Trade Agreements: Impact on the U.S. Economy







Prepared for Members and Committees of Congress



The United States is in the process of negotiating a number of trade agreements. In addition, the th
110 Congress may also address the issue of trade promotion authority (TPA), which expired on
July 1, 2007. These agreements range from bilateral trade agreements with countries that account
for meager shares of U.S. trade to multilateral negotiations that could affect large numbers of U.S.
workers and businesses. During this process, Congress likely will be presented with an array of
data estimating the impact of trade agreements on the economy, or on a particular segment of the
economy.
An important policy tool that can assist Congress in assessing the value and the impact of trade
agreements is represented by sophisticated models of the economy that are capable of simulating
changes in economic conditions. These models are particularly helpful in estimating the effects of
trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade
are identifiable and subject to some quantifiable estimation. Barriers to trade in services,
however, are proving to be more difficult to identify and, therefore, to quantify in an economic
model. In addition, the models are highly sensitive to the assumptions that are used to establish
the parameters of the model and they are hampered by a serious lack of comprehensive data in the
services sector. Nevertheless, the models do provide insight into the magnitude of the economic
effects that may occur across economic sectors as a result of trade liberalization. These insights
are especially helpful in identifying sectors expected to experience the greatest adjustment costs
and, therefore, where opposition to trade agreements is likely to occur.
This report examines the major features of economic models being used to estimate the effects of
trade agreements. It assesses the strengths and weaknesses of the models as an aid in helping
Congress evaluate the economic impact of trade agreements on the U.S. economy. In addition,
this report identifies and assesses some of the assumptions used in the economic models and how
these assumptions affect the data generated by the models. Finally, this report evaluates the
implications for Congress of various options it may consider as it assesses trade agreements. This
report will be updated as events warrant.






Backgr ound ............................................................................................................................... 1
An Overview of the Major Agreements....................................................................................1
Multilateral Agreements......................................................................................................1
Regional Trade Agreements................................................................................................3
Completed Bilateral Trade Agreements..............................................................................4
Pending Bilateral Trade Agreements..................................................................................8
Trade Liberalization and the Gains From Trade........................................................................9
Production Gains.................................................................................................................9
Adjustment Costs................................................................................................................9
Consumption Gains...........................................................................................................10
Economic Growth.............................................................................................................10
Estimating the Economic Impact of Trade Agreements...........................................................11
Overvi ew ....................................................................................................................... ..... 11
The Michigan Model and Estimates.................................................................................12
Investment and Capital Flows...........................................................................................15
Data on Barriers to Trade in Services...............................................................................17
Implications for Congress.......................................................................................................18
Table 1. Estimated Economic Effects on the United States of a 33% Reduction in Barriers
to Trade in Agriculture, Manufactures, and Services at the Doha Development Round............13
Table 2. Estimated Economic Effects on the United States of Free Trade Agreements with
Various Trading Partners............................................................................................................14
Table 3. Projected Sectoral Employment Effects (Job Gains and Losses) in the United
States of Various Trade Agreements...........................................................................................15
Table 4. Projected Sectoral Employment Effects (Job Gains and Losses) in the United
States of Various Trade Agreements...........................................................................................16
Author Contact Information..........................................................................................................20





Congress plays a direct role in formulating and implementing U.S. international trade policies. th,thth
During the 108 109, and 110 Congresses, this role gained increased importance as the United th
States negotiated an unprecedented number of trade agreements. The 110 Congress may also
address the issue of trade promotion authority (TPA), which expired on July 1, 2007. Under this
authority, Congress grants the President the authority to enter into certain reciprocal trade 1
agreements. Currently, the United States is involved in multilateral negotiations in the Doha
Development Agenda under the auspices of the World Trade Organization (WTO). On a regional
level, the United States is involved in negotiations on a Free Trade Area of the Americas (FTAA)
and with countries in southern Africa. In addition, the United States is pursuing bilateral trade
agreements with Malaysia, the United Arab Emirates, and Thailand. It has concluded agreements
with Australia, Bahrain, Chile, Morocco, Oman, Singapore, South Korea, the Dominican
Republic, and the five countries of the Central American Common Market (Guatemala, 2
Honduras, Nicaragua, El Salvador, and Costa Rica) and Congress has approved them. The Bush
Administration has also concluded agreements with Panama, Peru and Colombia, separately from
Ecuador and Bolivia, the other members of the proposed Andean-U.S. Free Trade Agreement.
Building a broad-based public consensus on international trade issues often has proved to be
difficult, especially as certain industries and labor groups within the economy have been
adversely affected by international competition. Based on previous experiences with international
trade agreements, Members of Congress and the public may view these agreements with varying
degrees of support and opposition. While few critics are likely to oppose outright all of the trade
agreements being negotiated, critics will oppose some aspects of the agreements, because certain
groups within the economy will incur a disproportionate share of the adjustment costs associated
with each trade agreement. Economists and others have developed economic models that utilize
advanced techniques to assess the economic impact of trade agreements on the economy as a
whole and on specific sectors within the economy. To help Congress evaluate the potential
economic effects, this report examines a sampling of these studies and offers an assessment of the
estimates they have generated.
In November 2001, trade ministers from 142 member countries of the World Trade Organization th
met in Doha, Qatar to launch the 4 WTO ministerial. The Doha meeting succeeded primarily by 3
agreeing to begin a new round of multilateral trade negotiations. These negotiations are intended
to build on agreements reached under the Uruguay Round of negotiations on trade in agriculture
and trade in services, part of the WTO’s already-established work program. For the United States,
the chief goal of the negotiations is to improve market access in agricultural trade, primarily by

1 For additional information, see CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and
Prospects for Renewal, by J. F. Hornbeck and William H. Cooper.
2 For additional information and status of the current negotiations, see CRS Report RL33463, Trade Negotiations
During the 110th Congress, by Ian F. Fergusson.
3 CRS Report RL32060, World Trade Organization Negotiations: The Doha Development Agenda, by Ian F.
Fergusson.





