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Prepared by Alvin Hilaire. The GTAP simulations were conducted by Yonghzeng Yang and research assistance was provided by Dustin Smith.
For example, in the last five years, the EU has completed negotiations for FTAs with South Africa, Mexico, Chile, Croatia, Former Yugoslav Republic of Macedonia, and a number of Mediterranean partners, while negotiations continue with Mercosur, Syria and the Gulf Cooperation Council (Lamy, 2002).
Key components of the Middle East strategy include: (a) expanding the U.S. Generalized System of Preferences (GSP) to the poorer countries of the region; (b) assisting with WTO accessions of Middle Eastern countries; (c) completing the FTA with Morocco and possibly “docking in” other countries to the treaty; (d) launching new FTAs with selected countries—initially Egypt and Bahrain; and (e) eventual establishment of a free trade agreement between the Middle Eastern countries (as a bloc) and the United States.
Panagariya (1999) describes a number of studies in which the trade diversion effect accompanying preferential trading arrangements is documented; some evidence also emerges from our simulations in Section C below.
A Report commissioned by the Australian Department of Foreign Affairs (CIE, 2001) sums up the situation: “The FTAA will constitute a powerful inducement for US investors to invest in Latin American markets. Australia has a keen interest in ensuring that Latin American countries do not secure an advantage over Australia in access to the US market. Especially given the likelihood of the US negotiating more FTAs in the future with more of Australia’s competitors, an Australian-U.S. FTA constitutes a potentially vital piece of negotiating insurance.”
Gordon (2003) considers the strategy a “high-risk” one, which could severely damage U.S. foreign policy and trade if restrictive trade blocs are erected in East Asia and other areas in response.
For example, Leith and Whalley (2003) point out that a wide variety of trade and regulatory practices exist among members of SACU, and negotiation of a U.S.-SACU FTA and harmonizing the various laws and administrative practices within this region would pose a considerable challenge. More generally, Bhagwati (2002) cautions on the potential “spaghetti bowl” effect of crisscrossing FTAs arising from different transition timetables and differing rules of origin.
Panagariya (2002) uses the examples of the GSP and AGOA to argue that preferential trade schemes not subject to WTO discipline can create damaging uncertainty.
For example, in the U.S.-Chile Agreement, limits and penalties are established on restrictions of capital transfers and there is no balance of payments safeguard clause. In principle, bilateral efforts that proscribe the temporary imposition of capital controls in crisis could undermine the effectiveness of any broader capacity to impose emergency measures on transactions. The U.S.-Canada FTA, NAFTA, and the GATS—which were the first comprehensive attempts at liberalizing controls on the cross border provision of services and investment—all provide for emergency measures.
For example, Krueger (1999) finds that NAFTA has not led to trade diversion in Mexico-U.S. trade. Olarreaga, et al. (2003) also illustrate the benefits of North-South trade-related R&D flows on productivity.
The GTAP model used in this paper is a comparative static, general equilibrium model based on neo-classical trade theory.
Chile has already concluded separate treaties with Canada, Mexico, and Central America and has comprehensive market opening agreements with Bolivia, Venezuela, Colombia, Ecuador, and Peru. Chile is an associate member of MERCOSUR and signed an FTA with the European Union in 2002. Free trade arrangements with South Korea, Japan, and Singapore are also reportedly under discussion.
There is little diversion from Argentina—which is a major supplier of Chile—because its exports compete less directly with the United States. To the extent that there is trade diversion, it is concentrated in manufactured goods. The GTAP database utilizes data as of 1997 and, therefore, does not include the Chile-EU agreement; thus, the results may overestimate trade diversion from the EU.