Despite their welfare-improving properties, negotiations on tariff reductions remain a highly contentious issue. Using the GTAP general equilibrium approach, this paper identifies potential winners and losers from partial removal of remaining tariffs in disaggregated sectors. By considering alternative approaches to further liberalising trade in three broadly defined sectors (agriculture, textiles and manufacturing), the paper establishes empirically the clear superiority of a comprehensive trade reform package which encompasses all sectors and geographic regions. Trade negotiators at the currently deadlocked Doha Round should take note of this result as a possible means of breaking the impasse.tariffs, CGE model, Doha Round

Allan N Rae

Shamim Shakur

English

Research Papers in Economics

Economics Bulletin, 2012, Vol. 32 No. 1 pp. 182-189
 
1.  Introduction 
 
The benefits of removing tariff barriers are unambiguous for a small economy, if 
undertaken in a non-discriminatory fashion. When a tariff is removed, resources will be 
transferred from protected sectors in the importing country and reallocated to other, more 
efficient, uses, giving rise to allocative efficiency gains there. Similar efficiency gains in the 
exporting country will result when  resources are re-allocated there. A further source of 
gain/loss is the expected change in the terms-of-trade resulting from the removal of barriers 
that increase the prices of some traded goods, and lower those of others. Only for very large 
importers, under some extreme conditions, it is possible for the terms-of-trade loss to 
outweigh efficiency gains.  
The driving force motivating removal of tariff barriers should, therefore, be the fact 
that a country benefits from opening its own markets, regardless of what policies other 
countries choose to pursue.  An overwhelming body of trade theory literature, as well as 
country evidence, supports this view.  In the past three decades, most countries including 
many “inward-looking” economies, have decided unilaterally to abandon the old autarkic 
model of import substitution in favour of greater integration into the global economy. China 
and Russia, two virtually closed economies until the late 1980s, have already established 
themselves in global trading discipline. 
With China joining the World Trade Organization (WTO) in 2003 and expected 
accession of Russia by mid-2012, it would be fair to say that the full benefits of trade 
liberalisation can be best realised by multilateral trade negotiations under WTO auspices, 
such as those currently underway under the banner of the Doha Round. Unfortunately, 
stalemate at the Doha Round continues despite the  original completion date of 2005. Bouet 
and Laborde (2010) used a variant (MIRAGE) dynamic computable general equilibrium 
(CGE) model to estimate the cost of a failure of the Doha Round and return to a protectionist 
regime. Their projections show global welfare would potentially be reduced by US$412 
billion, most of it in terms of lost opportunity for new tariff reduction commitments, along 
with a smaller amount for domestic support. 
Problems arise in comprehensive multilateral trade negotiations, as the reform agenda 
includes more ‘contentious sectors’ or product categories. Countries that are largely free-
traders can exhibit extreme protectionism when it comes to some sectors (typically 
agriculture), or politically sensitive products (typically labour-intensive goods). Several 
studies on such selective, sectoral, approaches to trade liberalisation confirm, however, the 
(globally) trade-distorting nature of them (see Rae et al. 2001).  Their welfare impacts 
therefore, are, by no means all beneficial. At the same time, it would be foolish to postulate 
that universal free trade is likely to be on the WTO agenda in the foreseeable future. Policy 
formulation must, therefore, involve considerations of what is feasible, and how best to 
provide incentives for conflicting interest groups to cooperate in order to achieve such a goal. 
The present research is indeed undertaken in that spirit. By considering some possible trade-
liberalising options in agriculture and selected labour-intensive manufactured products for the 
current WTO negotiations, welfare implications from their implementation are estimated 
here. These outcomes are then compared with those arising from the unlikely scenario of 
complete freeing-up of trade in all sectors, which, of course, is the first-best option. It 
therefore provides an ideal benchmark against which any actual outcome may be judged.  
High tariffs on agricultural products result in misallocation of resources, and 
exorbitant food prices for consumers in protectionist countries.  Hoekman et al. (2010, p. 
508) reports weighted average applied tariff by high-income countries (15.5%), are higher 
than developing (13.7%) and least developed countries (12.5%). Liberalising trade in 
agriculture need not be considered a concession to lesser-developed countries, but a favour 
 
