Order Code RL31932
CRS Report for Congress
Received through the CRS Web
Trade Agreements:
Impact on the U.S. Economy
Updated April 27, 2005
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Trade Agreements: Impact on the U.S. Economy
Summary
The United States is negotiating an unprecedented number of trade agreements.
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.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
An Overview of the Major Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Multilateral Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Regional Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Bilateral Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Trade Liberalization and the Gains From Trade . . . . . . . . . . . . . . . . . . . . . . 7
Production Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Adjustment Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Consumption Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Estimating the Economic Impact of Trade Agreements . . . . . . . . . . . . . . . . 9
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Michigan Model and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment and Capital Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Data on Barriers to Trade in Services . . . . . . . . . . . . . . . . . . . . . . . . . 17
Implications for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
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 . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 2. Estimated Economic Effects on the United States of Free Trade
Agreements With Various Trading Partners . . . . . . . . . . . . . . . . . . . . . . . . 13
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

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Trade Agreements: Impact on the U.S.
Economy
Background
Congress plays a direct role in formulating and implementing U.S. international
trade policies. During the 108th and 109th Congresses, this role gained increased
importance as the United States continues to negotiate an unprecedented number of
trade 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 free-trade
negotiations with countries in the Andean region and in southern Africa. In addition,
the United States is pursuing bilateral trade agreements with Panama, Thailand, and
the United Arab Emirates and Oman. It has concluded agreements with Australia,
Chile, Morocco, and Singapore and Congress has approved them. The Bush
Administration has concluded agreements with Bahrain, the Dominican Republic,
and the five countries of the Central American Common Market and awaits
Congressional approval of these agreements.1
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.
An Overview of the Major Agreements
Multilateral Agreements. In November 2001, trade ministers from 142
member countries of the World Trade Organization met in Doha, Qatar to launch the
4th WTO ministerial. The Doha meeting succeeded primarily by agreeing to begin
1 For additional information and status of the current negotiations, see CRS Issue Brief
IB10123, Trade Negotiations During the 109th Congress, by Ian Fergusson and Lenore Sek.

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CRS-2
a new round of multilateral trade negotiations.2 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 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
Reports
CRS Report RS20529; United States-Israel Free Trade Area.
CRS Report RS20864; A Free Trade Area of the Americas: Status of Negotiations
and Major Policy Issues.
CRS Report RS20909; Trade Agreements: A Pro-Con Analysis of Including Core
Labor Standards.
CRS Report RS21387; United States - Southern African Customs Union Free Trade
Agreement Negotiations.
CRS Report RS21464; Morocco - U.S. Free Trade Agreement.
CRS Report RS21846; Proposed U.S.-Bahrain Free Trade Agreement.
CRS Report RS21868; U.S.-Dominican Republic Free-Trade Agreement.
CRS Report RL30416; The Vietnam-U.S. Bilateral Trade Agreement.
CRS Report RL30652; U.S.-Jordan Free Trade Agreement.
CRS Report RL31144; The U.S.-Chile Free Trade Agreement; Economic and Trade
Policy Issues.
CRS Report RL31356; Free Trade Agreements: Impact on U.S. Trade and
Implications for U.S. Trade Policy.
CRS Report RL31870; The U.S.-Central American Free Trade Agreement (CAFTA):
Challenges for Sub-Regional Integration.
CRS Report RL32060; World Trade Organization Negotiations: The Doha
Development Agenda.
CRS Report RL32314; U.S.-Thailand Free Trade Agreement Negotiations.
CRS Report RL32322; Central America and the Dominican Republic in the Context
of the Free Trade Agreement (DR-CAFTA) With the United States.
CRS Report RL32375; The U.S. Australian Free Trade Agreement: Provisions and
Implications.
CRS Report RL32540; The Proposed U.S.-Panama Free Trade Agreement.
CRS Report RL32770; Andean-U.S. Free-Trade Agreement Negotiations.
Issue Briefs
CRS Issue Brief IB10123; Trade Negotiations During the 109th Congress.
A framework agreement on future negotiations was concluded in Geneva on
August 1, 2004, but a new deadline has not been set for the completion of the talks.
The framework provides a blueprint for future negotiations on agriculture, non-
agricultural market access, services and trade facilitation. It is still too early,
2 CRS Report RL32060, World Trade Organization Negotiations: The Doha Development
Agenda, by Lenore Sek.

