Modeling the interactions of complex tariff regimes

Complex tariff structures impose challenges to model-based policy analysis. Real-world tariff structures are rather complex, with not only ad valorem tariffs in place but also specific tariffs as well as tariff-rate quotas (TRQs). While ad valorem tariffs express the duty as a percentage share of the value (i.e. 7%), specific tariffs add an absolute value to be paid per volume, quantity, fat content, or other properties (i.e. 10€/ton). Tariff-rate quotas are two-tied systems that offer a reduced tariff for a certain contingent, i.e. 3000 tons of duty-free exports, while a higher tariff is applied to all imports beyond those first 3000 tons. Within model-based policy analysis, ad valorem equivalent tariffs (AVEs) are used to sum up the effects of different sorts of tariffs, which is then much easier to handle and aggregate in CGE models. As the effect of these tariffs on import quantities, welfare, and trade distortion can however differ and not all these differences are captured within the ad valorem equivalent tariff, modeling their precise mechanisms would be worthwhile. The matter becomes even more complex when TRQs, ad valorem tariffs, and specific tariffs interact. For instance, several empirical studies have shown that quantitative import restrictions cause a rise in import prices. Also theoretically, it could be shown why quantitative restrictions systematically give an advantage to more expensive commodities. The theoretical argumentation, however, depends on the sort of tariff that is to be paid outside the quota. We include an endogenous quota license allocation within a complex tariff structure, thereby allowing a projection of trade regimes in which quantitative restrictions and their trade-distorting effects, ad valorem tariffs, and specific tariffs are all included at once for the same group of commodities. We implement this in the CGEbox, a flexible, extendable, and modular code basis for CGE modeling in GAMS drawing on the GTAP database.