Predicting the effects of NAFTA with the BDS, GTAP, and EK models

We use the GTAP model together with version 3 (base year 1992) of the GTAP database to simulate the removal of tariff and non-tariff barriers between U.S., Canada, and Mexico under NAFTA. Our paper has two objectives. First is to evaluate the predictions made by GTAP against the actual post-NAFTA changes in NAFTA trade. Recent literature (Kehoe, 2005; Shikher, 2012) finds that pre-NAFTA predictions of the effects of NAFTA on trade have little correlation with the actual changes. Therefore, we wanted to investigate whether GTAP could have produced accurate predictions if it were used before NAFTA. The second objective is to compare the predictions of GTAP against the predictions of a general equilibrium model based on the Eaton and Kortum (2002) methodology with heterogeneous producers. We wanted to investigate if the two models would produce different predictions and investigate the sources of these differences. We find that the changes in NAFTA trade predicted by GTAP using pre-NAFTA data are much closer to what actually happened after NAFTA than the changes predicted by the pre-NAFTA studies we looked at (Brown, Deardorff, and Stern, 1992; Roland-Holst, Reinert, and Shiells, 1994). GTAP’s predictions are also close to those of the model with heterogeneous producers, though the latter’s predictions are more closely correlated with the actual changes. We investigate the causes of the differences in predictions by GTAP and a model with heterogeneous producers. Among the various causes we look at are model equations, parameter values, sensitivity to parameter values, and solution methods.