theory & empirics

8/2/2019 Theory & Empirics

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Lecture 8:

Measuring the impact of trade policy

Previous lecture showed how governmentintervention eg. via taxes, or quotas/permits drives awedge between the consumers marginal willingnessto pay and producers MC.

The consequence is a decline in netwelfarethoughnote certain sectors within society may gain. i.e.policy is also likely to have distributionalconsequences.

This was applied to protection of an industry eg.via tariffs. Analysis indicated a net welfare lossarising from the use of such trade policy.


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Figure 9.11 Effect of a Tariff

Free trade:

CS = A+B+C+D+E

PS = D

TR = 0

Tariff:

CS = A

PS = B+F

TR = D

Welfare

CS = -(B+C+D+E)

PS = B

TR = D

W = -(C+E)


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Trade policy instruments:

Tariffs = a tax on imports. Can either be a specific tax per

unit imported, or an ad valorem tax based on the value of thegood imported.

Quotas: where the amount of imports is limited to a certainquantity. Eg. trade in textiles and clothing.

VERS (Voluntary Export Restraints): signatories to GATTand the WTO are prohibited from introducing / raising tariffsand quotas. One way round this was where countries agreedto voluntarily restrain their exports (eg. Japanese cars in the1980s)

Export subsidies: where specific export industries are offeredsubsidies if they export

Non-tariff barriers to trade: customs formalities, technicalstandards, labelling requirements


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How is the impact of policies measured

Partial Equilibrium Modelling:

Requires information/assumptions about slopes of supply and demandschedules, as well as base data on trade flow, production, and tariffs.

Can be implemented at a high degree of product disaggregation.

Welfare measures based on CS, profits and tariff revenue

General Equilibrium modelling Also requires information on supply and demand, as well as on

intermediate input markets, factor markets, consumer behaviour + onthe interrelationships between these ( Social Accounting Matrix(SAM)).

Level of information required typically means these are implemented

at a much higher degree of aggregation. Welfare measure based on CV or EV, profits and tariff revenue

Both of these techniques are very widely used to measure theimpact of changes in trade policy or tax policy.


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Methodology

1. Choice of model: The model is composed of a system of

simultaneous equations. When these are solved theequilibrium quantities replicate the real world ie they giveyou the same quantities of goods, factors etc that the datatell you really exist

2. The procedure that is employed to ensure that this happensis known as calibration

3. Simulation: you can then change one of the parameters eg.tariffs, run the model again and compare the new valueswith the initial values. The difference gives you the impact

of the policy.4. Output:

Changes in production

Changes in trade flows

Changes in welfare + disaggregation of this


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Partial Eq. Example - Egypt

1. Choice of model: Single importerEgypt

Domestic supply

Three exportersEU, US, Rest of the World (ROW)

28 manufacturing industries

2. Choice of experiment/simulation: Regional integration ie. simulating the Barcelona

process

Multilateral experiment: reduction of tariffs with regard

to all sources Sensitivity analysis over key parameters, eg the

elasticitity of substitution of a good across countries.

See Excel file with simulations.


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Regional Integration: Theory & Empirics Regional integration is where a sub-set of countries

choose to liberalise trade between themselves, but not vis--vis the rest of the world.

Moving from restricted to free trade is welfare increasing,natural to assume that a move from restricted trade toregional integration will also be welfare increasing.

However, this is not necessarily the case. Restricted tradeis a distorted equilibrium, and so is regional integration:

Trade creation: a shift from high cost domestic producers

to lower cost partner country producers Trade diversion: a shift in source of imports from lower

cost rest of world sources to higher cost partner countrysources.


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Trade Creation and Trade Diversion

P

a b c d

pw

Pw(1+ t)

S

D

S1 D1 Q

pbe

Initially no regional integrationand the same import tariffs on world

and on country b.

imports of S1-D1 from world

which is the cheaper supplier.

Now regionally integrate with bie no tariffs on imports b.

The price at home to Pb

CS = a + b + c + dPS = -a

GR = -(c + e)

W = (b + d) - e

where b + d = trade creationand e = trade diversion

Classical theorydoes not offer us an a priori

reason why countries integrate. If you consider

integration as

1) unilateral tariff reduction (leading to TC)

2) then switching import from world to b

therefore why do step 2?


