Trade reform under regional integration: policy simulations using a CGE model for Guatemala

Abstract

The present paper evaluates the effects of alternative trade policy reforms to the Central American Common External Tariff (CET) schedule on the Guatemalan economy. To accomplish this, the paper develops a multiperiod Computable General Equilibrium (CGE) model, with dynamic sequencing to link interperiod equilibria. As is common in other CGE applications, the model allows for product differentiation, sector specific capital, and substitution in production and consumption. Furthermore, the model incorporates explicitly Guatemala's main economic features — including its membership in the Central American Common Market — and gives special attention to the tradable goods and commercial services sectors, to capture adequately the response of the economy to trade policy changes.

The trade reforms analyzed include small changes in the average CET rates, and a reduction in the dispersion of nominal protection rates across sectors. The results suggest that GDP, investment, employment and exports, particularly non-traditional exports to non-regional markets, are likely to increase moderately as a result of the policy reforms. Although the changes are modest, they are commensurate with the magnitude of the trade reforms analyzed — and they are likely to underestimate the gains achieved from trade liberalization.