Preferential Trade Liberalisation, Fiscal Policy Responses and Welfare: A Dynamic CGE Model for Jordan

This paper aims at assessing the effects on the Jordanian economy of the Association Agreement (AA) between Jordan and the European Union (EU). Particular emphasis is placed on the effects on consumer welfare. The EU-Jordan AA was signed in 1997 and entered into force in May 2002. It eliminates progressively tariffs on most industrial goods imported by Jordan from the EU. Custom duties on agricultural goods and processed agricultural products are gradually and only partially eliminated. Trade liberalisation is expected to bring about a positive impact on consumer welfare through lower prices of investment and consumption goods. On the other hand, it reduces government revenue due to foregone tariff revenue. Therefore counteracting fiscal measures are required in order to offset the loss in government revenue. In order to capture intertemporal effects brought about by trade liberalisation on the Jordanian economy, a multisectoral dynamic CGE model is specified and calibrated. Simulation results show that the implementation of the AA raises consumer welfare in Jordan and has positive effects on all macroeconomic variables in the long-run, but it reduces consumption in the short-run.