FTAA and Service Liberalization in Colombia

Abstract

In a previous study we found that accession to the FTAA could be welfareworsening
for Colombia because exports to the USA will be diverted away
from Colombia in favor of other Latin countries. In this paper we show that
there remain potentially large gains from an FTAA-style agreement. These
gains come from increased factor productivity and product variety as a result
of service liberalization and foreign direct investment (FDI). These benefits
are likely to be large enough to overcome the loss of competitiveness in US
goods markets. We use a computable general equilibrium model of the Colombian
economy that includes imperfect competition in order to highlight the
pro-competitive effects from entry as well as productivity effects from increased
product variety. In contrast to perfect competition models, such as
the GTAP model, this analysis incorporates productivity effects in both goods
and services markets endogenously, through a Dixit-Stiglitz framework. The
numerical model is innovative as it recognizes that foreign direct investment
or the availability of foreign expertise is necessary to have foreign firms compete
in key business services; and it endogenously captures increases in total
factor productivity from foreign direct investment liberalization.