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Geographical Extension of Free Trade Zones as Trade Liberalization: A Numerical Simulation Approach

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  • Chi-Yung Ng
  • John Whalley

Abstract

We consider progressive geographical expansion of free trade zones within countries as a form of trade liberalization and compare observationally equivalent liberalization involving changes in the coverage of a free trade zone for a fixed tariff rate, and tariff reductions applying to all trade if there are no free trade zones in the country (in the sense of generating similar changes in trade volumes). Our work is motivated by China’s approach to service trade liberalization in banking and other areas of progressive additions of cities to automatic licence treatment for foreign entities. We use numerical simulation methods to compare conventional national tariff reductions to trade liberalization achieved through the geographical expansion of free trade zones in terms of welfare impacts. Either the size of the free trade zone with a fixed tariff, or the tariff rate given the size of the free trade zone can be endogenously determined so as to yield observational equivalence in the sense of trade volume impacts across trade policy changes. Numerical results overwhelmingly indicate larger welfare costs from imposing geographically restrictive schemes since a higher tariff applies to a smaller fraction of trade, and distortions within country trade also apply. Numerical policy analyses using a conventional tariff-equivalent ad valorem modeling approach to evaluate the impacts of liberalizing geographical barriers can thus be highly misleading. We explore both pure exchange and with production cases, and relate our discussion to earlier literature on free trade zones.

Suggested Citation

  • Chi-Yung Ng & John Whalley, 2004. "Geographical Extension of Free Trade Zones as Trade Liberalization: A Numerical Simulation Approach," CESifo Working Paper Series 1147, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1147
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1147.pdf
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    References listed on IDEAS

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    1. Miyagiwa, Kaz F., 1986. "A reconsideration of the welfare economics of a free-trade zone," Journal of International Economics, Elsevier, vol. 21(3-4), pages 337-350, November.
    2. John Whalley, 2003. "Liberalization in China's Key Service Sectors Following WTO Accession: Some Scenarios and Issues of Measurement," NBER Working Papers 10143, National Bureau of Economic Research, Inc.
    3. Rodriguez, Carlos Alfredo, 1976. "A note on the economics of the duty free zone," Journal of International Economics, Elsevier, vol. 6(4), pages 385-388, November.
    4. Hamada, Koichi, 1974. "An economic analysis of the duty-free zone," Journal of International Economics, Elsevier, vol. 4(3), pages 225-241, August.
    5. Young, Leslie, 1991. "Unemployment and the optimal export-processing zone," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 369-385, November.
    6. Young, Leslie, 1987. "Intermediate goods and the formation of duty-free zones," Journal of Development Economics, Elsevier, vol. 25(2), pages 369-384, April.
    7. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550.
    8. Din, Musleh-ud, 1994. "Export processing zones and backward linkages," Journal of Development Economics, Elsevier, vol. 43(2), pages 369-385, April.
    9. Young, Leslie & Miyagiwa, Kaz F., 1987. "Unemployment and the formation of duty-free zones," Journal of Development Economics, Elsevier, vol. 26(2), pages 397-405, August.
    10. Hamilton, Carl & E.O. Svensson, Lars, 1982. "On the welfare effects of a duty-free zone," Journal of International Economics, Elsevier, vol. 13(1-2), pages 45-64, August.
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    Cited by:

    1. Whalley, John, 2005. "Pitfalls in the Use of Ad valorem Equivalent Representations of the Trade Impacts of Domestic Policies," Commissioned Papers 24164, Canadian Agricultural Trade Policy Research Network.
    2. Iris Claus & Les Oxley & Hejing Chen & John Whalley, 2014. "China'S Service Trade," Journal of Economic Surveys, Wiley Blackwell, vol. 28(4), pages 746-774, September.

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