Beyond Mercosur: Costs andBenefits of Trade Agreements

with Northern Blocs

Gabriel SánchezIERAL – Fundación Mediterránea

Questions:

• PTAs with FTAA, NAFTA, EU:– Costs and benefits for Argentina and Brazil

• Theory and empirics

– Macro and micro aspects of these RIAs– Design of politically feasible PTAs– Unilateral PTAs of Argentina

• With & without Brazilian retaliation

• Ranking of scenaria for Argentina

Motivation• Sub-optimal levels of openness:

Natural Openness vs Observed Openness

Japan ArgentinaBrasil

PeruEEUU

ChileMexico

SpainAustralia

New ZealandKorea

0

20

40

60

80

100

120

0 20 40 60 80 100 120Natural Openness

Obs

erve

d O

penn

ess

Natural Openness = Observed Openness

Motivation

• Advantages & disadvantages over UTL• Ongoing negotiations• Need to build up support:

– Measure aggregate costs & benefits– Identify winners and losers

• Check for Dutch Disease• Rank scenaria to asign priorities• Explore the desirability of unilateral strategies for

Argentina

Scenaria

• PTAs of Mercosur– Full-fledged PTAs– Politically constrained PTAs

• Argentina alone with other blocs– Politically-constrained PTAs– With & without Brazilian retaliations

• Simultaneous PTAs of Argentina & Mercosurwith other blocs

• Politically constrained• Potential advantages over sequential strategies

Research strategy

• Revision of theoretical predictions on the gains of PTAsfor an individual country:– Role of pre-PTA external tariffs of new partners– Role of the complementarity in import demands of new partners

• Qualitative assessments by confronting the theory with thedata

• Quantitative assessments via GTAP– Revision of literature on political economy of agricultural

protection in USA & the EU

• Design of politically constrained PTAs

Theoretical predictions

• De Melo, Panagariya & Rodrik (1993)– PTAs better than UTL if world splits in trading blocs

• Is this so?

– Gains from PTA will be bigger for Argentina &/orMercosur:

• The bigger are the pre-PTA bilateral tariffs & subsidiesimposed by the new trading partners

• The bigger the complementarity in import demands– The more apart the regions are in terms of factor endowments

Bilateral tariffs on Argentine exports

• High tariffs on all destinations for Mercosurexports– NAFTA & EU: agriculture– Rest of America: manufacture– Higher European tariffs:

• expect larger trade creation & TOT gains– Especially in Agriculture– Probable Dutch Disease

– NAFTA & FTAA:• expect more balanced export expansion• FTAA: more trade creation than PTA with NAFTA

Bilateral tariffs on Argentine exports

NAFTA EU-15Re s t of

Ame ricaCerea ls and Crops 40 ,6 6 34 ,1 8 -6 ,5 6

Fruit and vegetab le 0 ,7 1 5 ,6 4 1 5 ,3 2Anim a l products 6 ,1 4 9 0 ,6 7 6 ,7 8Fores try and Fishing 1 9 ,6 5 1 ,6 6 9 ,5Mining and petroleum 0 ,5 9 0 ,0 3 9 ,8 1Proces sed Agricultura l Prod 1 1 ,0 3 6 ,6 9 1 4 ,2 8Textiles , Lea ther and Wearing Apparel 1 ,6 4 5 ,2 1 1 1 ,3 7Cap ita l in tens ive Manufactures 3 ,4 3 ,7 9 ,2 4Labor in tens ive Manufactures 0 ,9 8 5 ,4 2 1 0 ,1 5

SECTOR

EXPORTS TO

Import demand complementarities

• Factor abundance a la Heckscher-Ohlin-Vanek

% CapitalSkilled Labor

Uns kille d Labor Crops Lands

Pas ture Lands

Argentina -4 1 ,9 -3 4 ,1 4 3 ,2 9 1 ,9 3 76 ,4Bras il --- -3 3 ,7 3 9 ,2 -9 ,9 3 5 ,6EU - 1 5 3 3 ,8 2 1 ,8 1 1 ,6 -3 8 ,5 -8 1 ,6NAFTA 4 4 ,3 6 2 ,3 2 7 ,9 8 6 ,7 8 ,7

Bilateral factor abundances

LandPhysical capital

UNSKILLEDLABOR

PASTURE LANDSCrop landsUNSKILLEDLABOR

Brazil

LandPhysical capitalHuman capital

PASTURELANDSCrop landsUnskilled labor

CROP LANDSPASTURE LANDSUNSKILLEDLABOR

Argentina

Rest ofAmerica

NAFTAEU

Much bigger complementarities with the EU

PTAs: expected pattern of export growth(based on tariffs and complementarities)

Capital-intensivemanufacturesAgricultural goodsProcessedagricultural goods

Labor-intensivemanufacturesCereals & cropsBeef & dairy

Agricultural goodsBeef & dairyProcessedagricultural goodsLabor-intensivemanufacturesTextiles & clothing(dutch disease inbeef & dairy)

Argentina

Rest of AmericaNAFTAEU

Shortcomings of qualitative assessment

• Cannot:– Quantify relative gains of each strategy– Quantify the extent of sectoral export specialization– Measure diversification in terms of destination of exports– Measure the impact on agricultural income in Northern

