. Sectors of the Model
Sectors in GTAP database
Agriculture
Paddy rice, wheat, cereal grains nec., vegetables, fruit, nuts, oil
seeds, sugar cane, sugar beet, plant-based fibers, crops nec., bovine
cattle, sheep and goats, horses, animal products nec., raw milk,
wool, silk-worm cocoons
Resource based industries Forestry, fishing, coal, oil, gas, minerals nec.
Food
Bovine cattle, sheep and goat meat products, meat products,
vegetable oils and fats, dairy products, processed rice, sugar, food
products nec., beverages and tobacco products
Textiles
Textiles, wearing apparel, leather products
Manufacturing
Wood products, paper products, publishing, petroleum, coal
products, chemical, rubber, plastic products, mineral products nec.,
ferrous metals, metals nec., metal products manufactures nec.
Automotive
Motor vehicles and parts, transport equipment nec.
Electronics
Electronic equipment, machinery and equipment nec.
Services
Electricity gas manufacture, distribution, water, construction, trade,
transport nec., water transport, air transport, communication,
financial services nec., insurance, business services nec.,
recreational and other services, public admin. and defence,
education, health, ownership of dwellings
Source: Authors Own Classification
45
Appendix 6: Share (%) of Intermediates, Labour and Capital in Gross Output
CAN
USA
MEX
MER
LAT
EUR
ROW
Average
CanUSA
Average
Latin
Intermediates
Labour
Capital
Total
Resources
Intermediates
Labour
Capital
Total
Food
Intermediates
59
16
24
100
63
15
22
100
29
33
38
100
35
21
44
100
35
30
35
100
53
31
16
100
41
30
29
100
61
16
23
100
33
28
39
100
51
12
36
100
43
18
39
100
19
7
73
100
40
17
44
100
35
11
54
100
38
17
45
100
35
14
50
100
47
15
38
100
31
12
57
100
69
68
68
74
70
70
70
69
71
Labour
Capital
Total
Textiles
Intermediates
Labour
Capital
Total
Manufacturing
Intermediates
Labour
Capital
Total
Technology
Intermediates
Labour
Capital
Total
Automobile
Intermediates
Labour
Capital
Total
Services
Intermediates
Labour
Capital
Total
16
15
100
14
18
100
05
27
100
11
16
100
08
22
100
13
17
100
11
19
100
15
17
100
8
21
100
63
27
10
100
66
25
9
100
56
11
32
100
64
15
21
100
65
10
25
100
68
21
11
100
69
16
15
100
65
26
9
100
62
12
26
100
65
23
12
100
63
23
14
100
62
08
30
100
66
17
17
100
67
10
23
100
67
21
12
100
69
15
17
100
64
23
13
100
65
12
23
100
64
24
12
100
54
32
15
100
59
12
29
100
62
21
16
100
53
11
36
100
65
28
7
100
67
16
17
100
59
28
13
100
58
15
27
100
78
15
7
100
71
23
6
100
68
8
24
100
75
18
07
100
70
11
19
100
73
22
6
100
72
15
13
100
75
19
6
100
71
12
17
100
35
36
30
100
37
39
24
100
29
22
49
100
36
35
29
100
41
28
32
100
40
30
29
100
41
31
27
100
36
37
27
100
35
28
36
100
Agriculture
Source: Computed from GTAP version 5 Database
46
Appendix 7: Benchmark Bilateral Tariff rates (%)
AGRI
RESO
FOOD
Tariff rates imposed on imports from Canada
United States
4.4
0.0
8.8
Mexico
33.7
0.0
34.1
Mercosur
6.8
0.2
20.1
Latin America
12.4
8.8
17.9
