Regional Trade Agreements Versus Global Trade Liberalisation: Implications for a Small Island Developing State

Abstract

This study undertakes an empirical investigation of the macroeconomic and sectoral impacts of two forms of regional trade agreements vis-à-vis global trade liberalisation on a small island country, using Fiji as a case study. In order to capture the feed-back effects of such a complex set of policies, we employ a dynamic computable general equilibrium model of the Fijian economy to investigate the impact of the Pacific Island Countries Trade Agreement (PICTA), the impact of PICTA, the Pacific Agreement for Closer Economic Relations (PACER), and the Economic Partnership Agreements (EPAs), the impact of full trade liberalisation, with tariff removal only and, the impact of full trade liberalisation (with removal of both tariff and non-tariff barriers). While PICTA consistently provides the least benefits across a range of macroeconomic indicators including real output, welfare, trade volumes, and employment, full trade liberalisation provides the greatest benefits compared to the other scenarios in terms of real output. However, the latter scenario is outperformed by PICTA, PACER, and the EPAs and full trade liberalisation (tariff removal only) in terms of welfare effects, trade volumes and employment. The policy implications hold important lessons for developing countries considering trade liberalisation.

Keywords: Trade liberalisation, Regional trade agreements, Computable general equilibrium models

JEL Classification: F11, F17, O56