eliminating agricultural export subsidies; easing tariffs and quotas; and reducing other forms of
trade-distorting domestic support. In addition, the United States hopes to expand negotiations on
trade in services and to reduce tariffs on industrial goods.
CRS Products on Trade Issues
CRS Report RS20864, A Free Trade Area of the Americas: Major Policy Issues and Status of
Negotiations, by J. F. Hornbeck.
CRS Report RS21387, United States-Southern African Customs Union (SACU) Free Trade
Agreement Negotiations: Background and Potential Issues, by Danielle Langton.
CRS Report RS22608, Trade Promotion Authority (TPA) Renewal: Core Labor Standards
Issues: A Brief Overview, by Mary Jane Bolle.
CRS Report RS22419, U.S.-Colombia Trade Promotion Agreement.
CRS Report RL31356, Free Trade Agreements: Impact on U.S. Trade and Implications for U.S.
Trade Policy, by William H. Cooper.
CRS Report RL31870, The Dominican Republic-Central America-United States Free Trade
Agreement (CAFTA-DR), by J. F. Hornbeck.
CRS Report RL32060, World Trade Organization Negotiations: The Doha Development
Agenda, by Ian F. Fergusson.
CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J. F. Hornbeck.
CRS Report RL33445, The Proposed U.S.-Malaysia Free Trade Agreement, by Michael F.
Martin.
CRS Report RL33463, Trade Negotiations During the 110th Congress, by Ian F. Fergusson.
CRS Report RL33743, Trade Promotion Authority (TPA): Issues, Options, and Prospects for
Renewal, by J. F. Hornbeck and William H. Cooper.
CRS Report RL34108, U.S.-Peru Economic Relations and the U.S.-Peru Trade Promotion
Agreement, by M. Angeles Villarreal.
A framework agreement on future negotiations was concluded in Geneva on August 1, 2004, but
a new deadline for the completion of the talks was not set and the talks stalled in 2005. This
framework was viewed hopefully, because it provides a blueprint for future negotiations on th
agriculture, non-agricultural market access, services and trade facilitation. The 6 Ministerial,
which occurred in Hong Kong in December 2005, was seen by many as the last opportunity to
settle key negotiating issues that could produce an agreement by 2007, the de facto deadline for
the negotiations before the U.S. trade promotion authority expired. On April 21, 2006, WTO
Director-General Pascal Lamy announced that WTO negotiators would not meet the April 30,
2006 deadline for reaching an agreement on a framework for further negotiations and that he had
committed negotiators to six weeks of continuous talks to reach an agreement. Trade negotiators
failed to reach an agreement during talks in Geneva from June 30-July 1, 2006 and the talks were
indefinitely suspended. On January 1, 2007, however, Lamy announced that the talks were back





in “full negotiating mode.” Chairs of the agriculture and industrial market access negotiating
groups offered draft modalities texts on July 17, 2007 that are serving to keep the differing parties
to the negotiations engaged in the talks despite criticism from nearly all quarters over the texts.
At the second Summit of the Americas in April 1998, 34 nations of the Western Hemisphere 4
agreed to initiate formal negotiations to create a Free Trade Area of the Americas by 2005. The
negotiations initiated efforts in five areas: market access; agriculture; services; investment; and
government procurement, but the negotiations have stalled. The United States and Brazil
attempted to broker a compromise by moving the negotiations away from a comprehensive,
single undertaking toward a two-tier framework comprising a set of “common rights and
obligations” for all countries, combined with voluntary plurilateral arrangements with country
benefits related to commitments. This approach, however has proved elusive and five of the
participants—Brazil, Argentina, Uruguay, Paraguay, and Venezuela—have blocked an effort to
restart the negotiations.
In November 2002, the Bush Administration announced that it was pursuing negotiations for a
free trade agreement with the Southern African Customs Union, comprised of Botswana, 5
Namibia, Lesotho, South Africa, and Swaziland. These negotiations reflect congressional interest
in strengthening U.S. trade with Africa as expressed in the African Growth and Opportunity Act
(P.L. 106-200). U.S. negotiators hope to gain reductions in tariffs and in non-tariff barriers in such
areas as telecommunications, financial services, legal services, and the movement of personnel.
The Southern African members are pressing for increased market access for goods not already
covered by the Africa Growth and Opportunity Act, especially for textiles and apparel, footwear,
and agricultural products. After six rounds of talks, negotiations have stalled and the December
2004 deadline for concluding the talks has passed. The talks are deadlocked over differing views
over the objectives of the talks and what sectors should be included for negotiation. Currently,
there is no deadline for concluding the talks.
On October 26, 2002, President Bush announced that the United States would begin negotiations
with the Association of Southeast Asian Nations (ASEAN) under the Enterprise for ASEAN 6
Initiative. The initiative offers the prospect of bilateral trade agreements with the 10 ASEAN
members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), Philippines,
Singapore, Thailand, and Vietnam). Under the agreement, the United States and each country will

4 CRS Report RS20864, A Free Trade Area of the Americas: Major Policy Issues and Status of Negotiations, by J. F.
Hornbeck.
5 CRS Report RS21387, United States-Southern African Customs Union (SACU) Free Trade Agreement Negotiations:
Background and Potential Issues, by Danielle Langton.
6 See http://www.whitehouse.gov/news/releases/2002/10/20021026-7.html





jointly determine when conditions are ripe for FTA negotiations. Two-way trade between the
United States and ASEAN reached $120 billion in 2001.
The Bush Administration initiated talks with the four Andean countries—Colombia, Peru,
Ecuador, and Bolivia—in November 2003 to reduce and eliminate barriers to trade and 7
investment. Negotiations began in May 2004, but the talks failed to reach a conclusion. As a
result, Peru decided to continue negotiating with the United States without Colombia or Ecuador,
and concluded a bilateral agreement in December 2005. Separate talks continued with Colombia
and concluded successfully on February 27, 2006. Negotiations with Ecuador are stalemated. The
agreements likely will be submitted to Congress as separate agreements, but they have not been
submitted as of June 1, 2006.
The Bush Administration signed an agreement with the five Central American Common Market 8
nations—Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua—on August 5, 2004.
President Bush signed the agreement into law on August 2, 2005 (P.L. 109-53). All countries
except Costa Rica and the Dominican Republic have ratified the agreement. As of July 1, 2006,
the United States had implemented the agreement for El Salvador, Honduras, Nicaragua and
Guatemala will do so for Costa Rica when it has adopted the necessary regulatory and legal
framework.
Many supporters have viewed the Dominican Republic-Central American Free Trade Agreement
(CAFTA) as a stepping stone toward completing a Free Trade Area of the Americas. U.S.
negotiators hope to assist U.S. firms and workers by reducing tariffs on U.S. merchandise
exports, and by reducing barriers to e-commerce, services, and intellectual property trade. The
U.S. also hopes to use the agreement to improve the participants’ commitment to the World Trade
Organization’s General Agreement on Trade in Services (GATS) and to define better the rules on
transparency. The Central American participants are aiming to deepen their already strong trade
relationship with the United States and to improve access for their textile and apparel products to
the U.S. market.
The United States and Australia concluded a bilateral free trade agreement on February 8, 2004.
The agreement was signed by the President on August 3, 2004 (P.L. 108-286) and took effect
January 1, 2005. For the United States, the agreement lowered Australian tariffs on most U.S.
exports of manufactured goods and agricultural products and will ensure nondiscriminatory
treatment in most areas of bilateral trade in services, government procurement, foreign

7 CRS Report RL32770, Andean-U.S. Free-Trade Agreement Negotiations, by M. Angeles Villarreal.
8 CRS Report RL31870, The Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR),
by J. F. Hornbeck.





