The 113 th Congress may also address two of the largest regional trade agreements proposed to date and the issue of trade promotion authority (TPA), which expired on July 1, 2007. The Obama Administration has initiated trade agreements with a broad collection of countries through the Trans-Pacific Partnership and with the Europe through the EU-U.S. Transatlantic Trade and Investment Partnership. Economists and others have developed economic models that utilize advanced techniques to assess the economic impact of trade agreements on the economy as a whole and on specific sectors within the economy. To help Congress evaluate the potential economic effects, this report examines a sampling of these studies and offers an assessment of the estimates they have generated. Negotiations to reduce barriers to trade in services, however, potentially could have a very large and positive effect on the U.S. economy, since the United States is highly competitive in a number of services sectors and U.S. direct investment abroad often spurs exports. However, this lack of precision may be an issue when the models are used to estimate the effects of bilateral trade agreements where the overall amount of trade and, therefore, the impact of the agreement, is expected to be less than that of a comprehensive multilateral agreement. These effects of trade agreements often are overlooked in estimating the impact of trade agreements due to the complexity involved. In addition, changes in exchange rates and in the business cycle can affect the overall state of the economy in ways that can outweigh the effects of trade agreements, given the already highly open state of the U.S. economy. Without better data on the extent and nature of barriers to trade in the services sectors, it will continue to be difficult to develop monetary estimates of the costs of those barriers and, therefore, estimates of the economic benefits that could accrue as a result of market liberalization. Econometric modeling, aided by recent advances, can assist policymakers in analyzing the economic effects of trade agreements. These models are particularly helpful in exploring the effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade are identifiable and subject to some quantifiable estimates. Barriers to trade in the services sector, however, are proving to be more difficult to identify and, therefore, to quantify in an econometric model. This is especially helpful in identifying which sectors likely will experience the greatest adjustment costs. Such modeling is highly sensitive to the assumptions that are used to establish the parameters of the model and are hampered by a serious lack of comprehensive data in the services sector.
The United States is considering a number of trade agreements, including the Trans-Pacific Partnership Trade Agreement (TPP) and the U.S.-European Union Trade and Investment Partnership. The Congress also may address the issue of trade promotion authority (TPA), which expired on July 1, 2007. In contrast with trade agreements with smaller economies, these two recently proposed agreements could have a significant impact on some aspects of U.S. trade and investment activities that could affect numerous U.S. workers and businesses. During this process, Congress likely will be presented with an array of data estimating the impact of trade agreements on the economy, or on a particular segment of the economy.
Sophisticated models of the economy that are capable of simulating changes in economic conditions often are used to assist Congress in assessing the value and the impact of trade agreements. These models are particularly helpful in estimating the effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade are identifiable and subject to some quantifiable estimation. Barriers to trade in services and investment, however, are proving to be more difficult to identify and, therefore, to quantify in an economic model. All economic models incorporate various assumptions that are necessary in order for the models to generate results. Invariably, these assumptions determine to some extent the results that are generated and limit their usefulness. In addition, the models are highly sensitive to the assumptions that are used to establish the parameters of the model and they are hampered by a serious lack of comprehensive data in the services sector. Nevertheless, the models often provide basic insights into the magnitude of the economic effects that may occur across economic sectors as a result of trade liberalization. These insights are especially helpful in identifying those sectors that are expected to experience the greatest disruptions and adjustment costs and, therefore, where opposition to trade agreements is likely to occur.
This report examines the major features of economic models being used to estimate the effects of trade agreements. It assesses the strengths and weaknesses of the models as an aid in helping Congress evaluate the economic impact of trade agreements on the U.S. economy. In addition, this report identifies and assesses some of the assumptions used in the economic models and how these assumptions affect the data generated by the models. Finally, this report evaluates the implications for Congress of various options it may consider as it assesses trade agreements.