RULES OF THUMB FOR EVALUATING PREFERENTIAL TRADING ARRANGEMENTS: EVIDENCE FROM CGE ASSESSMENTS

Abstract

Most interesting results on the welfare effects of regional arrangements are ambiguous at a theoretical level. Many questions only have quantitative answers that are specific to the particular model and policy considered. Thus, to determine the impact of prospective regional arrangements governments often rely on a quantitative evaluation. Usually at the request of a government involved, we have implemented a number of computable general equilibrium (CGE) models to inform policy-makers. 1 We summarize the main conclusions we draw from these studies, focusing on applications in the Americas. These conclusions are drawn from a number of model variants, including: perfect and imperfect competition; comparative static, comparative steady-state and dynamic; small open economy and multi-region; and representative consumer and multi-household. Despite the fact that we have found many of these results mentioned below repeatedly in our numerical work, and frequently undertaken piecemeal and systematic sensitivity analysis to identify the source of the results, we characterize these conclusions as rules of thumb. 2 We acknowledge that there are modeling variants or parameter specifications where these rules of thumb may not hold. Rule 1: Countries Excluded from a PTA Almost Always Lose Beginning in the mid 1990’s, countries in Latin America have entered into a “spaghetti bowl” of Preferential Trading Arrangements (PTAs). Considering each agreement on a pair-wise basis, excluded countries almost always lose from such arrangements. The obvious explanation is that the partner countries have preferred access to the markets of the included countries, which reduces demand for the exports of excluded countries into the markets of the PTA. In Table 1 we collate some results to illustrate a number of points. These calculations are based on the 1998 tariff of Chile of 11%. With our central elasticities