investment, and improved protection for intellectual property rights. For Australia, the agreement
lowers tariffs on U.S. imports of Australian beef, dairy, cotton, and peanuts, but provides no
change in access to sugar producers. Various U.S. agricultural interests, including beef, dairy, and
sugar producers, opposed the negotiations, because of Australia’s large, and competitive, th
agricultural sector. At $14 billion in 2004, Australia is the 15 largest market for U.S. exports th
and, at $7 billion, Australia is the 30 largest importer to the United States.
On September 14, 2004, the United States and Bahrain concluded negotiations for a free trade 9
agreement. The President signed the agreement into law on January 11, 2006 (P.L. 109-169). The
Administration views the agreement as a first step toward an eventual Middle East Free Trade
Area by 2013. Bahrain has a Bilateral Investment Treaty with the United States and a Trade and
Investment Framework Agreement. The agreement will eliminate tariffs on all consumer and
industrial product exports to Bahrain and eliminate tariffs on 98% of all U.S. agricultural products
with a 10-year phase out for the remaining items. Textiles and apparel trade will be duty free if
the product contains either U.S. or Bahrainian yarn. U.S. services providers will have among the
highest degree of access to service markets in Bahrain of any U.S. FTA to date in such areas as
audiovisual, express delivery, telecommunications, computer and related services, distribution,
healthcare, and services incidental to mining, construction, architecture, and engineering. U.S.
financial services and life and medical insurance providers will also have access to Bahrain’s
economy.
On June 6, 2003, the United States and Chile signed a bilateral free trade agreement.10 The
agreement was signed by the President on September 3, 2003 (P.L. 108-77) and became effective
on January 1, 2004. For the United States, trade with Chile accounts for less than one percent of
U.S. overall trade, but the agreement is significant because it is the first such agreement with a
South American country. The main U.S. objectives were accomplished by gaining market access
and reduced tariff rates for U.S.-made goods. In time, all goods traded between the two countries
will receive duty-free access. Under the agreement, 85% of bilateral trade in consumer and
industrial products is eligible for duty-free treatment, with other product tariff rates being reduced
over time. About 75% of U.S. agricultural exports will enter Chile duty-free within four years and
all duties will be fully phased out within 12 years after implementation of the agreement. For
Chile, 95% of its exports gain duty-free status immediately and only 1.2% fall into the longest 12
year phase out period. Other critical issues that were resolved include environment and labor
provisions, more open government procurement rules, increased access for services trade, greater
protection of U.S. investment and intellectual property.
On February 6, 2006, the United States and Colombia announced that they had concluded
negotiation of a free trade agreement. The agreement is comprehensive and would eliminate

9 CRS Report RS21846, U.S.-Bahrain Free Trade Agreement, by Martin A. Weiss.
10 CRS Report RL31144, The U.S.-Chile Free Trade Agreement: Economic and Trade Policy Issues, by J. F. Hornbeck.





tariffs and other barriers in goods and services trade between the two countries.11 Similar to the
U.S.-Peru FTA, the U.S.-Colombia agreement would eliminate duties on 80% of U.S. exports of
consumer and industrial products to Colombia immediately upon implementation. An additional
7% of U.S. exports would receive duty-free treatment within five years and all remaining tariffs
would be eliminated within ten years of implementation. Implementing legislation has not been
introduced in the Congress.
President Bush signed the United States-Morocco Free Trade Agreement (P.L. 108-302) on
August 3, 2004. The agreement entered into force on January 1, 2006, after the Moroccan 12
parliament ratified the agreement and King Mohammed VI signed it. The agreement is intended
to strengthen economic ties between the United States and Morocco and to show support for
Morocco’s position as a moderate Arab state. Morocco’s agriculture sector is highly protected and
should offer opportunities for U.S. business investment and U.S. exports. In particular, U.S. trade
officials expect that reductions in Morocco’s 20% tariff rate called for by the agreement should
increase U.S. exports to the country, especially exports of such items as wheat, soybeans, feed
grains, beef, and poultry. Business leaders also expect that the agreement will increase U.S.
investment in Moroccan telecommunications and tourism as well as in the fields of energy,
entertainment, transport, finance, and insurance. U.S. exports of information technology products,
construction equipment, and chemicals are expected to benefit. Morocco is looking for increased
access to the U.S. market, especially for Morocco’s citrus products, textiles, and apparel goods.
The Bush Administration notified Congress in November 2004 that it would begin negotiations
on a free trade agreement with the United Arab Emirates (UAE) and Oman. Talks began on
March 8, 2005, with the UAE and on March 12, 2005, with Oman. The President signed an
agreement with Oman on January 19, 2006. The Senate passed implementing legislation on June
29, 2006 (S. 3569), and the House passed the legislation (H.R. 5684) on July 20, 2006. Following
the House action, the Senate re-passed the implementing legislation under the House number on
September 19, 2006 and it became P.L. 109-283, when President Bush signed the law on
September 26, 2006.
The Bush Administration began formal negotiations with Panama on April 25, 2004, in Panama 13
City, Panama. The negotiations have progressed quickly. Negotiators met during the week of
January 31-February 6, 2005, and could conclude their talks at a tenth, but yet unscheduled,
round. The United States is seeking reductions in tariffs and other barriers to U.S. industrial,
agricultural, and consumer goods, and define rules for services trade, investment, government
procurement, intellectual property rights, and dispute resolution mechanisms. U.S. labor groups
are challenging Panama’s labor conditions, laws, enforcement efforts, and the language of the

11 CRS Report RS22419, U.S.-Colombia Trade Promotion Agreement, by M. Angeles Villarreal.
12 CRS Report RS21464, Morocco-U.S. Free Trade Agreement, by Raymond J. Ahearn.
13 CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J. F. Hornbeck, The Proposed U.S.-
Panama Free Trade Agreement, by J.F. Hornbeck.





FTA. Panama is seeking to solidify its access to U.S. markets for agricultural goods, textiles and
apparel, but already receives considerable benefits from the Caribbean Basin initiative’s (CBI)
unilateral trade preferences of the United States and is among the largest recipients of U.S.
foreign direct investment in Latin America.
On December 7, 2005, the United States and Peru announced the conclusion of a bilateral free
trade agreement. President Bush notified the Congress on January 6, 2006 that the United States
intended to enter into an agreement. The agreement is comprehensive and would eliminate tariffs
and barriers in goods and services trade between the two countries. Upon implementation, the
agreement would eliminate duties on 80% of U.S. exports of consumer and industrial products to
Peru. An additional 7% of U.S. exports would receive duty-free treatment within five years and
all remaining tariffs would be eliminated within ten years of implementation. The Administration
views the agreement as a building block in its strategy to advance free trade throughout the 14
Americas. Implementing legislation had not been introduced as of June 1, 2006.
On September 4, 2003, President Bush signed the U.S.-Singapore Free Trade Agreement (P.L. 15
108-78) into law. This agreement is the first of its kind for the United States with an Asian
country and sparked a debate over whether the United States should pursue such bilateral
agreements or pursue greater liberalization of trade relations through regional or multilateral
forums. Both Singapore and the United States had few remaining restrictions on their overall
trade activities, so the economic impact of this particular FTA is expected to be small for the
United States. Nevertheless, the agreement eliminates, with a phase-in period, tariffs on all goods
traded between the two countries, covers trade in services, and protects intellectual property
rights.
The areas that are affected the most are U.S. exports of chewing gum and distilled spirits and
imports of textiles and apparel. Industry analysts expect that U.S. textile and apparel producers
will experience few direct economic effects from this agreement, but there has been a sharp
division of views among industry representatives regarding the agreement’s rules of origin
governing trade in apparel goods. Apparel producers argue that the rules of origin on apparel are
restrictive and have been made worse through the agreement by additional complications and
burdens that discourage trade in apparel. The AFL-CIO opposed the agreement, because it argued
that the agreement would not sufficiently protect core worker rights.
In the area of services, the agreement should improve U.S. market access across a broad range of
sectors. U.S. banks, insurance companies, and securities and financial services companies are
looking to expand in Singapore’s market. The agreement also liberalizes controls over express
delivery service and such professional service providers as lawyers, engineers, and architects. In
addition, the agreement eases restrictions on telecommunications services, e-commerce, foreign
investment, intellectual property rights, and government procurement.

