Geoffrey Reed

English

Research Papers in Economics

FEDERAL RESERVE BANK OF ST. LOUIS
Commentary
Geoffrey Reed
T
his paper makes an important contribution to 
the debate on the potential gains from further
global trade liberalization under the proposed World
Trade Organization’s (WTO) round of negotiations,
WTO2000. We know from the Uruguay Round (UR)
that the results of applied general equilibrium (AGE)
simulations can inﬂuence the stance of negotiators.
Likewise, the potential for results (such as these) to
have a similar impact on WTO2000 outcomes is
enhanced by three major features. First, they are
based on microconsistent projections of production,
consumption trade, and trade-barriers data to 2005
(the date for completion of UR commitments). Second,
these projections are based on the assumption that
China will be a member of the WTO by that date.
Third, the liberalization of trade in services is modeled
explicitly (although, as acknowledged, imperfectly).
The construction of the 2005 benchmark data
from the starting point of the 1995 Global Trade
Analysis Project (GTAP) database required the collec-
tion of data from a wide range of sources. These fall
into two broad categories—growth parameters
affecting production possibilities and policy variables
that impact the regional and sectoral structures of
production, consumption, and trade.1 The former
(endowment growth, total factor productivity growth,
and natural resource depletion) result in projected
gross domestic product growth rates that are broadly
consistent with World Bank projections. The modeling
of policy changes necessarily is more important
and problematic.  Of the UR outcomes directed at
sectors, two—the completion of manufactures’
tariff cuts and the reform of the Multiﬁber Arrange-
ment (MFA)—are reasonably easy to incorporate.
The others, concerning agriculture and services,
are more problematic. In both cases it has been
assumed that there will be no effective changes in
protection between 1995 and 2005.2 Several of the
structural changes indicated by the 2005 projections
are striking. In particular, the developing countries
grow quickly, as a consequence of reductions in
manufactures’ tariffs and MFA reform, and they also
become more outward-oriented in manufactures,
with “South-South” trade substantially larger. 
The liberalization scenarios chosen are com-
plete liberalization in isolation of each of the three
main categories (manufactures, agriculture, and
services) and the combination of these three. It is
not surprising—and broadly consistent with liber-
alization simulations carried out using the 1995
GTAP database—that while there is greater pro-rata
expansion in manufacturing trade than agriculture,
the majority of the global welfare gains result from
the removal of the highly distortionary agricultural
policies. In both cases, the effects of liberalization
in services is dominated by the other main cate-
gories, for reasons that are made clear in the paper.
When considered from a regional perspective, the
most striking outcome is the high share of the
global welfare gains that accrue to the developing
countries; their losses due to adverse terms-of-
trade changes are substantially outweighed by
their efﬁciency gains.
It is evident that these complete liberalization
scenarios are highly unlikely to be realized in the
outcome of any WTO2000 negotiations. The devel-
oping countries may well seek and retain some
measure of special treatment because agricultural
reform will undoubtedly pose problems, the efﬁ-
cacy of the General Agreement on Trade in Services
(GATS) as a vehicle for liberalization is open to de-
bate, and other issues are likely to intrude. These
scenarios, however, indicate the scale of possibili-
ties for trade liberalization, both as an overall pack-
age and on a sector-by-sector basis, and, as such,
they are a substantial contribution. 
Having acknowledged the contributions made
by the paper, it seems appropriate to discuss modi-
ﬁcations that could be made to the model structure
in order to make it more realistic. The standard
JULY/AUGUST 2000 101
Geoffrey Reed is a reader in economics and a fellow of the Centre for Globalisation and Labour Markets at the University of Nottingham,
United Kingdom.
1 Necessarily, in view of the comparative static nature of the underlying
model, no attempt is made to assess the probable interaction between
liberalization and growth in total sector productivity, nor the effect of
the trade-related investment measures (TRIMS) and trade-related intel-
lectual property (TRIPS) agreements.
2 In the case of agriculture, I ﬁnd the “no change” assumption rather
implausible, but accept that the virtual impossibility of estimating
likely policy changes (in the light of both dirty tarifﬁcation and the
susceptibility of governments to lobbying by their farm sectors),
which makes “no change” a reasonable working assumption. REVIEW
1 02 JULY/AUGUST 2000
GT AP model implemented here, in common with
the majority of AGE multi-regional trade models, is
based on the assumptions of perfect competition
and constant returns to scale. There are many ways
in which such a model may be modiﬁed to make it
more consistent with observed market structures,
and some of these already have been implemented
in some form using the GTAP database. What follows
is perhaps best interpreted as a wish list, since many
would require a nontrivial augmentation of the exist-
ing GTAP database (or its equivalent).
It is convenient to distinguish two types of market
structure that arguably should be modeled explicitly:
imperfect competition within regional frontiers, and
multinational enterprises (MNEs). Within the former,
the new trade theories identify two broad structures,
both with decreasing costs: differentiated products
with many producers and (usually) freedom of entry/
exit, and few producers—often of a homogeneous
good, with strategic interdependence and (most often)
barriers to entry. Both give rise to cross-hauling, a
phenomenon dealt with in the standard GTAP model
via the Armington assumption, which is consistent
with perfect competition. Intuition suggests that, in 
a multiregion model, even a few ﬁrms producing
