U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

The GTAP Model
The discussion that follows focuses on the quantitative analysis incorporated in this
report—the CGE analysis presented in chapter 2. This appendix details the procedures used
to adapt the standard GTAP model in order to assess the likely effects of the U.S.-Korea
FTA. In the first section, the basic features of the static GTAP model are introduced. In the
second section, the adjustments made to the standard database are discussed. The third and
fourth sections present various aspects of the baseline construction and model-solution
techniques. The fifth section discusses the estimation of the likely economic effects of the
U.S.-Korea FTA and model limitations.
The Standard GTAP Model 1
The GTAP project consists of a documented global database on international trade,
economy-wide interindustry relationships, and national income accounts (the GTAP
database), and a standard modeling framework to organize and analyze the data (the GTAP
model). It allows for comparisons of the global economy in two environments: one in which
the base values of policy instruments such as tariffs, TRQs, or export restrictions are
unchanged, and one in which these measures are changed, or “shocked,” to reflect the
policies that are being studied. A change in policy makes itself felt throughout the economies
depicted in the model. The static model by design does not produce information about the
speed with which changes occur or about what happens to various dimensions of the
economies in the meantime. Rather, the simulation finds the new equilibrium of prices and
quantities within the model that result in response to the change in policy.
Results from the GTAP model are based on established global trade patterns. This means that
the model is unable to estimate changes in trade in commodities that historically have not
been traded. That is to say, if a particular commodity is not traded between two economies,
no model simulation will imply such a trade flow under any circumstance. Furthermore,
patterns of trade may exist for such reasons as the distance between countries, the presence
or absence of transport infrastructure, or cultural preferences, which are all imperfectly
captured by the model. The GTAP model does not directly account for historical or cultural
factors as determinants of trade patterns. The model assumes that these factors are unaffected
by the trade policy change.
In the GTAP model, domestic products and imports are consumed by firms, governments,
and households. Product markets are assumed to be perfectly competitive (implying zero
economic profit for the firm), with imports as imperfect substitutes for domestic products
(i.e., consumers are aware of the source of the products and may distinguish between them
based on the foreign or domestic origin), and sectoral production determined by global
demand and supply of the output.
1 For further information, see Hertel, ed., Global Trade Analysis.
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