14 CRS Report RS22391, U.S.-Peru Trade Promotion Agreement, by M. Angeles Villarreal.
15 CRS Report RL31789, The U.S.-Singapore Free Trade Agreement, by Dick K. Nanto.





The Bush Administration notified Congress on February 3, 2006 of its intent to begin formal 16
negotiations on a free trade agreement with South Korea. On February 12, 2007 the negotiators
had completed the seventh round of talks. For U.S. negotiators, the most difficult part of the talks
is in contending with South Korea’s well protected agricultural sector, non-tariff barriers in the
automotive and other manufacturing sectors, and status of products made at the Kaesong
industrial complex, an industrial zone in North Korea set up by South Korean manufacturers. For
the South Koreans, major sticking points are U.S. protection of textiles and apparel producers.
Negotiations with Malaysia began on March 8, 2006; the fifth round of the talks occurred during 17
the week of February 5, 2007. The United States is seeking the removal of import licensing
restrictions on motor vehicles, removal of government procurement restrictions, increased
protection for intellectual property rights (IPR), liberalized financial services, and negotiations on
a broad range of services.
The United States and Thailand began formal negotiations on a free trade agreement on June 28,
2004 in Hawaii. The Administration argues that the agreement will be comprehensive and seek to
liberalize trade in goods, agriculture, services, investment, and intellectual property rights. In
particular, the Administration said that the agreement will promote U.S. exports, primarily
benefitting U.S. farmers and the auto and auto parts industries, will protect U.S. investment, and
will advance the Enterprise for ASEAN Initiative. Other issues that likely will be negotiated
include government procurement, competition policy, environment and labor standards, and
customs procedures. The United States is Thailand’s largest market, which accounts for 20% of
Thailand’s exports.
The Bush Administration notified Congress in November 2004 that it would begin negotiations
on a free trade agreement with the United Arab Emirates (UAE) and Oman. Talks began on
March 8, 2005, with the UAE and on March 12, 2005, with Oman. Worker protection issues have
presented a major hurdle, because the UAE relies heavily on guest workers and it places
restrictions on the right to strike or organize. The Administration hopes that an agreement will
build on agreements that have been signed with other nations in the area (Israel, Jordan, Morocco,
Bahrain, and Oman) and will encourage a movement toward more open trade and more
investment.

16 CRS Report RL33435, The Proposed South Korea-U.S. Free Trade Agreement (KORUS FTA), by William H.
Cooper and Mark E. Manyin.
17 CRS Report RL33445, The Proposed U.S.-Malaysia Free Trade Agreement, by Michael F. Martin.





Nations pursue trade liberalization to achieve a number of national objectives. Economists argue,
however, that free trade, or the international trade of goods and services free from restrictions and 18
barriers, provides nations with a broad group of economic benefits. These benefits are
categorized as one-time, or static, benefits, which include gains for consumers and gains for
producers, and dynamic benefits that accrue over time and can positively affect the long-term rate
of growth of a country. While it is not always possible to measure these effects precisely, most
economists believe that the net effect of international trade on the national economy as a whole is
positive, i.e., that the total gains exceed the total costs.
International trade is one among a number of forces that determine the complex makeup of jobs,
industries, wages, and products in the economy. For an economy such as that in the United States,
international trade alone does not determine economic expansions or contractions, the level of
income, the level of national output, the overall wage rate, or even have much of an impact on the 19
distribution of income. Trade liberalization, however, by reducing foreign barriers to U.S.
exports and by removing U.S. barriers to foreign goods and services, helps to strengthen those
industries that are the most competitive and productive and to reinforce the shifting of labor and
capital from less productive endeavors to more productive economic activities.
Economists have long recognized that the long-term production gains associated with greater
specialization in the economy create a wide range of short-term adjustment costs as labor and
capital are shifted from less efficient industries and activities into more efficient industries and
activities. These adjustment costs are difficult to measure, but they are potentially large over the
short run and can entail significant dislocations for some segments of the labor force, for some
companies, and for some communities. In negotiating trade agreements, governments are most
mindful of the adjustment costs involved and, at times, are constrained in their ability to fashion
such agreements because of opposition by groups within the economy that will bear heavy costs
from trade liberalization. These costs are especially acute for labor groups within the economy
that lack advanced education and training skills that provide them with the means necessary to be
redeployed in other sectors of the economy.

18 Economic trade theory argues that natural resources, which serve as the building blocks of production within an
economy, are limited at any one point in time, whereas demands for those resources are unlimited, creating a scarcity of
resources. This scarcity of resources means that nations strive to use their resources in the most efficient way possible
in order to maximize the goods and services that are available to their citizens, a common definition of a nation’s
standard of living. Nations then specialize in the production of certain goods and then trade with other nations for the
goods they do not produce. These concepts of specialization and trade lead to the conclusion that a nation will find that
it is in its economic self-interest to engage in trade with other nations even if it can produce all goods and services at a
lower cost than any other nation. By specializing in the production of those goods and services in which it is most
efficient, or in which it has a comparative advantage, a nation maximizes its total productive capability and national
income.
19 Gottschalk, Peter, and Timothy M. Smeeding, Cross-National Comparisons of Earnings and Income Inequality.
Journal of Economic Literature, June 1997. p. 645.





Economists generally agree that consumption gains for consumers comprise the largest long-term
gains for an economy that arise from international trade and, therefore, from any reduction of
trade barriers. Trade models attempt to estimate these effects indirectly. A change in trade policies
should lead to changes in prices for traded goods and, therefore, in consumers’ real incomes, as
well as to changes in the efficiency of production, which will also improve a nation’s overall
economic welfare. Consumption gains mean that consumers benefit from international trade by
having a broader selection of goods and services available to them at lower prices than are
available from purely domestic production. Also, the wider array of product selection likely
enhances consumer well-being, because the competition that arises from international trade also
affects the quality of the goods and services that are available. In some cases, this means that
consumers have a choice of different levels of quality and that they can acquire not only the
particular type of good they desire, but also the level of quality they desire. Since international
trade encourages specialization, the production gains from trade also mean that consumers are
offered a greater selection of prices for the goods they consume. If consumers choose lower-
priced goods, their real incomes rise, which allows them to consume an even broader assortment
of goods and services, and it expands national incomes.
In addition to the “static” gains from trade described above, a growing body of research suggests
that trade potentially plays a dynamic role in the economy. The full range of these effects are
difficult for trade models to capture because they extend beyond the estimation time-frame of the
models. Research into dynamic trade models concludes that there are important feedback effects
and channels through which trade can alter the structure of markets and the rate of economic
growth over the long run. By stimulating trade and investment, trade liberalization could add to
these feedback effects. The literature on dynamic trade models concludes that free trade, or trade
liberalization, alters all participants’ rate of economic growth through a number of channels,
including improved access to specialized capital goods; human capital accumulation, learning-by-20
doing, and the transfer of skills; and the introduction of new products. These activities alter the
rate of economic growth by changing the incentives for firms to invest in research and
development—technical change—which, in turn, leads to permanent changes in the rate of
economic growth. In assessing this body of research, a U.S. International Trade Commission
study asserted that, “...formal empirical application of the new growth theory in a trade context
has barely started,” but that, “...the dynamic effects of trade policy changes can yield substantially 21
larger estimates than those based on static models.”