Europe
31.0
0.3
48.2
Rest of the World
66.3
1.2
33.9
Tariff rates imposed on imports from United States
Canada
4.2
0.0
25.4
Mexico
17.0
0.0
32.9
Mercosur
6.8
0.3
16.6
Latin America
10.0
7.8
17.2
Europe
12.7
0.5
27.0
Rest of the World
45.1
1.8
40.4
Tariff rates imposed on imports from Mexico
Canada
1.9
0.0
31.8
United States
8.6
0.0
8.8
Mercosur
10.9
2.0
17.2
Latin America
12.2
4.9
16.3
Europe
18.3
0.1
31.0
Rest of the World
24.8
1.8
40.7
Tariff rates imposed on imports from Mercosur
Canada
2.0
0.0
17.7
United States
16.2
0.5
15.5
Mexico
6.9
9.9
21.4
Latin America
10.9
10.1
14.8
Europe
7.8
0.2
31.9
Rest of the World
41.9
1.8
34.6
Tariff rates imposed on imports from Latin America
Canada
2.2
0.0
24.0
United States
13.4
0.4
18.0
Mexico
12.0
9.5
24.4
Mercosur
7.8
3.6
15.1
Europe
10.4
0.4
42.5
Rest of the World
33.0
1.3
26.5
Tariff rates imposed on imports from Europe
Canada
4.7
0.0
49.9
United States
10.6
0.4
8.8
Mexico
5.6
6.8
30.0
Mercosur
9.8
2.4
17.8
Latin America
7.0
7.3
18.2
Rest of the World
23.8
4.5
37.6
Tariff rates imposed on imports from Rest of the World
Canada
3.5
0.0
22.6
United States
14.6
0.4
12.2
Mexico
10.5
6.5
31.7
Mercosur
8.8
4.4
16.7
TEXT
MANU
TECH
AUTO
SERV
0.0
0.0
16.5
15.7
8.2
12.5
0.0
0.0
8.1
7.4
2.1
3.6
0.0
0.0
14.1
9.9
3.5
5.7
0.0
0.0
12.3
25.4
3.0
6.2
0.0
0.0
0.0
1.8
0.0
0.4
0.0
0.0
16.8
22.3
8.6
12.3
0.0
0.0
10.5
9.9
3.4
5.8
0.0
0.0
13.5
9.1
3.2
4.6
0.0
0.0
16.5
12.9
3.1
4.2
0.0
0.0
0.0
2.7
0.0
0.2
0.0
0.0
16.2
12.9
9.1
11.7
0.0
0.0
10.1
9.0
3.7
7.0
0.0
0.0
14.4
10.9
3.7
3.4
0.0
0.0
36.3
16.9
5.3
12.3
0.0
0.0
0.0
1.9
0.0
0.2
11.5
7.5
11.6
13.3
5.4
8.5
4.1
3.0
9.4
10.2
4.2
5.1
2.6
2.4
11.6
9.0
3.1
7.1
3.3
1.7
13.4
16.6
6.4
14.6
0.0
0.0
0.0
2.1
0.0
0.3
20.1
14.5
20.8
17.3
9.4
10.4
1.8
2.5
8.1
7.9
2.3
3.0
3.7
3.5
13.6
18.0
3.1
5.6
4.6
1.3
13.2
18.4
1.1
2.1
0.0
0.0
0.0
0.0
0.0
0.2
14.9
9.7
22.3
15.9
14.5
15.0
4.3
3.1
9.6
10.8
9.8
8.6
2.8
2.2
8.8
14.2
9.2
7.1
2.6
2.0
12.8
22.1
11.9
11.7
0.0
0.0
0.0
0.0
2.1
0.2
18.6
13.3
21.3
19.8
4.8
2.8
10.5
10.4
2.0
1.8
10.1
14.2
6.2
2.6
14.3
34.4
0.0
0.0
0.0
0.0
47
Latin America
Europe
12.1
10.2
4.9
0.1
18.6
40.6
13.3
10.6
10.7
3.6
9.9
3.9
15.0
6.7
2.1
0.0
Source: GTAP Data Base
Appendix 8
Percentage change in Tariff rates among FTAA members
AGRI
RESO
FOOD
Tariff rates imposed on imports from Canada
United States
0
0
0
Mexico
0
0
0
Mercosur
0
-100
0
Latin America
0
-100
0
Tariff rates imposed on imports from Unite States
Canada
0
0
0
Mexico
0
0
0
Mercosur
0
-100
0
Latin America
0
-100
0
Tariff rates imposed on imports from Mexico
Canada
0
0
0
United States
0
0
0
Mercosur
0
-100
0
Latin America
0
-100
0
Tariff rates imposed on imports from Mercosur
Canada
-3
-100
0
United States
-47
-100
-43
Mexico
0
-100
0
Latin America
0
-100
0
Tariff rates imposed on imports from Latin America
Canada
-13
-100
0
United States
-36
-100
-51
Mexico
0
-100
0
Mercosur
0
-100
0
TEXT
MANU
TECH
AUTO
SERV
0
0
-100
-100
0
0
-100
-100
0
0
-100
-100
0
0
-100
