SCENARIOS FOR TRADE INTEGRATION IN THE AMERICAS

This paper analyzes two potential trade liberalization scenarios – a Free Trade Area of theAmericas (FTAA) and possible links between MERCOSUR and the European Union(EU) – in a world computable general equilibrium (CGE) model. The model alsoincorporates some macro elements such as a cash- in-advance mechanism and rigidities inwages and exchange rates. The empirical results show that the two alternative regionalintegration scenarios are good for the participants while have little impact on the nonparticipants.Both scenarios are net trade creating, as trade creation greatly exceeds tradediversion, and the trade-diversion has relatively minor effects on the affected regions.The gains are larger for the Latin American participants than for their large potentialpartners – the U.S. and EU. These results are consistent with earlier studies of NAFTA,which also predicted small positive gains for the U.S. and large gains for Mexico. Manycountries in Latin America are currently undergoing macroeconomic strains, and growthin the region has slowed. In this environment, external shocks and stabilization andstructural adjustment programs are likely to lead to significant swings in trade balancesand exchange rates. These issues will have to be considered in acknowledging that it ishard to reap the long-term benefits of trade liberalization in an environment ofmacroeconomic instability.