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Trade Liberalizations in Latin America and Eastern Europe
The Cases of Ecuador and Slovenia
Stanley Cho and Julian P. DıazUniversity of Minnesota
November 10, 2004
Preliminary and Incomplete
Motivation
¤ Two trade liberalization episodes are under way:
- Ecuador is negotiating a Free Trade Agreement with
the United States.
- Slovenia joins the European Union.
¤ Although these are two small economies, the trade liber-
alizations occur with their largest trade partners.
¤ We want to analyze the impact of these trade liberaliza-
tions on the economies of Ecuador and Slovenia.
¤ We follow the tradition of Shoven and Whalley (1984)
and construct calibrated general equilibrium models for
Ecuador and Slovenia.
¤ The first step is to build a Social Accounting Matrix
(SAM) for each economy.
¤ A SAM is a record of all the transactions that take place
in an economy in a particular period of time, with a finer
level of disaggregation than an Input-Output Matrix.
¤ Examples of the use of SAMs for Applied General Equilib-
rium Models: Kehoe et.al. (1988) for the Spanish econ-
omy, etc.
EcuadorSocial Accounting Matrix (2001)
production consumption factors institutions capital exports total 1 2 3 4 5 6 7 8 9 10 prim text trans oman serv prim text trans oman serv labor capital households govt prim 682997 24662 0 2908505 192468 526186.5 0 0 0 0 0 144885 2987915 7467619 text 29924 373117 3012 65657 39225 0 849926.5 0 0 0 0 29303 86244 1476409
production trans 39273 35 216163 66647 193183 0 0 71901 0 0 0 591148 104705 1283055 oman 810655 86343 4013 2874587 2953055 0 0 3858666 0 0 2069055 1563682 14220056 serv 1170504 257348.5 82428 2054446 4531043 648898.5 213120.5 71024 1396656 5567827 2133707 2560303 870302 21557606 prim 1175085 1175085 text 1178044 1178044
consumption trans 272300 272300 oman 6143994 6143994 serv 5721724 5721724
L 1796738 264299.9 15424.22 454519.9 6942046 9473028 factors K 2683852 198003.1 7686.777 799053.1 5652908 9341503
households 9473028 9341503 18814531 government 19457 24513 109298 725954 43390 0 114997 129375 888673 153897 591660 2801214
institutions dir taxes 591660 591660 ind taxes 401 0 0 488958 43390 0 114997 129375 888673 153897 1819691 tariffs 19056 24513 109298 236996 0 389863 capital 3731724 667507 995463 5394694 imports 234219 248087 845030 4270687 1010288 6608311 total 7467619 1476409 1283055 14220056 21557606 1175085 1178044 272300 6143994 5721724 9473028 9341503 18814531 667507 5394694 6608311
Outline
- Background
- The Model
- Data, Calibration, Results
- Numerical Experiments
- Conclusion and Future Work
Ecuador
¤ A relatively very open economy.
¤ Weighted tariff rate implied by data: 5.89%
¤ US main trade partner.
¤ Member of the Andean Community of Nations (CAN), a
regional free trade agreement. Trade with CAN is impor-
tant.
Ecuador[Exports + Imports]/GDP
0.00
0.20
0.40
0.60
0.80
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
EcuadorComposition of Imports (2001)
Textiles4.36% Chemical
Products26.90%
Transportation Equipment
14.92%
Fuels 5.23%%
Cereals1.82%
Capital Goods14.34%
Other32.44%
EcuadorComposition of Exports (2001)
Other30.58 %
Banana19.11%
Flowers4.99%Shrimp
5.84%
Petroleum39.47%
EcuadorDestination of Exports (2001)
US 36.48%
Andean17.39%
EU 15 13.84%
Other 32.29%
EcuadorOrigin of Imports (2001)
Other 44.37%
EU 15 11.71%
Andean20.66% US
23.26%
EcuadorTariff Schedule
Sectors Tariff rate
Cereals 13.20%
Flowers 1.23%
Other primaries 4.45%
Shrimp 20.00%
Textile 9.88%
Chemicals 4.60%
Transports 12.93%
Other manufacturing 5.92%
Service 0.00%
Weighted Average 5.90%
Slovenia
� Slovenia is a very open economy.