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CRS-3
however, to determine the full scope of the negotiations as well as the nature of any
final agreement. The 6th Ministerial will occur in Hong Kong in December 2005.
Regional Trade Agreements.
Free Trade Area of the Americas (FTAA). At the second Summit of the
Americas in April 1998, 34 nations of the Western Hemisphere agreed to initiate
formal negotiations to create a Free Trade Area of the Americas by 2005.3 Although
much work remains to be done, the negotiations have initiated efforts in five areas:
market access; agriculture; services; investment; and government procurement. The
United States is seeking an overall reduction in tariff rates as its primary goal. Latin
American participants are pressing to alter U.S. trade remedy laws, domestic support
for farmers, and peak tariff rates, and they hope to open the U.S. market to imports
of agricultural products, steel, and textiles. At this time, it seems doubtful that
negotiations will be concluded by the end of 2005.
Central American Free Trade Agreement. The Bush Administration
reached agreement with four of the five Central American Common Market nations
— El Salvador, Guatemala, Honduras, and Nicaragua in December 2003 and with
Costa Rica — the fifth member — in January 2004.4 The Administration reached a
separate agreement with the Dominican Republic in March 2004 that was integrated
into the Central American Agreement. Many supporters view 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 hoped 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 negotiations 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. As of this
date, the Administration had not submitted implementing legislation to Congress
concerning the Agreement.
U.S.-Southern African Customs Union Free Trade Agreement. 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, Namibia, Lesotho, South Africa, and Swaziland.5 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
3 CRS Report RS20864, A Free Trade Area of the Americas: Status of Negotiations and
Major Policy Issues, by J. F. Hornbeck.
4 CRS Report RL31870, The U.S.-Central American Free Trade Agreement (CAFTA):
Challenges for Sub-Regional Integration, by J.F. Hornbeck.
5 CRS Report RS21387, United States - Southern African Customs Union Free Trade
Agreement Negotiations: Background and Potential, by Danielle Langton.

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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.
U.S.-Andean Free Trade Agreement. 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 investment.6 Talks
continue to progress, but they are unlikely to be concluded before mid-2005, if they
are concluded at all this year. A number of issues remain, including unresolved
disputes involving U.S. investments in Andean countries, certain types of agricultural
tariffs, and patent protection for test data. Another concern is the treatment of trade
unionists, especially in Columbia, where union leaders are targeted by death squads.
Enterprise for ASEAN. 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 Initiative.7 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 jointly determine when conditions are ripe for FTA negotiations. Two-
way trade between the United States and ASEAN reached $120 billion in 2001.
Bilateral Trade Agreements.
U.S.-Chile FTA. On June 6, 2003, the United States and Chile signed a
bilateral free trade agreement.8 The agreement 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,
6 CRS Report RL32770, Andean-U.S. Free Trade Agreement Negotiations, by Lenore Sek.
7 See [http://www.whitehouse.gov/news/releases/2002/10/20021026-7.html]
8 CRS Report RL31144, The U.S.-Chile Free Trade Agreement: Economic and Trade
Policy Issues, by J.F. Hornbeck.

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increased access for services trade, greater protection of U.S. investment and
intellectual property.
U.S.-Singapore FTA. On September 4, 2003, President Bush signed the
U.S.-Singapore Free Trade Agreement (P.L. 108-78) into law.9 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.
U.S.-Australian FTA. The United States and Australia concluded a bilateral
free trade agreement on February 8, 2004. The agreement 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 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, agricultural
sector. At $14 billion in 2004, Australia is the 15th largest market for U.S. exports
and, at $7 billion, Australia is the 30th largest importer to the United States.
9 CRS Report RL31789, The U.S.-Singapore Free Trade Agreement, by Dick K. Nanto.

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U.S.-Moroccan FTA. President Bush signed the United States-Morocco Free
Trade Agreement (P.L. 108-302) on August 3, 2004. The Moroccan parliament
ratified the agreement in January 2005, but King Mohammed VI has not yet signed
the legislation.10 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.
U.S.-Bahrain FTA. On September 14, 2004, the United States and Bahrain
concluded negotiations for a free trade agreement.11 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 proposed 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. Implementing legislation has not yet
been submitted to Congress.
U.S.-Panama Free Trade Agreement. The Bush Administration began
formal negotiations with Panama on April 25, 2004, in Panama City, Panama.12 The
negotiations have progressed quickly. Negotiators met during the week of January
31-February 6, 2005, and could conclude their talks at a ninth, 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 FTA. Panama is
seeking to solidify its access to U.S. markets for agricultural goods, textiles and
10 CRS Report RS21464, Morocco - U.S. Free Trade Agreement, by Raymond J. Ahearn.
11 CRS Report RS21846, Proposed U.S.-Bahrain Free Trade Agreement, by Martin A.
Weiss.
12 CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J.F.
Hornbeck.

