The New Challenges of the Regional Trade Agenda for the Andean Countries

The Andean countries grouped in the Andean Community of Nations (CAN) have adopted a challenging trade negotiating agenda that, in a context of increasing global interdependence, should enable them to promote development and further their integration in the international economy. To that end, they must successfully modernize their economic and institutional structures and adapt them to the more competitive environment created by freer trade. The group is engaged in the negotiations for the Free Trade Area of the Americas (FTAA), as well as for bilateral agreements with the United States and Mercosur; these are the three broadest schedules under negotiation in the Western Hemisphere. All of these agreements offer the Andean countries gains in terms of trade and economic growth, but they also entail substantial structural changes. The latter have significant domestic economic and political implications, and it is important to anticipate those repercussions. This analysis is timely, since there are few studies on the trade negotiations’ economic impact and the policy implications for the Andean countries. In this paper we assess the economic impact of these three regional agreements: the FTAA, whereby the countries of the Western Hemisphere will eliminate all tariff barriers to intra-hemispheric trade; a free trade agreement (FTA) between the CAN and Mercosur; and individual FTAs between four Andean countries (Colombia, Ecuador, Peru and Bolivia) and the United States. We apply a multi-region, multi-sector, comparative, static computable general equilibrium (CGE) model, benchmarked in 1997. The policy variable is tariffs, including ad valorem equivalent estimations of specific and mixed tariffs, as well as TRQs. Preliminary results show the impact of these agreements is positive for all the Andean countries. The sectoral impact is especially dynamic in the bilateral agreement with Mercosur, where tariffs are higher and current trade levels are modest. By comparing the economic impact on each CAN member of negotiating bilaterally with the United States, or as a group in the FTAA, we find that the gains from a broader free trade area clearly surpass those of securing access to the US market, because of the tariff preferences that the United States has already granted to four Andean countries. However, we also observe a significant decline in intra-regional flows in these agreements when tariffs are removed. In all three scenarios, all the Andean countries see a strengthening of their traditional comparative advantage in resource-oriented industries and labor-intensive sectors. Market opening alone, however, does not necessarily enhance export diversification and induce a change in economic structure. Nor does it reinforce technology-intensive industries. There will be fewer benefits for agriculture and some less competitive capitalintensive industries. Moreover, these regional agreements will bring about some structural adjustment in production and labor markets that could be painful in the short run. Since it is crucial to identify the effects on sensitive sectors and target key dynamic industries, in order to prepare for both the negotiations and domestic structural adjustment, these sectoral findings are extremely useful.