Order Code RL31932
Trade Agreements:
Impact on the U.S. Economy
Updated March 15, 2007
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
An Overview of the Major Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Multilateral Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Regional Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Free Trade Area of the Americas (FTAA) . . . . . . . . . . . . . . . . . . . . . . . 3
U.S.-Southern African Customs Union Free Trade Agreement . . . . . . 4
Enterprise for ASEAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U.S.-Andean Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Central American Free Trade Agreement-Dominican Republic . . . . . . 4
Completed Bilateral Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S.-Australian Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S.-Bahrain Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S.-Chile Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S.-Colombia Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S.-Moroccan Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 6
U.S.-Panama Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
U.S.-Peru Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
U.S.-Singapore Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 7
Pending Bilateral Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
U.S.-South Korea Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . 8
U.S.-Malaysia Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 8
U.S.-Thailand Free Trade Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 8
U.S.-United Arab Emirates-Oman Free Trade Agreement . . . . . . . . . . 9
Trade Liberalization and the Gains from Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Production Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Adjustment Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Consumption Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Estimating the Economic Impact of Trade Agreements . . . . . . . . . . . . . . . . . . . 11
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Michigan Model and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment and Capital Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Data on Barriers to Trade in Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Implications for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Table 2. Estimated Economic Effects on the United States of Free Trade
Agreements With Various Trading Partners . . . . . . . . . . . . . . . . . . . . . . . . 15
Table 3. Projected Sectoral Employment Effects (Job Gains and Losses)
in the United States of Various Trade Agreements . . . . . . . . . . . . . . . . . . . 17
Table 4. Projected Sectoral Employment Effects (Job Gains and Losses)
in the United States of Various Trade Agreements . . . . . . . . . . . . . . . . . . . 18

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 with countries in
southern Africa. In addition, the United States is pursuing bilateral trade agreements
with Malaysia, Oman and the United Arab Emirates, Thailand, and South Korea. It
has concluded agreements with Australia, Bahrain, Chile, Morocco, Singapore, the
Dominican Republic, and the five countries of the Central American Common
Market (Guatemala, Honduras, Nicaragua, El Salvador, and Costa Rica) and
Congress has approved them.1 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.
1 For additional information and status of the current negotiations, see CRS Report
RL33463, Trade Negotiations During the 110th Congress, by Ian F. Fergusson.

CRS-2
CRS Products on Trade Issues
CRS Report RS20529; United States-Israel Free Trade Area, by Joshua Ruebner.
CRS Report RS20864; A Free Trade Area of the Americas: Status of Negotiations and
Major Policy Issues, by J. F. Hornbeck.
CRS Report RS20909; Trade Agreements: A Pro-Con Analysis of Including Core Labor
Standards, by Gary J. Wells.
CRS Report RS21387; United States - Southern African Customs Union Free Trade
Agreement Negotiations, by Danielle Langton.
CRS Report RS21464; Morocco - U.S. Free Trade Agreement, by Raymond J. Ahearn.
CRS Report RS21846; U.S.-Bahrain Free Trade Agreement, by Martin A. Weiss.
CRS Report RS21868; U.S.-Dominican Republic Free-Trade Agreement, by Lenore
Sek.
CRS Report RS22391; U.S.-Peru Trade Promotion Agreement, by M. Angeles
Villarreal.
CRS Report RS22419; U.S.-Colombia Trade Promotion Agreement, by M. Angeles
Villarreal.
CRS Report RL30416; The Vietnam-U.S. Bilateral Trade Agreement, by Mark E.
Manyin
CRS Report RL30652; U.S.-Jordan Free Trade Agreement, by Mary Jane Bolle.
CRS Report RL31144; The U.S.-Chile Free Trade Agreement; Economic and Trade
Policy Issues, by J. F. Hornbeck.
CRS Report RL31356; Free Trade Agreements: Impact on U.S. Trade and Implications
for U.S. Trade Policy, by William H. Cooper.
CRS Report RL31789; The U.S.-Singapore Free Trade Agreement, by Dick K. Nanto.
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 RL32314; U.S.-Thailand Free Trade Agreement Negotiations, by Raymond
J. Ahearn and Wayne M. Morrison.
CRS Report RL32322; Central America and the Dominican Republic in the Context of
the Free Trade Agreement (DR-CAFTA) with the United States, coordinated by K.
Larry Storrs.
CRS Report RL32375; The U.S. Australian Free Trade Agreement: Provisions and
Implications, William H. Cooper.
CRS Report RL32540; The Proposed U.S.-Panama Free Trade Agreement, by J. F.
Hornbeck.
CRS Report RL32770; Andean-U.S. Free-Trade Agreement Negotiations, by M.
Angeles Villarreal.
CRS Report RL32829; Trade Issues in the 109th Congress: Policy Challenges and
Opportunities, by William H. Cooper.
CRS Report RL33328; Proposed U.S.-Oman Free Trade Agreement, by Mary Jane
Bolle.
CRS Report RL33435; The Proposed South Korea-U.S. Free Trade Agreement, by
William H. Cooper and Mark E. Manyin.
CRS Report RL33445; The Proposed U.S.-Malaysia Free Trade Agreement, by Michael
F. Martin

