Since the early 1990s, economic modeling of trade agreements (TAs) has played an important role in the assessment of TAs by the federal government, business community, and economists.
We have written before about the poor forecasting record of economic models of trade agreements. In this testimony, we develop modifications to the standard GTAP trade model that enable it to deliver more accurate forecasts. We back-test our modified version of GTAP against the US-South Korea KORUS trade agreement of 2011. The modifications highlight some of the common ways in which national economies respond to trade agreements that explain why the results have been disappointing for the US. The modifications also illustrate a path that economic modelers of trade agreements can pursue to deliver more accurate forecasts in the future.
We believe economic modeling has a role to play in helping the public and policymakers to better understand the impact of trade agreements.