A General Equilibrium Analysis of Australia Providing Duty Free Access on Goods Imported from Least Developed Countries

The Doha ministerial declaration commits industrialised countries to liberalising access for least developed countries (LDCs) to their markets. Preferential trade policies have diverse impacts on the country that initiates them and on its trading partners, which include not only the LDCs but also other developed and developing countries that compete with LDCs in world export markets. To what extent such a policy may affect the initiating country and its trading partners is of concern to policy makers. This paper uses Australia as a case study to quantify the general equilibrium effects of providing tariff-free access to Australian markets on all parties concerned. The main sources of the projected effects are identified and discussed. We use a disaggregated version of the GTAP model to minimise aggregation bias. We also develop a post-solution micro-simulation model and an extended database to derive results for those LDCs and some other trading partners that are not identified separately in the GTAP database. Given the current patterns of trade and tariffs, removing tariffs on Australian imports from LDCs will primarily affect imports of clothing. Simulation results show that the overall effects on the Australian economy are likely to be small due to the small share of Australia’s trade with LDCs and the small effect of tariff cuts on the domestic prices paid by consumers and producers. The policy change is projected to benefit mainly major LDC clothing exporters. To what extent other trading partners that already enjoy free access to Australia’s domestic market, are affected depends on the degree of substitution between imports from these two sources. Based on the empirical evidence, the adverse effect on other exporters to Australia is modest.