The Cost of Tariff and Non-tariff Protection in Colombia. A Computable General Equilibrium Exercise

This article evaluates, through a computable general equilibrium model calibrated for Colombia, 2014, the cost of agricultural protection exercised through tariffs and non-tariff measures. To calculate the cost of protection, the elimination of tariff and non-tariff barriers is simulated, evaluating the impact on GDP and on households’ welfare, by calculating the "equivalent variation". Non-tariff protection is measured through the concept of "equivalent tariff", that is, the tariff that would produce a reduction on imports equal to that produced by non-tariff barriers. The simulations incorporate the effects of reallocation of both variable resources (labor and intermediate inputs) and fixed resources (land and capital) and incorporate the effects of exposure to competition on the margins of the sectors that operate in monopolistic competition. In the short term, changes in effective or equivalent tariffs, affect the allocation of variable resources. But they also affect the income associated with fixed factors, which means that, in the long term, these fixed factors are reallocated between sectors. Finally, the impact on the change of the margins applied in the sectors that operate in monopolistic competition is also calculated, because of the elimination of barriers and the greater exposure to competition that this implies. The results indicate that agricultural protection costs the country about 1.5% of GDP; and between 0.9% and 3.4% of household income, with large losses in some productive sectors and gains in others, which highlights the problems of political economy that the implementation of this type of reforms faces. An important contribution of the study is the use of probability distribution functions for the substitution parameters incorporated in the model: this allows to determine a range of variation, according to different values of the elasticities of substitution.