Economic experts have been trying to calculate the economic impact of the Uruguay Round since negotiations were completed almost two years ago. Scenarios have ranged from optimistic forecasts that most regions, countries and industries will gain to more pessimistic warnings that there will be winners and losers with little of the benefit accruing to the world's poorest countries.

The truth is, of course, that the Uruguay Round is far too large and complicated an agreement, and the impact of the agreed trade liberalization on economic activity too uncertain, to confirm the extreme view of either optimists or pessimists.

The Final Act of the seven-year round of multilateral trade negotiations contains around fifty Agreements, Understandings and Decisions that will make up the core rules of the game for the world trading system in the coming decades. Appended are more than 20,000 pages of national tariff schedules and market access concessions, including the initial liberalization commitments under the General Agreement on Trade in Services (GATS). Moreover, while at least the text of the agreement is no longer a moving target, implementation will not be complete until 2005.

Undeterred by this complexity, Joseph Francois, Bradley McDonald and Håkan Nordström have recently completed one of the most sophisticated assessments of the impact of the Round so far. Their assessment is based on a fifteen-sector, nine-region numerical model of the world economy.

Their task is further complicated by the nature of the agreement. In contrast to previous GATT rounds, the Uruguay Round was born largely of non-tariff concerns which are inherently harder to model. The successful reduction of tariffs in the first seven rounds - particularly on industrial goods in the developed countries, brought down from 40% in 1947 to 5% today - has made traditional, non-discriminatory Most Favoured Nation (MFN) tariff protection a relatively minor issue between developed countries.

The hard-fought gains in this area have, however, been gradually eroded by less transparent trade barriers. The relative decline of tariff barriers has merited a shift in focus to more pressing areas for reforms, including non-tariff barriers (NTBs), GATT rules, and trade in services. While still important in the Uruguay Round, the tariff reduction issue was only one of many areas that called for attention.

Francois and his colleagues’ paper provides both an overview of the market access components of the Uruguay Round and an assessment of its economic implications:

• First, the authors model improved market access for goods resulting from tariff reductions.
• Second, they model the elimination of GATT exceptions for quantitative restrictions on industrial products, particularly the agreement to bring textiles and clothing back under normal GATT rules.
• Third, they examine the agreement on agriculture, which includes a conversion of NTBs to tariff equivalents paired with some cuts in the rates, and a reduction of trade-distorting export and production subsidies.

The analysis differs from earlier studies in several important ways. First, it is based on the final set of Uruguay Round market access offers. Previous studies have had to make do with formula tariff cuts derived from stated negotiation objectives.

Second, the authors break new ground in terms of model structure. In contrast to previous estimates of the Round's global effects, they account for imperfect competition and scale economies, including returns from increased specialization at intermediate stages of production. Previous assessments have, in general, assumed perfect competition and constant returns to scale. But specialization and related scale economies affect the results considerably, not least for developing countries.

Lastly, they also account for medium-run investment effects, in which initial static income effects can influence steady-state investment, compounding the initial impact over time. The combination of dynamics and intermediate product specialization captures important effects of trade liberalization often missed when perfect competition and static technologies are assumed.

The simulations suggest substantial gains as a result of the Uruguay Round. According to Francois, McDonald and Nordström, global incomes may have been $291 billion higher had the agreement's market access provisions been in place in 1990. They estimate that, by the year 2005, these provisions may contribute $510 billion annually to global welfare (measured in 1990 dollars).

The most important overall source of gains is the elimination of quotas on industrial products. The second most important source depends on the model. In a world characterized by constant returns to scale technologies, it is agriculture. In this case, agricultural reforms provide up to 31% of the income gains.

Industrial tariff cuts become relatively more important when scale and specialization economies are at stake. In this case, the net complementarities implied by two-way trade, involving both pro-competitive effects and increased specialization and product variety, also yield cross-border spillovers of the effects of liberalization. These spillover effects, which prove particularly important for the group of developing and transition economies, are missed in constant returns models.

Francois et al reject the view that developing countries may lose from the agreement. They find, by contrast, that the welfare gains are relatively broad-based among the regions defined in their model. In terms of trade and production patterns, the trade of all regions is expected to expand, led by the trade of developing and transition economies.

Developing countries are estimated to expand production and exports of clothing, textiles and other manufactures, while developed countries are expected to expand production of capital and technology-intensive industrial products, including transport equipment. Moreover, countries that are well-endowed with arable land are expected to increase significantly their exports of agricultural products, owing largely to the reduced presence of export-subsidized competition. On a sectoral basis, the greatest increases in exports are in textiles and clothing from developing economies.

But the authors end with a warning. Their simulations suggest clear gains for consumers and some dramatic changes, notably increases in export volumes from developing to developed countries in particular sectors and markets. But these trade responses will only occur if the Uruguay Round is actually implemented and there is no backlash from those producer groups in developed countries who may lose as a result. If the planned trade liberalization were to trigger a defensive protectionist backlash, then the welfare consequences would look very different.

This article reviews research reported in The Uruguay Round: A Global General Equilibrium Assessment, Discussion Paper No. 1067 by Joseph F Francois, Bradley McDonald and Håkan Nordström, available from CEPR. Francois is a research economist at the World Trade Organization. and a Research Fellow in CEPR’s International Trade programme. McDonald is a research economist at the World Trade Organization, and Nordström is a research economist at the World Trade Organization The paper is produced as part of CEPR's research programme on Market Integration, Regionalism and the Global Economy, supported by the Ford Foundation.