Publication: The Price Effect of Tariff Liberalization: Measuring the Impact on Household Welfare
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Published
2009
ISSN
03043878
Date
2012-03-30
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Trade policy literature has for many years emphasized open policies positive impact on economic growth and development. While these results generally hold when measured on averages, empirical evidence suggests that trade liberalization is unlikely to produce beneficial results across all households. This study adds to the literature by providing an analysis of the distributive effects of tariff liberalization in Mexico. The paper examines the effect of tariff liberalization from the perspective of households both as consumers and factor owners allowing for imperfect domestic price transmission. The results indicate the overall positive effect of tariff liberalization masks significant differences in the distribution of gains both across income levels and across geographic regions. Richer households are found to have gained relatively more. Urban areas, as well as Mexican states closest to the United States border, are also found to be larger beneficiaries while southernmost states have been largely bypassed by the effects of tariff liberalization. Those results can be explained not only in relation to the different endowments of the households, but also by the diverse effects on local prices that has resulted from Mexican trade liberalization.
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Publication Who Benefited from Trade Liberalization in Mexico? Measuring the Effects on Household Welfare(World Bank, Washington, D.C., 2004-04)This study performs an ex-post analysis of the effects of the trade liberalization in Mexico between 1989 and 2000, taking into account regional differences in the Mexican economy. The effects of trade liberalization are first translated into changes in regional prices and wages. Those estimates are plugged into a farm-household model to estimate the effect on households' welfare. The findings suggest that trade liberalization has affected domestic prices and labor income differently both across income groups and geographically across the country, hence producing diverse outcomes on different households. Regarding prices, the results indicate that trade liberalization has lowered relative prices of most non-animal agricultural products and, while reducing the cost of consumption, has reduced households' agricultural income, widening the income gap between urban and rural areas. The findings also show that trade liberalization has had diverse effects on wage rates. Skilled workers, for which trade liberalization has produced an increase in wages, have benefited relative to unskilled workers. Wages of unskilled workers have in many regions decreased as a result of trade liberalization. Similar differences are found in the geographic distribution of the benefits of trade liberalization, with the states closest to the U. S. border gaining threefold more relative to the least developed states in the south. Therefore trade liberalization, although beneficial, has contributed to an increase in inequality between the south and the north of the country, urban and rural areas, and skilled and unskilled labor. From a poverty perspective, the trade liberalization that occurred between 1989 and 2000 has had the direct effect of reducing poverty by about 3 percent, therefore lifting approximately 3 million individuals out of poverty.Publication Do Regional Trade Pacts Benefit the Poor? An Illustration from Dominican Republic--Central American Free Trade Agreement in Nicaragua(2009)This paper provides an ex-ante assessment of the poverty and income distribution impacts of the Central American Free Trade Area agreement on Nicaragua. A general equilibrium macro model is used to simulate trade reform scenarios and estimate their price effects, while a micro module maps these price changes into real income changes at the individual household level. The final impact on poverty is not too large, but its dispersion across households is significant and should be considered when designing compensatory policies. A main policy message is that Nicaragua should consider enlarging its own liberalization to countries other than the United States to boost trade-induced poverty reductions.Publication Trade Policy, Income Risk, and Welfare(2010)This paper develops a framework to study empirically the relationship between trade policy and individual income risk and to evaluate the associated welfare consequences. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, we find that trade policy changes have a significant short-run effect on income risk. Further, while the tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.Publication Trade Reform and Household Welfare : The Case of Mexico(World Bank, Washington, DC, 2001-08)The authors use a two-step, computationally simple procedure to analyze the effects of Mexico's potentially unilateral tariff liberalization. First, they use a computable general equilibrium model provided by the Global Trade Analysis Project (GTAP) as the new price generator. Second, they apply the price changes to Mexican household data to assess the effects of the simulated policy on poverty and income distribution. By choosing GTAP as the price generator, the authors are able to model Mexico's differential tariff structure appropriately: almost zero for North American Free Trade Agreement (NAFTA) members and higher tariffs for nonmembers. Even starting with low tariff protection, simulation results show that tariff reform will have a positive effect on welfare for all expenditure deciles. Under an assumption of nonhomothetic individual preferences, trade liberalization benefits people in the poorer deciles more than those in the richer ones.Publication Trade Liberalization, Antidumping, and Safeguards: Evidence from India's Tariff Reform(2011)This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political-economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991-1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000-2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.
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