An evaluation of the Tokyo Round trade agreement using general equilibrium computational methods

An empirically based general equilibrium model involving the United States, Japan, the (nine-member) EEC, and a residual rest of the world is used to evaluate the Tokyo Round trade agreement negotiated under the GATT. Equilibria for post-Agreement policy regimes are computed and compared to a pre-Agreement equilibrium. Results indicate small aggregate welfare impacts but more significant terms of trade effects. Losses seem likely for Third World countries due to an adverse terms of trade change. Under some assumptions the changes in NTB codes produce more significant effects than the tariff cuts in the Agreement.     

Computable general equilibrium models for trade policy analysis in developing countries: A survey

This paper surveys the contributions of computable general equilibrium (CGE) simulation models designed to quantify the implications of alternative trade policy scenarios in developing countries. The paper starts with a review of the basic structure of CGE models, using a one-sector model with product differentiation on the import and export side. The basic properties of CGE models are established and a series of applications to trade policy, internal-external balance and growth, and intertemporal issues are discussed.     

The US–China trade war and Phase One agreement

The Trump administration changed US trade policy toward China in ways that will take years for researchers to sort out. This paper makes four specific contributions to that research agenda. The first is to carefully mark the timing, definitions, and scale of the products subject to the tariff changes affecting US–China trade from January 20, 2017 through January 20, 2021. One result was each country increasing its average duty on the other to rates of roughly 20 percent, with the new tariffs and counter-tariffs covering more than 50 percent of bilateral trade. The second contribution is to highlight two additional channels through which bilateral tariffs changed during this period that received less research attention. One tariff change is through product exclusions, another is trade remedy policies of antidumping and countervailing duties. The third contribution is to provide an initial exploration into why China fell more than 40 percent short of meeting the goods purchase commitments set out under the first year of the Phase One agreement. The last contribution is to consider additional trade policy actions—involving forced labor, export controls for reasons of national security or human rights, and reclassification of trade with Hong Kong—likely to affect US–China trade beyond the Trump administration.     

Rent seeking and the North-South terms of trade

In this paper results are reported for a series of counterfactual experiments with an eight- region numerical general equilibrium model of world trade, production, and welfare. In these analyses trade restrictions in the developing world are modeled as quantity constrained import licensing, which generates competitive rent-seeking behavior. Model experiments concentrate on the implications of differential factor endowment growth for the North-South terms of trade, and the effects of alternative trade policy changes in developing countries.     

Applied general equilibrium analysis of trade liberalisation on land-based sectors in Malaysia and Indonesia

This paper presents general equilibrium evaluations of forest sector trade for Southeast Asian exporters. The four scenarios examined range from the 1994 Uruguay Round tariff reductions to a complete liberalisation of forest and agricultural products trade. We find that simultaneous reductions in forest and agricultural sector tariffs make Indonesia and Malaysia worse off. For Indonesia, this is due to the fall in forest rent and agricultural tariff revenues. Malaysia has the highest ratio of agricultural imports to total land-based sector imports, the rise in agricultural prices thus hits Malaysian consumers the hardest.We find that terms of trade effect omitted from the partial equilibrium framework may reduce the welfare calculations for Malaysia and Indonesia in the forest sector trade by as much as 106 and 58%, respectively. This points to the importance of general equilibrium modelling in the logging industry. The same applies to other sector specific analyses where trade is concentrated between few countries.     

Assessing non-tariff barriers in Syria

International trade in Syria is highly regulated through a combination of tariffs and non-tariff barriers. At 8% of the value of imports on average, effective tariffs are relatively low. However, non-tariff barriers to trade actually make Syria's trade restrictiveness very high. Comparing world and domestic prices of imports indeed suggests that non-tariff barriers increase the domestic price of imported goods by 17% on average, notably the result of significant quantitative restrictions. Using a computable general equilibrium model, the costs of NTBs on the Syrian economy are assessed. Simulations suggest that reallocation gains resulting from a complete removal of NTBs could be substantial. Accordingly, the key message from the analysis is that trade reform if it focuses only on tariff reduction will have limited growth benefits. On the contrary, if the Government abolishes the widespread non-tariff barriers to trade, including the elimination of quantitative trade restrictions, trade policy can become the central instrument to redress Syria's growth prospects.     

Game-modeling multilateral trade negotiations

Using actual trade and tariff data for the United States and the European Community, this paper demonstrates how a trade negotiation such as the Tokyo Round can be modeled as a game among countries attempting to minimize individual welfare loss functions. First, we construct welfare functions based on suggested trade negotiation goals. We compute both the noncooperative Nash-Cournot equilibrium tariffs and the cooperative Nash equilibrium implied by these welfare functions. Welfare outcomes under the computed equilibrium tariffs are then compared with those arising from the initial tariff structure, as well as the tariff structure actually determined by the negotiation. We find that, while the game model tracks closely the decisions of the negotiators in the Tokyo Round, later unilateral political decisions resulted in less optimal tariffs.     

