Piecemeal trade reform in partially liberalized economies : an evaluation for Turkey

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.