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Market access has been at the core of eight negotiating rounds of the General Agreement on Tariffs and Trade (GATT). Yet, agricultural trade remains a heavily protected sector, characterized by higher tariffs relative to industrial goods, large tariff dispersions, numerous specific tariffs and systems of tariff-rate-quotas. This has made the analysis of trade liberalization a formidable task among policy analysts. Previous studies of agricultural trade liberalization have used partial or general equilibrium models of trade. However, each of these modeling strategies has their drawbacks. General equilibrium (GE) models have been criticized because they face serious aggregation issues and miss much of the policy detail that occurs at the tariff line. Partial equilibrium (PE) models on the other hand are often more disaggregated but lack internal consistency and have nothing to say about the economy-wide effects from trade reform. The purpose of this paper is threefold. One, we develop a methodology that combines PE and GE modeling techniques permitting us to extend GE to the tariff line. Two, we introduce a fully disaggregated U.S. dairy sector and compare PE and GE liberalization results from global dairy reform, thereby offering some insight into the potential errors implicit in current GE studies. Finally, we illustrate how our methodology allows for an explicit treatment of tariff rate quotas in the U.S. dairy sector on a bilateral basis for narrowly defined product lines.

The formulation of market equilibrium problems as mixed complementarity problems (MCP) permits integration of bottom-up programming models of the energy system into top-down general equilibrium models of the overall economy. Despite the coherence and logical appeal of the integrated MCP approach, implementation cost and dimensionality both impose limitations on its practical application. A complementarity representation involves both primal and dual relationships, often doubling the number of equations and the scope for error. When an underlying optimization model of the energy system includes upper and lower bounds on many decision variables the MCP formulation may suffer in robustness and efficiency. While bounds can be included in the MCP framework, the treatment of associated income effects is awkward. We present a decomposition of the integrated MCP formulation that permits a convenient combination of top-down general equilibrium models and bottom-up energy system models for energy policy analysis. We advocate the use of complementarity methods to solve the top-down economic equilibrium model and quadratic programming to solve the underlying bottom-up energy supply model. A simple iterative procedure reconciles the equilibrium prices and quantities between both models. We illustrate this approach using a simple stylized model.

We motivate the formulation of market equilibria as a mixed complementarity problem (MCP) in order to bridge the gap between bottom-up energy system models and top-down general equilibrium models for energy policy analysis. Our objective is primarily pedagogic. We first lay out that the MCP approach provides an explicit representation of weak inequalities and complementarity between decision variables and market equilibrium conditions. This permits us to combine bottom-up technological details and top-down economic richness in a single mathematical format. We then provide a stylized example of how to integrate bottom-up features into a top-down modeling framework along with worked examples and computer programs which illustrate our approach.

Gains from productivity and knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through ?reinventing the wheel?. We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or ?absorptive?) capacity of the domestic economy.

We present a decomposition approach for integrated assessment modeling of climate policy based on a linear approximation of the climate system. Our objective is to demonstrate the usefulness of decomposition for integrated assessment models posed in a complementarity format. First, the complementarity formulation cum decomposition permits a precise representation of post-terminal damages thereby substantially reducing the model horizon required to produce an accurate approximation of the infinite-horizon equilibrium. Second, and central to the economic assessment of climate policies, the complementarity approach provides a means of incorporating second-best effects that are not easily represented in an optimization model.

We study the role of technology subsidies in climate policies, using a simple dynamic equilibrium model with learning-by-doing. The optimal subsidy rate of a carbon-free technology is high when the technology is first adopted, but falls significantly over the next decades. However, the efficiency costs of uniform instead of optimal subsidies, may be low if there are introduction or expansion constraints for a new technology. Finally, supporting existing energy technologies only, may lead to technology lock-in, and the impacts of lock-in increase with the learning potential of new technologies as well as the possibilities for early entry and thight carbon constraints.

We investigate the importance of "what"-flexibility on top of "where"- and "when"-flexibility for alternative emission control schemes that prescribe long-term temperature targets and eventually impose additional constraints on the rate of temperature change. We find that "what"-flexibility substantially reduces the compliance costs under alternative emission control schemes. When comparing policies that simply involve long-term temperature targets against more stringent strategies that include additional constraints on the rate of temperature increase, it turns out that the latter involve huge additional costs. These costs may be interpreted as additional insurance payments if damages should not only dependent on absolute temperature change but also on the rate of temperature change.

