How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?

Abstract

Computable General Equilibrium models, widely used for the analysis of Free Trade Agreements (FTAs) are often criticized for having poor econometric foundations. This paper improves the linkage between econometric estimates of key parameters and their usage in CGE analysis in order to better evaluate the likely outcome of a Free Trade Area of the Americas. Our econometric work focuses on estimation of a particular parameter, the elasticity of substitution among imports from different countries, which is especially critical for evaluating the positive and normative outcomes of FTAs. We match the data in the econometric exercise to the policy experiment at hand, and employ both point estimates and standard errors from the estimates.The FTAA analysis then takes explicit account of the degree of uncertainty in the underlying parameters. We sample from a distribution of parameter values given by our econometric estimates in order to generate a distribution of model results, from which we can construct confidence intervals. We find that imports increase in all regions of the world as a result of the FTAA, and this outcome is robust to variation in the trade elasticities. Ten of the thirteen FTAA regions experience a welfare gain in which we are more than 95% confident. We conclude that there is great potential for combining econometric work with CGE-based policy analysis in order to produce a richer set of results that are likely to prove more satisfying to the sophisticated policy maker. (Financial Times, 2003)

The Global Impacts of Biofuel Mandates

“…This price responsiveness of bilateral trade is governed by the "Armington" elasticity of substitution among imports. We draw on recent econometric estimates of Hertel et al, (2007), who utilize variation in bilateral trade costs in order to estimate the elasticity of substitution amongst products supplied by different exporters. Those authors estimate this elasticity for corn (coarse grains) to be 2.6 with a standard error of 1.1, and 4.9 (0.8) for oilseeds Table 1).…”

Capital Mobility and Capital Tax Competition

“…Moreover, several recent studies have obtained significantly higher estimates of the import substitution elasticity. For example, Erkel-Rousse and Mirza (2002) estimate an overall import substitution elasticity of 3.8, with many industries characterized by elasticities between 6.5-7.0 and some as high as 13.0, and Hertel, et al (2004) obtain an estimated import substitution elasticity for 40 different products of 7.0, with estimates that exceed 10 in some cases.…”

Una revisión de los efectos del Tratado de Libre Comercio entre Colombia y Estados Unidos

“…La primera fuente es Hertel, et al (2004), quienes estimaron unas elasticidades muy altas para estos parámetros, en promedio es de 7, lo cual es bastante grande si se compara con las antiguas estimaciones utilizadas por el modelo GTAP, que se encuentra alrededor de 5,3. De otra parte, en los trabajos de Anderson, van der Mensbrugghe y Martin (2005;2006), se muestra que para el modelo LINKAGE las elasticidades utilizadas son una tercera parte que las elasticidades encontradas por Hertel et al (2004). Finalmente, Harrison, Rutherford y Tarr (1997;, con el modelo GTAPinGAMS utilizan unas elasticidades de 2, las cuales son bastante bajas comparadas con los demás autores.…”