CRS-3
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 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.
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 agriculture, non-agricultural market access,
services and trade facilitation. The 6th 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 expires. 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. It seems unlikely that, even if the talks do
move the issue forward, a final schedule for tariffs on agriculture, market access,
offers on services issues, texts on rules and trade facilitation, and recommendations
to implement the ‘aid for trade” issue advanced in the Hong Kong declaration can be
reached in such a short time-frame.
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 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
2 CRS Report RL32060, World Trade Organization Negotiations: The Doha Development
Agenda,
by Ian F. Fergusson.
3 CRS Report RS20864, A Free Trade Area of the Americas: Status of Negotiations and
Major Policy Issues
, by J. F. Hornbeck.

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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.
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.4 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.
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.5 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.
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
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.
Central American Free Trade Agreement-Dominican Republic. The
Bush Administration signed an agreement with the five Central American Common
4 CRS Report RS21387, United States - Southern African Customs Union Free Trade
Agreement Negotiations: Background and Potential
, by Danielle Langton.
5 See [http://www.whitehouse.gov/news/releases/2002/10/20021026-7.html].
6 CRS Report RL32770, Andean-U.S. Free Trade Agreement Negotiations, by M. Angeles
Villarreal.

CRS-5
Market nations — Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua —
on August 5, 2004.7 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.
Completed Bilateral Trade Agreements
U.S.-Australian Free Trade Agreement. 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 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.
U.S.-Bahrain Free Trade Agreement. On September 14, 2004, the United
States and Bahrain concluded negotiations for a free trade agreement.8 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
7 CRS Report RL31870, The U.S.-Central American Free Trade Agreement (CAFTA):
Challenges for Sub-Regional Integration
, by J.F. Hornbeck.
8 CRS Report RS21846, Proposed U.S.-Bahrain Free Trade Agreement, by Martin A.
Weiss.

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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.
U.S.-Chile Free Trade Agreement. On June 6, 2003, the United States and
Chile signed a bilateral free trade agreement.9 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.
U.S.-Colombia Free Trade Agreement. 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 tariffs and other
barriers in goods and services trade between the two countries.10 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.
U.S.-Moroccan Free Trade Agreement. 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 parliament
ratified the agreement and King Mohammed VI signed it.11 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
9 CRS Report RL31144, The U.S.-Chile Free Trade Agreement: Economic and Trade
Policy Issues
, by J.F. Hornbeck.
10 CRS Report RS22419, U.S.-Colombia Trade Promotion Agreement, by M. Angeles
Villarreal.
11 CRS Report RS21464, Morocco - U.S. Free Trade Agreement, by Raymond J. Ahearn.