The authors estimate that the Free Trade Agreement of the Americas (FTAA), the EU-MERCOSUR agreement, and multilateral trade policy changes will all be beneficial for Brazil. The Brazilian government strategy of simultaneously negotiating the FTAA and the EU-MERCOSUR agreement, while supporting multilateral liberalization through the Doha Agenda, will increase the benefits of each of these policies. The authors estimate that the poorest households typically gain roughly three to four times the average for Brazil from any of the policies considerethe United States protects its most highly protected markets. Both the FTAA and the EU-MERCOSUR agreements are net trade-creating for the countries involved, but excluded countries almost always lose from the agreements. The authors estimate that multilateral trade liberalization of 50 percent in tariffs and export subsidies results in gains to the world more than four times greater than either the FTAA or the EU-MERCOSUR agreement. This shows the continued importance to the world trading community of the multilateral negotiations.

We analyze the economic effects of the differentiated targets for carbon abatement in six European Union member states. Our recursively-dynamic model includes a detailed representation of trade and energy consumption and incorporates optimistic projections for future energy markets provided by the European Commission as the Business-as-Usual scenario. In the base case we find that the EU implementation of the Kyoto Protocol implies low overall costs and a relatively even cost distribution across member states. We also show that a less optimistic development in energy efficiency implies higher costs in all countries, especially in those with high abatement costs. Finally, we find that uniform abatement targets increase overall costs marginally but changes the cost distribution significantly, holding total EU emissions constant.

Environmental tax schemes in OECD countries often involve tax rates differentiated across industrial, commercial and household sectors. In this paper, we investigate four potentially important arguments for these deviations from uniform taxation: pre-existing tax distortions, domestic equity concerns, global environmental effectiveness, and strategic trade policy. Our primary objective is to ascertain whether the degree of tax differentiation observed in many countries can be rationalized on economic grounds. In simulations with a computable general equilibrium model, we calculate optimal policies under various settings. Our simulation results lead us to conclude that there is little economic rationale for the common policy practice of discriminating strongly in favor of heavy industries, even when accounting for interacting taxes, distributional concerns, leakage, and international market power.

This article uses a multi sector, multi county, computable general equilibrium model to examine Chile's strategy of 'additive regionalism' negotiating bilateral free trade agreements with all of its significant trading partners. Taking Chile regional arrangements bilaterally, only its agreements with Northern partners provide sufficient market access to overcome trade diversion costs. Due to preferential market access, however, additive regionalism is likely to provide Chile with gains that are many multiples of the static welfare gains from unilateral free trade. At least one partner country loses from each of the regional agreements considered, and excluded countries as a group always lose. Gains to the world from global free trade are estimated to be vastly larger than gains from any of the regional arrangements.

Using a multisector, computable general equilibrium model, the authors examine Chile's strategy of negotiating bilateral free trade agreements with all of its significant trading partners (referring to this policy as additive regionalism). They also evaluate the Free Trade Agreement of the Americas (FTAA) and global free trade. Among Chile's bilateral regional agreements, only Chile's agreements with"Northern"partners provide enough market access to offset the costs to Chile of trade diversion. Because of preferential market access, however, additive regionalism is likely to provide Chile with many times as many gains as the static welfare gains from unilateral free trade. The authors find that at least one partner country loses from each of the regional trade agreements they consider, and excluded countries as a group they always lose. They estimate that the FTAA produces large welfare gains for the members, with the European Union being the big loser. Gains to the world from global free trade are estimated to be at least 36 times greater than gains from the FTAA. Even countries of the Americas in aggregate gain more from global free trade than from the FTAA.

Policies to reduce emissions of greenhouse gases such as CO2 will affect the rate and pattern of technological change in alternative energy resources and other production processes. Imperfections in markets for non-polluting technologies imply that a decentralised economy does not deliver a socially optimal outcome, and this could justify policy interventions such as subsidies. This paper considers the welfare effects of technology subsidies as part of a carbon abatement policy package. We argue that the presence of spillovers in alternative energy technologies does not necessarily imply that subsidy policies are welfare improving. We illustrate this point in the context of a general equilibrium model with two forms of carbon-free energy, an existing “alternative energy” which is a substitute for carbon-based fuels, and “new vintage energy” which provides a carbon-free replacement for existing energy services. Subsidisation of alternative energy on the grounds of spillover effects can be welfare-worsening if it crowds-out new vintage technologies