183Economics Bulletin, 2012, Vol. 32 No. 1 pp. 182-189
 
the high-income countries can do for themselves. For industrials, despite the GATT/ WTO’s 
success in lowering the tariff rates on manufactured products, there is systematic 
discrimination against those imported manufactured products in which developing countries 
have a strong comparative advantage. Hertel and Martin (2000, p.464) noted that the average 
tariffs imposed by high-income countries on manufactured imports from developing countries 
are, on average, four times as high as those imposed on manufactured imports from other 
high-income countries. They assert that the primary reason for this is the tariff treatment of 
textiles and clothing in the high-income countries.   
The developing countries lag behind their developed counterparts in implementing 
their trade liberalisation commitments despite being given more moderate targets and longer 
adjustment period. The Doha Round has been criticised for not requiring developing 
countries to reciprocate concessions with obligations on market access.
1  The effects of tariff 
reductions by all groups are quantified in this research. 
 
2. Model, data and liberalisation scenarios 
Scott and Wilkinson (2011) surveys the current literature, concluding that CGE 
simulations have increasingly become the preferred method of estimating how much is to be 
gained from concluding liberalised trade deals. This research uses the Global Trade Analysis 
Project (GTAP) CGE model (Hertel 1997) to quantify the impacts of global trade reforms. 
This is a relatively standard, multi-region, model built on a complete set of economic 
accounts and detailed inter-industry linkages for each of the economies are represented. In 
GTAP, products are differentiated by country of origin, allowing bilateral trade to be 
modelled, and bilateral international transport margins are incorporated and supplied by a 
global transport sector. Aggregations applied to the Version 5 GTAP database to the level of 
20 commodities and 15 regions are shown in Appendix Tables A.1 and A.2 respectively. The 
20 aggregated commodity sectors in Table A.1 were then collapsed into 3 broad sectors: (i) 
agriculture and food, (ii) textiles, clothing and leather (TCL) and (iii) other manufacturing 
sectors, to show decomposition of gains to various regions from liberalising trade in these 
broad sectors. They are presented in Table 1 below.  
 
Table 1.  Aggregation of GTAP Sectors with Selected Products 
Aggregated sector name  Included products 
 
Agriculture and food 
Paddy rice, Wheat, Vegetables, fruit, nuts, Raw milk, Dairy 
products, Cereal grains, Meat: cattle, sheep, goats, horses, 
Meat products, Animal products. 
 
Textile, clothing and leather 
(TCL) 
 
Textiles, Leather products, Clothing & wearing apparel. 
 
Remaining manufacturing 
and services 
Processed foods, beverages and tobacco, Forestry & 
minerals, Motor vehicles & parts, transport equipment, 
Electronics, machinery and equipment, Other 
manufacturing, Services. 
Source: GTAP Database 
 
                                                 
1  Jagdish Bhagwati at the 2002 Annual Meeting of the World Economic Forum. Bhagwati also criticised 
bilateral trade deals and sectoral agreements by adding these are increasingly “taking the good players away 
from Geneva”. 
 