CRS-7
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.-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 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 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.
U.S.-Peru Free Trade Agreement. 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
Americas.13 Implementing legislation had not been introduced as of June 1, 2006.
U.S.-Singapore Free Trade Agreement. On September 4, 2003, President
Bush signed the U.S.-Singapore Free Trade Agreement (P.L. 108-78) into law.14
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
12 CRS Report RL32540, The Proposed U.S.-Panama Free Trade Agreement, by J.F.
Hornbeck.
13 CRS Report RS22391, U.S.-Peru Trade Promotion Agreement, by M. Angeles Villarreal.
14 CRS Report RL31789, The U.S.-Singapore Free Trade Agreement, by Dick K. Nanto.

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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.
Pending Bilateral Trade Agreements
U.S.-South Korea Free Trade Agreement. The Bush Administration
notified Congress on February 3, 2006, of its intent to begin formal negotiations on
a free trade agreement with South Korea.15 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.
U.S.-Malaysia Free Trade Agreement. Negotiations with Malaysia began
on March 8, 2006; the fifth round of the talks occurred during the week of February
5, 2007.16 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.
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
15 CRS Report RL33435, The Proposed South Korea-U.S. Free Trade Agreement (KORUS
FTA)
, by William H. Cooper and Mark E. Manyin.
16 CRS Report RL33445, The Proposed U.S. -Malaysia Free Trade Agreement, by Michael
F. Martin.

CRS-9
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.
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. The
President signed an agreement with Oman on January 19, 2006, but implementing
legislation has not yet been submitted to Congress. Negotiations with the UAE are
continuing. Worker protection issues have presented 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 (Israel, Jordan, Morocco, and
Bahrain) and will encourage a movement toward more open trade and more
investment.
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.17 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.
17 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.

CRS-10
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.18 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
18 Gottschalk, Peter, and Timothy M. Smeeding, Cross-National Comparisons of Earnings
and Income Inequality. Journal of Economic Literature, June 1997. p. 645.

CRS-11
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.
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.19 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.”20
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.21 The most common approach uses
19 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).
20 The Dynamic Effects of Trade Liberalization: A Survey. Washington, United States
International Trade Commission. (USITC Publication 2608). February, 1993. p. 11.
21 A compilation of studies can be found in: Brown, Drusilla K., and Robert M. Stern,
(continued...)

CRS-12
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
economies.22 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.23 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.24 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
21 (...continued)
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.
22 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.
23 Rivera, Sandra A., Key Methods for Quantifying the Effects of Trade Liberalization.
International Economic Review, January/February 2003. p. 2-5.
24 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.

CRS-13
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.25 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 activity of $164 billion in
the U.S. economy, as indicated in Table1.26 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
25 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.
26 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.

CRS-14
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.
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
itself,27 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
27 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.

CRS-15
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 benefits.28 An agreement with the Southern
African Customs union would be expected to yield $12.6 billion in trade benefits to
the United States.29
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
$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.
28 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.
29 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.

CRS-16
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
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.30 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 has negotiated 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.31 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
30 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.
31 Brown, and Stern, Measurement and Modeling of the Economic Effects of Trade and
Investment Barriers in Services, p. 280.

CRS-17
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)
Doha
Global free
APEC
(one-third
ASEAN
trade
FTA
cut)
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.

CRS-18
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.

CRS-19
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
Hoekman32 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.33 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.”34 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
32 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.
33 Nicoletti, Giuseppe, The Economy-Wide Effects of Product Market Policies. Paris,
Organization for Economic Cooperation and Development, 4-5 March 2002.
34 Hoekman, The Next Round of Services Negotiations: Identifying Priorities and Options,
p. 37.

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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 thumb in
determining negotiating priorities.35
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.36 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
35 Ibid., p. 41.
36 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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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 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.

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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.