� EU 15 by far the main trade partner. Other non-EU 15
trade partners: Croatia, Bosnia & Herzegovina, Russia,
Poland, US.
� Low tariff rates, little dispersion.
� By becoming an EU member, it will adopt EU’s tariff
schedule.
Slovenia[Exports + Imports]/GDP
1.00
1.10
1.20
1.30
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
SloveniaComposition of Exports (2001)
Other Manuf.62.98%
Primaries1.98%Food & Bev
2%Textiles7.57%Leather
1.16%Wood & Furn
11.29%
Transp. Equip.13%
SloveniaComposition of Imports (2001)
Other Manuf.61%
Primaries13%
Food & Bev3%
Textiles7%
Leather1%
Wood & Furn3%
Transp. Equip.13%
SloveniaOrigin of Imports (2001)
Other22.25%
EU 1567.47%
BIH0.61%
CRO3.98%
USA2.92%
SloveniaDestination of Exports (2001)
Other22.25%
EU 1562.19%
BIH4.30%
CRO8.63%
USA2.63%
ROW54.69%
EU 15 45.31%
EU 15 62.60%
ROW 37.40%
SloveniaDestination of Exports (2001)
Primaries Manufactures
SloveniaOrigin of Imports (2001)
EU 1544.62%
ROW55.38%
ROW29.25%
EU 1570.75%
Primaries Manufactures
Slovenia and EUTariff Rates
11.70%
19.50%
7.10%
2.80% 2.90% 3.40%3.00%
9.20%
1.50% 0.60%0.40% 0.60%2.30%3.00%
0%
5%
10%
15%
20%
25%
Primary Food & Bev Textiles Leather WoodProducts
TransportationEq.
OtherMaufactures
SloveniaEU
The Model
¤ A Static Applied General Equilibrium Model.
¤ Agents:
- Households
- Firms
- Government
- Foreign Trade Partners
Sectoral Disaggregation
¤ We disaggregate the economies in the sectors that might
exhibit the greatest impact due to elimination of tariffs.
Ecuador Slovenia
Banana PrimariesCereals Food & BeveragesFlowers LeatherOther Primaries Wood & FurnitureShrimp TextilesTextiles Transportation EquipmentChemical Products Other ManufacturesTransportation Equipment ServicesOther ManufacturesServices
Types of Goods: Ecuador
Production Goods (GP) Consumption Goods (GC)Banana BananaCereals CerealsFlowers FlowersOther Primaries Other PrimariesShrimp ShrimpTextiles TextilesChemical Products Chemical ProductsTransportation Equipment Transportation EquipmentOther Manufactures Other ManufacturesService Services
Investment Good Imported Good
Types of Goods: Slovenia
Production Goods (GP) Consumption Goods (GC)Primaries PrimariesFood & Beverage Food & BeverageLeather LeatherWood & Furniture Wood & FurnitureTextiles TextilesTransportation Equipment Transportation EquipmentOther Manufactures Other ManufacturesServices Services
Investment Good Imported Good
Trade Partners
Ecuador Slovenia
United States (us) EU 15 (eu)Andean Community (and) Rest of the World (row)Rest of the World (row)
Households
¤ Households derive utility from purchasing the consump-
tion goods:
max∑
i∈GC
θc,i log ci
s.t.∑
i∈GC
(1 + tc,i)pc,ici = (1− τd)(w¯+ rk)
Domestic Production Firms
¤ Use intermediate inputs from all the sectors in fixed pro-
portions and combine capital and labor to produce the
domestic good:
yj,d = min
{xd
ban,j
adban,j
,xd
cer,j
adcer,j
, ... ,xd
ser,j
adser,j
, βjkαjj `
(1−αj)j
}, j ∈ GP
¤ In equilibrium these firms make zero profits.