184Economics Bulletin, 2012, Vol. 32 No. 1 pp. 182-189
 
It should be noted that the services sector in Table 1 is combined with the category of 
the remaining manufacturing industries. This is standard in GTAP models; one drawback of 
GTAP is that it does not collect data on services trade. Being a general equilibrium model, 
however, closure requires that all sectors be included. So, the services sector had to be 
lumped into one of the other sectors. GTAP data is updated on a 3-year cycle and the latest 
version (version 7) database is currently available. Version 5 database that is used in our 
simulations made significant improvements on previous versions with the use of Agricultural 
Market Access Database (AMAD). Finally, to solve the model, we used  the GEMPACK 
software (Harrison and Pearson 1996).  
Two liberalisation scenarios are modelled. The first is a partial liberalisation of 
existing trade barriers in (i) the agriculture and food, (ii) textiles, clothing and leather (TCL) 
and (iii) other manufacturing sectors. By using the decomposition technique of Harrison et al. 
(1999), the separate impact of each of these three groups of sectoral trade reforms on the 
model variables are obtained. Thus, for example, an overall welfare gain or expansion in 
trade can be broken down to the changes due to agricultural, TCL and other manufacturing 
liberalisations. The decomposition of our estimated gains are later illustrated in Figure 1 in 
next section. The detailed reforms of the first liberalisation scenario is as follows: reduce 
tariffs on agriculture and food, TCL, and other manufactures by 36% in all regions; and  cut 
expenditures on agricultural and food export subsidies by developed countries by 36%. The 
reforms for the second liberalisation scenario are the complete removal of tariffs in all 
regions for the above sectors, and the elimination of agricultural export subsidies. The latter 
is the ideal free trade scenario. 
3.  Results and interpretations 
The results of the trade liberalisation scenarios outlined above are summarised in 
Table 2. The agricultural sector being the most protected sector, potential global gains from 
liberalising agricultural trade forms the biggest component of the total gain. Half of the 
global gains from agricultural reform alone will accrue to Japan, the EU and the European 
Free Trade Association (EFTA) nations, where most of the trade distortions currently remain 
(see Table 2). These gains are calculated as equivalent variation (EV) measures. When 
agriculture is included in overall trade reform, these regions will experience the efficiency 
gains from the release of resources from agriculture to other sectors. Improved market access 
in these important and protected markets will deliver substantial gains (in relative terms) to 
South America, Australia and New Zealand as major net exporters of agricultural products. 
Many of these countries belong to the Cairns Group, for whom inclusion of agriculture is an 
important enticing factor to the new Round. The important point to note is that none of the 15 
regions stand to lose from partial liberalisation involving only the agricultural sector. That is 
not the case with partial liberalisation in the other two sectors. 
Despite the success of previous trade Rounds in attaining low average tariffs in the 
manufacturing sector, further reductions in this sector alone will bring substantial gains in 
global welfare (equal to more than half of those emanating from agricultural sector reform 
alone). Once again, Japan would be the largest single-nation beneficiary. There would be 
substantial developing country gains in South America and Southeast Asia. North America 
and non-EU Europe would be substantial losers from continued manufactures tariff reduction, 
while the EU can expect a small gain. China and Australia would lose somewhat. In regard to 
tariff reductions in the TCL sector, the developing countries in Southeast and South Asia, 
China and Africa would be the big winners. Other gains would accrue to some developed 
countries in non-EU Europe, Northeast Asia and Canada. The USA and the EU would be the 
significant losers here. 
 
 
185Economics Bulletin, 2012, Vol. 32 No. 1 pp. 182-189
 
 
Table 2.  Welfare changes due to partial and complete liberalisations (US$ million) 
Region 
Due to partial liberalisation in 
   
 
Complete 
liberalisation 
 
Agriculture 
and food  TCL 
Other 
manufacturing  Total  
   
 Aus  408 52  -83  377  1759 
 NZ  469  -4  18  483  2182
 China  821  1905  -86  2640  3186
 NE Asia  830  918  968  3716  9757 
 Japan  2392  64  047  6504  15696
 SE Asia  823  939  1062  2824  6091
 S Asia  228  755  394  1376  937
 Canada  611  101  -376  336  1074
 USA  1372  -431  -2117  -1176  -3101
 S America  1756  -42  2690  4405  11662
 EU  4924  -263  824  5486  8491
 EFTA  2175  115  162  2452  7041
 Other Europe  857  730  1531  3118  7314
 Africa  976  419  530  1925  3375
 ROW  1883  292  1374  3549  6813
 Global  20526  5551  11937  38015  82279 
Source: GTAP calculations 
 
 
Figure 1: Decomposition of global and regional welfare gain  
 
 
 
 
 
 
 
 
 
 
 
