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Pitfalls in the Use of Ad valorem Equivalent Representations of the Trade Impacts of Domestic Policies

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John Whalley ()

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Abstract

Numerical simulation exercises to analyze the impacts of potential changes in non-tariff policies commonly use ad valorem equivalent tariff treatment even though estimated impacts using explicit model representation and ad valorem equivalent treatments will differ. The difficulty for modellers is that the detail and subtlety embodied in a wide array of policy interventions means that some simplification is appealing, but no meaningful general propositions exist in the theoretical literature as to the sign or size of the differences in predicted effects. All that can seemingly be done is to investigate the differences case by case, but even here the findings are sensitive both to the particular form of model used as well as the model parameterization employed. As a result, there is relatively little in the literature that provides guidance as to how serious the pitfalls may be, and how misleading ad valorem tariff equivalent treatment is. Here I draw on three examples of numerical modelling where explicit representation of policy interventions are used. The picture that emerges is one of large quantitative and even qualitative differences in predicted impacts. These examples suggest that where interventions differ from a tariff, ad valorem representation should be undertaken in numerical trade modelling only with substantial caveats.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1480.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1480

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Find related papers by JEL classification:
F00 - International Economics - - General - - - General
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F10 - International Economics - - Trade - - - General
F15 - International Economics - - Trade - - - Economic Integration

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  1. Edgar Cudmore & John Whalley, 2003. "Border Delays and Trade Liberalization," NBER Working Papers 9485, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. John Whalley, 2003. "Liberalization in China's Key Service Sectors Following WTO Accession: Some Scenarios and Issues of Measurement," NBER Working Papers 10143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Thomas A. Wolf & Emine Gürgen, 2000. "Improving Governance and Fighting Corruption in the Baltic and CIS Countries - The Role of the IMF," IMF Working Papers 00/1, International Monetary Fund.
  4. Rodriguez, Carlos Alfredo, 1976. "A note on the economics of the duty free zone," Journal of International Economics, Elsevier, vol. 6(4), pages 385-388, November. [Downloadable!] (restricted)
  5. Hamada, Koichi, 1974. "An economic analysis of the duty-free zone," Journal of International Economics, Elsevier, vol. 4(3), pages 225-241, August. [Downloadable!] (restricted)
  6. Trela, Irene & Whalley, John & Wigle, Randall, 1987. " International Trade in Grains: Domestic Policies and Trade Impacts," Scandinavian Journal of Economics, Blackwell Publishing, vol. 89(3), pages 271-83.
  7. Lisandro Abrego & Raymond Riezman & John Whalley, 2001. "How Reasonable Are Assumptions Used in Theoretical Models?: Computational Evidence on the Likelihood of Trade Pattern Changes," NBER Working Papers 8169, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Ng, Chi-Yung & Whalley, John, 2004. "Geographical Extension of Free Trade Zones as Trade Liberalization: A Numerical Simulation Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Berg, Andrew & and Pattillo, Catherine, . "Improving Governance and Fighting Corruption in the Baltic and CIS Countries: The Role of the IMF," IMF Economic Issues 21, International Monetary Fund. [Downloadable!]
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