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Chile’s Free Trade Agreements: How Big is The Deal?

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Author Info
Rómulo A. Chumacero
Rodrigo Fuentes
Klaus Schmidt-Hebbel

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Abstract

Chile put into place broad free trade agreements (FTAs) with its two major trading partners: the EU (effective 2003) and the US (effective 2004). This paper quantifies their economic effects for the Chilean economy, stemming from the conventional trade components (lower tariffs and higher market access) and other aspects of the latter broad FTAs, including improved intellectual property rights, factor productivity gains, and their fiscal consequences (tax compensation, larger customs expenditure). The paper also considers that the country risk premium may decline and aggregate investment may rise in response to the institutional stability and policy credibility enhanced by the FTAs. Simulation results are reported for steady states and dynamic transition paths, based on a three-sector dynamic general equilibrium model for an open economy inhabited by infinitely-lived representative agents. The model is calibrated to the Chilean economy and the actual features of both trade agreements. Due to Chile’s high initial trade openness, the reported effects of FTAs on resource allocations, relative prices, expenditure composition, welfare, output, and aggregate consumption do not exceed 1% in any given period. On impact, the largest gains come from a lower risk premium that leads to a temporary consumption and investment boom, which is reverted in the long run as a result of larger net foreign liabilities. In steady state, the gains from improved factor productivity dominate all other effects.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 264.

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Date of creation: May 2004
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Handle: RePEc:chb:bcchwp:264

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References listed on IDEAS
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  1. Bhandari, Jagdeep S. & Ul Haque, Nadeem & Turnovsky, Stephen J., 1989. "Growth, debt, and sovereign risk in a small, open economy," Policy Research Working Paper Series 260, The World Bank. [Downloadable!]
  2. Turnovsky, Stephen J, 1997. "Equilibrium Growth in a Small Economy Facing an Imperfect World Capital Market," Review of Development Economics, Blackwell Publishing, vol. 1(1), pages 1-22, February. [Downloadable!] (restricted)
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    Other versions:
  4. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 1997. "Trade policy options for Chile : a quantitative evaluation," Policy Research Working Paper Series 1783, The World Bank. [Downloadable!]
  5. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 1998. "Computational Analysis of the Accession of Chile to the NAFTA and Western Hemisphere Integration," Discussion Papers Series, Department of Economics, Tufts University 9820, Department of Economics, Tufts University. [Downloadable!]
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  6. Juan Eduardo Coeymans & Felipe Larraín, 1994. "Efectos de un Acuerdo de Libre Comercio entre Chile y Estados Unidos: Un Enfoque de Equilibrio General," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(94), pages 357-400. [Downloadable!]
  7. Coe, David T. & Helpman, Elhanan, 1995. "International R&D spillovers," European Economic Review, Elsevier, vol. 39(5), pages 859-887, May. [Downloadable!] (restricted)
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  8. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January. [Downloadable!] (restricted)
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  9. Osang, Thomas & Turnovsky, Stephen J., 2000. "Differential tariffs, growth, and welfare in a small open economy," Journal of Development Economics, Elsevier, vol. 62(2), pages 315-342, August. [Downloadable!] (restricted)
  10. Wolfgang Keller, 1997. "Are International R&D Spillovers Trade-Related? Analyzing Spillovers Among Randomly Matched Trade Partners," NBER Working Papers 6065, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 2001. "Chile's regional arrangements and the Free Trade Agreement of the Americas : the importance of market access," Policy Research Working Paper Series 2634, The World Bank. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Klaus Schmidt-Hebbel, 2006. "Chile’s Economic Growth," Working Papers Central Bank of Chile 365, Central Bank of Chile. [Downloadable!]
  2. Roberto Álvarez & Rodrigo Fuentes, 2004. "Patterns of Specialization and Economic Growth in Chile by Sector," Working Papers Central Bank of Chile 288, Central Bank of Chile. [Downloadable!]
  3. Calani, Mauricio, 2007. "Testing Globalization-Disinflation Hypothesis," MPRA Paper 4787, University Library of Munich, Germany, revised 10 Sep 2007. [Downloadable!]
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