On Oct. 6th, CPA testified at a hearing of the US International Trade Commission on trade agreements. We focused on the failure of economic models to accurately forecast the impact of trade agreements on the US economy. We demonstrated how modifications of the standard economic model for trade can make the model more accurate. We back-test our modified model on the US-South Korea KORUS trade agreement of 2011 and found that our model performed much better than the standard model used by the ITC in a published report in the runup to KORUS. Our modifications to the model allow for national differences in import preferences and for the fact that import penetration can lead to unemployment in the importing nation. Our modifications illustrate our first steps on a path to make economic models of trade more realistic and the forecasts more accurate.
