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GTAP Resource #2074

"How to calculate and implement import tariff cuts?"
by Brockmeier, Martina, Rainer Klepper and Janine Pelikan

Market Access is the key question in the current WTO negotiations. To open market access a tiered formula for tariff reduction is proposed. Using this kind of formula involves sharp reductions of higher tariffs and small reductions of lower tariffs. While WTO negotiations and the implementation of the agreed tariff cuts take place on the 6 digit level of the bound tariff rate, most partial or general equilibrium models only allows for tariff cuts on a highly aggregated level of applied tariffs. Thus, to operate large scale models like GTAP it is necessary to aggregate detailed tariff information of thousand of applied and bound tariff lines to a manageable size.
WTO scenarios for simulations with general or partial equilibrium models can be built on the basis of two different approaches. A very detailed method builds scenarios from the most disaggregated bound and applied tariff line level used for example by JEAN et al., 2005 and ANDERSON et al., 2005. In so doing, it is necessary to implement the tariff cuts at a disaggregated applied and bound tariff line levels (e.g., the 6 digit level of the harmonized system 96 (HS96)) with the help of statistical programs, e.g., SAS. Thus, water in the tariffs (compare PODBURY and ROBERTS, 2003) or binding overhang (compare FRANCOIS and MARTIN, 2003) is taken into account. Thereafter, the new applied tariff rate is aggregated to the sectoral and regional aggregation of the model and a shock is calculated to move the applied tariff rate to the new level (e.g., after implementation of the WTO decisions). This procedure has the advantage of being as close as possible to the negotiation process. Additionally, it takes account of the tariff peaks that are most clearly identifiable at the detailed tariff line level. To build scenarios from the most detailed tariff line level, however, requires a huge amount of resources in form of access to the prevailing databases (e.g., Trains, AMAD, COMTRADE, etc.) and labor inputs. Additionally, the work needs to be done for each WTO scenario, e.g., if tariff reductions are based on different tariff cuts of the tiered formula.
Another, less resource consuming method would be to aggregate the bound tariff rates from the 6 digit tariff line level to the prevailing model aggregation. Applying this approach all kind of shocks for different formulas can easily be calculated using the aggregated applied and bound rates. However, this approach underestimates the prevailing protection because it smoothes out the tariff peaks which might most likely result in lower tariff cuts.
Given these two approaches to implement tariff cuts the most crucial question is: Do these two approaches differ so much that the higher costs of the detailed method are justified? In order to answer this question we implement scenarios where the tiered formula is applied on the 6 digit tariff line and the aggregated model level, respectively, and compare the results. The arising differences in simulation results will show the impact of different aggregation levels.
The simulations of this paper are based on the GTAP framework. Version 6 of the GTAP data base employs the Market Access Map (MAcMaps). MAcMaps offers applied protection data that is aggregated from the 6 digit applied tariff line level to the GTAP level. In order to compare the two approaches, mentioned above, we supplement the GTAP data base with a bound rate that is aggregated from the corresponding 6 digit level. Despite the endogenity bias and the disregard of prohibitive tariffs we use import weighting in all our aggregation. The advantage of this method is the data availability up to the 6 digit level and the consideration of the relative importance of trade flows. The impacts of different weighting schemes or tariff aggregators are extensively analyzed in the literature (compare BACH and MARTIN, 2001; BUREAU and SALVATICI, 2004; MARTIN et al. 2003). In contrast, there is currently no publication available that tackles the problem of the level of aggregation. Our study will try to fill this gap.
Finally we summarize the main findings and conclude in the last chapter of our paper.

ANDERSON, K. ,MARTIN, W. and VAN DER MENSBRUGGHE, D. (2005), Doha Merchandise Trade Reform and Developing Countries: What’s at Stake? Plenary Paper for the 8th Annual Conference on Global Trade Analysis, Lübeck, 8-11 June.

BACH, C.F. and MARTIN, W., (2001). Would the right tariff aggregator for policy analysis please stand up? Journal of Policy Modelling Vol. 23 , pp. 621-635.

BUREAU, J.-C. and SALVATICI, L. (2004). WTO Negotiations on Market Access in Agriculture: a Comparison of Alternative Tariff Cut Proposals for the EU and the US. In: Topics in Economic Analysis & Policy. Vol. 4, No. 1, Article 8.

FRANCOIS, J. and MARTIN, W. (2003). Formula approaches for market access negotiations. The World Economy. Vol. 26, No. 1, pp. 1-28.

JEAN, S., LABORDE, D. and MARTIN, W. (2005), Consequences of Alternative Formulas for Agricultural Tariff Cuts, Chapter 4 in Anderson, K. and Martin, W. eds, Agricultural Trade Reform and the Doha Development Agenda.

MARTIN, W., VAN DER MENSBRUGGHE D. and MANOLE, V. (2003): Is the Devil in Details?: Assessing the Welfare Implication of Agricultural and Non Agricultural Trade Reform. World Bank, Washington DC.

PODBURY, T. and ROBERTS, I. (2003), Opening Agricultural Markets through Tariff Cuts in the WTO, ABARE Report 03.2, RIRDC publication 03/011, Canberra.

Resource Details (Export Citation) GTAP Keywords
Category: 2006 Conference Paper
Status: Published
By/In: Presented at the 9th Annual Conference on Global Economic Analysis, Addis Ababa, Ethiopia
Date: 2006
Created: Brockmeier, M. (5/1/2006)
Updated: Brockmeier, M. (3/15/2007)
Visits: 3,475
No keywords have been specified.

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