Winners and losers: Assessing the impact of Chinese Yuan appreciation

This study uses a computational general equilibrium model to examine the effects of the Chinese currency on the consumption, investment, trade, output, and welfare of different countries or regions. The results indicate a general decline in welfare across the globe. China is the biggest loser, with a reduction in output. Its domestic interest rate is likely to decline, leading to a potential liquidity trap. The policy implication of this research is that China should minimize changes in its currency value in the short run.     

Global adjustment to US disengagement from the world trading system

US trade policy in the Trump administration is protectionist, raising tariffs outside of WTO rules, threatening trade wars, withdrawing from existing trade agreements, and negotiating new bilateral trade deals rather than free trade agreements. The reaction of the rest of the world has been to support the WTO rules-based trading system and to pursue new and expanded regional trade agreements that do not include the US. The result may be US disengagement from the world trading system, with countries diverting trade around the US. We use a global computable general equilibrium (CGE) model to analyze changes in trade and production patterns for a variety of scenarios, including US trade wars. We find that adjustment to US disengagement is feasible—the changes in trade shares as countries divert trade are modest and achievable, with very little impact on the volume of global trade. If the US engages in trade wars with major partners, the best response for other trade partners is to sit out the trade war, accept higher US tariffs, and gain markets from global trade diversion around the US. Finally, because of indirect effects, widespread tariffs fail to benefit the protected sectors—a fallacy of composition in a protectionist trade policy.     

The experience of the EEC Eurolink Project in modeling bilateral trade linkage equations

Following the basic philosophical approach of the LINK Project, which links various national econometric models built in different countries, the Commission of the European Communities has succeeded in linking the full-size quarterly econometric models of the four major European countries. The Eurolink Project is being extended to cover the other EEC countries as well as the United States, Canada, and Japan. The results reported in this paper are part of this larger project which attempts to link the EEC member economies in a trade and capital flows econometric model and explain the transmission of interdependent economic fluctuations from country to country. In the present study, the interconnection between the various economies is represented by bilateral trade flows only. Flows of invisibles and of financial capital are not completely studied and are not yet ready to be included in this report.The theoretical structural model with its bilateral trade supply and demand functions and the technique employed for the construction of bilateral import and export price indices are presented. Estimation results are shown and discussed with emphasis on their use for the analysis of international trade and for policy decision making.     

Imperfect competition,border protection and consumer boycott: The future of the dairy industry in Israel

Recent increases in prices of dairy products in Israel led to consumer unrest and boycotts against dairy producers during the summer of 2011. The Israeli dairy industry is highly distorted with production quotas and administered prices for raw milk, tariff rate quotas and an oligopoly in dairy processing. Since the issue of self-sufficiency and food security is at the top of Israel's national priorities, the future of the dairy industry is generating heated debate. Thus, we use a general equilibrium model to estimate the effects associated with particular alternative policies actually discussed to liberalize the Israeli dairy industry.     

Partial vs. general equilibrium analysis and choice of functional form: Implications for policy modeling

In formulating empirically tractable, economywide models, researchers are often forced to employ “convenient” functional forms. These forms embody restrictive maintained hypotheses. Alternatively, flexible functional forms may be utilized in a partial equilibrium setting. Estimation and incorporation of flexible functions into computable general equilibrium models is considerably more demanding of research resources. Assuming that shortcuts will continue to be necessary for researchers attempting to respond to current policy problems, this paper compares these two alternatives. Specifically, a general equilibrium model for New York State is employed to evaluate the relative performances of flexible partial equilibrium models and their more restrictive, general equilibrium counterpart. In the particular application considered, the former approach is found to dominate the latter.     

Trade policy and the United States labour market

The United States Government proposed a sweeping review of existing trade deals when the current Administration took office in January 2017. This paper reviews the ongoing changes, and considers the potential impact of two strands of the trade policy debate on the United States labour market. First, we consider policy decisions that may impact the location decision of multinational enterprises, especially within the context of the renegotiation of NAFTA. Second, we review the policy debate related to the steel industry, and the potential channels through which an import tariff on steel imports may impact the labour market.     

Trade liberalisation and urban–rural linkages: a CGE analysis for Ethiopia

Using a rural–urban computable general equilibrium (CGE) model, this paper examines the impacts of trade liberalisation on structural transformation and overall growth of the Ethiopian economy. The simulation experiments suggest that the impacts of trade liberalisation depend on wage-setting conditions in the urban region. With a fixed urban real wage, trade reform adversely affects overall economic growth mainly because of large contractions in the urban region. If urban nominal wage is flexible, both rural and urban regions experience expansion in GDP. An important policy implication of this analysis is that the success of trade liberalisation critically depends on the extent to which product and labour market reforms are synchronised. On the other hand, simultaneous implementations of nominal devaluation and reductions in external trade tariffs would not enhance structural transformation of the economy. However, this policy conflict does not necessarily arise if the introduction and implementation of different policy instruments of trade reforms are appropriately sequenced.     