Blocs• Crucial for the design of politically feasible PTAs

– Evaluate PTAs with trade wars among Mercosur members

• Use quantitative methods: GTAP model

Impact of full-fledged PTAs forMercosur

Brazil stands to gain more than Argentina

Trade Expansion (%)

REGION/ PARTNER Exports Value Imports ValueArgentina / NAFTA 9 4 ,55 9 4 ,98Argentina / ALCA 1 13 ,8 5 1 15 ,0 1Argentina / UE 2 28 ,5 9 2 50 ,3 8Bras il/ NAFTA 1 89 ,1 4 1 71 ,2 1Bras il/ ALCA 1 84 ,9 3 1 64Bras il/ UE 2 50 ,6 8 2 27 ,5 4Impact on terms of t rade and GDP

Argent ina 1 ,66 1 ,49 2 5 ,6 5Bras il 0 ,12 -0 ,59 1 0 ,0 6Argent ina 0 ,23 0 ,39 1 ,32Bras il 3 ,99 4 ,05 6 ,03

PTA EUTerm s of trade (%)

Rea l GDP

PTA NAFTA ALCA

Sectoral specialization in Argentina• PTA with EU:

– dutch-disease in beef & dairy• PTA with NAFTA:

– Follows comparative advantage and pre-PTA tariffs– “Surprising” growth in capital-intensive manufactures

• “Competitiveness” gains: intermediate goods of industrial originamount to 67% of production costs in this sector

• Consistent with dynamics of past decade

• FTAA:– Bigger growth in capital-intensive manufactures and less in labor-

intensive. Comparative advantage + PTA tariffs– Agricultural goods (processed and primary)

Transp. Equipment 29%Plastic 27%

0091)(* −→ USArgX!

0091)( −→ USArgX!

Sectoral specialization in Argentina

Participation on the argentines exports growth

SECTORSPTA with

NAFTA ALCAPTA with

EUCerea ls and Crops 0 ,2 0 ,1 5 -0 ,0 4Fruit and vegetab le -0 ,0 2 -0 ,0 1 -0 ,0 2

Anim al products -0 ,0 1 0 ,0 3 1 ,3Fores try and Fishing 0 ,0 1 0 0Mining and petroleum 0 ,0 2 0 ,0 2 0 ,0 2Processed Agricultura l P rod 0 ,1 9 0 ,2 2 -0 ,1 4

Textiles , Lea ther and Wearing Appar 0 ,0 8 0 ,0 2 -0 ,0 3Cap ita l in tens ive Manufactures 0 ,2 7 0 ,3 6 -0 ,0 7Labor in tens ive Manufactures 0 ,2 1 0 ,1 6 0 ,0 2

Distributive effects in Northern Blocs

Large income losses for farmers (especially in EU): full-fledged PTAs not viable

Dist ribut ive effects in NAFTA and EUFactor Es ce nario NAFTA EU

PTA with NAFTA

-6 ,8

PTA with UE

-4 5 ,85

ALCA -8 ,1 4PTA with NAFTA

0 ,1 7

PTA with UE

0 ,6

ALCA 0 ,3 2PTA with NAFTA

0 ,2

PTA with UE

1 ,0 8

ALCA 0 ,4 8PTA with NAFTA

0 ,1 3

PTA with UE

0 ,6 9

ALCA 0 ,2 7Capita l

Land

Unskilled Labor

Skilled Labor

From economics to politics I• Sectoral weights in Government’s objetive

function

Source: Johnson, Mahe and Roe (1993)

Activitie s USA EUSugar 1 ,5 6 1 ,5 7Dairy Products 1 ,2 9 1 ,4 6Fodder and other ca t t le 1 ,2 3 1 ,3 2Cerea ls 1 ,1 5 1 ,3 4Budget 1 1Beef 0 ,9 2 1 ,3 2Consum ers 0 ,8 7 0 ,8 3Pork and poultry 0 ,8 5 0 ,9 5

Politically constrained PTAs

EU: bigger agricultural income loss, moreprotectionist→smaller preferences

Politically feasible preferencesMercosur concessions

Tariff Tariff Export subsidy Tariff Export subsidy

Cereals and Crops -100% -50% -40% -40%Animal Products -100% -50% -50% -20% -20%Processed Agricultu -100% -50% -30%Other Sectors -100% -100% -100%

NAFTA concessions EU concessions

Impact of politically constrained PTAs

• Smaller, but still large, expansion of trade forMercosur members

• Trade expansion now is similar in all PTAs →PTA with EU loses edge

• Without full agricultural liberalization, small TOTlosses in all PTAs

• Smaller efficiency gains• More balanced export growth• PTAs are still worth, but sensitive to size of

Northern preferences in agricultural trade

Impact of politically constrained PTAs

Effects on terms of trade, GDP and capital flows (%)

NAFTA EU ALCATerms of Trade -1,66 -0,66 -1,14Real GDP 0,17 0,58 0,34Capital flows (mill U$) 237,58 1218,19 689,23

