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Trade policy options for Chile : a quantitative evaluation

Author

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  • Harrison, Glenn W.
  • Rutherford, Thomas F.
  • Tarr, David G.

Abstract

Chile is currently evaluating a wide range of possible trade policies. Using a global computable general equilibrium model, the authors examine a range of trade policy and complementary tax policy options for Chile. They focus on Chile's principal preferential trade policy options: a free-trade area with MERCOSUR, a customs union with MERCOSUR, and a free trade area with NAFTA. They also examine such options as complementary tariff reduction with nonpartner countries in combination with implementing the free trade area options; unilateral or global trade liberalization; and the optimum unilateral tariff. Their principal policy conclusions: lowering Chile's tariffs preferentially or multilaterally leads to only small gains as Chile starts with a rather efficient external trade regime, uniform tariffs of 11 percent. Largely because of its efficient uniform tariff, preferential tariff reduction will reduce Chilean welfare through trade diversion, unless Chile can improve its access in the markets of partner countries. NAFTA offers enough access to benefit Chile; MERCOSUR does not, once the trade diversion costs of MERCOSUR are taken into account. Under their preferred-elasticity scenario, Chile can convert the MERCOSUR agreement from a loss to a gain if it lowers its external tariff to between 6 and 8 percent. Doing so will also increase the gains from a potential agreement with NAFTA. Chile's current value-added tax imposes distortionary costs because collection rates are nor uniform. Chile will gain if it can collect the VAT more uniformly. Tariff reductions from trade reform will require an increase in domestic taxes, so greater uniformity in domestic taxes (less distortion in replacement taxes) will maximize the benefits from trade reform. Welfare will be improved by moving toward unifromity in the VAT and lowering the Chilean tariff to between 6 and 8 percent. This model ignores dynamic gains from trade liberalization, the result of importing either a greater variety of products or more technologically advanced products.

Suggested Citation

  • Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 1997. "Trade policy options for Chile : a quantitative evaluation," Policy Research Working Paper Series 1783, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1783
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    References listed on IDEAS

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    1. Glenn W. Harrison & Thomas F. Rutherford & David G. Tarr, 2014. "Trade Reform in the Partially Liberalized Economy of Turkey," World Scientific Book Chapters,in: APPLIED TRADE POLICY MODELING IN 16 COUNTRIES Insights and Impacts from World Bank CGE Based Projects, chapter 5, pages 95-121 World Scientific Publishing Co. Pte. Ltd..
    2. Wooton, Ian, 1986. "Preferential trading agreements: An investigation," Journal of International Economics, Elsevier, vol. 21(1-2), pages 81-97, August.
    3. Harrison, Glenn W & Rutherford, Thomas F & Wooton, Ian, 1991. "An Empirical Database for a General Equilibrium Model of the European Communities," Empirical Economics, Springer, vol. 16(1), pages 95-120.
    4. Athukorala, Premachandra & Riedel, James, 1994. "Demand and Supply Factors in the Determination of NIE Exports: A Simultaneous Error-Correction Model for Hong Kong: A Comment," Economic Journal, Royal Economic Society, vol. 104(427), pages 1411-1414, November.
    5. Hammond, Peter J & Sempere, Jaime, 1995. "Limits to the Potential Gains from Economic Integration and Other Supply Side Policies," Economic Journal, Royal Economic Society, vol. 105(432), pages 1180-1204, September.
    6. Riedel, James, 1988. "The Demand for LDC Exports of Manufactures: Estimates from Hong Kong," Economic Journal, Royal Economic Society, vol. 98(389), pages 138-148, March.
    7. Valdes, A, 1996. "Surveillance of Agricultural Price and Trade Policy in Latin America during Major Policy Reform," World Bank - Discussion Papers 349, World Bank.
    8. Juan Eduardo Coeymans & Felipe Larraín, 1994. "Efectos de un Acuerdo de Libre Comercio entre Chile y Estados Unidos: Un Enfoque de Equilibrio General," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(94), pages 357-400.
    9. Bond,Eric W., 1997. "Using tariff indices to evaluate preferential trading arrangements : an application to Chile," Policy Research Working Paper Series 1751, The World Bank.
    10. Glenn W. Harrison & Thomas F. Rutherford & Ian Wooton, 1993. "An Alternative Welfare Decomposition for Customs Unions," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 961-968, November.
    11. Reinert, Kenneth A. & Roland-Holst, David W., 1992. "Armington elasticities for United States manufacturing sectors," Journal of Policy Modeling, Elsevier, vol. 14(5), pages 631-639, October.
    12. Harrison, Glenn W & Vinod, H D, 1992. "The Sensitivity Analysis of Applied General Equilibrium Models: Completely Randomized Factorial Sampling Designs," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 357-362, May.
    13. Glenn W. Harrison & Thomas F. Rutherford & David G. Tarr, 2014. "Economic implications for Turkey of a Customs Union with the European Union," World Scientific Book Chapters,in: APPLIED TRADE POLICY MODELING IN 16 COUNTRIES Insights and Impacts from World Bank CGE Based Projects, chapter 16, pages 395-404 World Scientific Publishing Co. Pte. Ltd..
    14. Glenn W. Harrison & Thomas F. Rutherford & David G. Tarr, 2017. "Quantifying The Uruguay Round," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 16, pages 363-388 World Scientific Publishing Co. Pte. Ltd..
    15. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
    16. Alberto Valdés, 1995. "Joining an Existing Regional Trade Agreement from the Perspective of a Small Open Economy: Chile's Accession to NAFTA and MERCOSUR," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(5), pages 1292-1297.
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    Citations

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    Cited by:

    1. Silvia Laens & Inés Terra, 2003. "Integration of the Americas: Welfare Effects and Options for the MERCOSUR," Documentos de Trabajo (working papers) 0903, Department of Economics - dECON.
    2. Mabel Cabezas, 2003. "Tratado de Libre Comercio Entre Chile y Estados Unidos: Revisión de Estudios que Cuantifican su Impacto," Working Papers Central Bank of Chile 239, Central Bank of Chile.
    3. Kimakova, Alena & Rajabiun, Reza, 1999. "An Applied General Equilibrium Analysis of EU Integration for Hungary and Slovakia," Transition Economics Series 9, Institute for Advanced Studies.
    4. Klaus Schmidt-Hebbel, 2006. "Chile's Economic Growth," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 43(127), pages 5-48.
    5. Bond,Eric W., 1997. "Using tariff indices to evaluate preferential trading arrangements : an application to Chile," Policy Research Working Paper Series 1751, The World Bank.
    6. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 2001. "Chile's regional arrangements and the Free Trade Agreement of the Americas : the importance of market access," Policy Research Working Paper Series 2634, The World Bank.
    7. Glenn W Harrison & Thomas F Rutherford & David G Tarr, 1997. "Opciones de Política Comercial para Chile: Una Evaluación Cuantitativa," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(102), pages 101-137.
    8. Romulo Chumacero & Rodrigo Fuentes, 2004. "Chile's Free Trade Deals with the EU and the US: A Big Deal?," Econometric Society 2004 Far Eastern Meetings 661, Econometric Society.

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