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GTAP Resource #3884

"Some methodological and practical issues of using CGE models to evaluate free trade agreements: the roles of initial trade patterns, baseline projection, and Armington elasticities"
by Yu, Wusheng and Hans Grinsted Jensen


In recent years many free trade agreements have come into force. Still many other potential agreements are under negotiations. As a result, there has been increasing demand for model-based evaluations of the potential economic impacts of these agreements. Computable general equilibrium models have been frequently used by analysts to provide numerical answers to satisfy this demand.

A typical FTA will usually be fully implemented within a few years from the time when the deal is reached, with trade barriers being gradually reduced during that period. Thus, the typical CGE modeling exercise of an FTA usually starts with a database featuring trade patterns and protection structures amongst the FTA member countries in a given year that is understandably earlier than the year when the FTA will be fully implemented. Due to the cost associated with constructing the large data set to be used for these exercises, analysts are most likely only equipped with a data base describing the trade and protection patterns of a year that is also earlier than the current year. This means that prior to model the actual reductions of trade barriers in relation to the FTA, analysts need to first conduct projection runs of their model to generate a “business-as-usual” baseline which reflects their best “guess” of the concerned economies at the time when the FTA will be fully implemented and with the assumption that any trade policy changes related to the FTA will not be implemented. The effect of implementing the FTA will then be computed by conducting another model run against the baseline where the FTA will be implemented.

There are several issues associated with this exercise that can significantly impact its reliability. First, trade patterns reflected in the database prior to the baseline projection may differ significantly from the current trade patterns, for example if the original database has an earlier base year or if rapid economic growth in a certain...

Resource Details (Export Citation) GTAP Keywords
Category: 2012 Conference Paper
Status: Published
By/In: Presented at the 15th Annual Conference on Global Economic Analysis, Geneva, Switzerland
Date: 2012
Created: Yu, W. (4/30/2012)
Updated: Yu, W. (4/30/2012)
Visits: 1,566
- Preferential trading arrangements
- Asia (South-Central)
- European Union

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