The Debate Over The Gains From Preferential Trade Liberalization in the CGE Models - Further Investigation

Abstract

While many economists believe that model-based empirical studies will provide useful insights into the theoretical debate over the welfare implications of preferential trading agreements (RTAs), the controversy over the positive gains from RTAs generated by computable general equilibrium (CGE) models has intensified recent years. In their recent survey on the results of recent empirical studies Robinson and Thierfelder, (1999, p.2) have suggested that "a large number of model-based empirical studies support a few robust conclusions about RTAs: (1) They increase welfare of participating countries; (2) aggregate trade creation is much larger than trade diversion; (3) the big numbers appear in models that incorporate features of new trade theory; (4) there are welfare gains from expanding membership; and (5) global trade liberalization increases welfare more than the formation of an RTA." However, Panagariya and Duttagupta (2001) have strongly criticised the above survey and the results obtained from CGE models very recently. They argue that CGE models generate gains from RTAs because they are based on internally inconsistent assumptions and questionable values of key parameters. In other words they argue that many of the CGE models generate benefits from RTAs by recourse to a wrong model and wrong values of parameters. This controversy has generated considerable attention. We employ a CGE model (using the GTAP database) to analyse the issue further taking account of the Panagariya and Duttagupta criticism over the use of CGE models in examining the impact of RTAs. We make the assumptions of the model consistent with their study and use a model based on some empirically estimated parameter values to run some illustrative simulations to examine the impact of a RTA. This kind of further investigation will provide more input to the debate.