20 Krugman, Paul R. Rethinking International Trade. Cambridge, The MIT Press, 1990; Romer, Paul M. Capital,
Labor, and Productivity. Brookings Papers on Economic Activity: Microeconomics 1990. Washington, the Brookings
Institution. p. 337-367; Romer, Paul M. Increasing Returns and Long-Run Growth. Journal of Political Economy,
October 1986. p. 1002-1037; Grossman, Gene M., and Elhanan Helpman. Endogenous Product Cycles. Cambridge,
National Bureau of Economic Research, March 1989. (Working Paper No. 2913).
21 The Dynamic Effects of Trade Liberalization: A Survey. Washington, United States International Trade Commission.
(USITC Publication 2608). February, 1993. p. 11.





Since the stakes involved in liberalizing trade are potentially very large, a number of economists
has attempted to analyze the economic effects of removing barriers to trade in goods and services
and to derive monetary values for those effects. Several different approaches are used to estimate 22
the cost and effect of reducing barriers to trade in goods and services. The most common
approach uses sophisticated mathematical models of the U.S. economy to simulate the effects of
trade liberalization. The three models used most often are: gravity models, partial equilibrium
models, and general equilibrium models. Gravity models are based on the theory that large 23
economies have a greater pull on trade flows than do smaller economies. As a result, the size of
an economy and its distance from trading partners are important factors in estimating the
monetary value of changes in trading rules. Partial equilibrium models are used to measure the
effects of trade restraints on a specific sector, rather then on the economy as a whole. Both gravity
models and partial equilibrium models provide aggregate estimates of the effects of changes in
trading rules and barriers, but they offer limited detailed information on the labor and sectoral
effects of trade liberalization.
General equilibrium models, or computable general equilibrium (CGE) models, attempt to
encompass all economic activity within an economy and attempt to estimate the economy-wide
effects of changes in trade or economic policy. These models can offer comprehensive
assessments of cross- and inter-industry linkages both worldwide and between regions of the 24
world. Such models attempt to mimic as closely as possible the real world economy through the
use of an abstract mathematical representation of the environment in which relevant economic
agents operate and of the decision-making process by which they make choices of consumption 25
of goods, capital accumulation, etc. These models incorporate assumptions about consumer
behavior, market structure and organization, production technology, investment, and capital flows
in the form of foreign direct investment. General equilibrium models use large sets of data that
represent numerous countries and attempt to estimate economy-wide feedback effects from a

22 A compilation of studies can be found in: Brown, Drusilla K., and Robert M. Stern, Measurement and Modeling of
the Economic Effects of Trade and Investment Barriers in Services. The Review of International Economics, May
2001; Hoekman, Bernard, the Next Round of Services Negotiations: Identifying Priorities and Options. Review, Federal
Reserve Bank of St. Louis, July/August 2000; and Dihel, Nora, Quantification of the Costs to National Welfare of
Barriers to Trade in Services: Scoping Paper. Paris, Organization for Economic Cooperation and Development,
November 21, 2000.
23 Gravity models have been used for 40 years to estimate trade flows between countries. They are based on the
conclusion that the volume of exports between any two trading partners is an increasing function of their national
incomes, and a decreasing function of the distance between them. Although the models have been criticized for lacking
a strong theoretical basis, recent work has demonstrated that the model is consistent with the Ricardian and Heckscher-
Ohlin models. An important drawback of the model is that it can estimate only the aggregate flows of goods, but it does
not provide any information about the effects on labor or on individual sectors in the economy. See Wall, Howard, J.,
Using the Gravity Model to Estimate the Costs of Protection. Review, Federal Reserve Bank of St. Louis,
January/February, 1999. p. 39.
24 Rivera, Sandra A., Key Methods for Quantifying the Effects of Trade Liberalization. International Economic Review,
January/February 2003. p. 2-5.
25 Zarazaga, Carlos, E.J.M., Measuring the Benefits of Unilateral Trade Liberalization Part 1: Static Models. Economic
and Financial Review, Federal Reserve Bank of Dallas, Third Quarter 1999. p. 15; also see Zarazaga, Carlos, E.J.M.,
Measuring the Benefits of Unilateral Trade Liberalization Part 2: Dynamic Models. Economic and Financial Review,
Federal Reserve Bank of Dallas, First Quarter 2000.





change in trade policy in a given sector or industry and assess the impact of the change on
employment, production, and economic welfare.
One well-known and often-referenced general equilibrium model used frequently to analyze the
economic effects of changes in trade policy is the model maintained by economists Drusilla 26
Brown, Robert M. Stern, and Alan V. Deardorff at the University of Michigan. In a recent study,
Brown, Stern, and Deardorff used the model to estimate the economic effects on the United States
of trade negotiations in the multi-country Doha Development Round and various proposed
regional and bilateral trade agreements. In each scenario, the trio begin by using available data to
develop a base estimate of the present level of trade. Next, they adjust the model to reflect some
basic assumptions about how trade negotiations will reduce barriers to trade and then use these
estimates to make an adjusted projection of major macroeconomic data. The difference between
the initial set of data on the economy and the projected macroeconomic data that reflects
anticipated changes in the economy as a result of trade negotiations gives rise to the numerical
estimates of the effects of trade negotiations on trade, employment, industrial composition, and
other macroeconomic data. One important drawback to the estimates derived by Brown,
Deardorff, and Stern, and others is that the general equilibrium models used to derive most of the
estimates of trade liberalization do not capture the adjustment costs that inevitably arise from
trade liberalization. As a result, the data generated by the models represent the positive effects of
changes in trade rules, but not the overall net effects—positive and negative—of trade
liberalization.
Using the technique described above, Brown, Stern, and Deardorff developed estimates of the
impact on the U.S. economy of reaching an agreement on the various components of the Doha
Development round. They adopted a number of key assumptions, including an assumption that
the negotiations will result in a 33% reduction in the barriers to trade in agriculture,
manufactures, and services, which is projected to give rise to a combined increase in economic 27
activity of $164 billion in the U.S. economy, as indicated in Table 1. This and the other
estimates used in this report that were derived by the Michigan model estimated a permanent
change in economic activity between the “before” and “after” states of the economy and should
not be considered either as an annual change in economic welfare or as an annual amount that can
be accumulated over time. Brown, Stern, and Deardorff also projected the impact on the United
States if all barriers to trade worldwide were removed unilaterally, which they estimate at $497
billion. With current U.S. gross domestic product (GDP) of over $13 trillion, the monetary gains
for the U.S. economy associated with the above estimates of trade liberalization would be less
than 1.5% and 4.5% of GDP, respectively.

