Tariff escalation, export shares and economy-wide welfare: A computable general equilibrium approach ?

a r t i c l e i n f o The current literature suggests that tariff escalation (TE) lowers the competitiveness of processing sectors. Coffee and cotton are agricultural products that face the problem of TE in developing countries, where we observe low global coffee product export shares but high global cotton textile export shares, posing a question on TE's impact on competitiveness. This paper employs a computable generalised equilibrium (CGE) modelling approach to examine the impact of TE on export shares of processed coffee and cotton textiles. We modify the standard GTAP (global trade analysis project) model to solve for global export shares and simulate the impact of eliminating TE on coffee and cotton to analyse economy-wide trade and welfare implications. Results show that TE has mixed effects on export shares, depending on the initial economic structure. Findings reveal that the elimination of TE on cotton and coffee may generate potential global gains of over US$ 0.7 billion, mainly from the cotton sector. Given the relative size of these sectors in global agriculture, the magnitude of gains is not small. This underlines the need for the policy-makers to examine, address and evaluate the prevalence of TE on a sectoral basis in ongoing WTO negotiations. Negotiations to liberalise agriculture through modalities on agriculture market access (AMA) reflect trade liberalisation effort by World Trade Organization (WTO) member countries since the launch of the Doha round in 2001. The AMA negotiations which explicitly acknowledge tariff escalation (TE) as a relevant issue for developing countries as is the associated concept of effective protection, has been a long-recognized issue in trade policy literature escalation occurs when tariffs on downstream imports tend to be higher than tariffs on upstream imports such that the level of protection offered downstream, where goods are typically more processed, exceeds that upstream for less-processed intermediate goods. This is a typical problem faced by agricultural commodity exporters, who recognise that the imposition of higher import duties on processed products than on input commodities is a form of protection that impedes developing countries' efforts to move away from the production of primary agricultural products to value-added exports (Mathews, 1994). TE creates a distinct disincentive for export diversification by developing countries that do not employ resources towards higher stages of agricultural processing (Antimiani et al., 2009; Clarke and Bruce, 2006). The disadvantage is further magnified by low world prices of primary commodities, …