weakly differentiated goods, with freedom of entry
and exit, will be approximated fairly well by the per-
fect competition/Armington structure. Certainly some
AGE models that have used these as alternative struc-
tures do not report very different outcomes (e.g.,
Blake et al., 1999, Harrison et al., 1997). When there
are few ﬁrms and barriers to entry, however, it is likely
that explicit modeling of that structure will have an
important effect on outcomes, particularly in sectors
where ﬁrms have monopsony as well as monopoly
power. As an indicator of the differences within one
sector across countries, which is attributable at least
in part to barriers to entry, Table 1 reports estimates of
net margins in large food retailers for ﬁve developed
economies. It is immediately apparent that the net
margin for the United Kingdom (UK) is considerably
greater than the average for the other countries. 
This prompts four observations:
1. When there are few ﬁrms and the number 
of ﬁrms stays constant over the medium
term (as is typically the case in many retail
sectors), there may be a signiﬁcant effect on
consumer prices; 
2. Concentration in the retailing sector may
have a greater effect on consumer prices
than concentration in manufacturing;
3. A disaggregation of the “other services 
(private)” sector in the GTAP database that
allowed modeling of the retail and other
intermediary sectors—ideally with the pro-
vision of data on sectoral concentration—
would be of great value; and
4. Modeling of such activities preferably should
be done on a sectoral and regional basis.3
Multinational enterprises, of course, also raise
many of the issues listed above, along with some
other issues that are peculiar to themselves. Data
on the activities of MNEs notoriously are difﬁcult to
obtain, but, given those data, MNEs may be incor-
porated into an AGE framework (e.g., Markusen,
1998). Their dominance in some sectors (both manu-
facturing and service) is readily apparent, and makes
them a target of choice for organizations (including
governments) seeking to restrain (if not reverse)
trade liberalization. The failure of applied models
of trade liberalization to take speciﬁc account of
MNEs makes it all too easy for opponents of further
trade liberalization to dismiss such models (at least
to their own satisfaction) as unrealistic (if not biased).
Making some attempt to remedy the omission of
3 Britain has consumer prices that are notably higher than those in other
European Union (EU) countries (i.e., the price differential far exceeds
the costs to a private individual for transporting the goods back to the
United Kingdom.) These seem to reﬂect both continued dominance of
many retailing sectors by a small number of ﬁrms and effective non-
tariff barriers to trade with the rest of the European Union. Despite rul-
ings by the European Commission and investigations by the UK’s Ofﬁce
of Fair Trading—notably for automobiles and a maintained press cam-
paign against “Rip-off Britain”—there is little indication of change.
Net Margins in Large Food Retailers
for 1992
France 0.5 - 2%
Germany 0.5 - 1.5%
Holland 0.5 - 1.5%
United Kingdom 6.3%
United States 1.5%
I am grateful to my colleague, Wyn Morgan, for 
providing me with these data, which were derived 
from various sources.
Table 1MNEs will improve the general acceptability 
of applied trade models.
The growing tendency of both domestic ﬁrms
and MNEs to source their intermediate inputs from
low-wage developing economies has, of course, an
impact on the developing countries’ level and struc-
ture of trade. Perhaps just as importantly, it will
affect developing countries’ labor markets, in par-
ticular wage levels and labor standards. The poten-
tially beneﬁcial effects of increased trade, however,
may be reduced if the developed country ﬁrms have,
and exploit, their monopsony power. Given that
labor standards and wages in low-income countries
also are a subject of (self-interested) concern to
trade negotiators in the developed countries, the
relevance of applied trade models would be en-
hanced by greater detail in labor disaggregation in
global databases. Since in most trade models labor
is speciﬁed as internationally immobile, such dis-
aggregation could proceed on a region-by-region
basis. This greater detail also would facilitate the
modeling of domestic institutions and policies that
affect labor mobility between domestic sectors, such
as unionization, wage legislation and rigidities, and
hire-ﬁre legislation.
One of the strengths of applied general equilib-
rium modeling is that it allows the estimation of
outcomes in second-best situations, where even the
signs of changes may be indeterminate in more
general analytic models. Even the piecemeal incor-
poration of some of the modiﬁcations suggested
above would better inform the debate on further
trade liberalization. I have little doubt that the imple-
mentation of several already is planned by those
associated with the Global Trade Analysis Project.
REFERENCES
Blake, Adam T., Anthony J. Rayner, and Geoffrey V. Reed. “A
Computable General Equilibrium Analysis of Agricultural
Liberalization: The Uruguay Round and Common
Agricultural Policy Reform,” Journal of Agricultural
Economics (September 1999), pp. 400-24.
Harrison, Glenn W., Thomas F. Rutherford, and David G.
Tarr, “Quantifying the Uruguay Round,” The Economic
Journal (September 1997),  pp. 1405-30.
Markusen, James R. “Multinational Firms in Global
Analysis,” Paper presented at the First Annual Conference
on Global Economic Analysis, Purdue University, 1998.
FEDERAL RESERVE BANK of ST. LOUIS
JULY/AUGUST 2000    103
FEDERAL RESERVE BANK of ST. LOUIS104 JULY/AUGUST 2000
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A Computable General Equilibrium Analysis of Agricultural Liberalization: The Uruguay Round and Common Agricultural Policy Reform,”

Multinational Firms in Global Analysis,” Paper presented at the

Potential gains from reducing trade barriers in manufacturing, services and agriculture; commentary

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Potential gains from reducing trade barriers in manufacturing, services and agriculture; commentary

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