26 Now known as the Michigan Brown-Deardorff-Stern Model, the Michigan Model of World Production and Trade
includes data on 29 industrial sectors for 18 industrialized countries and 16 newly industrialized and developing
countries.
27 Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, Multilateral, Regional, and Bilateral Trade-Policy
Options for the United States and Japan. Research Seminar in International Economics, Discussion Paper No. 490, The
University of Michigan, December 16, 2002. Table 1; and Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern,
Computational Analysis of Multilateral Trade Liberalization in the Uruguay Round and Doha Development Round.
Research Seminar in International Economics, Discussion Paper No. 489, The University of Michigan, December 8,
2002.





A small decline in U.S. welfare in the agricultural sector reflects reductions in agricultural import
tariffs, export subsidies, and production subsidies. In this formulation, these reductions produce 28
offsetting effects in the agricultural sector itself, but they induce slightly negative effects on
other sectors in the economy as a result of changes in prices for agricultural goods and for the
U.S. terms of trade (prices of exports relative to prices of imports). Gains in the manufacturing
sector arise from reduced foreign tariffs on U.S. manufactured goods exports, which increases
U.S. exports and domestic manufacturing output and improves production efficiency. These gains
also represent a shift of capital within the economy from less productive activities into
manufacturing areas that are more productive and capital flows from abroad in the form of
foreign direct investment. The large gains indicated in the services sector reflect the relatively
high level of foreign barriers U.S. exporters presently face in this sector and the high level of U.S.
competitiveness in this sector.
Table 1. Estimated Economic Effects on the United States of a 33% Reduction in
Barriers to Trade in Agriculture, Manufactures, and Services at the Doha
Development Round
(in $ U.S. billions)
Agricultural Protection Manufactures Tariffs Services Barriers Combined
$-7.23 $36.52 $134.75 $164.04
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, Multilateral, Regional, and Bilateral Trade-
Policy Options for the United States and Japan. Research Seminar in International Economics, Discussion Paper No.
490, The University of Michigan, December 16, 2002. Table 1.
In a process similar to that described above, Brown, Stern, and Deardorff estimate the impact on
the U.S. economy of various regional and bilateral trade agreements, as indicated in Table 2. As
expected, bilateral trade arrangements would produce modest gains for the U.S. economy as a
whole, given the smaller value of a bilateral trade relationship for the U.S. economy. These
arrangements are expected to be of greater importance to the trading partners because of the size
of their trade with the United States relative to the size of their overall level of trade and the size
of their respective economies. Trade agreements with Chile, Singapore, Australia, Morocco, and
South Korea, for instance, are estimated to result in trade benefits for the U.S. economy of $4
billion, $17 billion, $19 billion, $6 billion and $30 billion, respectively. A free trade agreement
with the 21 nations that comprise the Asia-Pacific Economic Association Cooperation is projected
to offer economic benefits of $244 billion for the United States and surpass those of the Doha
round, most likely because free trade agreements tend to be more comprehensive in terms of the
number of industrial and services sectors that are involved compared with the WTO negotiations.
An agreement with ASEAN is projected to yield benefits of $13 billion, while a Free Trade
Agreement of the Americas (FTAA) would give rise to an estimated $68 billion in economic 29
benefits. An agreement with the Southern African Customs union would be expected to yield 30
$12.6 billion in trade benefits to the United States.

28 Reducing agricultural import tariffs lowers import prices and spurs the substitution of imports for domestic
production, causing the domestic industry to contract. The extent of this contraction would depend on whether the tariff
reduction in the U.S. sector was more or less than in other countries. Reducing export subsidies lowers world prices;
similarly, reducing production subsidies raises prices. The net of these effects depends on the extent of tariffs and
subsidies in the domestic economy prior to reduction and on reductions in domestic tariffs and subsidies relative to
similar reductions abroad.
29 According to authors of the study, the estimated economic effects of the FTAA should be considered as the most
(continued...)





Table 2. Estimated Economic Effects on the United States of Free Trade Agreements
with Various Trading Partners
(in $ U.S. billions)
APEC ASEAN Free Trade Agreement of the Chile FTA Singapore Korea
FTA FTA Americas (FTAA) FTA FTA
$244.25 $12.98 $67.59 $4.41 $17.5 $30.1

SACU CAFTA Australia FTA Morocco
FTA FTA
$12.61 $17.26 $19.39 $5.97
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, Multilateral, Regional, and Bilateral Trade-
Policy Options for the United States and Japan. Research Seminar in International Economics, Discussion Paper No.
490, The University of Michigan, December 16, 2002. Table 3. Updated estimates are from: Brown, Drusilla K,
Kozo Kiyota, and Robert M. Stern, Computational Analysis of the Free Trade Area of the Americas (FTAA). Research
Seminar in International Economics, Discussion Paper No. 508, the University of Michigan, revised February 5,
2005. Brown, Drusilla K, and Kozo Kiyota, and Robert M. Stern, Computational Analysis of the U.S. FTAs With
Central America, Australia, and Morocco. Research Seminar in International Economics, Discussion Paper No. 507,
Revised January 31, 2005. Brown, Drusilla K., Kozo Kiyota, and Robert M. Stern, Computational Analysis of the U.S.
FTA With the Southern African Customs Union (SACU). Research Seminar in International Economics, Discussion
Paper No. 545, May 31, 2006.
The Michigan model incorporates an input-output model for each economy in the model. Input-
output accounts trace the flow of input commodities into the production processes of industries,
the flow of intermediate goods between industries, and the flow of output from industries to final
uses in the economy. This approach provides an estimate of the magnitude of employment effects
that might be expected and a view of the possible job gains and losses across industrial sectors in
the economy, as indicated in Table 3 and Table 4. In the approach used by Brown, Stern, and
Deardorff, it is assumed that job losses will be perfectly offset by job gains, so that the data in
Tables 3 and 4 are not projections of the job losses and job gains for each sector. Instead, the
model provides an estimate of the relative magnitude of employment effects that might be
experienced in various industries, thereby identifying those industries that are most vulnerable to
increased competition as a result of trade liberalization.
According to this approach, global free trade, or trade without restrictions, would add jobs to the 31
U.S. agricultural sector, but reduce jobs in textiles, apparel, retail trade, and services. Similarly,
completing the liberalization schedule of the Uruguay round of trade talks was shown to result in
the largest gains in jobs in agriculture, with losses in textiles and apparel, although there would be
job gains in services due to the more limited schedule of liberalization. The Doha Round, with its
focus on agriculture and services, would generate gains in the agricultural sector, but employment

(...continued)
positive effects that are possible under the proposed terms of the agreement. These effects are expected to accrue over a
considerable period of time and that the process of negotiations could be hampered by less than full compliance on the
part of some of the members of the FTAA.
30 Brown, Drusilla K., Kozo Kiyota, and Robert M. Stern, Computational Analysis of the U.S. FTA With the Southern
African Customs Union (SACU). Research Seminar in International Economics, Discussion Paper No. 545, May 31,
2006.
31 The estimates for job losses in services is surprising and is a product of the particular estimating method used in the
model. For a more complete explanation see page 13 of this report.





