Computational analysis of the Free Trade Area of the Americas (FTAA)

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). 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. The modeling focus is on the effects of the bilateral removal of tariffs on agriculture and manufactures and of services barriers. The computational results indicate that the FTAA would increase the economic welfare of member countries by $118.8 billion, with the largest increases accruing to the United States, $67.6 billion, and to South America, $27.6 billion. The FTAA is trade-diverting for most of the rest of the world, with a welfare reduction of $9.3 billion. In comparison, if the FTAA countries were to adopt unilateral free trade, total member welfare would increase by $476.8 billion and global welfare by $812.7 billion. If multilateral free trade were adopted by all countries/regions in the global trading system, the welfare effects would be considerably larger, $751.2 billion for the FTAA members and $2.4 trillion globally.