Assessing the Impacts of FTAs: Issues for the Small, Open and Regionally Integrated Economy

Abstract

The computable general equilibrium model has become the workhorse tool for assessing the impacts of bilateral trade liberalization. This paper draws on recent experience within Foreign Affairs and International Trade Canada in modeling the impacts of potential free trade agreements with various partners to highlight (a) the importance of microeconomic closures (and in particular the implicit assumptions concerning the elasticities of supply of capital and labour) that are suitable for the circumstances of the economy in question; (b) the likelihood that regional economic integration will result in significant intraregional “leakage” of impacts of FTA effects with extraregional partners; (c) the need to take into account institutional features such as producer price supports when liberalizing border measures; and (d) the possibility of linking the results from the gravity model literature on the trade impacts of FTAs with CGE model-based results — the former reflecting the “all-in” impacts, the latter the tariff effects alone, and the difference impliedly reflecting the non-tariff aspects of FTAs.

Keywords: free trade agreements, FTAs, CGE model, closure, regional integration

JEL Classification: F14, F15, F17