losses in textiles and apparel, retail trade, and services, although these losses would be one-third
of those that might be experienced under global free trade. As expected, free trade agreements
with APEC, ASEAN, and a Free Trade Agreement of the Americas yield smaller changes in
employment than either global free trade, or the Doha round of trade talks. Furthermore, the
model simulation indicates that each bilateral trade agreement the United States has negotiated
can be expected to have a small impact on the U.S. economy.
One drawback to the present state of development of general equilibrium models is that they still
do not compare in complexity with the real economy, nor do they capture all of the potential
economic effects that could arise from trade agreements. For instance, the Michigan model
incorporates investment flows that reflect a shift of resources within the economy from less
productive to more productive economic activities and a shift of resources across national borders 32
in the form of foreign investment in the economy. As a result of trade liberalization, inflows of
foreign capital would be expected to increase as U.S. industries become more productive and,
therefore, more profitable and attractive to foreign investors. By the same token, U.S. direct
investment abroad would increase as trade liberalization improved the prospects of foreign
economies. In some estimates, the flows of foreign capital comprise a large part of the overall
economic gains that are derived within the models. The models, however, do not reflect the
corresponding appreciation or depreciation of the dollar’s exchange rate that would accompany
such flows. These corresponding changes in the dollar’s value could blunt or reinforce the
positive trade effects the model associates with trade liberalization policies.
Table 3. Projected Sectoral Employment Effects (Job Gains and Losses) in the
United States of Various Trade Agreements
(number of workers)
Global free trade Doha (one-third cut) APEC FTA ASEAN
Agriculture 278,658 91,966 394,420 27,259
Mining 5,794 1,912 -236 -68
Food 61,966 20,451 34,811 3,401
Textiles -66,265 -21,870 -50,099 -19,570
Apparel -157,229 -51,891 -107,610 -38,570
Leather -28,829 -9,515 -24,769 -10,068
Wood 46,941 15,502 4,264 4,459
Chemicals 27,828 9,184 -545 -1,410
Mineral Prod. -1,146 -378 -1,906 643
Metal 22,174 7,318 -1,483 5,261
Transp. 15,209 5,020 -1,587 1,518
Mach. 68,028 22,451 -10,699 -870

32 Brown, and Stern, Measurement and Modeling of the Economic Effects of Trade and Investment Barriers in
Services, p. 280.





Global free trade Doha (one-third cut) APEC FTA ASEAN
Other Manuf 30,096 9,933 -40,992 -23,864
Elec. 7,566 2,497 -419 846
Constr. 2,814 929 -11,377 2,876
Trade -91,056 -30,051 -129,833 13,330
Services -300,997 -99,339 105 18,333
Gov. Services 78,418 25,881 -52,047 16,495
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, Multilateral, Regional, and Bilateral Trade-
Policy Options for the United States and Japan. Research Seminar in International Economics, Discussion Paper No.
490, The University of Michigan, December 16, 2002. Tables 2 and 4. Brown, Drusilla K., Kozo Kiyota, and
Robert M. Stern, Computational Analysis of the Free Trade Area of the Americas (FTAA). Research Seminar in
International Economics, Discussion Paper No. 508, the University of Michigan, Revised February 5, 2005. Tables
2 and 4.
Table 4. Projected Sectoral Employment Effects (Job Gains and Losses) in the
United States of Various Trade Agreements
(number of workers)
FTAA SACU Australia Morocco
Agriculture -12,460 973 94 1,314
Mining -3,251 27 504 -44
Food -3,452 353 -756 542
Textiles -6,028 -109 810 -32
Apparel -16,804 -211 619 -129
Leather 620 202 207 -8
Wood 2,502 163 394 -10
Chemicals 2,883 127 1,555 -88
Mineral Prod. 957 76 539 29
Metal 2,024 33 1,957 -138
Transp. 2,970 369 1,741 -50
Mach. 21,830 1,230 6,229 -367
Other Manuf 2,148 77 653 -52
Elec. -228 14 15 2
Constr. -88 -13 -257 -57
Trade 1,991 -2101 -11,716 -1,140
Services 2,788 11 -2,188 -194
Gov. Services 1,597 -1221 -398 389
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, Multilateral, Regional, and Bilateral Trade-
Policy Options for the United States and Japan. Research Seminar in International Economics, Discussion Paper No.
490, The University of Michigan, December 16, 2002. Table 2 and 43. Brown, Drusilla K., Kozo Kiyota, and
Robert M. Stern, Computational Analysis of the Free Trade Area of the Americas (FTAA). Research Seminar in
International Economics, Discussion Paper No. 508, the University of Michigan, Revised February 5, 2005. Tables





2 and 4 Updated estimates are from: Brown, Drusilla K, Kozo Kiyota, and Robert M. Stern, Computational Analysis
of the Free Trade Area of the Americas (FTAA). Research Seminar in International Economics, Discussion Paper No.
508, the University of Michigan, Revised February 5, 2005. Table 2. Brown, Drusilla K, and Kozo Kiyota, and
Robert M. Stern, Computational Analysis of the U.S. FTAs With Central America, Australia, and Morocco. Research
Seminar in International Economics, Discussion Paper No. 507, Revised January 31, 2005. Tables 7b and 8b.
Brown, Drusilla K., Kozo Kiyota, and Robert M. Stern, Computational Analysis of the U.S. FTA With the Southern
African Customs Union (SACU). Research Seminar in International Economics, Discussion paper No. 509, July 6,
2004. Table 3b.
Another inherent problem associated with estimating the effects of trade liberalization is the
dearth of information on barriers to trade in services. As Table 1 shows, the Michigan model and
other general equilibrium models estimate that the largest gains from trade liberalization likely
would arise from the liberalization of trade in services. This result conforms well with most
notions of where additional benefits from trade liberalization may reside and from the dominating
role of services in the U.S. economy. In developing their estimates of the benefits of liberalizing 33
trade in services, Brown, Deardorff, and Stern use estimates developed by Bernard Hoekman on
the average gross operating margins of firms listed on national stock exchanges in 18 countries as
a proxy for estimating barriers to services trade. Hoekman bases his estimates on a standard
economic assumption that the prices firms charge should reflect their marginal costs.
Market restrictions, or barriers to entry by foreign firms, however, drive a wedge between market
price and marginal cost so that firms operating in protected markets will generate higher than
expected profits, or experience higher than average rates of return. Hoekman considers this
wedge to be indicative of the magnitude of domestic barriers in services sectors. According to
Hoekman’s data, all U.S. service sectors except construction had profit margins above average,
which would imply that all U.S. service sectors except construction have erected relatively high
barriers to entry by foreign firms. As a result, the model simulation estimates large employment
losses in this sector under global free trade and the Doha development round of trade
negotiations.
This conclusion, however, does not conform well with the estimates of most studies on market
openness. For instance, the Organization for Economic Cooperation and Development (OECD)
concluded after analyzing the services sectors of the 30 member countries of the OECD that the 34
U.S. services sector was among the very least restrictive. Hoekman also offered a caution in
using the estimates because, “In general, a large number of factors will determine the ability of
firms to generate high (gross operating) margins, including market size (number of firms), the
business cycle, the state of competition policy enforcement, the substitutability of products, fixed 35
costs, etc.” In addition, Hoekman’s estimates do not differentiate between industries that have
high profit margins as a result of barriers and those that have high profit margins because they
possess some sort of economic competitive advantage. Without better data on the extent and
nature of barriers to trade in the services sectors, it will continue to be difficult to develop
monetary estimates of the costs of those barriers and, therefore, estimates of the economic