Welfare gains from partial & complete reforms
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The total global gains from partial removal of remaining tariffs in all sectors together 
is higher, when compared to equivalent reductions in any of the sectors in isolation; and all 
regions gain, except the USA. Finally, global gains from complete removal of remaining 
tariffs in all sectors are higher (more than twice), when compared to our scenario of partial 
tariff removal in all sectors. Once again, all regions would gain, except the USA. In both 
scenarios, the terms-of-trade effect becomes substantially negative for the USA. In terms of 
agriculture, the simulations required either substantial or total removal of export subsidies. 
Increase in world export prices for grains and livestock products are thus dampened by the 
fall for the goods the USA exports. In addition, price increases in US imports of TCL and 
some other manufactured imports also impacted US terms-of-trade negatively. 
4. Conclusion 
Frictions amongst developed countries as well as between developed and developing 
members of the WTO continues to threaten a successful outcome from the WTO’s already 
protracted current trade round. Scott (2008) observes that CGE modelling, by informing the 
negotiating positions of the member states, has come to play an increasing role in WTO 
negotiations. Results from our CGE estimates suggest perhaps liberalising initiatives that 
combine agricultural trade and trade involving labour-intensive industrial products might bear 
fruit because they are capable of offering incentives to both the industrialised and developing 
countries to cooperate. Finally, by applying across-the-board uniform tariff reductions in all 
sectors, involving all countries, the paper unleashes the practicality of a potentially 
comprehensive trade Round acceptable to all parties. The applied general equilibrium model 
(GTAP) used in the simulations captures the interactions between these sectoral reforms, and 
brings out the advantages offered by a comprehensive Round of trade negotiations. 
References 
Bouet and David Laborde (2010) “Assessing the potential cost of a failed Doha Round”, 
World Trade Review, 9, 319-351. 
Harrison, W.J. and Pearson, K.R. (1996) “Computing solutions for large general equilibrium 
models using GEMPACK”, Computational Economics, 9, 83-127. 
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187Economics Bulletin, 2012, Vol. 32 No. 1 pp. 182-189
 
Harrison, W.J., Horridge, J.M. and Pearson, K.R. (1999) “Decomposing simulation results 
with respect to exogenous shocks”, Paper presented at Second Conference on Global 
Economic Analysis, 20-22 June, Denmark. 
Hertel, T.W. (Ed.) (1997) Global Trade Analysis: Modeling and Applications, Cambridge 
University Press, Cambridge and New York. 
Hertel, T.W. and Martin, W. (2000) “ Agriculture and manufactures in a millennium round: 
implications for developing countries”, The World Economy, 23, 455-469. 
Hoekman, B.,  Martin, W. and  Mattoo, A. (2010)  “Conclude Doha: it matters!”, World 
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Appendix 
Table A.1:  Aggregation of GTAP (Version 5)- Sectors 
Acronym Description Acronym Description
pdr            Paddy rice  tex Textiles   
wht            Wheat  leather Leather  products 
vgf    Vegetables, fruit, nuts  transp_equip  Motor vehicles & parts, 
transport equipment  
mil    Dairy products  mach_equip Electronic  equipment, 
machinery and equipment  
proc_food Processed  foods, beverages and 
tobacco 
oth_manuf Other  manufacturing 
nat_res  Forestry & minerals  svc Services 
gro  Cereal grains  clothing  Clothing & wearing apparel 
cmt  Meat: cattle, sheep, goats, horse  rmk      Raw milk 
 
omt    Meat products  oap  Animal products 
ctl   Cattle, sheep, goats, horses      --- --- 
 
 
 
188Economics Bulletin, 2012, Vol. 32 No. 1 pp. 182-189
 
 
Table A.2: Aggregation of GTAP (Version 5) - Regions 
Acronym Countries  included  Acronym Countries  included 
aus  Australia  chn  China and Hong Kong 
nz New  Zealand  sas  South  Asia 
oeu  Other European countries  usa  U.S.A. 
eft EFTA  can  Canada 
jpn Japan  sth_amer  Mexico, Central & South 
America 
nea  South Korea and Taiwan  eu  EU 
sea  Indonesia, Malaysia, Philippines, Thailand, 
Singapore, Vietnam 
row  Rest of the world 
afr Africa     
 
 
189

Agriculture and manufactures in a millennium round: implications for developing countries”, The World Economy,

Assessing the potential cost of a failed Doha Round”, World Trade Review,

Computing solutions for large general equilibrium models using GEMPACK”,

Conclude Doha: it matters!”,

Decomposing simulation results with respect to exogenous shocks”,

Global Trade Analysis: Modeling and Applications,

The poverty of the Doha Round and the least developed countries”,

The sectoral approach to trade liberalisation: should we try to do better?”,

The use and misuse of negotiation simulations,”

The impact of comprehensive tariff reductions in multilateral trade: further results from computable general equilibrium simulations

http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I1-P17.pdf

The impact of comprehensive tariff reductions in multilateral trade: further results from computable general equilibrium simulations

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