Download Applied Analysis III: Partial Equilibrium Analysis and Simulation

Building Trade and Investment Capacity in Myanmar
Applied Analysis III:
Partial Equilibrium Analysis and Simulation
29 May 2014,
Yangon, Myanmar
Witada Aunkoonwattaka (PhD)
Trade and Investment Division, ESCAP
[email protected]
Tools for ex-ante policy analysis
Ex. what will be the potential effects of an FTA?
Tools:
1. Partial Equilibrium Analysis (PE)
Estimating the potential effects on an individual product (PE)
2. General Equilibrium Analysis (GE)
Estimating the potential effects on the whole economy (GE)
Potential impacts on an individual product
• How an FTA will affect production, consumption, and trade flows
in the domestic market for a single commodity?
– What will be an import increase?
– What will be an export increase of FTA partners?
– What will be an export decrease of non-member countries?
– What will be a fall in tariff revenue?
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Reasons for focusing on an individual product
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•
•
•
•
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trade is significant in the country’s trade balance
It generates substantial tariff revenue,
It employs a large share of the country’s workforce
Its output contributes significantly to GDP
Firms in the sector may be important political players
It may be located in an important region of a country
• The in-depth analysis at the level of individual industry or product
makes partial equilibrium (PE) approach more appropriate
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What is Partial Equilibrium (PE) analysis?
• The effects of policy actions are examined only in the markets that
are directly affected (apples not oranges).
• General Assumptions:
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•
•
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Country is relatively small
Sector in question is small
No adjustment – short- term impact analysis
Consumer preferences are fixed
• Some technical assumptions:
– NO substitution between different products…
(modeling one market
at a time)
– Armington assumption: Imperfect substitution between imports of product i
from trading partners A, B, C, (varieties)…
– Modeling based on elasticities (percentage changes): Zero trade flows remain
zero (no market entry of new trading partners)
What is Partial Equilibrium (PE) analysis? (Ct’d)
• Supply and demand curves are used to depict the price effects of
policies.
• Producer and consumer surplus is used to measure the welfare
effects on participants in the market.
• Ignores spillover effects on other industries /countries.
PE for analyzing trade policies
• Feed the model with a policy shock (and see what will be a
result?)
• Analysis of own trade-policy change impact
– Price (consumers and producers)
– Quantity imported (diversion and creation)
– Tariff revenues
• Analysis of change market access impact
– Quantity exported
– Producers price
How does PE work?
An example from an analysis on tariff
Input:
• A change in trade policy (tariff)
• Parameters (elasticities)
Output:
• Effect on prices and quantities (volumes) traded
• Trade diversion effect
• Trade creation effect
Most PE software gives you only change in import and exports,
but these come from change in prices and quantities.
Simple effect of a tariff in PE
Two countries
• USA exports
• MEX imports
Qft = Q in free trade
Qt = Q with tariff T
For Mexico
PE results of Tariff:
•new higher price
•new lower quantity
•tariff revenue
For USA
PE results of Tariff:
•new lower price
•new lower quantity
New price and new quantities are the sources of “welfare” effects
Small importing country
This assumption will make the
analysis even simpler
NO
Term of trade effects
Effects on Exporting countries
The effects of the tariff are only
for the importing country
Example: Lower tariff on rice from Vietnam (in US) will not affect US prices or Wld
prices.
PE - various effects
Due to tariff liberalization of country A with a partner country B
Software for PE analysis
SMART – UNCTAD/World Bank WITS
TRIST – World Bank website – Excel
GSIM -UNCTAD/World Bank WITS
Trade Effect Simulation: SMART
(Single market simulation model)
For a given change in tariff rates
(applied or bound) provides for one
trading partner, it calculates:
-
Trade Creation and Diversion effects
Tariff revenue effect
Welfare effect
Importer and Exporter Views
SMART
Assumptions:
– Each product is independent
– A same product from different supplier is an
imperfect substitute
– Three sets of elasticities (Demand, Supply
and Substitution between two suppliers)
Trade Effects Simulation
(Single market simulation model)
Example:
Market: European Union
Products: Motor vehicles of HS 8703
Tariff cut scenario: Duty free for Korean
exports
Question:What will be the loss (or gain)
to Japanese exports of the same
product?
SMART: The Results
• Through a set of 5 output reports, WITS provides the
following results:
– Trade Total Effect composed of:
• Trade Diversion Effect
• Trade Creation Effect
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–
–
–
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Pre and Post Exports by Partner
Pre and Post cut average duty rate
Welfare
Tariff Revenue effect
Price effect only if one uses a non infinite Supply elasticity
(infinite by default in SMART)
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SMART: Comments
• Preferential tariff reduction (free trade areas,
customs unions, bilateral agreements) diverts
trade away from countries not enjoying
preferences (Trade Diversion)
• When most efficient producers are part of the
FTA, preferences may, on balance, create new
trade (Trade Creation)
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(Import) Market View Report
Exporter View Report
(Importer) Welfare Effects Report
(Tariff) Revenue Impact Report
Trade Creation Effects Report
Software limitations
• Results depends on pre-defined elasticities
– But these can be adjusted into the software
• Trade policy restricted to tariffs (taxes)
• Not well suited to assess policy related to other trade policies
or costs
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–
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Non-tariff measures
Cost of compliance
Behind-the-border issues
Trade facilitations
How to treat non-traditional trade policy?
• Calculate an AVE and plug it into the software, but the policy
needs to work the same as a tariffs
– quotas (impact prices/quantities)
–
trade facilitation (impact prices/quantities)
• Directly calculate the effect of the policy/impediment on
domestic prices, and or quantities exported or imported.
– Build your own PE model, or econometrics
In a nutshell, when to use PE analysis?
• Impacts of a shock on trade flows
• Impacts of a shock on domestic prices, government revenues.
• Impacts of a shock on specific markets and products.
• Not so good for analyzing impacts of multiple shocks that
happen at the same time, e.g. Doha Round impacts.
Advantages of using PE Analysis
• PE models can be used to compute trade impacts of trade
policy at a very disaggregated level of statistical product
classification.
– This detailed level is very often the level at which trade liberalization
and rule of origin in trade agreements are negotiated.
• Easier to implement than general equilibrium
• Less of a black box than general equilibrium
• Less intensive on data requirements
• Easy to change parameters and check for robustness to
different assumptions
Limitations
• No long-term effects (dynamic effects) such as growth or
reallocation of production factors are taken into account.
• It ignores the inter-industry effects and the feedback effects
of a trade policy change
– One way to look at it is the short-run impacts of a policy change on a
particular industry
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Useful readings
• Andriamananjara, Cadot, and Grether (2013). Tools for
Applied Goods Trade Policy Analysis: An Introduction, in
Arvid Lukauskas, Robert M. Stern, and Gianni Zanini (eds),
Handbook of Trade Policy for Development. Oxford
University Press.
• Jammes and Olarreaga (2005). Explaining SMART and
GSIM, mimeo, World Bank
• Plummer, Cheong, and Hamanaka (2010). Methodology for
Impact Assessment of Free Trade Agreements. Manila,
ADB.
• World Bank (2011). User’s Manual-WITS.
• WTO-UNCTAD (2012), A Practical Guide to Trade Policy
Analysis.
Thank you.
For more information on Simulation
Tools in WITS, please visit
https://wits.worldbank.org