Economic Models
Economists have developed a number of sophisticated models designed to simulate the changes in economic conditions that could be expected from a trade agreement. These models, which are based on modern economic theories of trade, are helpful where the barriers to trade are quantifiable, although the results are highly sensitive to the assumptions used in establishing the parameters of the model.
One type of model used extensively by economists to estimate the economy-wide effects of trade policy changes, such as the results of a multilateral trade round, is the Applied General Equilibrium Model, also called the Computable General Equilibrium (CGE) Model.[13] James
Jackson of the Congressional Research Service notes: “These models incorporate assumptions about consumer behavior, market structure and organization, production technology, investment, and capital flows in the form of foreign direct investment.”[14]
CGE models may be used to estimate the impact of a trade agreement on trade flows, labor, production, economic welfare, or even the environment. They may consider the effects of the agreement on all countries involved, and are ex ante; that is, they attempt to forecast changes that would result from a trade agreement. General equilibrium models are based on input-output models, which track how the output of one industry is an input to other industries. General equilibrium models use enormous data inputs that reflect all the elements to be considered.[15]
One of the great strengths of these models is that they can show how the effects on industries flow through the entire economy. One of their disadvantages is that because of their complexity, the assumptions behind their projections are not always transparent. Economic models are useful to give a sense of what might happen as a result of a trade agreement. They give the appearance of being authoritative, but users need to be aware that economic models are not predictive of what will actually happen and that they have significant weaknesses.
First, the results of any model depend on the assumptions underlying it, such as the degree to which imported products and domestically produced products can be substituted for one another, or whether or not there is perfect or imperfect competition. Differing assumptions can produce a wide range of results, not only in magnitude but also sometimes even in the direction of projected changes.
Second, the economic data needed are often weak, not only for developing countries but even for the United States and other developed nations. For example, trade and economic data between countries, and even within countries, are not readily compatible. In the United States, the North American Industry Classification System (NAICS), which is used to collect statistical data describing the U.S. economy, is based on industries with similar processes to produce goods or services. In contrast, data on international trade in goods are collected on a commodity basis.[16] The United States’ NAFTA partners, Canada and Mexico, also use NAICS, but the European Union uses a system called Nomenclature of Economic Activities. Although there are concordances between these differing systems, these are far from exact.
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