Hub-and-Spokes FTAs in the Presence of Technology Spillovers: An application to the Western Hemisphere

The recent proliferation of bilateral agreements has created a number of “hub-and-spokes” types of trade relationship: i.e., one economy becomes a “hub” by establishing bilateral agreements with a number of nations (the “spokes”). This paper compares and contrast the economic implications of hub-and-spokes (HAS) configuration vis-à-vis FTA of the Americas (FTAA) from the viewpoints of both the hub (Chile) and the spokes (US and Mercosur) in the Western Hemisphere using an augmented version of a nine-region, seven-traded-commodity comparativestatic GTAP model. To the extent that HAS affects the international flows of goods and services and that some technological spillovers are associated with international trade flows, it is shown that the existence of HAS affects trans-border technology flows from developed spoke to developing hub and/or, spoke regions either directly or indirectly through open regional trade. 4% Hicks-Neutral technical progress in high-technology products in developed spoke (USA) has differential impacts on productivity elsewhere. Destination regions’ ability to utilize new technology hinges on their extent of technology capture contingent on their absorptive capacity, proximity and institutional-structural congruence. Together with trade flows, these factors determine the recipient’s success in assimilating foreign technology. Differential rates of technology transmission via intermediates are also ascribed to trade policy under sequential comparative static trade liberalization scenarios. With sequencing, the benefits accrue more to Chile as first mover and relatively less to Mercosur. But, with technology flows under fullfledged FTAA the gains are more pronounced compared to bilateral FTA between Chile and Mercosur under HAS. Without sequencing, the gain to Chile is not so prominent. Diminution of welfare under FTAA scheme is attributed to preference dilution impact. Also, sectors intensive in high tech products register higher productivity growth.