Estimating effects of price-distorting policies using alternative distoritions databases

Abstract

To analyze the effects of prospective policy changes, sectoral and economy-wide modelers need to begin with baseline estimates of policy induced price distortions. Global trade modelers mostly use the Global Trade Analysis Project (GTAP) protection database, which currently relies heavily on 2004 import tariffs plus (for Organization for Economic Cooperation and Development countries) an estimate of agricultural production and export subsidies in that year. This chapter addresses three questions relating to the very extensive use of that database. Are there other price-distorting policy instruments worthy of inclusion in the base year? What is the appropriate counterfactual set of price distortions in the year of concern (such as when a proposed reform is expected to be fully implemented, as distinct from the base year of 2004)? How are the price distortions (e.g. tariff rates) on individual products aggregated to the GTAP product groups? (i) We show there are some additional agricultural policy instruments that need to be included for some developing countries. (ii) We draw on political economy theory, a set of political econometric equations and knowledge of current World Trade Organization (WTO)-bound tariffs to show that some developing countries could well raise their agricultural protection rates over coming decades in the absence of a successful conclusion to the WTO's Doha Round. Hence, the appropriate counterfactual policy regime in projections modeling may not be the status quo, but rather higher agricultural protection rates for at least some countries. The alternative counterfactual considered generates much higher estimates of the prospective costs of not embracing trade policy reform. (iii) We draw on recent aggregation theory to show that the national and global welfare costs of current policies are seriously underestimated using conventional tariff aggregation methods.