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GTAP Resource #2108

"Simulating trade policy reforms at the detailed level: some practical solutions"
by Laborde, David and Alex Gohin

CGE are now widely used for assessing trade policy changes and their results used for assisting policy makers in their choices. The major limitation of these tools comes from the level of aggregation of the model. This paper will define a methodology to assess trade policy shocks at the hs6 level (nomenclature including more than 5,000 products), starting from a GTAP world (57 sectors). Agricultural liberalization is particularly well suited to illustrate this approach since agricultural tariffs display a strong variance and that many LDCs are highly specialized in a specific product (cacao, coffee, cotton etc.).

Due to numerical capacity or data availability constraints, CGE models are rarely used with more than fifty geographical areas and fifty sectors. The sector dimension is the most problematic, for theoretical and policy oriented reasons.

First, inside an aggregate sector, products present a lot of heterogeneity: for a given GTAP sector: trade elasticities and protection levels differ between the different kind products. Moreover, across countries, product specialization and often hyper specialization for many developing countries, implies that speaking about a “homogeneous”aggregate sector is misleading. By example, the change in the price in a sector “Other crops”, including coffee and cacao, implies very strongly different situation for a country specializes in coffee and an other specialized in cacao.

Second, implementing non linear tariff reduction at the aggregate level leads to underestimate the real impact of these shocks on specific products and doest not allow to tackle the tariff peaks issue in the right way.

Last element, due to the increasing specialisation and segmentation in the production chain, policy makers needs to have information on the impact of trade policy reforms at the finest level. Having information on the aggregate level of textile import changes is not very relevant and will minimize the true adjustment costs that people will face. By being more precise, models will become more realistic and more appealing for economic agents.

In the first part of this paper, we re-examine the well know Armington assumption. Basically, for a given sector, a nested Armington structure means that every country produces a specific variety, which is an imperfect substitute with products from other regions.

Nevertheless, this assumption has two interpretations. In one hand, at the finest level, the geographical specificity is present: a French cow’s milk cheese is different from an Italian one. On the other hand, for an aggregate sector, the country particularities come from the composition of the aggregate: at the hs6 level each product is homogeneous, whatever its origin, but going up to the aggregate sector, the relative shares of the hs6 products define a country specific basket.

Both interpretations lead to alternative modelling choices that we explore in a second part. Then, focusing, on the second case, we look at an illustrative example. We rely on available data: GTAP database, trade flows at the hs6 level from BACI database and protection data from MacMapHS6v2. The most problematic parameters to obtain are elasticities of substitution at the HS6 level. In order to have robust estimates, we focus our attention on agricultural sectors that have been studied through numerous studies [ref].

As we shown, agricultural tariffs display a strong variance due to tariff peaks and specific tariffs which ad-valorem equivalents are unit value sensitive. This is strong argument in favour in our approach to look at agricultural liberalization issue. We look at two scenarios: a full liberalization and a Doha scenario (non linear cut) and compare results with an aggregate model. We compare our results with more theoretical approach that links tariff dispersion and welfare or trade effects (Anderson and Neary, 2004).

We conclude in showing that working at the detailed level also allow a better treatment of Tariff Rate Quotas, an important protectionist tool that is particularly reluctant to any aggregation procedure.

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: Laborde, D. (5/2/2006)
Updated: Batta, G. (5/30/2006)
Visits: 3,546
No keywords have been specified.

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