BOOK "Methodology for Impact Assessment of Free Trade Agreements
Published in 2010
Authors: Michael G. Plummer
             David Cheong
             Shintaro Hamanaka

Chapter 1 Theoretical Framework for Economic Analysis of Free Trade Agreements 7
1.1. Viner’s Model and Extensions 8
1.1.1. Viner’s Model 9
1.1.2. Extensions to Viner’s Model 10
1.2. General Equilibrium Models 11
1.2.1. Meade–Lipsey and Wonnacott–Wonnacott Models 11
1.2.2. Lloyd–Maclaren Model 15
1.2.3. Kemp–Wan Theorem 17
1.3. Dynamic Effects of Free Trade Agreements 18
1.3.1. Economies of Scale and Variety 18
1.3.2. Impacts on Foreign Direct Investment 19
1.3.3. Structural Policy Change and Reform 19
1.3.4. Competitiveness and Long-Run Growth Effects 19
1.4. Theoretical Foundations for Computable General Equilibrium and Gravity Model 20
1.4.1. Foundations for Computable General Equilibrium Analysis 20
1.4.1.1. Characteristics of Agents in a Typical Computable General Equilibrium Model 21
1.4.1.2. Computable General Equilibrium Models of International Trade
and Free Trade Agreements 22
1.4.1.3. Limitations of Computable General Equilibrium Analysis of Free Trade Agreements 23
1.4.2. Foundations for the Gravity Model 24
1.4.2.1. Gravity Models and Free Trade Agreement Assessment 25
1.4.2.2. Limitations of Gravity Models 25
1.5. Concluding Remarks 25
References (Chapter 1) 26

Chapter 2 Methods for Ex-Ante Economic Evaluation of Free Trade Agreements 29
2.1. Trade Indicators to Evaluate the Potential Economic Effects of a Free Trade Agreement 30
2.1.1. Indicators of Regional Trade Interdependence 32
2.1.1.1. Intraregional Trade Share 33
2.1.1.2. Intraregional Trade Intensity 34
2.1.1.3. Regional Trade Introversion Index 36
2.1.2. Indicators of Comparative Advantage, Regional Orientation,
Trade Complementarity, and Export Similarity 38
2.1.2.1. Revealed Comparative Advantage 38
2.1.2.2. Regional Orientation 38
2.1.2.3. Complementarity 39
2.1.2.4. Export Similarity 40
2.1.3. Strengths and Limitations of Trade Indicators 40
2.2. Estimating the Potential Economic Effects of a Free Trade Agreement in an Individual Market 41
2.2.1. The SMART Model 41
2.2.2. Example of Motorcycle Market in the Lao People’s Democratic Republic 43
2.2.3. Strengths and Limitations of the SMART Model 44
2.3. Computable General Equilibrium Estimation of the Potential
Economic Effects of a Free Trade Agreement 45
2.3.1. The GTAP Model 46
2.3.2. Example of Computable General Equilibrium Analysis of a Free Trade Agreement:
GTAP Simulation of the Effects of the ASEAN Free Trade Area on Cambodia,
the Lao People’s Democratic Republic, and Viet Nam 48
2.3.2.1. Simulated Aggregate Effects 50
2.3.2.2. Simulated Sectoral Effects 51
2.3.2.3. Simulated Welfare Effects of the ASEAN Free Trade Area 53
2.3.3. Strengths and Limitations of the GTAP Model 55
2.4. Concluding Remarks 57
References (Chapter 2)

Chapter 3 Methods for Ex-Post Economic Evaluation of Free Trade Agreements 73
3.1. Free Trade Agreement Preference Indicators 74
3.1.1. Coverage Rate 74
3.1.2. Utility Rate 76
3.1.3. Utilization Rate 76
3.1.4. Value of Free Trade Agreement Preferences 78
3.1.5. Data Sources: Customs Data and Firm Surveys 78
3.1.6. Strengths and Limitations of Free Trade Agreement Preference Indicators 79
3.2. Free Trade Agreement Trade and Welfare Indicators 80
3.2.1. Qualitative Analysis of Trade Creation and Trade Diversion 80
3.2.2. Quantitative Indicators of Trade and Welfare Effects 82
3.2.2.1. Trade Volumes and Terms of Trade: Observed Values

3.2.2.2. Trade Volumes and Terms of Trade: Extrapolated Values
with Pre-Free Trade Agreement Growth Rates 84
3.2.3. Strengths and Limitations of Free Trade Agreement Trade and Welfare Indicators 86
3.3. The Gravity Model 87
3.3.1. Gravity Model Data 89
3.3.2. Interpretation of Gravity Model Results 89
3.3.3. Strengths and Limitations of the Gravity Model 92
3.4. Concluding Remarks 93
References (Chapter 3) 94
Appendix 3: Association of Southeast Asian Nations
Free Trade Area’s Form D—Certificate of Origin 96
Chapter 4 Special Considerations for Developing Countries 97
4.1. “Lock-In” of Structural Reform and Policy Adjustment 98
4.2. Technology Transfer and Foreign Direct Investment 102
4.3. Human and Institutional Capacity Building 103
4.4. Macroeconomic Stability Considerations 105
4.5. Strategic Considerations 106
4.6. Concluding Remarks 107
References (Chapter 4) 108