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CGE results: perfect competition, CRS

Authors Scenario

Welfare gains (US$ Billion)

Global LDCs

Lippoldt & Kowalski

(Base = 1998)

100% in manufacturing

tariffs

63.3 51.4

100% in manufacturing

+ agricultural tariffs

97.2 68.4

World Bank, 2004

(Base = 1997)

Manuf cut to 5% in DCs,

10% in LDCs

98 58

Andersen, Francois et.al

(Base = 1995)

100% M liberalisation 254.3 108.1

Dessus, et.al

(Base = 1995)

100% in manuf and ag.

Tariffs

82 18*

* = non OECD countries

Source: Trade and the Global Economy, HM Treasury and DTI, May 2005


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CGE results: imp. comp, dynamic models

Authors Scenario

Welfare gains (US$ Billion)

Global LDCs

Nagarajan

(base = 1995, IC, IRS)

50% in protection on

M, A & S + trade

facilitation

385

World Bank, 2004

(1997 base, dynamic)

100% liberalisation in A

+ M aby all

832 539

Dessus, et.al

(Base = 1995, dynamic)

100% A +M tariffs 1212 455

Source: Trade and the Global Economy, HM Treasury and DTI, May 2005

Note, that in contrast, the Edinburgh G8 summit agreed to boost aid to

$50 billion!

Total support to agriculture in the OECD countries, in 2001 was $311

billion


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Hufbauer & Elliot on the US

1. Tariffs and quantitative restrictions in 1990 cost

American consumers about $70 billion = more than1% of GDP

2. Net change in welfare for the economy was of theorder of $11 billion. 70% of this was captured by

foreign producers as quota rents3. Nearly 50% of the consumer costs are accounted

for by 21 industries

4. More than a third ($24 billion) are from protectionin textiles and clothing.

5. In terms of net national welfare, the cost perprotected job is about $54,000.


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Messerlin on the EU

1. EC protection (tariff and NTB) highly concentrated

in certain sectorsagriculture, process foodstuffs,textiles & clothing, steel and chemicals.

2. Many highly protected goods are intermediategoods in which LDCs have a comparative

advantage3. The costs to EU consumers add up to

approximately 7% of EU GDP.

4. The estimated rents from protection correspond toabout 30-40% of the total costs of protection

5. In terms of net national welfare the cost per jobsaved is of the order of220,000


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And for the LDCs

Similarly Robinon et. al. show that protectionism

and subsidies by developed countries, cost LDCs$24 billion annually. Latin America & the Caribbean: $8.3 billion

LDCs in Asia: $6.6 billion

Sub-saharan africa ~ $2 billion

However, note that successful development policyis not simply about having a liberal trade regime. Requires appropriate domestic policies, regulations and

structures, macro-economic stability, appropriateinvestment, lack of corruption

Also simply liberalising (agricultural) trade maynot be the answersee eg. article by D. Rodrik


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Summary

Wide variety of protectionist measures that can be used,though note the constraints of GATT and the WTO

Estimating the costs of these policies typically involves

either partial or general equilibrium models.

The underlying welfare measures are then consumersurplus, and CV/EV.

Cost of these policies can be very high for both DCs and

LDCs

Note however that models are sensitive to assumptionstherefore have to be very careful in interpreting results


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Additional Readings

1. Feenstra, R. (1992), How Costly is Protectionism,Journal of Economic

Perspectives, 6(3), 159-78.2. Hufbauer,G. C and Elliott K A (1994) Measuring the Costs of

Protection In the US. Institute for International Economics,

Washington, DC. (Read pp. 1-42, plus a couple of case studies.)

3. Hufbauer, G.C. Surveying the cost of protection: A partial equilibrium

approach,http://www.iie.com/publications/chapters_preview/66/2iie2350.pdf

4. Messerlin, P, The real cost of European Protectionism,

http://www.which.net/campaigns/other/freetrade/messerline.pdf

5. Diao, X, Diaz-Bonila,E and Robinson, S, How much does it hurt: The

impact of agricultural trade policies on developing countries.6. Dani Rodrik, How to Make the Trade Regime Work for

Development, February 2004. A few thoughts on the Doha and

post-Doha trade agenda
http://www.iie.com/publications/chapters_preview/66/2iie2350.pdfhttp://www.which.net/campaigns/other/freetrade/messerline.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://ksghome.harvard.edu/~drodrik/How%20to%20Make%20Trade%20Work.pdfhttp://www.which.net/campaigns/other/freetrade/messerline.pdfhttp://www.iie.com/publications/chapters_preview/66/2iie2350.pdf

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