# **_3. Potential gains accruing from trade liberalization and opportunities to boost productivity through trade integration_**

Policy simulations, obtained from a customized CGE model, point to substantial gains from trade liberalization in Brazil. A customized CGE model for Brazil is applied to assess the impacts of trade liberalization reforms on exports, imports, GDP and output.<sup>19</sup> Three hypothetical liberalization scenarios are modeled (Figure 13). In the first scenario, called “coordinated trade reforms within Mercosur”, each Mercosur member unilaterally reduces tariffs by 50 percent with respect to non-Mercosur countries, NTMs are streamlined among the Mercosur parties<sup>20</sup> and export taxes are eliminated among the parties. In the second scenario, a reciprocal preferential trade agreement between Mercosur and the EU is modeled where the average tariff applied by Brazil to EU products would fall from 10.7 to 3.2 percent in a 10-year time-horizon, while the average tariff in the EU for Brazilian products would fall from about 2.5 percent to close to 1 percent, NTM tariff equivalents are reduced by 15 percent and export taxes are eliminated among Mercosur and EU countries. The third scenario comprehends a preferential trade agreement between Mercosur and the Pacific Alliance, where Mercosur countries and Pacific Alliance members gradually reduce tariffs over 10 years,<sup>21,22</sup> NTM tariff equivalents are reduced by 15 percent and export taxes are eliminated among the parties.<sup>23</sup> 19 The model used is the LINKAGE model, which is a dynamic, multi-sector, multi-region model with economy-wide coverage for each region. For each economy, the model also tracks the inter-linkages between sectors through inputoutput transactions, as well as various sources of final demand including private and government consumption, imports, exports, and investment. The database used is the Global Trade Analysis Project (GTAP) which was modified to update the data and identify subsectors of interest for Brazil. Starting from the GTAP database 9.2, the base year of 2011 was updated to 2015 and the input-output structures for Brazil were updated to reflect the latest official tables from IBGE. The sectoral dimension in GTAP was expanded to include several new sectors of interest in Mercosur countries. These include sectors such as beef, soybean, soybean products, wine, footwear, furniture, home appliances, and auto parts that are part of more aggregate GTAP sectors.

> 20 Resulting in a reduction of 15 percent in the tariff equivalents for goods and services.

> 21 It is worth highlighting there will be already free trade between Mercosur and the Pacific Alliance by 2019.

22 In this case, the trade-weighted average tariff applied by Brazil to products from the countries in the Pacific Alliance would fall from 1.3 to 0.3 percent. The average tariff faced by Brazil in the Pacific Alliance would fall from 2.9 percent to 0.8 percent.

23 For the Mercosur-Pacific Alliance scenario, NTM tariff equivalents are reduced by 15 percent and export taxes are eliminated among the parties. Moreover, a bilateral market access is assumed so that existing liberalization among partners remain. Existing tariff barriers with Pacific Alliance countries have been lowered by previous bilateral or Mercosur agreements under the ALADI framework, especially with respect to Chile and Peru. Most tariff liberalization in this scenario would be with respect to Mexico and to a lesser extent Colombia. Liberalization with the Pacific Alliance is assumed to take place both more quickly and more comprehensively. No products are excluded from liberalization and all tariffs are either removed or partially reduced for the most sensitive products.

10