A growing body of evidence suggests that the close availability of diverse business services is important for economic growth. Producer services such as managerial and engineering consulting can provide specialized knowledge to help domestic firms develop at lower unit cost. But these intermediate services are often nontraded, or costly to trade, which may be one reason that cities and industrial complexes form and economic performance differs across regions. Because services are costly to trade, foreign services are best transferred through foreign direct investment. This has important implications for public policy. Policies that affect foreign direct investment differ considerably from those that affect trade in goods. The authors develop a model of services, results from which show that: A) Liberalizing restraints on inward foreign direct investment has a powerful positive impact on the income and welfare of the importing country. The impact is much stronger than in traditional competitive models of trade in goods. B) Policies to protect domestic skilled labor against competition from imported services can have the perverse effect of lowering returns to domestic skilled labor-because while imported services economize on the use of domestic skilled labor (compared with domestic service industries), the positive effects on scale and productivity in the downstream industry can be powerful enough that the real wages of domestic skilled labor rise after the liberalization of foreign direct investment in service industries. In other words, domestic skilled labor and foreign direct investment are partial-equilibrium substitutes in the model but are typically general-equilibrium complements. C)The increase in the variety of imported services leads to increased total factor productivity in downstream industries, but the relative impact on downstream industries depends on how intensively they use intermediate services. The differential in effects on productivity in the production of final goods can be strong enough that permitting foreign direct investment can actually affect whether a good is exported rather than being imported. Policymakers should be aware that protection of a domestic service industry affects different constituencies differently. Although domestic capital owners may be adversely affected by foreign direct investment, domestic skilled workers in the industry are likely to see demand for their skills-and their real wages-rise. Moreover, downstream industries that use the service unambiguously benefit from foreign direct investment and their expansion can be surprisingly strong.

We decompose the economic implications of the Kyoto Protocol at the cross-country level, splitting the total economic impact for each region into contributions from its own emission abatement policy and those from other regions. Our analysis which is based on a large-scale computable general equilibrium model for the world economy indicates that spillover effects are an important consequence of multilateral carbon abatement policies.. We calculate a crosscountry matrix for monetary transfer payments which would have to be assigned on a bilateral basis in order to provide compensation for the international spillovers associated with the implementation of the Kyoto Protocol. Im Rahmen einer angewandten Gleichgewichtsanalyse untersuchen wir die ökonomischen Auswirkungen des Kioto-Protokolls auf bilateraler Ebene. Hierzu zerlegen wir den gesamten Wohlfahrtseffekt für jede Region in einen Anteil, der auf die eigene Emissionsminderungspolitik zurückzuführen ist und die jeweiligen Anteile (internationale spillovers), die durch Klimaschutzpolitiken in anderen Regionen verursacht werden. Es wird deutlich, daß internationale spillovers einen wesentlichen Beitrag zu den allgemeinen Gleichgewichtseffekten multilateraler Politikmaßnahmen liefern. Wir berechnen eine Matrix von bilateralen Transferzahlungen, die als Ausgangspunkt für politikrelevante Verhandlungen über Kompensationen für internationale spillovers im Zuge der Umsetzung des Kioto-Protokolls dienen könnte.

This paper examines the distributional consequences of public debt reduction achieved through spending cuts. Under the assumption that public goods and transfers are relatively more valuable to the poor, our calculations indicate that the elderly poor stand to lose from such policies. Debt reduction produces short-term deficits and long-term surpluses, and when future surpluses are recycled into higher provision of public goods and transfers, future generations of poor could gain. If future surpluses are recycled through lower labour taxes, working households in the future would be positively affected. We conclude that debt reduction could have positive or negative impacts on vertical equity, yet inter- rather than intra-generational equity is likely to pose the greatest obstacle to fiscal consolidation. Based on majority voting by self-interested households, debt reduction would never occur. Yet, in a formal social welfare analysis, some debt reduction programmes may be deemed beneficial with social discount factors as high as two percent. When we then consider alternative time profiles for debt reduction, we conclude that slower is better.

Policy interventions in large open economies do not only affect the allocation of domestic resources but change international market prices. The change in international prices implies an indirect secondary burden or benefit for all trading countries. This secondary terms of trade effect may have important welfare implications: Countries without change in domestic policies may nevertheless gain or suffer from the action of other countries; in turn, the primary welfare effect of countries interfering domestically may be substantially enhanced or weakened due to international spill-overs. Obviously, policy makers of economies that are integrated into international markets have an essential interest to gain insights about the different sources of welfare changes associated with domestic policy changes. In this paper, we present a decomposition that splits the overall welfare effect into a domestic market effect holding international prices constant and an international market effect as a result of changes in international prices (terms of trade effect). We demonstrate the usefulness of our decomposition approach in the context of an empirical welfare analysis of international carbon abatement policies.

