Trade Liberalization in Latin America and Eastern Europe: the Cases of Ecuador and Slovenia

This paper analyzes the potential effects of two ongoing trade liberalization experiences: Ecuador signing a Free Trade Agreement with the United States and Slovenia joining the European Union as a full member. We construct a static Applied General Equilibrium Model and perform a numerical experiment that consists on eliminating all import tariffs that Ecuador and Slovenia impose on the United States and European Union, respectively. To calibrate our models, we work with Input-Output tables and construct a Social Accounting Matrix for each country. We perform additional numerical experiments, such as sensitivity analysis on the import and export elasticities of substitution, a partial liberalization scenario, the fiscal impact of eliminating the tariff revenues and how this loss can be compensated with other taxes, and an alternative trade liberalization framework for Slovenia. We find that both countries benefit from these trade liberalization reforms, with prices falling in the import sector and production rising in the export sector. However, different forms of trade liberalization (free trade agreement vs. customs union) have different implications on the patterns of trade and welfare.