Cooperation and Competition Industry Simulations of Trade Liberalization

The main purpose of this chapter is to investigate the effects of reciprocal tariff reductions for three of the four Latin American countries which form the MERCOSUR, namely Argentina, Brazil, and Uruguay. The study is conducted within the framework of the partial equilibrium model developed by Smith and Venables (1988). The model, which allows for economies of scale and trade in differentiated products, has previously been used to analyze the effects of the completion of the EC (Smith and Venables, 1988), the resource and welfare implications of Spain's access to the EC (Gual, Martinez Giral and Vives, 1989), and the likely effects of EFTA (European Free Trade Association) countries' joining the Community (Norman, 1989). It has also been applied to the study of optimal tariffs and subsidies for industrialized countries (Gasiorek, Smith, and Venables, 1989). As far as we know, the present study is the first attempt to apply the Smith-Venables model to data on developing countries. Next sections describe the model and the calibration procedure, makes some short comments on data-related problems and examine some basic issues of the simulations. Simulation results in terms of welfare and output changes are then reported and analyzed. They relate to two integration scenarios: one with a 50 per cent reduction in inrra-MERCOSUR tariffs and the other with a 100 per cent reduction. A comparison of the results from simulating Bertrand and Cournot firm behavior is also presented. The last section focuses on the problem of policy harmonization between