Impacts on NAFTA Members of Multilateral and Regional Trading Arrangements and Initiatives and Harmonization of NAFTA's External Tariffs

We have used the Michigan Model of World Production and Trade to simulate the economic effects on the NAFTA member countries and other major trading countries/regions of a prospective new round of WTO multilateral trade negotiations, the variety of free trade agreements (FTAs) that the NAFTA members have negotiated or are considering, and the adoption of a system of common external tariffs by the NAFTA members. We estimate that an assumed reduction of post-Uruguay Round tariffs on agricultural and industrial products and services barriers by 33 percent in a new WTO trade round would increase world welfare by $613.0 billion, with gains of $177.3 billion for the United States, $13.5 billion for Canada, $6.5 billion for Mexico, and significant gains for all other industrialized and developing countries. If there were global free trade, world welfare would increase three-fold to $1.9 trillion and the country/region gains would be similarly larger. Regional FTAs such as an expansion of NAFTA to include Chile and a Western Hemisphere FTA would increase global and member-country welfare but much less than a new WTO multilateral trade round would. Separate bilateral FTAs negotiated or being considered by Canada, Mexico, and the United States would have positive, though generally small, welfare effects on the partner countries, but potentially disruptive sectoral employment shifts in some countries. There would be trade diversion and detrimental welfare effects on some nonmember countries for both the regional and bilateral FTAs analyzed. If the NAFTA members were to adopt a system of common external tariffs to replace their existing differentiated external tariffs, a system based on trade weights would have less distortive effects on trade and welfare than a system based on simple averages or production-weighted tariffs.