further adjustments to the data by accounting for preferential tariffs in the US, Central America, and the Dominican Republic that were not already captured in GTAP, moving the base year to 2005 (the expected date of DR-CAFTA’s entry into force at the time of the study’s writing), and modifying the regional structure of the database to focus specifically on DR-CAFTA member states. The results show that the US welfare and GDP gains are very modest, reaching US$166 million and US$228 million, respectively. USITC (2004) estimates that all US exports to DR-CAFTA partners are likely to increase, led by sales of textiles, apparel, and leather products (US$803 million, or 15 percent above the base year). DR-CAFTA countries increase their exports of textiles, apparel, and leather products by US$3 billion, while sales of sugar, meat, and dairy rise slightly and exports of other products decline. USITC (2004) does not consider the liberalization of services in its analysis, citing lack of reliable data on service barriers. While qualitative results for the US are similar to Hilaire and Yang (2003), the size of the welfare gains is several times smaller than what is reported in that study. This is consistent with the use of a much later base year and lower initial tariffs in USITC (2004), which adopted a baseline that was more representative of the actual conditions prior to the implementation of DR-CAFTA.

Francois et al. (2005) provide another assessment of DR-CAFTA using GTAP6, but without any modifications to the data. Their results show a welfare gain of US$116 million in the United States and US$1,028 million in Central America. The effects on US output are positive but very small, while the output of textiles and apparel in Central America rises by more than 40 percent with other sectors experiencing small to moderate declines. Francois et al. (2005) also implement several alternative simulations, including the likely effects of DR-CAFTA on FDI by endogenizing capital accumulation and saving rates. This results in a nine percent increase in the Central American capital stock and additional US$1,817 million welfare gain, while the US experiences an additional US$131 million increase in welfare.<sup>5</sup> All of the above studies have examined DR-CAFTA in the context of a global model, limiting the scope of investigation to region-wide effects and ignoring potentially important country heterogeneity within Central America. Thus far, only one study (Bussolo and Niimi, 2006) considered the effects of DR-CAFTA in a single-country framework. The authors show that real GDP in Nicaragua could rise between 0.5 and 1.1, depending on assumptions about labor mobility. Imports of agriculture in Nicaragua are likely to rise by 21 percent, while exports of agricultural products and processed foods could increase by 5 and 6 percent, respectively. Most of the DR-CAFTA gains to Nicaraguan economy are achieved through own liberalization, with the benefits reduced by only one-quarter if the US does not reciprocate with its own tariff reductions. Furthermore, Bussolo and Niimi (2006) find that these adjustments represent more than three-quarters of the changes in real GDP, exports, and imports that would be expected if Nicaragua were to unilaterally liberalize vis-`a-vis all of its trading partners.

The general conclusion from the above studies, with the exception of Brown et al. (2004), is that welfare gains from DR-CAFTA are likely to be small—around 1 percent of GDP or less for Central America and almost negligible for the US. Studies using more recent data, such as Francois et al. (2005), tend to show lower welfare gains, consistent with the fact that average tariffs have been declining since the mid-1990s. These results are in line with more general observations in Robinson

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> 5The magnitude of the increase in capital stock appears fairly optimistic. Total investment (as a share of GDP) did not significantly increase in Mexico following the implementation of NAFTA, although FDI inflows did expand. Other than references to the relatively high current stock of US FDI in the region and the expected (but not quantified) improvements in the investment climate, Francois et al. (2005) do not provide reasons why such a large increase in total investment could materialize in Central America.

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