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

  • Rómulo A. Chumacero
  • Rodrigo Fuentes
  • Klaus Schmidt-Hebbel

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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  1. repec:att:wimass:9607 is not listed on IDEAS
  2. Drusilla K. Brown & Alan V. Deardorff & Robert M Stern, 2001. "Multilateral, Regional, and Bilateral Trade-Policy Options for the United States and Japan," Working Papers 469, Research Seminar in International Economics, University of Michigan.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
  4. Keller, Wolfgang, 1998. "Are international R&D spillovers trade-related?: Analyzing spillovers among randomly matched trade partners," European Economic Review, Elsevier, vol. 42(8), pages 1469-1481, September.
  5. Jagdeep S. Bhandari & Nadeem Ul Haque & Stephen J. Turnovsky, 1990. "Growth, External Debt, and Sovereign Risk in a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 388-417, June.
  6. Juan Eduardo Coeymans & Felipe Larraín, 1994. "Efectos de un Acuerdo de Libre Comercio entre Chile y Estados Unidos: Un Enfoque de Equilibrio General," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(94), pages 357-400.
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