33 Hoekman, Bernard, The Next Round of Services Negotiations: Identifying Priorities and Options. Review, the
Federal Reserve Bank of St. Louis, July/August 2000. p. 38.
34 Nicoletti, Giuseppe, The Economy-Wide Effects of Product Market Policies. Paris, Organization for Economic
Cooperation and Development, 4-5 March 2002.
35 Hoekman, The Next Round of Services Negotiations: Identifying Priorities and Options, p. 37.





benefits that could accrue as a result of market liberalization. After reviewing various studies that
have attempted to assign values to national barriers to services trade, Hoekman concluded,
Summing up, although the data situation is not very good, quite a bit can be done by analysts
to quantify the relative magnitude and distribution of the gains of increasing competition on
services markets...The research clearly suggests that potential gains from liberalization may
be very large. While this work is important and useful, the state of the data on barriers is
such that, in the near term, policymakers will have to continue to rely primarily on rules of 36
thumb in determining negotiating priorities.
Brown, Deardorff, and Stern make an assumption that the Doha Round of negotiations will result
in a 33% reduction in barriers to trade in services, agriculture, and manufactured goods. While
such an assumption is essential in order to run the economic model, it may not reflect realistically
the outcome of the negotiations. In addition, it is not clear what a 33% reduction in the barriers to
trade in services would look like, since the nature of this sector and the barriers it faces are
substantially different from those that exist in the manufacturing and agricultural sectors and the
barriers in the services sector do not lend themselves to a similar process of reciprocal exchange
of market access.
Economic activities that comprise the services sector range from such business services as
accounting, financial, and architectural activities to a broad range of consumer services that are 37
not easily defined and categorized. Anticipating the effects of liberalizing trade in these areas is
difficult for most nations because they do not know the full extent of the barriers their exports
face. In addition, nations are grappling with a subtle, but important, distinction in the services
sector between liberalizing barriers to market access that involve eliminating discrimination in the
treatment of foreign and domestic services providers and governmental activities that involve a
range of regulatory and supervisory activities, especially in the areas of public health and safety,
the environment, and clean water and air standards. Such issues become even more complicated
in countries like the United States where regulatory responsibilities are shared by the federal,
state, and local governments, and professional governing bodies.
The United States currently is involved in negotiating an assortment of trade agreements. These
agreements range from bilateral agreements with trading partners that account for very small
shares of total U.S. trade to multinational trade agreements that could have a significant effect on
certain U.S. workers, industries, and businesses. At some point, Congress may well be asked to
consider legislation that implements these agreements. In doing so, it may consider a number of
different, and perhaps conflicting, objectives and it will be presented with data and information
that emphasize differing viewpoints on how the agreements will affect the economy and the
nation.
Econometric modeling, aided by recent advances, can assist policymakers in analyzing the
economic effects of trade agreements. These models are particularly helpful in exploring the
effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers

36 Ibid., p. 41.
37 For instance, see the scope of the U.S. services offer at the Doha round: CRS Report RS21492, Services Negotiations
in the WTO: An Overview of the U.S. Offer, by James K. Jackson.





to trade are identifiable and subject to some quantifiable estimates. In most cases, these barriers
are represented by tariffs or quotas that can be adjusted on a reciprocal basis. Barriers to trade in
the services sector, however, are proving to be more difficult to identify and, therefore, to
quantify in an econometric model. Although progress is being made, it likely will be some time
before the models can provide realistic estimates of the effects of trade liberalization in this
sector. The models, however, do provide a sense of the magnitude of economic effects that can be
expected to occur across sectors in the economy. This is especially helpful in identifying which
sectors likely will experience the greatest adjustment costs.
There are drawbacks to using the econometric models. Such modeling is highly sensitive to the
assumptions that are used to establish the parameters of the model and are hampered by a serious
lack of comprehensive data in the services sector. Such shortcomings likely will not be as
apparent in analysis of bilateral trade agreements between the United States and another trading
partner, but they likely will become important when the analysis involves a large number of
countries, such as in a regional or multilateral trade agreement. In addition, these models likely
understate the adjustment costs that are inevitably involved in liberalizing trade and they may
well understate the positive effects of trade liberalization over the long run, because such effects
are beyond the time-frame of the estimates. As a result, it is possible that trade liberalization may
have a larger positive impact on the U.S. economy over the long term than most economic models
indicate. Nevertheless, even if the derived benefits from multilateral negotiations were twice as
great as the most optimistic estimates indicate, except for unilateral reductions in trade barriers in
all countries, the overall impact on the U.S. economy is expected to be modest, at best. The
effects on the economy from liberalizing trade on a bilateral basis through the proposed bilateral
free trade arrangements will yield especially minor gains for the U.S. economy.
Congress may choose to reject any trade agreement in favor of maintaining the status quo, or it
may choose to circumvent the arduous task of negotiating multilateral trade agreements and
unilaterally remove all barriers to U.S. trade. While unilaterally removing all trade barriers would
please economic purists, it is unlikely given the issues it would raise and the prospects that it
would leave U.S. negotiators with few bargaining chips during trade negotiations. Such an action
likely would engender a public backlash, particularly from those labor and trade groups that
would be most directly affected by such a policy. In addition, the task of demonstrating the
benefits of liberalizing trade is complicated by the fact that the short term adjustment costs
associated with trade liberalization are difficult to equate clearly with the benefits that accrue
slowly over time. This means that it is difficult to demonstrate conclusively at the early stages of
negotiations that the long-term benefits of trade liberalization will outweigh the short-term
adjustment costs.
Given these prospects, it seems likely to assume that policymakers will weigh the benefits of
greater trade liberalization against the anticipated dislocations for workers and industries and
determine whether to accept or reject each agreement on the basis of a broad set of factors. While
such analyses cannot forecast every outcome, they can aid policymakers in assessing which
industries and sectors likely will experience the highest adjustment costs and, therefore, which
industries and groups may need assistance in receiving training or other assistance. Often,
Congress has addressed trade-induced changes through trade adjustment assistance for workers
and firms displaced as a result of trade agreements and trade liberalization. Such assistance has
often been promoted as a principle of fairness by spreading out the adjustment costs beyond those
most directly affected, and as a method for persuading those who are affected to buy into the
changes by reallocating some of the gains from those who benefit to those who bare the greatest
share of the adjustment costs. These adjustment costs likely will rise if the scope of trade





agreements expand beyond single trading partner to incorporate large numbers of trading
partners.
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751