Blocks who admit preferences

Trade Expansion (%)REGION/PARTNER Exports Value Imports Value Volume of exports Volume of

importsArgentina/NAFTA 70,1 70,6 73 70,7Argentina/ALCA 90,8 93,1 92,8 92,9Argentina/EU 114,2 118,5 115,8 118,6

Impact of politically constrained PTAs

Participation on the exports growth

SECTORS NAFTA UE ALCA

Cereals and Crops 0,05 0,01 0,02

Fruit and vegetable -0,01 0 0

Animal products 0,03 0,13 0,06

Forestry and Fishing 0,01 0 0

Mining and petroleum 0,01 0,01 0,02

Processed Agricultural Prod 0,21 0,04 0,28

Textiles, Leather and Wearing Apparel 0,13 0,16 0,01

Capital intensive Manufactures 0,29 0,13 0,41

Labor intensive Manufactures 0,2 0,48 0,15

From economics to politics II

• Unilateral PTAs for Argentina• Smaller import penetration → bigger Northern concesions

– NAFTA: welfare gains from PTA with Mercosur are verysmall compared to farmers’ real income losses

• Exclusive access: bigger gains from a given concesion• Drawback: possibility of Brazilian retaliations

Effects on NAFTA members of full-fledged PTAPartner Farmers' income Exports value WelfareArgentina -3,5% 1,9% 0,014%Mercosur -7,0% 9% 0,034%

NAFTA-Argentina PTAs

• Three scenaria:– Concesions that exceed by half those obtained by Mercosur– Same concesions as Mercosur– Concesions 50% smaller than those obtained by Mercosur

Preferences obtained50% bigger than Mercosur Same as Mercosur 50% smaller Mercosur-NAFTA

ARGENTINAExport volume 104,29 102,22 101,38 84,52Terms of trade -0,46 -1,48 -1,87 -1,88Welfare 0,19 0,06 0,01 -0,07BRAZILExport volume -0,7 0,01 0,56 158,28Terms of trade -0,12 -0,09 -0,07 -1,25Welfare -0,26 -0,22 -0,19 3,53

Impact of Argentina’s unilateral PTAs

• Comparison to Mercosur’s PTAs:– Bigger trade expansion– Smaller TOT losses– Even when preferences are smaller, this is more than

compensated by exclusive access to Northern markets• Effects on Brazil

– Argentina is a small market: sharing exclusive accesswith NAFTA members inflicts small damage

– Retaliations would arise largely from politicalconsiderations

Brazilian retaliations

Bigger retaliations in manufacturing trade, where Argentina has hada very dynamic behavior within Mercosur

Brazil's retaliations Scenario 1 Scenario 2Bilateral Bilateral export Bilateral Bilateral exporttariff subsidy tariff subsidy

Cereals & crops 5% 2,50% 10% 5%Animal products 5% 2,50% 10% 5%Processed agricult goods 5% 2,50% 10% 5%Fruit & vegetable 5% 2,50% 10% 5%Forestry & fishing 5% 2,50% 10% 5%Textiles, leather & apparel 10% 5% 20% 10%K-int manufactures 10% 5% 20% 10%L-Int manufactures 10% 5% 20% 10%

PTAs with Brazilian retaliations

• Simulate case where Argentina gets large concesions fromNAFTA

Effects of Brazilian retaliationsScenario 1 Scenario 2

ARGENTINAExport volume 90,42 93,96Terms of trade -0,24 0,84Welfare 0,11 0,14BRAZILExport volume -4,81 -1,69Terms of trade -0,34 -0,91Welfare -0,17 -0,15

PTAs with Brazilian retaliations

• Slightly smaller, but still large, export growth forArgentina than benchmark (75% concesions w.o.retaliations)

• Big diversification of destinations (not shown here)• Positive impact on TOT!

– Brazil’s tariffs cum export subsidies improve TOT

• Smaller, but positive, welfare gains• Large growth of Argentine manufacturing exports, in spite

of Brazilian retaliations• Brazil is HURT. No economic rationale for retaliations

Sequencing of PTAs• Simultaneous PTAs may lead to bigger

agricultural preferences from Northern blocs• Rationale:

– Bigger aggregate agricultural exports from Mercosur,but smaller penetration in each market

– Smaller agricultural income losses in each Northernbloc

Real price of land (%)NAFTA EU

Mercosur - EU -46Mercosur - ALCA -8,1Mercosur -EU- ALCA -3,1 -30,2

Conclusions

-If negotiating within Mercosur, EU is more promising, albeitmore reluctant

- Better to negotiate simultaneously with all blocs- Better for Argentina to go alone, even if Brazil retaliates -Bigger preferences + exclusive access more than compensate retaliations

Argentine benefits from Mercosur PTAsExport volume Terms of trade Real GDP d(manuf X)/d(total X)

EU 118,6 -0,66 0,58 0,81ALCA 92,8 -1,14 0,34 0,83NAFTA 73 -1,66 0,17 0,73

Benefits from Arg-NAFTA with retaliationsExport volume Terms of trade Real GDP d(manuf X)/d(total X)

90,42 -0,24 0,19 0,77