An Assessment of the Economic Effects of the Menu of U.S. Trade Policies

Abstract

The Michigan Computable General Equilibrium (CGE) Model of World Production and Trade is used to calculate the aggregate welfare and sectoral employment effects of the menu of U.S. trade policies. The menu of policies encompasses the various preferential U.S. bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers, and global (multilateral) free trade. The welfare impacts of the FTAs on the United States are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small but vary across the individual sectors depending on the patterns of the bilateral liberalization. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on nonmember countries for some of the FTAs analyzed. In comparison to the welfare gains from the U.S. FTAs, the gains from both unilateral trade liberalization by the United States and the FTA partners and from global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The U.S. FTAs are based on “hub” and “spoke” arrangements. It is shown that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system, which could be avoided if multilateral liberalization in the context of the Doha Round were to be carried out. Kozo Kiyota is Associate Professor of International Economics in the Faculty of Business Administration, Yokohama National University. He is also a Research Fellow at the Manufacturing Management Research Center (MMRC), the University of Tokyo and a Faculty Fellow at the Research Institute of Economy, Trade and Industry (RIETI). He received his Ph.D. from Keio University, Tokyo, Japan. His research focuses on empirical microeconomics. He has published articles in the International Journal of Industrial Organization, Journal of Economic Behavior and Organization, and The World Economy. Robert M. Stern is Professor of Economics and Public Policy (Emeritus) in the Department of Economics and Gerald R. Ford School of Public Policy, University of Michigan.