Food Policy Review No. 8

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Trade liberalization is expected to act positively on world economic development and poverty alleviation, both of which have become high priorities of the international community. This emphasis explains why numerous studies have focused on assessing the expected benefits of trade liberalization on development. The main empirical tools for these assessments have been the use of spatial and nonspatial partial equilibrium models, gravity equations, and single- and multicountry computable general equilibrium models (CGEMs). Multicountry CGEMs, however, have produced strikingly divergent results. As demonstrated by recent studies, the associated increase in world welfare from full trade liberalization ranges from 0.2 to 3.1 percent—results that differ by a factor of 15!

The objective of this study is to examine the efficiency of trade modeling in capturing the benefits from trade liberalization. It provides a survey of methodologies utilized to assess the impact of trade liberalization, putting an emphasis on multicountry CGEMs, and examines the extent to which such assessments diverge. The survey also demonstrates the benefits of “complementary analysis,” which utilizes different methodologies to study a specific topic.

The report presents global modeling results using a general equilibrium model—the modeling international relations under applied general equilibrium (MIRAGE) model—the results of which are compared to those obtained in recent studies. Using the MIRAGE model,¹ full trade liberalization is estimated to increase world real income by US$100 billion (+0.33 percent) after 10 years of implementation. This trade reform would be development-friendly, as it entails a larger growth rate of real income for developing countries and especially for least-developed countries.

The report offers four explanations on the divergent results of multicountry general equilibrium models, including the MIRAGE study undertaken here:

1. experiments are not the same;
2. data are not the same;
3. behavioral parameters are not the same; and
4. theoretical features are not the same.

Each explanation is examined in detail. The simulation in this report is also utilized to check explanations of divergent results in the literature. To quantify the importance of the four factors, a sensitivity analysis is carried out. This method provides a quantitative assessment of expected benefits from liberalization when one hypothesis is modified, and it confirms that:

• Direct trade barriers, such as tariffs, tariff quotas, and antidumping duties, are smaller than previously expected. Consequently, the expected benefits from full trade liberalization are not as large as assessed in recent literature.
• In multicountry trade models, the size of the expected benefits depends crucially on the value of Armington trade elasticities. The simulation that has been carried out in this study is founded on the Global Trade Analysis Project elasticities, which are small compared to others used in the literature.
• The size of expected benefits from trade liberalization also depends crucially on the potential positive impact of trade openness on factor productivity. Several multicountry trade models utilize ad hoc methodologies to capture this element, such as a relation that automatically amplifies expected benefits, but these methodologies do not explain how trade integration raises factor productivity.

Benefits from eliminating tariff barriers, domestic support, and export subsidies have been recently revised downward; nevertheless, trade liberalization is beneficial and could contribute to poverty alleviation.

This publication is available to download by chapter or as full text.

• Full Text
  (PDF 1.2M)

• Table of contents, foreword, preface, and front matter
  
  (PDF 152K)
• Introduction
  
  (PDF 66K)
• Chapter 1: Background
  
  (PDF 115K)
• Chapter 2: Methodologies for Assessing the Impact of Trade Liberalization
  
  (PDF 178K)
• Chapter 3: A New Assessment of the Impact of Trade Liberalization
  
  (PDF 585K)
• Chapter 4: Modeling Trade Liberalization and Development Using CGEMs: A Survey
  
  (PDF 525K)
• Chapter 5: Conclusions
  
  (PDF 103K)
• Appendix A: Arable Land per Person, by Country
  
  (PDF 127K)
• Appendix B: Correspondence Tables
  
  (PDF 125K)
• Appendix C: Initial Patterns of World Trade
  
  (PDF 140K)
• Appendix D: Impact of Full Trade Liberalization on World Prices
  
  (PDF 113K)
• Appendix E: Decomposition of Full Trade Liberalization, by Liberalizing Region
  
  (PDF 110K)
• Appendix F: Decomposition of Full Trade Liberalization, by Activity
  
  (PDF 101K)
• Appendix G: Decomposition of Full Trade Liberalization, by Instrument
  
  (PDF 111K)
• Appendix H: Methodology for Assessing the Impact of Full Trade Liberalization by CGEM
  
  (PDF 162K)
• Appendix I: Custom Taxes as a Proportion of Gross Domestic Product
  
  (PDF 124K)
• Appendix J: Model Option: No Pre-Experiment
  
  (PDF 109K)
• Appendix K: Model Option: No Preferential Duties
  
  (PDF 110K)
• Appendix L: Model Option: Higher Trade Elasticities
  
  (PDF 110K)
• Appendix M: Model Option: Trade Increases Factor Productivity
  
  (PDF 110K)
• References
  
  (PDF 86K)
• About the Author
  
  (PDF 52K)