Simulated economic impacts in applied trade modelling: A comparison of tariff aggregation approaches

This paper assesses the performance of two recently developed tariff aggregators in reducing tariff aggregation bias by analysing Swiss beef market liberalisation scenarios. Specific relevant sources of bias are addressed: substitution effects on import demand, Tariff Rate Quotas and overprotection in tariffs. The aggregators are linked to a global large-scale partial equilibrium model and benchmarked against a standard aggregator. The choice of the aggregation method shows considerable effects on simulated economic impacts, specifically if the dispersion in tariffs or tariff cuts is large. A large bias is revealed in simulated gains from trade liberalisation using the standard aggregator. The impacts on traded quantities are found to be overestimated, while price and welfare effects can be higher or lower by switching to alternative aggregation methods. By reducing aggregation bias and depicting negotiated tariff schedules more directly, the proposed aggregators enhance the contribution of trade modelling to evidence-based policy making.     

Is Trade Liberalisation Pro-Poor in Pakistan? Evidence from Large-Scale Manufacturing

This article aims to analyse the impact of industry-level trade liberalisation (measured through industry-specific tariff rates) on poverty in Pakistan. Combining data for tariff rates with the Labour Force Survey of Pakistan, we use quantile regression analysis to estimate the impact of changes in tariff rates on workers’ wages (associated with the manufacturing sector of Pakistan) that are at different points of the income distribution. Our findings meaningfully signal that trade liberalisation helps to reduce poverty in the economy. Based on these results, this study provides policy recommendations to reap maximum benefits from trade liberalisation.     

Trade Liberalisation, Closer Economic Relations and Intra-Industry Specialisation

Abstract
Much of the growth in trade among the industrialised countries, and more recently among countries in the Asia-Pacific region, has taken the form of intra-industry trade (HT). Australia has historically had one of the lowest shares of IIT among OECD countries. This article examines how Australia's IIT has changed in the 1980s in response to the process of trade liberalisation and completion of the Closer Economic Relations (CER) pact with New Zealand. HT indexes are estimated for Australia's multilateral and trans-Tasman trade for 1981 and 1991 for 132 industries using data at the 3 and 4-digit level of the Standard International Trade Classification (SITC). The results point to a sharp increase in the share of IIT for both multilateral and trans-Tasman trade. Industries that have undergone the largest reductions in protection levels have increased their shares of IIT quite considerably. Increased intra-industry specialisation suggests that the short-run adjustment costs associated with trade liberalisation are likely to be lower. If IIT continues to grow in response to the ongoing process of internationalisation of the Australian economy, then Australia's prospects for expanding its share of world trade are good.     

The Pattern and Determinants of Intra-Industry Trade in Australian Manufacturing

This paper presents the pattern and determinants of intra-industry trade (IIT) in Australian manufacturing since the late 1970s. The results point to a sharp rise in IIT from the mid 1980s which appears to be linked with an outward-oriented policy. Industry-level analysis indicates that industries which experienced a sharp fall in protection are the industries with the higher levels of IIT. These include textiles, garments, rubber products, and machinery and equipment. An increasing trend in IIT suggests that the short-term adjustment costs associated with trade liberalisation are likely to be lower, and that liberalisation can proceed without huge short-term adjustment costs. Using a logit model the determinants of IIT are investigated. Results indicate that IIT is positively related to product differentiation and scale economies, and negatively related to the levels of protection and foreign ownership in the pre-liberalisation period. In the post-liberalisation period, however, scale economies explain the inter-industry variations in IIT. R&D intensity and close economic integration appear to have no impact on IIT regardless of the nature of the policy regime.     

Tariff escalation and invasive species damages

We investigate the interface between trade and damages from invasive species (IS), focusing on escalation in tariffs between raw-input and processed-good markets, and its implication for IS-based damages. The current tariff escalation in processed agro-forestry products motivates our analysis. Tariff escalation exacerbates the likelihood of IS introduction by biasing trade flows towards increased trade of primary commodity flows and against processed-product trade. We show that a reduction of tariff escalation, by lowering the tariff on processed goods increases allocative efficiency and reduces IS-based damages, a win-win situation. We also identify policy menus for trade reforms involving tariffs on both raw input and processed goods leading to win-win situations.     

LEGISLATED PROTECTION AND THE WORLD TRADE ORGANIZATION

Tariff bindings and administered protection are two characteristics of the World Trade Organization (WTO) that are little understood. Tariff bindings place a ceiling on tariffs that is not always reached, whereas administered protection provides all industries with some minimum import protection, effectively creating a floor for protection. How do these policies affect applied most favored nation (MFN) tariff rates that are enacted through the legislature? I model tariffs determined by a dynamic legislative process and show that low applied MFN tariffs are less likely with tariff bindings and more likely with administered protection than under purely legislated protection.     

