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Trade policy analysis in the presence of duty drawbacks

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  • Ianchovichina, Elena

Abstract

Duty drawback schemes, which typically involve a combination of duty rebates and exemptions, are a feature of many countries'trade regimes. They are used in highly protected developing economies as a means of providing exporters with imported inputs at world prices, thus increasing their competitiveness, while maintaining the protection on the rest of the economy. In China, duty exemptions have been central to the process of trade reform and have led to a tremendous increase in processed exports using imported materials. Despite the widespread use and importance of duty drawbacks, these new trade liberalization instruments have been given relatively little attention in empirical multilateral trade liberalization studies. The paper presents an empirical multi-region general equilibrium model, in which the effects of policy reform are differentiated based on the trade orientation of the firms. The model is useful for analyzing trade liberalization in the presence of duty drawbacks, assessing whether countries should introduce or abolish these types of arrangements, and evaluating the impact of improved duty drawback system administration. The author's analysis shows that failure to account for duty exemptions in the case of China's recent WTO accession will overstate the increase in China's trade flows by 40 percent, welfare by 15 percent, and exports of selected sectors by as much as 90 percent. The magnitude of the bias depends on the level of pre-intervention tariffs and the size of tariff cuts-the larger the initial distortions and tariff reductions, the larger the bias when duty drawbacks are ignored. The bias in the estimates of China's real GDP, trade flows, and welfare changes due to WTO accession increases more than three times when China's pre-intervention tariffs are raised from their 1997 levels to the much higher 1995 levels. These results suggest that trade liberalization studies-focusing on economies in which protection is high, import concessions play an important role, and planned tariff cuts are deep-must treat duty drawbacks explicitly to avoid serious errors in their estimates of sectoral output, trade flows, and welfare changes.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3312.

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Date of creation: 01 May 2002
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Handle: RePEc:wbk:wbrwps:3312

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Keywords: Trade Policy; Economic Theory&Research; Rules of Origin; Environmental Economics&Policies; Export Competitiveness; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Environmental Economics&Policies; Economic Theory&Research; Trade Policy; World Trade Organization;

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  1. Ianchovichina, Elena & Martin, William, 2003. "Economic impacts of China's accession to the World Trade Organization," Policy Research Working Paper Series 3053, The World Bank.
  2. Ianchovichina, Elena, 2003. "GTAP-DD: A Model for Analyzing Trade Reforms in the Presence of Duty Drawbacks," GTAP Technical Papers 1192, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  3. Harrison, W Jill & Pearson, K R, 1996. "Computing Solutions for Large General Equilibrium Models Using GEMPACK," Computational Economics, Society for Computational Economics, vol. 9(2), pages 83-127, May.
  4. Ianchovichina, Elena & Martin, Will, 2001. "Trade liberalization in China's accession to the World Trade Organization," Policy Research Working Paper Series 2623, The World Bank.
  5. Terrie L. Walmsley & Thomas W. Hertel, 2001. "China's Accession to the WTO: Timing is Everything," The World Economy, Wiley Blackwell, vol. 24(8), pages 1019-1049, 09.
  6. Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 2003. "The protectionist bias of duty drawbacks: evidence from Mercosur," Journal of International Economics, Elsevier, vol. 59(1), pages 161-182, January.
  7. Gruen, Nicholas, 1999. "Towards a More General Approach to Trade Liberalization," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 385-96, December.
  8. Malcolm, Gerard, 1998. "Adjusting Tax Rates in the GTAP Data Base," GTAP Technical Papers 315, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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Cited by:
  1. Ghosh, Madanmohan & Rao, Someshwar, 2010. "Chinese accession to the WTO: Economic implications for China, other Asian and North American economies," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 389-398, May.
  2. Elena IANCHOVICHINA & Will MARTIN, 2006. "Trade Impacts of China's World Trade Organization Accession," Asian Economic Policy Review, Japan Center for Economic Research, vol. 1(1), pages 45-65.
  3. Dimaranan, Betina & Ianchovichina, Elena & Martin, William J., 2007. "China, India, and the future of the world economy : fierce competition or shared growth?," Policy Research Working Paper Series 4304, The World Bank.
  4. Houssein Guimbard & Hugo Valin, 2008. "Vietnam's Accession to the WTO: Ex-Post Evaluation in a Dynamic Perspective," Working Papers 2008-31, CEPII research center.
  5. L. Alan Winters & Shahid Yusuf, 2007. "Dancing with the Giants: China, India, and the Global Economy," World Bank Publications, The World Bank, number 6632, October.
  6. Hung-Gay Fung & Jian Zhang, 2007. "An Assessment of the Closer Economic Partnership Arrangement Between China and Hong Kong," Chinese Economy, M.E. Sharpe, Inc., vol. 40(2), pages 36-50, April.
  7. Lim, Jamus Jerome & Saborowski, Christian, 2010. "Estimates of trade-related adjustment costs in Syria," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 843-864, November.
  8. Miria Pigato, 2009. "Strengthening China's and India's Trade and Investment Ties to the Middle East and North Africa," World Bank Publications, The World Bank, number 2626, October.
  9. Stephen Tokarick, 2006. "Does Import Protection Discourage Exports?," IMF Working Papers 06/20, International Monetary Fund.
  10. Ianchovichina, Elena & Ivanic, Maros & Martin, Will, 2009. "Implications of the growth of China and India for the other Asian giant : Russia," Policy Research Working Paper Series 5075, The World Bank.

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