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GTAP Resource #1452

"A New Index to Evaluate the Effective Protection: An Application in a CGE Context"
by Antimiani, Alessandro

The failure of the Conference in Cancun due to the increasing “role” of the developing countries, the growing presence of China in the world trade and the enlargement of the EU are affecting the world economy system. Tariff escalation - which refers to the wedge between the tariff on a processed commodity and the one on the corresponding primary commodity – is discussed in the last round within the World Trade Organisation (WTO) as one of the major obstacles to the establishment of processing industries, and to the diversification of agricultural exports.
Developing countries often complain that tariffs tend to be higher on processed products than on primary commodities. The relationship between input and output tariffs is usually evaluated using the effective rates of protection (ERP), that is, the protection expressed in terms of the value added rather than the final price of a given product. The ERP seeks to capture in a single figure support to productive factors resulting from a complex tariff structure. By including the price-distorting effects on intermediate inputs as well as on output, ERP provides a measure of the "net" effect of border policies. As we know the usual definition of the effective rate of protection breaks down in a general equilibrium, consequently, in this paper we use the index of effective protection introduced by J. Anderson (“Effective protection redux”, Journal of International Economics, 44-2, 1998). According to Anderson (1998) "Effective protection is the ranch house of trade policy construction – ugly but apparently too useful to disappear". In order to avoid the critiques that have been brought to the index originally conceived by Corden (1971), Anderson defined a “Distributional Effective Rate of Protection” (DERP) for each sector j: the idea is to find the uniform tariff on all distorted goods affecting profits in j, which is equivalent to that of the initial tariff structure.
The aim of our work is to develop, in CGE context, the application of the DERP and to compute and compare, by this new index, the levels of effective protection of USA, EU and developing countries (though in two groups, net exporters and other).
The outline of the paper is as follow: section 2 introduce the analytical foundation of the DERP and discusses the method followed for the calculation of the DERP (Anderson, 1998; Antimiani, Conforti, Salvatici, 2003) which has been based on the Global trade Analysis Project (GTAP) model (Hertel, 1997). The methodology used is a “counterfactual” analysis where we find the uniform tariff equivalent of the actual protection levels: in a free-trade scenario, we ask the model to compute the uniform tariff that would eliminate any incentives to reallocate the "fixed factor" to or from the sector for which we are computing the index. This methodology is similar to the ones used to compute any “theoretical consistent measure”, like is the Trade Restrictiveness Index (TRI), introduced by Anderson (1996).
In Section 3 we present a computation of the DERP for the 2003 for EU, updating the base date by shocking a set of macroeconomic variables and implementing Agenda2000 reform of the CAP. We shows the strength of the new method by comparing the DERP with the traditional one and doing some sensitivity analysis between DERP and a specific parameters. In this context we look at the sensitivity of the DERP to a changes in the value of elasticity between domestic and import products due to the Armington specification. Section 4 discusses the empirical results where we show the better accuracy of the DERP with respect to the old index; in addition, the results should allowed us to compare the effective protection of USA, EU and developing countries, comparing the level of effective protection given to a sector in a different countries. Finally section 5 reports concluding remarks.

Resource Details (Export Citation) GTAP Keywords
Category: 2004 Conference Paper
Status: Published
By/In: Presented at the 7th Annual Conference on Global Economic Analysis, Washington DC, USA
Date: 2004
Created: Antimiani, A. (4/28/2004)
Updated: Antimiani, A. (4/28/2004)
Visits: 3,116
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