Asymmetric trade protection leading not to productivity but to export share change

This article revisits a classical theme in economics, that is, the relationship between trade protection and economic performance, with an improved treatment of the endogeneity of tariffs and with consideration of alternative performance criteria. This paper also considers the effects of asymmetric protection, such as higher tariffs on consumer goods and lower tariffs on producer goods. Using sectoral data on Korean manufacturing during the period from 1967 to 1993, this study finds that the effect of trade protection by tariff tends to show up not in terms of total factor productivity but in terms of revealed comparative advantage and export shares of sectors. Such an effect tends to be greater in consumer goods, which are the main targets of promotion by higher tariffs. This study verifies the potentially positive role of tariffs under certain conditions, especially under discipline from world markets.     

Effective rates of protection and the Fordney–McCumber and Smoot–Hawley Tariff Acts

This study presents the first calcualtions of effective rates of protection for 1920, 1923 and the first and second half of 1930 for the United States economy disaggregated to 39 sectors. The calculated changes in the effective on the United States economy of the Emergency and Fordney–McCumber tariff acts of 1921 and 1922 and of the Smooth–Hawley Tariff Act of 1930.

The results suggest that the Emergency and Fordney–McCumber tariff acts resulted in a much larger increase in the level of protection given to American industry than the Smoot-Hawley Tariff Act. Further, the results indicate that Smoot-Hawley had a small effect on the level of protection.     

Unfinished Business

Abstract This article is about three phases in Australian trade policy: protectionism, unilateral liberalisation, and participation in regional trade liberalisation. Australia used to have one of the most protected economies in the world. The last dozen years have seen a radical transformation of Australian economic policy: Australia is in the process of becoming one of the most open economies in the world. The last five-to-ten years have also seen a related transformation of Australian foreign economic policy. This policy is now centrally concerned with promoting the process of international economic integration within the Asian region; particularly through the APEC process. Should Australia be pursuing ‘open regionalism’ in the Pacific? or promoting an Asia Pacific trading bloc? or concentrating on its own unilateral trade liberalisation? or using its energy to press for global liberalisation through the GATT? I argue that there remains a deep contradiction in the APEC process; that ‘open regionalism’ is in Australia's interests, and that the critical test of Australia's conversion to liberalisation will come in this third phase, in the future answers that it gives to these questions.     

Flexible and welfare-consistent tariff aggregation over exporter regions

In this paper we improve on existing tariff aggregation techniques in applied equilibrium models (AEM) with the aim of correcting for two sources of bias in simulated welfare results: (1) aggregation over exporter regions with significant tariff dispersion and (2) variable tariff rates determined by Tariff Rate Quota (TRQ) regimes. Both aspects seem important due to an increasing number of bilateral FTAs which drive up tariff divergence across countries and tend to apply TRQs, at least temporarily. We demonstrate that the proposed aggregation technique can handle both tariff and non-tariff barriers to trade by combining a number of tariff indexes in a modified trade balance condition in a welfare-consistent manner. Additionally, different rent-allocation shares for TRQs can be easily introduced in our methodological extension. We also address the implications of some rather strict behavioral assumptions with regard to demand that welfare consistent aggregation requires. An empirical analysis of the Korean dairy market in the EU–South Korea FTA using the proposed method shows that simulated welfare gains are largely affected by the tariff aggregation technique over regions and trade policy instruments. Based on this finding we recommend the more widespread application of welfare consistent tariff aggregation in applied modeling and further research on that topic.     

The Effects of Foreign Trade Liberalisation and Financial Flows between Slovenia and the EU after Accession

The new version of the CGE model of the Slovenian economy based on the 1998 SAM was used for simulations of the consequences of further foreign trade liberalisation after 1998 as the outcome of implementation of Free Trade Agreements and the European Agreement, adaptation of the Customs Tariff to the for manufacturing products, adoption of the EU Common External Tariff after the accession of Slovenia to the EU, and estimated transfers between the two budgets. Results obtained show a positive net outcome of Slovenian accession to the EU in the long run. On the other hand, rational behaviour by the government will certainly moderate possible short-run negative effects and improve favourable long-run effects.     

Industrial labour productivities and tariffs in South Africa

The analysis of the effect of tariffs for labour productivity faces the challenge of tariff policy endogeneity. Tariff policy is designed to promote economic development and the industrial sector tariff structure may reflect characteristics of the industries protected. We seek to identify the effect of tariffs by taking advantage of multilateral tariff liberalization using reductions in industrial sector tariffs in other world regions as instruments for sectoral tariff reductions in South Africa. The data cover 28 manufacturing sectors over the period 1988–2003. We find that tariff reductions have stimulated labour productivity when instrumented by multilateral tariffs. The ordinary least‐squares estimates show downward bias and this confirms the endogeneity of tariffs. Investigation of channels of effects shows some support for the importance of competitive pressure and technology spillover from trade liberalization.     

Liberalization Agreements in the GATT/WTO and the Terms‐of‐trade Externality Theory: Evidence from Three Developing Countries

The terms‐of‐trade theory suggests that governments engage in trade negotiations with their trade partners in an effort to escape from a terms‐of‐trade prisoner's dilemma by mutually internalizing externalities that they impose on each other. In this paper, I use predictions of the terms‐of‐trade relationship to provide support for the theory based on the negotiating patterns of three developing countries during the Uruguay Round of the Generalized Agreements on Tariff and Trade. I use industry level import value as well as tariff schedules from these contracting party states that were graduated from the US Generalized System of Preferences list during the Uruguay Round. I exploit the rapid change in their tariff schedules from the best response to the optimal level within a single negotiation round to empirically test the terms‐of‐trade theory. I find that my estimates are consistent with the predictions of the theory as applied to these three developing countries that were compelled to negotiate for tariff concessions during the Uruguay Round.     

