## **Appendix I: Comparison of the CASE study of the impact on Armenia of the Deep and Comprehensive Agreement between Armenia and the European Union with the present study**

Maliszewska et al. (2008) (hereafter the CASE study) estimated the impacts on Armenia of a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU. As we do in the present study, they estimate four likely impacts of the DCFTA for Armenia: (i) reduced border costs; (ii) standards harmonization; (iii) commitments in the services sectors; and (iv) improvements in the investment climate. The CASE study estimates that gains from the first three components will be 3.4 percent (this is the comparative static DCFTA scenario). When the improvement in the investment climate is added to the first three, the gains are an estimated 8.0 percent of GDP (this is the comparative steady state DCFTA scenario). The estimates of the CASE study are considerably higher than the comparable estimates of this study: we estimate that the gains from the first three components will be 1.4 percent. When the improvement in the investment climate is added to the first three, our estimated gains increase to 1.6 percent.<sup>44</sup> In this appendix we explain the reason for the differences in the estimates. They are due to a combination of two effects: (i) larger assumed distortions in the CASE study; and (ii) different modeling assumptions. In all cases, the assumptions of the CASE study lead to larger estimated gains. The CASE study systematically assumes larger distortions are present in the Armenia than we assume in the present study. The larger the distortions are, the more gains there are from their removal. The larger distortions in the CASE study partly reflect the fact that our study was based on estimates of distortions in 2010, while the CASE study uses estimates of distortions from 2006 or 2007. Since Armenia has implemented substantial reforms in the interim, the initial distortions in the CASE study are significantly higher. This is the case with border costs. But it is also due, in some cases, to the fact that we had greater data available to us that allowed a more accurate estimate, for example in the services survey and estimates that we conducted. Further, there is a key modeling assumption difference in the assumption of which countries benefit from preferential liberalization of services that results in larger estimated gains in the CASE study, and a further modeling assumption difference in the comparative steady state scenario.

# **I. Comparative Static Estimates**

# (i) **Barriers in Services.**

The estimated gains of the CASE team from services commitments as part of a DCFTA should be substantially greater than the estimates in the present study for two reasons. First, the CASE team assumed that the barriers to foreign direct investors in services are much higher than we have estimated. Second, while our study assumed that commitments to foreign services suppliers under the DCFTA will be limited to EU suppliers, the CASE team assumed that the commitments under the DCFTA will be provided to all foreign suppliers (Maliszewska et al., 2008, p.154). We elaborate on each of these two aspects.

> 44 The latter estimates is for our ―unilateral‖ scenario.

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