GTAP Trade Policies Simulations: When Does “Firm Heterogeneity” Need to be Considered?

1.2 When is it necessary to incorporate “firm heterogeneity” into trade policy practice? In general trade policy practice, “firm heterogeneity” is reflected by a firm’s behaviours at the micro level, namely the impact of firm entry and exit on policy effectiveness, especially on welfare. The practice of trade policies raises two noteworthy questions: (i)Would all trade policies affect firm entry and exit, or only particular trade policies would? (ii)Is there a threshold value defining the impact of trade policies on firm entry and exit? In other word, to what extent will trade policies start affecting firm entry and exit? 1.3 Research Question in This Paper GTAP model has been widely applied in trade policy simulation. The standard GTAP model (Hertel, 1997) has matured after decades of development. Akgul et al. (2016) introduced “firm heterogeneity” based on the standard GTAP model and developed the GTAP-HET model. Then, when we employ the GTAP model to analyse trade policies, we would also face with the same problem: for which policy simulation, the standard GTAP model could solve the problem, which would be necessary to include the GTAP-HET model, so as to be able to grasp the effect of firm heterogeneity? This paper intended to employ both standard GTAP model and the GTAP-HET model, to simulate tariff and non-tariff policies separately, and to answer above question through comparative analysis.