Trade Liberalisation of Intermediate Inputs

This paper considers the effects of tariff cuts in the intermediate inputs market. Traditional trade theories predict that upstream industries would contract and downstream industries would expand. In contrast, new trade theories show that trade liberalisation of the intermediate inputs market may expand both upstream and downstream industries.     

ENDOGENOUS PROTECTION IN A TRADE LIBERALIZING ECONOMY: THE CASE OF SOUTH AFRICA

This article aims to establish the changes that occurred in the institutional structures governing trade policy in South Africa during the period 1990–1998. It also examines the forces that influenced the application of tariff policy by the major tariff-setting bodies by applying various theories of endogenous protection to their decisions. Using firm-level data on applications made to the Board on Tariffs and Trade, the study finds that when estimating a probit model, employment considerations rather than capital invested influenced the board's decisions to grant protection. In addition, the board is found to have granted protection even in the face of tariff lines having been bound under the Uruguay Round. The article argues that this should not be interpreted as a reversal of the trade liberalization but rather as an attempt by the board to cushion firms from the acceleration in the tariff rationalization process that occurred after the GATT offer. Finally, it is suggested that the board's response to changes in import penetration ratios between industries that were considered organized provides prima facie evidence of the superior lobbying ability of such industries.     

Trade liberalization,firm entry,and income inequality

This paper examines the short‐ and long‐run effects of trade liberalization via tariff reductions on income inequality in an economy, which is characterized by an imperfectly competitive urban manufacturing sector and a perfectly competitive rural agricultural sector. Tariff reductions reduce domestic output in the importable urban manufacturing sector, leading to shifts of capital from the urban sector to the rural agricultural sector. This can narrow the wage gap between skilled and unskilled labor in the short run. However, the lowered capital cost attracts new firms, and subsequently excessive entry of firms, to the urban manufacturing sector. This firm entry effect can mitigate the favorable effect of tariff reductions on wage inequality in the long run. Empirical study confirms the findings.     

A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes

This paper develops a Ricardian model with transaction costs and endogenous and exogenous comparative advantages. It shows that the level of division of labour and trade increases as transaction conditions improve. It identifies the conditions for trade negotiations that result in zero tariff rates and the conditions for the coexistence of unilateral tariff protection and unilateral laissez faire policies. The model may explain the policy transformation of some European governments from Mercantilism to laissez faire in the 18th and 19th century and policy changes in developing countries from protection tariff to trade liberalization and tariff negotiation.     

Transport Cost and Tariff Protection of Australian Manufacturing*

This paper provides estimates of transport cost and tariff protection available to import-competing Australian manufacturing industries. It finds that transport costs provide an important component of total protection available to such industries; one which, for many, is more important than the Australian tariff. In view of the effects of protection on industrial structure and performance, it should be explicitly recognized that transport costs are an unavoidable element of the protective structure and are deserving of study in their own right.     

Impact of trade liberalisation on labour market and poverty in Sri Lanka. An integrated macro-micro modelling approach

This paper revisits the long standing controversy of trade and poverty linkage using a macro-micro modelling approach based on general equilibrium and microsimulation analytical frameworks. Sri Lanka, the first country in South Asia which undertook trade reforms more than three decades ago, is taken as a case in point in this study. The paper analyses the effects of trade liberalisation on income distribution and poverty in the urban, rural and estate sectors in Sri Lanka using the first ever microsimulation model built for the country in combination with a multi-household computable general equilibrium (CGE) model. The results reveal that without any fiscal policy adjustments a 100% tariff cut would lead to an increase in economic growth and a reduction in poverty incidence both in the short run as well as in the long run. However, when the tariff cut combined with the fiscal policy adjustments to maintain the budget neutrality, poverty outcomes showed mixed results. In contrast, results show that trade liberalisation increases the income inequality in Sri Lanka.     

Time-consistent protection with learning by doing

Can a government induce efficiency gains in his domestic industry by protecting it against foreign competition? Would such trade protection be time consistent? The present paper builds a dynamic equilibrium model that accounts for learning-by-doing effects that link firms’ strategies over time. The model shows that the existence of dynamic economies of scale suffices to overcome the traditional government's lack of commitment of its tariff policy. This paper compares the infinite horizon Markov perfect equilibrium of this game with the dynamic equilibrium under commitment as well as the static Nash equilibrium. Equilibrium strategies are derived in closed form by solving a linear-quadratic differential game. Optimal trade policy involves higher tariff levels than in the static setup in order to account for future gains in efficiency. Under reasonable assumptions, the unique stable MPE is characterized by a domestic price and tariff that decrease as experience accumulates, thus supporting the future liberalization of trade as an equilibrium feature of this dynamic game.