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Chile's Free Trade Deals with the EU and the US: A Big Deal?

  • Romulo Chumacero
  • Rodrigo Fuentes

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 quanti- fies their economic effects for the Chilean economy, stemming from the conventional trade components (lower tariffs and higher market access) and other aspects of the lat- ter broad FTAs, including improved intellectual property rights, factor productivity gains, and their fiscal consequences. 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. The reported effects of FTAs on resource allocations, relative prices, expenditure composition, output, and welfare are generally small due to Chile's high initial trade openness; aggregate output and consumption do not exceed 1% in any given period. On impact, the largest gains come from a lower risk premium that leads to a tem- porary 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 Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 661.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:661
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  4. Drusilla K. Brown & Alan V. Deardorff & Robert M. Stern, 2001. "Multilateral, Regional, and Bilateral Trade-Policy Options for the United States and Japan," Discussion Papers Series, Department of Economics, Tufts University 0112, Department of Economics, Tufts University.
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  7. 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.
  8. David T. Coe & Elhanan Helpman, 1993. "International R&D Spillovers," NBER Working Papers 4444, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
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  12. 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.
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