A Dynamic Evaluation of the Effects of A Free Trade Area of the Americas-An Intertemporal, Global General Equilibrium Model

Abstract

This study examines the dynamic effects of a Free Trade Area of the Americas (FTAA) on the countries within the Western Hemisphere.The analysis uses an intertemporal, global, multi-sector general equilibrium model which takes into account changes in saving-investment, capital accumulation, and the linkages between openness in trade and economic growth.The study finds that the developing countries in the hemisphere may not enjoy welfare gain from an FTAA if they trade more with non-hemisphere countries and if trade-diverting effects dominate trade-creating effects.Taking into account the total factor productivity (TFP)-trade linkages, however, all developing countries in the region would benefit from an FTAA.The direct effects of an FTAA on the U.S. and Canada are modest, while the indirect effects of an FTAA, i.e., the effects on U.S. and Canadian firms to invest in their neighboring countries, are strong.

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