Final Production Goods Firms
¤ Purchase domestic goods
(1 + tp,j)pj,dyj,d
and imported goods
eus(1 + τj,us)pj,usyj,us + eand(1 + τj,and)pj,andyj,and
+ erow(1 + τj,row)pj,rowyj,us
¤ Combine domestic output with imported goods to pro-
duce final goods:
yj = γj
[δj,dy
ρmj,d + δj,usy
ρmj,us + δj,andy
ρmj,and + δj,rowyρm
j,row
] 1ρm
¤ Note when ρm → 0, yj = γj
[y
δj,dj,d y
δj,usj,us y
δj,andj,and y
δj,rowj,row
]
Investment Good Firm
¤ The Investment Good Firm combines the final goods as
intermediate inputs in fixed proportions:
yinv = min
{xinv
ban,inv
ainvban,inv
,xinv
cer,inv
ainvcer,inv
, ... ,xinv
ser,inv
ainvser,inv
}
¤ Its output is purchased by the households, the govern-
ment, and by foreigners.
Consumption Goods Firms
¤ Produce goods to be consumed exclusively by households.
They combine final production goods as intermediate in-
puts in fixed proportions:
ycj = min
{xc
ban,j
acban,j
,xc
cer,j
accer,j
, ... ,xc
ser,j
acser,j
}, j ∈ GC
¤ We assume that xci,j = 0 for i 6= j, ser.
Government
¤ Derives utility from consuming services and the invest-
ment good:
θg,ser log cg,ser + θg,inv log cg,inv
¤ Government’s budget constraint:
τd(w¯+ rk) +∑
j∈GP
tp,jpj,dyj,d +∑
j∈GC
tc,jpc,jcj+
∑
j∈GP
τj,useuspj,usyj,us +∑
j∈GP
τj,andeandpj,andyj,and +
∑
j∈GP
τj,rowerowpj,rowyj,row = psercg,ser + pinvcg,inv
Trade Partners
� The representative agent in each foreign country f pur-
chases imported goods from the domestic economy, and
consumes a local good:
max
∑j∈GP
θf,j logxf,j
+ θf,inv logxf,inv + θf,f logxf,f
s.t.∑
j∈GP
(1 + τt,j)pjxf,j + pinvxf,inv + efxf,f = efIf
Equilibrium
¤ An equilibrium is a set of:
- prices for domestic goods (pj,d)j ∈GP
- prices for final goods (pj)j ∈GP , pinv
- prices for consumption goods (pc,j)j ∈Gc
- factor prices r, w
- real exchange rates (eus, eand, erow)
- foreign prices (pban,f , ... , pser,f)f=us,and,row
- consumption plan for the consumer (cban, ccer, ... , cser, cinv)
- production plan for domestic good firm j
(yj,d, xdban,j, ... , xd
ser,j, kj, `j)
- production plan for final good firm j
(yj, yj,d, yj,us , yj,and, yj,row)
- production plan for investment good firm j
(yinv, xinvban,inv, ... , xinv
ser,inv)
- production plan for consumption good firm j
(ycj, xc
ban,j, ... , xcser,j)
- consumption plan in country f
(xban,f , ... , xser,f , xinv,f , xf,f)
- consumption plan for the government (cg,ser, cg,inv)
such that, given taxes and tariffs:
(i) The consumption plan (cban, ccer, ... , cser, cinv) solves the
consumer’s problem.
(ii) The production plan (yj,d, xdban,j, ... , xd
ser,j, kj, `j) solves the
domestic good firm j problem, and generates zero profits.
(iii) The production plan (ycj, xc
ban,j, ... , xcser,j) solves the con-
sumption good firm j problem, and generates zero profits.
(iv) The production plan (yinv, xinvban,inv, ... , xc
ser,inv) solves the
investment firm problem, and generates zero profits.
(v) The production plan (yj, yj,d, yj,us , yj,and, yj,row) for final
good firm j minimizes cost and generates zero profit.
(vi) The market for final good j clears,
yj =∑
i∈GP
xdj,i +
∑
i∈GC
xcj,i + xj,inv + xus,j + xand,j + xrow,j
(vii) The market for consumption good j clears, ycj = cj.
(viii) The market for investment good clears,
yinv = cinv + cg,inv + xus,inv + xand,inv + xrow,inv
(ix) The factor markets clear, i.e.∑
j `j = ¯, and∑
j kj = k
(x) The Government balances its budget.
