Effects of Regional Trade Agreements on Trade, Production, and Economic Welfare of Colombia: Partial and General Equilibrium Analysis

Abstract

The number of Regional Trade Agreements (RTAs) has risen drastically during the last decades. This global trend has been followed by the trade policy of Colombia signing agreements mainly with trading partners from America and Europe. However, currently, the trade policy of this country seems to be facing a crossroads. On one hand, Colombia is a member of the Pacific Alliance that aims to promote trade integration with the Asia-Pacific region, being the only one of its members that is not in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the proposed Free Trade Area of the Asia-Pacific (FTAAP). On the other hand, the government of Colombia has announced that is not going to negotiate new RTAs. Motivated by this context and given that the empirical literature evaluating the effects of the RTAs in the economy of Colombia is limited, this research aims to fill this gap. For this purpose, it presents evaluations of the RTAs on trade flows, production, and economic welfare of RTAs of this country that entered into force since the mid-1990s and of the mega-RTAs in the Asia-Pacific region. Chapter 1 describes the recent trade policy of Colombia to contextualize the objective and motivation of this research. Chapter 2 presents trade indicators to identify the most important trends in the trade pattern of this country since the 1990s and with its RTA partners since the respective agreement entered into force. This part includes indicators to describe the composition of the trade flows by trading partners and products, comparative advantage and concentration of exports, intra-industry trade, trade intensity, exports diversification, and a Constant Market Share (CMS) analysis to capture the changes in the competitiveness of the exports of Colombia in the markets of its RTA partners. The considered RTAs of Colombia included multilateral agreements (Andean Community, RTAs with the Northern Triangle, with the European Free Trade Association (EFTA), with the European Union, and the Pacific Alliance) and bilateral agreements (RTAs with Mexico, Chile, Canada, the United States, South Korea, and Costa Rica). Chapter 3 presents an ex-post evaluation of the effects of eleven considered RTAs on Colombia that entered into force during the mid-1990s and the mid-2010s. These RTAs are the agreements of Colombia with the Andean Community, Mexico, Chile, the Northern Triangle, the EFTA. Canada, the United States, the European Union, the Pacific Alliance, South Korea, and Costa Rica. This evaluation includes partial and general equilibrium gravity analysis. The purpose of using the partial equilibrium gravity analysis is to estimate the direct effects of these RTAs on trade, while that of using the general equilibrium analysis is to estimate the full effects of the RTAs on trade and economic welfare. The partial equilibrium gravity analysis is based on estimations of the structural gravity model with panel data for 143 countries during the period 1991-2018. The estimate specification of this model has three types of fixed effects (exporter-time, importer-time, and exporter-importer fixed effects) and uses the Poisson Pseudo Maximum Likelihood (PPML) estimator. This set of fixed effects controls for Multilateral Resistance Terms (MRTs) and the potential endogeneity of the RTAs. The PPML estimator addresses the issue of zero trade-flows and heteroscedasticity. The estimates show that the exports of Colombia tended to increase due to the RTAs with the Andean Community, Mexico, and Chile. Besides, the imports of Colombia tended to increase due to the RTAs with the Andean Community, Mexico, and those tended to decrease due to the RTA with the EFTA. At a sectoral level, the RTAs have significant effects on the exports of transportation and food products, and those have significant effects on the imports of animal, food products, textiles and clothing, and hides and skins. Most of these RTAs have significant and heterogeneous effects on the sectoral exports and imports of Colombia. The general equilibrium analysis follows the General Equilibrium Analysis with PPML (GEPPML) procedure with cross-sectional data for 143 countries for the year 20121 . The results show that each of the RTAs of Colombia increases the exports and improves the economic welfare of Colombia, mainly the RTAs with the United States and the European Union. Among the bilateral RTAs, Colombia is the most benefited member in RTAs in which the trading partner has a large economic size than Colombia. Due to trade diversion, the United States register the largest reductions in exports in all the RTAs in which is not a member. Besides, the countries that register the largest contractions in real Gross Domestic Product (GDP) due to most of the RTAs are Panama and Venezuela. Chapter 4 presents an ex-ante evaluation of the potential effects of the RTAs in the Asia-Pacific region on Colombia. These RTAs are the RTA between the Pacific Alliance and its associate members (PA+), Colombia joins to the CPTPP (COL-CPTPP), the Regional Comprehensive Economic Partnership (RCEP), Colombia as a member of the RCEP (COL-RCEP), the FTAAP, and Colombia as a member of the FTAAP (COL-FTAAP). This evaluation includes partial and general equilibrium analysis. The partial equilibrium analysis uses the Software for Market Analysis and Restrictions on Trade (SMART) model. The RTAs are simulated as total tariff reductions in Colombia from the RTA partners to all products imported in 2017. This model allows capturing these effects at the most disaggregate level of products and trading partners. However, this model assumes that all markets are independent (i.e. does not consider inter-sectoral effects). The results show that imports of Colombia could increase mainly from Canada and Singapore with the PA+, from Japan and Vietnam with to the COL-CPTPP, from China and Japan with the COL-RCEP and the COL-FTAAP. Furthermore, due to trade diversion, imports could decrease mainly from the United States and China due to the PA+ and the COL-CPTPP, from Mexico and the United States due to the COL-RCEP, and from Brazil and Germany due to the COL-FTAAP. The products that register the largest increases in imports belong to the sector transportation. In terms of economic welfare, the RTA that registers the largest increase in the consumer surplus of Colombia is the COL-FTAAP, followed by the COL-RCEP, the COL-CPTPP, and the PA+. The general equilibrium analysis uses the Global Trade Analysis Project (GTAP) model with its latest database (GTAP10). In this analysis, there are considered 33 trading partners, 21 sectors, and long-term closure. In an attempt to update the base year of the GTAP10 database (2014), different RTAs that have been entered into force since the 2010s were pre-simulated. Among these pre-simulated RTAs are the Pacific Alliance and the CPTPP. The considered RTAs are simulated assuming only tariff reductions and assuming both tariff reductions and trade facilitation measures. The objective is to compare the obtained results between both cases and shows the relevance of considering the reduction in trade costs. Assuming both tariff reductions and trade facilitation measures, the results show that the PA+, the COL-CPTPP, the COL-RCEP, and the COL-FTAAP increase trade flows of Colombia. In percentage terms, the sector that registers one of the largest increases in exports is transportation, while clothing registers the largest increases in imports. The production of Colombia expands and its economic welfare increases with all these RTAs. The largest expansion in production and improvement in economic welfare correspond to the COL-FTAAP, followed by the COL-CPTPP, the COL-RCEP, and the PA+. The sectors that expand production in all these RTAs are crops, food products, and services. Besides, the RCEP and the FTAAP decrease trade flows, contract production, and worsen the economic welfare of Colombia.