An exploratory assessment of the potential impact of the free trade area of the americas on the andean community

Abstract

An exploratory evaluation of the potential impact of the Free Trade Area of the Americas on the Andean Community is performed through a simulation using GTAP. Hosted by Purdue University, GTAP is a multi-region, applied general equilibrium model widely used to analyze global economic issues. The experiment is performed in a perfect competition, constant returns to scale framework and eliminates tariffs on goods trade between Western Hemisphere countries. The simulation results show modest but positive net welfare gains accruing to the Andean Community, largely due to allocative efficiency gains. Adverse terms of trade effects and trade diversion considerably reduce potential gains. Economic distortions within the Andean Community also have negative effects on welfare. Trade becomes more concentrated in bilateral flows with the United States and real returns on factors of production show improvements