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GTAP Resource #1019

"Regional, Unilateral and Multilateral Trade Policies for Growth and Poverty Reduction in Brazil"
by Harrison, Glenn, Thomas Rutherford, David G. Tarr and Angelo Gurgel

In 2002, regional, multilateral and unilateral trade policy options are all on the table for the government of Brazil. In this paper, we evaluate the key trade policy options of Brazil and MERCOSUR for the next few years. Some of the questions we answer are the following. What is the impact of the FTAA or the potential EU-MERCOSUR free trade agreement? If the EU excludes agricultural products from the agreements or if the US applies antidumping actions to the most protected sectors, do the agreements lose their attractiveness? What are the potential gains from multilateral liberalization compared with regional. Importantly, how can Brazil and MERCOSUR use a combination of regional, multilateral and unilateral policies to optimize their trade policy options? How do these policies impact on partner or excluded countries and how do they compare to multilateral liberalization.

Given the desire to know the impact of trade policy on the poor, there is a strong focus in the paper on the impact of the various policies on the poor in Brazil. We analyze the impact on 20 different types of Brazilian households: ten rural and ten urban, where rural and urban households are classified according to income levels. The household demand functions for Brazil are endogenously incorporated into our multi-region model. We claim that one of the most important innovations of this paper is to establish a clear and intuitive link between factor incomes, trade liberalization and the poor. This required careful work in both estimating factor intensities in Brazilian sectors of production and working with the Living Standards Measurement Survey for Brazil.

We employ a multi-region, multi-commodity model to answer these questions. Given the focus on the FTAA and the EU-MERCOSUR agreement, we retain all the GTAP regions or countries in the Americas, but aggregate the GTAP regions outside of the Americas, the EU and Japan into one aggregate Rest of the World region. We aggregate the 57 GTAP sectors into 22 sectors, retaining the sectors most important for trade policy.

We employ the GTAP5 dataset for countries outside of Brazil. Within Brazil we significantly reconstruct the dataset. The input output table is updated from 1985 to 1996. Due to the notorious problems within input output tables in presenting factor shares (especially in agriculture and services) we calculate factor shares at the level of the industry from independent data. We employ the Brazilian Living Standards Measurement Survey (LSMS) to obtain household expenditure shares and the source of income for household from factors of production and transfers. We impose MERCOSUR on the data set and correct for problems in the trade distortions reported in services sectors. All these data modifications are documented in several appendices.

Our results indicate that both the FTAA and the EU-MERCOSUR agreements provides benefits to Brazil, although the FTAA is negative for Argentina due to the erosion of preferential access to Brazil’s markets. Access to the highly protected agricultural markets of the European Union can have a very powerful impact on the welfare of the MERCOSUR countries, especially Uruguay, given its relative small size. But if the EU excludes agriculture the gains to MERCOSUR countries are very modest. The gains from an FTAA combined with and agreement with the EU for MERCOSUR exceed the sum of the agreements separately due to the decline in trade diversion.

Excluded countries are esimated to lose from the regional agreements in virtually all cases, and the gains to the world from multilateral liberalization are more than four times greater the best of the regional arrangements.

The impact at the household level is progressive: the poor gain three to four times the average for the economy as a percent of their consumption. This is because Brazil protects capital manufacturing at the expense of agriculture and unskilled labor intensive manufacturing. Since agriculture is relatively unskilled labor intensive, liberalization raises the wage of unskilled labor, which is the major source of income for the poor.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2002 Conference Paper
Status: Published
By/In: Presented at the 5th Annual Conference on Global Economic Analysis, Taipei, Taiwan
Date: 2002
Created: Tarr, D. (4/29/2002)
Updated: Bacou, M. (7/16/2002)
Visits: 2,958
- Economic analysis of poverty
- South America

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