-100
0
0
0
-100
0
0
-100
-100
0
0
-100
-100
0
0
-100
-100
0
0
-100
-100
0
0
0
-100
0
0
-100
-100
0
0
-100
-100
0
0
-100
-100
0
0
-100
-100
0
0
0
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
0
0
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
-100
0
0
0
0
48
Appendix 9
Effect of NAFTA-like Tariff Cuts Between NAFTA and Other FTAA Members:
Regional supply of Goods and Services (Long Term)
(% change over benchmark)
AGRI
RESO
FOOD
TEXT
MANU
TECH
AUTO
SERV
-0.3
-0.8
2.1
-8.4
44.5
-1.9
-1.8
-0.2
-0.6
2.0
-7.7
-4.8
-1.5
-1.5
-2.9
-5.9
1.9
151.0
97.5
-0.7
-0.9
0.1
0.1
2.3
30.2
25.6
-1.4
-1.4
0.1
0.1
0.9
74.7
39.6
-1.6
-1.5
1.7
0.1
9.0
121.9
514.0
-2.8
-2.9
0.0
0.2
3.2
-6.2
4.2
-1.3
-1.3
-0.5
-0.8
1.9
-8.2
37.2
-2.1
-2.0
-0.1
-0.4
2.1
-7.6
-4.7
-1.4
-1.4
-2.2
-4.8
2.8
157.4
190.1
0.2
0.0
0.1
0.0
2.2
44.1
40.1
-1.5
-1.4
-0.1
-0.2
0.6
69.1
33.1
-1.8
-1.7
2.0
-0.2
8.6
223.7
105.1
-3.1
-3.2
-0.1
0.0
3.0
-6.3
7.5
-1.4
-1.4
-2.4
-2.9
0.2
-1.1
15.1
-4.0
-3.9
-2.1
-2.4
0.4
-9.4
-6.6
-3.3
-3.4
-7.1
-9.9
-2.0
136.9
59.7
-4.9
-5.0
-0.9
-1.0
0.7
40.0
33.4
-2.5
-2.4
-1.3
-1.4
-0.7
74.7
44.2
-3.0
-2.9
1.1
-1.1
1.8
1533.0
192.2
-4.0
-4.0
-1.8
-1.7
0.7
-7.9
2.7
-3.1
-3.1
11.6
13.9
93.1
1.3
72.9
9.7
9.8
9.2
43.9
11.6
0.7
4.2
7.8
7.8
129.1
73.9
142.2
0.6
93.0
12.2
12.0
32.0
25.6
69.9
0.1
55.3
8.2
8.2
31.7
29.9
112.1
-3.6
51.9
12.1
12.2
92.5
60.1
438.2
-9.8
287.5
30.1
30.1
7.4
7.5
10.8
0.6
13.1
6.0
6.0
8.1
57.8
10.4
0.0
2.2
6.6
6.6
314.7
190.3
354.3
224.5
-7.4
22.7
22.5
20.6
24.3
62.4
43.2
0.0
9.3
9.3
41.4
39.6
136.4
143.0
-4.2
13.2
13.3
131.9
62.6
459.0
442.8
-16.6
37.5
37.5
4.6
4.7
7.8
-2.0
2.1
3.2
3.2
Regional supply by Canada
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
-0.5
-1.5
2.6
-7.4
-0.9
-1.6
-1.5
Regional supply by United States
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
-0.7
-1.2
2.6
-7.3
-0.8
-1.6
-1.5
Regional supply by Mexico
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
-3.6
-4.3
-0.3
-10.0
-3.7
-4.5
-4.4
Regional supply by Mercosur
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
8.9
46.7
12.2
1.4
8.5
7.7
7.8
Regional supply by Latin America
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
5.4
26.0
7.5
-2.9
3.6
3.1
3.2
12.8
14.5
91.5
24.7
2.5
10.7
10.9
49
Regional supply by Europe
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
0.7
0.0
4.1
-6.0
0.6
-0.1
-0.1
1.5
1.0
3.8
-7.9
-8.3
-0.2
-0.1
1.3
0.9
3.5
-6.3
-3.4
-0.1
-0.1
-2.5
-5.5
2.4
-10.3
-26.3
-0.2
-0.4
1.5
1.5
3.7
-7.7
-8.1
0.0
0.0
1.8
1.7
2.5
-15.1
-16.5
0.1
0.1
5.3
3.0
12.1
-32.0
-40.0
0.0
-0.1
1.4
1.5
4.5
-5.0
-1.4
0.0
0.0
1.3
0.9
3.5
-6.3
-3.4
-0.1
0.0
-2.5
-5.5
2.4
-10.3
-26.3
-0.2
-0.4
1.5
1.5
3.7
-7.7
-8.1
0.0
0.0
1.8
1.7
2.5
-15.1
-16.5
0.1
0.1
5.3
3.0
12.1
-31.9
-39.9
0.0
-0.2
1.4
1.5
4.6
-5.0
-1.4
0.0
0.0
Regional supply by Rest of the World
Canada
United States
Mexico
Mercosur
Latin America
Europe
Rest of the World
0.7
0.0
4.1
-6.0
0.6
-0.2
0.0
1.5
1.0
3.9
-7.9
-8.2
-0.2
-0.1
50