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Computational Analysis of the Free Trade Area of the Americas (FTAA)
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Abstract
We use the Michigan Model of World Production and Trade to assess the economic effects of the Free Trade Area of the Americas (FTAA) that is currently being negotiated among the 34 countries in the region. The model covers 18 economic sectors in each of 22 countries/regions and is based on Version 5.4 of the GTAP database for 1997 together with specially constructed estimates of services barriers and other data on sectoral employment and numbers of firms. The distinguishing feature of the model is that it incorporates some aspects of trade with imperfect competition in the manufacturing and services sectors, including monopolistic competition, increasing returns, and product variety. The modeling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and services barriers. Rules of origin and other restrictive measures and the non-trade aspects of the FTAA are not taken into account due to data constraints. The computational results indicate that the FTAA would increase the economic welfare of the FTAA member countries by 118.8billion,withthelargestincreasesaccruingtotheUnitedStates,67.6 billion, and to South America, 31.0billion.TheFTAAistradedivertingformostoftherest−of−world,withawelfarereductionof9.3 billion. In comparison, if the FTAA countries were to adopt unilateral free trade, total FTAA member welfare would increase by 476.8billionandglobalwelfareby812.7 billion. If multilateral free trade were adopted by all countries/regions in the global trading system, the welfare effects would be considerably larger, 751.2billionfortheFTAAmembersand2.7 trillion globally.Trade liberalization, Globalization