An Agriculture Economy Interaction Model for Egypt - Analysis of the Proposed Free Trade Agreement with USA

Permitted under the Article (XXIV) of GATT/WTO, Free Trade Agreements (FTAs) have become a prominent feature in the current trading system. Its share in total world trade has increased tremendously. Although it may be considered an easy substitute for a more difficult multilateral arrangement, it goes further beyond what is agreed upon in the world trade organization. In this regard, FTAs may provide lessons and suggest good practices that could be used to enhance economic policy debate. The current research is directed to assess and quantify the economy wide consequences of the proposed FTA between Egypt and the United States, which represents an important stepping stone towards a regional free trade agreement with the countries of the Middle East and North Africa (MENA) following the bottom-up approach in negotiation. Unlike the previous studies, which are mainly based on qualitative analysis, partial equilibrium or general equilibrium static models, the present research develops a dynamic computable general equilibrium (CGE) model that captures the interaction between the agriculture sector and the rest of the economy in a consistent and comprehensive manner. As an analytical tool, the model – as well as its social accounting matrix- reflects three technical modifications to the CGE modeling tradition. First, it represents an issue- oriented economy-wide modeling approach that establishes the linkages between agriculture sector and the rest of the economy. Second, it handles the case of multiple rest of the world with similar exchange rate and different regions (USA and the rest of the world). Third, aggregate investment spending is broken down into investment of domestic origin and foreign direct investment (FDI) flows. Given the above economic rationale, the model is used to capture and assess the impact of two main effects: (i) the effect of removing tariffs on trade between Egypt and the United States, which is nominated the "shallow agreement effect " and (ii) the effect generated by the shallow agreement in addition to reducing non-tariff measures and increasing FDI inflows from the United states, which is nominated the " the deep agreement effect". Taking into account the scheduled total annual U.S. aid to Egypt, the main results of the simulation experiments can be summarized as follows: First, the main results show that the aggregate and sectoral impacts in all experiments are quite modest due to the fact that the bilateral trade and investment flows with the United States are relatively small. Second, reducing non-tariff measures and attracting U.S. Foreign direct investment flows as part of the deep agreement is expected to provide positive gains in the medium/long run with an increase in average annual growth rate of real gross domestic product (GDP) accounting for 1.87% compared with the reference path. Third, Analytical results show limited structural changes caused by the deep agreement in the medium-long run. Fourth, the experimental analysis shows a clear improvement in Egypt’s external balance. This improvement is apparent in exports, trade balance and the current account surplus. Sixth, the deep agreement is expected to have positive effects on real households consumption and Investment as well as terms of trade and employment. However, it shows a negative effect on aggregate national saving.