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CRS-7
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.
U.S.-United Arab Emirates-Oman Free Trade Agreement. 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 could be a major hurdle. Both the UAE and Oman rely heavily on
guest workers and place 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 and will encourage a movement toward more
open trade and more investment.
U.S.-Thailand Free Trade Agreement. 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.
Trade Liberalization and the Gains From Trade
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 barriers, provides nations with a broad group of
economic benefits.13 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.
13 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.

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Production Gains. 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
distribution of income.14 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.
Adjustment Costs. 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.
Consumption Gains. 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.
14 Gottschalk, Peter, and Timothy M. Smeeding, Cross-National Comparisons of Earnings
and Income Inequality. Journal of Economic Literature, June 1997. p. 645.

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Economic Growth. 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-doing, and the
transfer of skills; and the introduction of new products.15 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 larger estimates than
those based on static models.”16
Estimating the Economic Impact of Trade Agreements
Overview. 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 the cost and effect
of reducing barriers to trade in goods and services.17 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 economies have a greater pull on trade flows than do smaller
15 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).
16 The Dynamic Effects of Trade Liberalization: A Survey. Washington, United States
International Trade Commission. (USITC Publication 2608). February, 1993. p. 11.
17 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.

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CRS-10
economies.18 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 world.19 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 of goods, capital accumulation, etc.20 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 change in trade policy
in a given sector or industry and assess the impact of the change on employment,
production, and economic welfare.
The Michigan Model and Estimates. 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 Brown,
Robert M. Stern, and Alan V. Deardorff at the University of Michigan.21 In a recent
18 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.
19 Rivera, Sandra A., Key Methods for Quantifying the Effects of Trade Liberalization.
International Economic Review, January/February 2003. p. 2-5.
20 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.
21 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
(continued...)

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CRS-11
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 activity of $164 billion in
the U.S. economy, as indicated in Table1.22 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 nearly $11 trillion, the monetary gains for the U.S.
economy associated with the above estimates of trade liberalization would be
equivalent to 1.5% and 4.5% of GDP, respectively.
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 offsetting effects in the agricultural sector
21 (...continued)
countries and 16 newly industrialized and developing countries.
22 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.

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CRS-12
itself,23 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
Manufactures
Services Barriers
Combined
Protection
Tariffs
$-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 potentially with 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
23 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.

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CRS-13
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 benefits.24
Table 2. Estimated Economic Effects on the United States of
Free Trade Agreements With Various Trading Partners
(in $ U.S. billions)
Free Trade
Agreement
APEC
ASEAN
Singapore
Korea
of the
Chile FTA
FTA
FTA
FTA
FTA
Americas
(FTAA)
$244.25
$12.98
$67.59
$4.41
$17.5
$30.1
SACU
Australia
Morocco
CAFTA
FTA
FTA
FTA
$9.61
$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. 509, July 6, 2004.
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 Tables 3 and 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
24 According to authors of the study, the estimated economic effects of the FTAA should
be considered as the most 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.

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CRS-14
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 U.S. agricultural sector, but reduce jobs in textiles, apparel,
retail trade, and services.25 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 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 currently is negotiating
can be expected to have a small impact on the U.S. economy.
Investment and Capital Flows. 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 in the form of foreign investment in the economy.26 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.
25 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 14 of this
report.
26 Brown, and Stern, Measurement and Modeling of the Economic Effects of Trade and
Investment Barriers in Services, p. 280.

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CRS-15
Table 3. Projected Sectoral Employment Effects (Job Gains and
Losses) in the United States of Various Trade Agreements
(number of workers)
Global free
Doha
APEC
ASEAN
trade
(one-third cut)
FTA
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
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 2and
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.

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CRS-16
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.

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CRS-17
Data on Barriers to Trade in Services. 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 trade in
services, Brown, Deardorff, and Stern use estimates developed by Bernard
Hoekman27 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 U.S. services sector was
among the very least restrictive.28 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 costs, etc.”29 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 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,
27 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.
28 Nicoletti, Giuseppe, The Economy-Wide Effects of Product Market Policies. Paris,
Organization for Economic Cooperation and Development, 4-5 March 2002.
29 Hoekman, The Next Round of Services Negotiations: Identifying Priorities and Options,
p. 37.

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CRS-18
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 thumb in
determining negotiating priorities.30
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 not easily defined and categorized.31 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.
Implications for Congress
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.
30 Ibid., p. 41.
31 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.

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CRS-19
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 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

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CRS-20
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.

---