We analyze the economic effects of the differentiated targets for carbon abatement in six European Union member states. Our recursively-dynamic model includes a detailed representation of trade and energy consumption and incorporates optimistic projections for future energy markets provided by the European Commission as the Business-as-Usual scenario. In the base case we find that the EU implementation of the Kyoto Protocol implies low overall costs and a relatively even cost distribution across member states. We also show that a less optimistic development in energy efficiency implies higher costs in all countries, especially in those with high abatement costs. Finally, we find that uniform abatement targets increase overall costs marginally but changes the cost distribution significantly, holding total EU emissions constant.

The authors develop a numerical endogenous growth model approximating an infinite horizon, which allows them to investigate the relationship between trade liberalization and economic growth. Economic theory generally implies that trade liberalization will improve economic growth, and the two phenomena are positively correlated in empirical tests, but the connection is not well-substantiated in numerical general equilibrium models. In the authors'model, an intermediate input affects aggregate output through a Dixit-Stiglitz function. Additional varieties provide the engine of growth in this framework and the existence of this mechanism magnifies the welfare costs. In this model with lump sum revenue replacement, reducing a tariff from 20 percent to 10 percent produces a welfare increase (in terms of Hicksian equivalent variation over the infinite horizon) of 10.7 percent of the present value of consumption in their central model, where the economy is assumed to be unable to borrow on international financial markets. If macroeconomic and financial reforms are in place that would allow international borrowing, however, the same tariff cut is estimated to result in a 37 percent increase in Hicksian equivalent variation. On the other hand, if inefficient replacement taxes must be used in an economy without the capacity to borrow internationally, the gains would be reduced to 4.7 percent. Larger tariff cuts--typical of those in many developing countries over the past 30 years--produce larger estimated welfare gains at least proportionate to the size of the cut. The authors apply the model to five developing countries and estimate the impact of the tariff changes those countries plan to undertake as part of Uruguay Round commitments. Because of the dynamic effects, estimated gains are considerably larger than those found in the literature on the impact of the Uruguay Round.

Chile is currently evaluating a wide range of possible trade policies. Using a global computable general equilibrium model, the authors examine a range of trade policy and complementary tax policy options for Chile. They focus on Chile's principal preferential trade policy options: a free-trade area with MERCOSUR, a customs union with MERCOSUR, and a free trade area with NAFTA. They also examine such options as complementary tariff reduction with nonpartner countries in combination with implementing the free trade area options; unilateral or global trade liberalization; and the optimum unilateral tariff. Their principal policy conclusions: lowering Chile's tariffs preferentially or multilaterally leads to only small gains as Chile starts with a rather efficient external trade regime, uniform tariffs of 11 percent. Largely because of its efficient uniform tariff, preferential tariff reduction will reduce Chilean welfare through trade diversion, unless Chile can improve its access in the markets of partner countries. NAFTA offers enough access to benefit Chile; MERCOSUR does not, once the trade diversion costs of MERCOSUR are taken into account. Under their preferred-elasticity scenario, Chile can convert the MERCOSUR agreement from a loss to a gain if it lowers its external tariff to between 6 and 8 percent. Doing so will also increase the gains from a potential agreement with NAFTA. Chile's current value-added tax imposes distortionary costs because collection rates are nor uniform. Chile will gain if it can collect the VAT more uniformly. Tariff reductions from trade reform will require an increase in domestic taxes, so greater uniformity in domestic taxes (less distortion in replacement taxes) will maximize the benefits from trade reform. Welfare will be improved by moving toward unifromity in the VAT and lowering the Chilean tariff to between 6 and 8 percent. This model ignores dynamic gains from trade liberalization, the result of importing either a greater variety of products or more technologically advanced products.

This paper describes a suite of programs that allow realistic complementarity problems to be accessed from within the MATLAB programming environment. The suite of programs uses data generated from the GAMS/MCP library and makes function and Jacobian evaluations available directly to the MATLAB user. All the required data is stored in a binary encoding of the problem, completely independent of GAMS. Use of the programs is described here, along with a list of all the problems that are currently available in binary form. Details on how the binary files are generated from GAMS are also given.

