Deep Trade Agreements and Welfare Gains : Strategies for Latin American Integration

This paper examines how trade liberalization and the signing of integration agreements affect growth and welfare in Latin America and the Caribbean (LAC), with a particular focus on the role of deep trade agreements. We distinguish between, on the one hand, less deep agreements that grant tariff preferences or establish free trade areas mainly in goods and, in some cases, also in services, without incorporating a broad set of additional regulatory disciplines; and, on the other hand, deep agreements that combine free trade in goods and services with more extensive commitments in areas such as investment, intellectual property, competition policy, government procurement, regulatory standards and other dimensions of economic policy. The analysis relies on a dynamic Structural Gravity Model of Trade (SGMT), formulated as a dynamic general equilibrium model with growth driven by capital accumulation. It uses an improved dataset that corrects measurement biases and, in particular, extends and refines the coverage of trade agreements. On this basis, the paper conducts counterfactual simulations to compare alternative integration strategies: deepening existing agreements within LAC and signing deep agreements between the region and major global economic hubs. The results show that deep agreements generate trade effects that are roughly three times larger than those associated with shallow or medium-depth agreements. In addition, the dynamic welfare gains from deep agreements-measured in terms of real consumption-are about twice as large as their static effects. This gap highlights the importance of capital accumulation and long-run adjustment margins, which can only be captured adequately in a dynamic framework. Although a large share of intraregional trade in LAC already takes place under preferential agreements, the simulations indicate that modernizing and deepening existing commitments yields larger welfare gains than prioritizing the signing of new agreements, even with extra-regional partners. In particular, scenarios in which LAC acts as an integrated bloc and signs deep agreements with major global hubs-such as Europe, North America or Asia-emerge as the option that maximizes aggregate welfare gains. Taken together, the findings provide quantitative evidence for trade policymaking in the region: they suggest that the main margin for improvement lies not only in opening additional markets, but in moving towards deeper and more coherent integration that strengthens regional resilience, enhances competitiveness and supports long-run growth in Latin America and the Caribbean