Transmissions of real economic shocks across the Pacific Rim economies

We use Asian International Input–Output Tables 1995 in measuring trade dependencies of 10 Pacific Rim economies within a regional general equilibrium model. We develop two sets of metrics in measuring the trade dependencies of the economies. First, we use final demand elasticity of exports in measuring the sensitivities of the economies in the model to autonomous changes in the final demand in any other economy in the region. Second, we use a final-demand-weighted index of export elasticities that are induced by variations in the final demand vector of any economy in the model as indicators of the strength of the shocks transmitted across countries.The estimated coefficients have important policy implications. First, these coefficients identify the most vulnerable sectors of the economies in terms of the export/import dependency. Second, these coefficients may be readily used in bilateral and regional trade negotiations. Using these coefficients, policy makers can provide mutual trade concessions in dampening the effects of real and financial shocks transmitted from the trading partners.     

Betting the farm on high food prices: A consumer based approach to agriculture protection

Our question is quite simple: If agriculture protectionism is a product of economic development, why is agriculture protected at such varying degrees by otherwise similarly developed countries? Previous attempts to fit agriculture into general models of trade policy formation have relied exclusively on producer demand for protection and merely assume the associated demand for lower prices that might come from consumers. Not surprisingly, these previous studies add only minimally to this strange phenomenon. Our method turns this approach on its head by modeling the political strategy of agriculture protection on the costs incurred by the consumer. Taking both producers and consumers into account more accurately reflects the intent of extant theoretical models of protectionism. Our results show that using the consumer as the dependent variable provides more robust results on common independent variables. Recent global events show that consumer disapproval of agriculture policies should not be underestimated by political scientists or politicians.     

The nexus between income distribution,trade policy,and monopoly power: An assessment of the tin market

The article suggests a manner in which degrees of monopoly power can be introduced into a trade policy model of the computable general equilibrium type. The distributional effects of tariffs and subsidies are compared, first under competitive conditions and then under conditions of monopoly power.The tin market, for which Malaysia can be assumed to exert monopoly power, is used as an example to show the distributional consequences of applying a competitive model in cases where a model allowing for monopoly power would have been more appropriate. The existence of monopoly power is shown to have important distributional effects. Policy modelers, dealing with distributional issues, should therefore be careful about the assumptions made about market forms.     

Policy modeling of foreign exchange rates

This paper is neither a complete survey of empirical work on exchange rate determination, nor a review of the ballooning volume of theoretical models. It is instead an attempt to classify the main alternative approaches to modeling exchange rates. I shall concentrate on approaches that can be used to assess the effects of alternative policies. There will be four further sections in the paper. The first three sections will each deal withthe structure, empirical support, and policy consequences of three main types of model: purchasing power parity models emphasizing the close and immediate relation of goods markets; interest rate parity models emphasizing the close and immediate international linkage of markets for financial assets; and structural balance-of-payments models that do not assume either of the above linkages to be so strong and immediate as to eliminate the other, and that hence require separate (but interdependent) modeling of trade and capital linkages in the determination of exchange rates. Each of these main categories has many rather distinct models within it, and some models are not easily classified into one of the three categories; I hope that the three-way split will nevertheless serve to make some distinctions that are important for policy modeling.In the final section I shall try to summarize the available model results that pertain to national and international policy choices under a system of more flexible exchange rates, and then to suggest where more or better model building might usefully increase the amount of information available to guide policy decisions.     

Are tariffs bad for growth? Yes,say five decades of data from 150 countries

The empirical evidence on the growth effects of import tariffs is sparse in the literature, notwithstanding strong views held by the public and politicians. Using an annual panel of macroeconomic data for 151 countries over 1963–2014, we find that tariff increases are associated with an economically and statistically sizeable and persistent decline in output growth. Thus, fears that the ongoing trade war may be costly for the world economy in terms of foregone output growth are justified.     

Alternate adjustments to external shocks in Hungary

A multisector computable general equilibrium model is used to evaluate Hungary's response to the external price shocks in the 1970s. The model incorporates characteristics of Hungary's reformed socialist economy. The results show that although the deterioration in terms of trade was important, the policies of insulation of the economy and increases in investment had a much larger detrimental impact on the trade balance. The existence of planned CMEA trade reduced the effects of the price shocks on the trade deficit. Export promotion by means of higher export subsidies would not have been effective to reduce the trade deficit in Hungary.