Morocco is interested in developing a reciprocal free trade agreement with the European Community (EC), although it already enjoys free access to EC markets in industrial products and is not obligated to give EC exporters reciprocal access. But Moroccan agricultural exports are impeded by agricultural protection in the European Community. A free trade agreement would require that Morocco lower its moderately high tariffs against its most important trading partner. Tariff reductions against the European Community but not against the rest of the world may provide benefits provided the trade diversion costs of preferential tariff reduction do not dominate. The authors apply a 39 sector general equilibrium model of the Moroccan economy which includes the sectors most likely to be affected by such an agreement. They investigate the economic effects of the prospective free trade agreement as well as five other trade liberalization scenarios for Morocco. Some of their most important findings are: The welfare benefits to Morocco from a free trade agreement with the European Community would be about 1.5 percent GDP. Such substantial welfare gains partly reflect the benefits of reducing dispersion in the tariff regime. Welfare benefits of about 2.5 percent of GDP would accrue from liberalizing trade with the rest of the world - with only slightly higher adjustment costs. Liberalizing trade with the world would provide greater benefits because it would eliminate the trade diversion costs associated with discriminatory trade liberalization. (Although the fact that significant benefits would accrue from discriminatory liberalization against imports from either the European Community or the rest of the world indicates that trade diversion is not dominant.) As a result of improved access to the European Community, employment and output in the vegetable and citrus fruit sectors would expand. But the phosphate sector stands to gain most from the free trade agreement because liberalization wouldinduce a depreciation in the real exchange rate. Morocco's cereal, meat, dairy, and sugar sectors would loose more in terms of employment, because of significantly lower import prices from the European Community. The nontraded goods sector would also contract slightly. The value added tax would have to be increased to compensate for the loss in tariff revenues, on which Morocco depends. Estimates are provided as ranges, with probability assessments, because of the element of uncertainty.

Turkey undertook a major liberalization of trade policy in the 1980s. Import quotas disappeared, the Turkish lira was made convertible, and tariffs are generally lower. Those changes and the export subsidies that remain have removed the anti-export bias from Turkey's external incentive regime. Using a 40-sector computable general equilibrium model, the authors consider several more trade liberalization options available to the Turkish government. They conclude that uniformity of tariffs and export subsidies would substantially improve Turkey's welfare. Although the"Ramsey"optimal import taxation would call for non-uniform import taxes inversely proportional to the elasticity of import demand in each sector, the observed dispersion of tariff structure in Turkey is inconsistent with optimal departures from uniform protection. In fact, uniformity achieves an extremely high proportion of the benefits of full trade liberalization because, in the absence of a general anti-export bias, theprincipal distortion remaining in the trade regime derives from dispersion of the tariff and, especially the export subsidy structure. An increasing number of developing countries - including Chile, Indonesia, Mexico, and Poland - have in recent years undertaken extensive trade liberalization. It is no longer clear that these economies retain an anti-export bias in their trade regime. Perhaps the most important policy conclusion the authors reach is that one must be wary of advocating piecemeal reform of tariffs or export subsidies alone. Piecemeal across-the-board tariff reductions do not always improve welfare; they must generally be coordinated with reductions in export subsidies to ensure improved welfare. The authors counterfactually assume that Turkey's tariffs are at the 1985 level which reintroduces an anti-export bias of import tariffs. In this case, piecemeal tariff reduction to the 1989 level is beneficial. Even small export subsidies are not always beneficial, despite the rule of thumb that small export subsidies are a welfare-enhancing offset to the anti-export bias of import tariffs. Export subsidies in Turkey are highly dispersed, and piecemeal reductions in the export subsidies reduce that dispersion. When the authors counterfactually impose uniformity of tariffs and export subsidies, they note that small export subsidies are beneficial as a piecemeal policy for offsetting the anti-export bias. Policymakers in developing countries have occasionally applied export subsidies in individual sectors with high tariffs as a means of encouraging exports in a sector that may otherwise rely on the highly protected domestic market. The authors show that in Turkey high export subsidies in sectors with high tariffs are particularly counterproductive - because at the multisector level the distortion introduced by the export subsidy dominates the reduction in anti-export bias. Turkey's proposed policy of harmonizing its tariff to the European Community's (EC's) common external tariff would yield only small welfare changes. Harmonizing the EC tariffs will require lowering tariffs below already low levels, in the presence of export subsidies almost as large as the existing average effective tariff rate. However harmonizing to the EC tariff structure can be beneficial if at the same time export subsidies are removed or reduced.