(xi) Trade is balanced:
ef
∑
j
pj,fyj,f =∑
j
pjxj,f + pinvxinv,f , f = us, and, row
(xii) The consumption plan (xban,f , xcer,f , ... , xser,f , xinv,f , xf,f)
solves country f representative consumer’s problem.
Data
¤ For Ecuador:
- Input-Output Matrix (2001)
- Foreign Trade Statistics
- Source: Central Bank of Ecuador
¤ We construct a 10-sector SAM.
¤ For Slovenia:
- Input-Output Matrix (2001)
- Foreign Trade Statistics
- Trade in Services Statistics
- Statistical Office of the Republic of Slovenia and Bank
of Slovenia
¤ We construct an 8-sector SAM.
Calibration
¤ We calibrate the values of the parameters of the model
economy so that, in equilibrium, the agents replicate the
transactions observed in the SAM.
¤ Also, we obtain:
Partners’ GDP IFS
Partners’ Tariff Rates WTO Trade Policy Reviews
ρm Sensitivity Analysis: ρLm = 0.0
ρHm = 0.9
Experiments – For Ecuador
� Experiment 1 – “Partial Liberalization”: Ecuador and the
US lower, but do not completely eliminate the tariffs they
impose on each other.
� Experiment 2 –“Free Trade Agreement”: Ecuador and
the US completely eliminate their tariffs.
� NOTE: In both cases, Ecuador does not alter its tariffs
with the Rest of the World.
Real Income Indices
¤ Consumer Real Income Index =[cθbanban × ...× cθser
ser × cθinvinv
]
¤ Government Real Income Index =[cθg,bang,ban × ...× c
θg,serg,ser × c
θg,invg,inv
]
¤ “Social” Real Income Index =[CΘban
ban × ...× CΘserser × CΘinv
inv
]
where Cj = cj + cg,j and Θj =cj + cg,j∑
j cj +∑
j cg,j
Dataσimp=1 σimp=10 σimp=1 σimp=10σexp=1 σexp=1 σexp=1 σexp=1
Banana 0.000 0.020 0.020 0.000 0.000Cereal 0.134 0.020 0.020 0.000 0.000Flower 0.013 0.020 0.020 0.000 0.000
Other primaries 0.094 0.020 0.020 0.000 0.000Shrimp 0.222 0.020 0.020 0.000 0.000Textile 0.161 0.020 0.020 0.000 0.000
Chemicals 0.061 0.020 0.020 0.000 0.000Transport 0.164 0.020 0.020 0.000 0.000
Other manufacture 0.070 0.020 0.020 0.000 0.000Service 0.000 0.000 0.000 0.000 0.000Banana 0.000 0.000 0.000 0.000 0.000Cereal 0.134 0.134 0.134 0.134 0.134Flower 0.013 0.013 0.013 0.013 0.013
Other primaries 0.094 0.094 0.094 0.094 0.094Shrimp 0.000 0.000 0.000 0.000 0.000Textile 0.161 0.161 0.161 0.161 0.161
Chemicals 0.061 0.061 0.061 0.061 0.061Transport 0.164 0.164 0.164 0.164 0.164
Other manufacture 0.070 0.070 0.070 0.070 0.070Service 0.000 0.000 0.000 0.000 0.000Banana 0.034 0.020 0.020 0.000 0.000Cereal 0.012 0.020 0.020 0.000 0.000Flower 0.040 0.020 0.020 0.000 0.000
Other primaries 0.040 0.020 0.020 0.000 0.000Shrimp 0.050 0.020 0.020 0.000 0.000Textile 0.095 0.020 0.020 0.000 0.000
Chemicals 0.041 0.020 0.020 0.000 0.000Transport 0.027 0.020 0.020 0.000 0.000
Other manufacture 0.035 0.020 0.020 0.000 0.000Service 0.000 0.000 0.000 0.000 0.000Banana 0.100 0.100 0.100 0.100 0.100Cereal 0.100 0.100 0.100 0.100 0.100Flower 0.100 0.100 0.100 0.100 0.100
Other primaries 0.100 0.100 0.100 0.100 0.100Shrimp 0.040 0.040 0.040 0.040 0.040Textile 0.040 0.040 0.040 0.040 0.040
Chemicals 0.040 0.040 0.040 0.040 0.040Transport 0.040 0.040 0.040 0.040 0.040
Other manufacture 0.040 0.040 0.040 0.040 0.040Service 0.000 0.000 0.000 0.000 0.000
ECUADOR NUMERICAL EXPERIMENTS II : FREE TRADE AGREEMENT WITH US
Tariffs
Partial Liberalization Total Liberalization
Benchmark
tarif
f rat
e on
US
tarif
f rat
e on
RO
WU
S ta
riff r
ate
RO
W ta
riff r
ate
EcuadorBanana Exports to US
1.0000
1.0513
1.1009
