The effects of the Uruguay round: empirical evidence from U.S. industry

BERNARD YEUNG [*] This article uses an event study to evaluate the anticipated results of the Uruguay Round on U.S. industry, Economists commonly use computable general equilibrium (CGE) models to predict the net economic efficiency effects of trade agreements. The event study method represents a complementary approach that relies on stock price movements to assess how investors predict that an event, in this case the conclusion of the Uruguay Round, will affect industry profitability. The empirical estimates indicate that U.S. industries with comparative advantage (disadvantage) experience positive (negative) stock price reactions, reflecting an increase (a decrease) in the industry trade and investment opportunities as well as an increased (decreased) return to existing tangible and intangible assets. For the market as a whole, the variation in stock prices does not differ significantly from zero, and the economic magnitude of industry gains and losses is small. These results are consistent with most CGE assessments and wit h the skeptical attitude that the real impact of the Uruguay Round Agreement remains uncertain. (JEL F13, F2) (1.) INTRODUCTION The Uruguay Round of trade negotiations that concluded in December 1993 represents the eighth round of multilateral trade negotiations that has occurred over the past 50 years. The breadth of consensus reached by over 150 nations was previously thought unattainable. The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) covers a much wider range of transactions than was the case in prior agreements. In addition to reducing tariffs, the Uruguay Round disciplines many nontariff barriers. Additionally, trade in intellectual property and in services is now governed by GAIT principles. Other major developments include the establishment of the World Trade Organization (WTO), a body that will monitor compliance with the agreement, administer a stronger dispute resolution mechanism to settle trade-related disputes, and provide a forum for future multilateral negotiations. What will be the impact of this ambitious trade liberalization agreement? Proponents claim that it will generate hundreds of billions of dollars of additional income annually. Some industry leaders, however, argue that the Uruguay Round Agreement will result in a flood of imports that will seriously injure U.S. industry, displace thousands of workers, and bankrupt many companies. Many economists suggest the effects are likely to be quite small [see Schott (1994) for a survey of early work, and Martin and Winters (1996) for projections based on actual offers made]. Deardorff (1994) states, "The Round itself, at least in terms of its economic effects, may not make a big difference" (p. 7). The computable general equilibrium (CGE) analysis of Harrison et al. (1997) projects that the U.S. annual gain in income will be $13 billion or 0.3% of GDP. This article investigates how investors assess the result of the Uruguay Round Agreement. Specifically, it examines how U.S. stock prices in 198 different three-digit SIC industries reacted to news of the successful conclusion of the Uruguay Round. It finds stock price reactions are positive for U.S. industries that are net exporters or technology intensive, that is characteristics of industries with a comparative advantage internationally. Overall, the net change in U.S. capital value is insignificantly negative and the magnitude of the capital value created and destroyed by the Uruguay Round is rather small. These results are broadly consistent with projections based on CGE models and also with the attitude that the impact of the Uruguay Round Agreement remains uncertain, depending on its actual implementation. The remainder of this article is organized as follows. Section II briefly summarizes the major agreements reached in the Uruguay Round negotiations and previous economic assessments of their importance. …