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Monday, April 22, 2013

Trade Agreements: Impact on the U.S. Economy

James K. Jackson
Specialist in International Trade and Finance

The United States is considering a number of trade agreements, including the Trans-Pacific Partnership Trade Agreement (TPP) and the U.S.-European Union Trade and Investment Partnership. The Congress also may address the issue of trade promotion authority (TPA), which expired on July 1, 2007. In contrast with trade agreements with smaller economies, these two recently proposed agreements could have a significant impact on some aspects of U.S. trade and investment activities that could affect numerous U.S. workers and businesses. During this process, Congress likely will be presented with an array of data estimating the impact of trade agreements on the economy, or on a particular segment of the economy.

Sophisticated models of the economy that are capable of simulating changes in economic conditions often are used to assist Congress in assessing the value and the impact of trade agreements. These models are particularly helpful in estimating the effects of trade liberalization in such sectors as agriculture and manufacturing where the barriers to trade are identifiable and subject to some quantifiable estimation. Barriers to trade in services and investment, however, are proving to be more difficult to identify and, therefore, to quantify in an economic model. All economic models incorporate various assumptions that are necessary in order for the models to generate results. Invariably, these assumptions determine to some extent the results that are generated and limit their usefulness. In addition, the models are highly sensitive to the assumptions that are used to establish the parameters of the model and they are hampered by a serious lack of comprehensive data in the services sector. Nevertheless, the models often provide basic insights into the magnitude of the economic effects that may occur across economic sectors as a result of trade liberalization. These insights are especially helpful in identifying those sectors that are expected to experience the greatest disruptions and adjustment costs and, therefore, where opposition to trade agreements is likely to occur.

This report examines the major features of economic models being used to estimate the effects of trade agreements. It assesses the strengths and weaknesses of the models as an aid in helping Congress evaluate the economic impact of trade agreements on the U.S. economy. In addition, this report identifies and assesses some of the assumptions used in the economic models and how these assumptions affect the data generated by the models. Finally, this report evaluates the implications for Congress of various options it may consider as it assesses trade agreements.

Date of Report: April 10, 2013
Number of Pages: 28
Order Number: RL31932
Price: $29.95

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