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorCereal Exports to US
1.0000
1.0407
1.0868
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorFlower Exports to US
1.0000
1.0556
1.1062
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorOther Primaries Exports to US
1.0000
1.0562
1.1064
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
ECUADOR - EXPORTS TO US
EcuadorShrimp Exports to US
1.0000
1.0653
1.1167
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorTextile Exports to US
1.0000
1.17091.1183
0.9
0.95
1
1.051.1
1.15
1.2
benchmark FTA low sigma FTA high sigma
EcuadorChemicals Exports to US
1.0000
1.0665
1.1117
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorTransports Exports to US
1.0000
1.1179
1.0714
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorOther Manufacturing Exports to US
1.0000
1.0605
1.1045
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorService Exports to US
1.0000 1.0158
1.0636
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
Ecuador Goods Export share of US
0.39510.4060
0.3809
0.3
0.35
0.4
0.45
0.5
benchmark FTA low sigma FTA high sigma
EcuadorCereal Imports from US
1.0000
1.7007
1.1008
0.8
1
1.2
1.4
1.6
1.8
2
benchmark FTA low sigma FTA high sigma
EcuadorFlower Imports from US
1.0000 1.0219
0.6414
0.5
0.6
0.7
0.8
0.9
1
1.1
benchmark FTA low sigma FTA high sigma
EcuadorOther Primaries Imports from US
1.0000
1.0860
1.3390
0.9
1
1.1
1.2
1.3
1.4
benchmark FTA low sigma FTA high sigma
EcuadorShrimp Imports from US
4.2201
1.0000 1.2373
0.91.31.72.12.52.93.33.74.14.5
benchmark FTA low sigma FTA high sigma
ECUADOR - IMPORTS FROM US
EcuadorTransports Imports from US
1.9143
1.11581.0000
0.9
1.1
1.3
1.5
1.7
1.9
2.1
benchmark FTA low sigma FTA high sigma
EcuadorOther Manufacturing Imports from US
1.0000
1.0483 1.0336
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorTextile Imports from US
1.0000
2.2578
1.1427
0.9
1.3
1.7
2.1
2.5
benchmark FTA low sigma FTA high sigma
EcuadorChemicals Imports from US
1.0000
0.9337
1.0381
0.9
0.95
1
1.05
1.1
1.15
benchmark FTA low sigma FTA high sigma
EcuadorService Imports from US
1.0000 0.9813
0.5359
0
0.3
0.6
0.9
1.2
benchmark FTA low sigma FTA high sigma
EcuadorGoods Import share of US
0.24680.2680
0.2362
0.1
0.15
0.2
0.25
0.3
benchmark FTA low sigma FTA high sigma
EcuadorBanana Exports to Rest of the World
1.0000 0.9927 0.9947
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorCereal Exports to Rest of the World
1.0000 1.0056 1.0042
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorFlower Exports to Rest of the World
1.0000 0.99380.9912
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorOther Primaries Exports to Rest of the World
1.0000 0.99420.9921
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
ECUADOR - EXPORTS TO REST OF THE WORLD
EcuadorShrimp Exports to Rest of the World
1.0000 0.99360.9906
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorTextile Exports to Rest of the World
1.0000 0.99970.9983
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorChemicals Exports to Rest of the World
1.0000 1.0013 0.9982
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorTransports Exports to Rest of the World
1.0000
1.01741.0193
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorOther Manufacturing Exports to ROW
1.0000 1.0008 0.9971
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
EcuadorService Exports to Rest of the World
1.0000 0.99410.9925
0.96
0.98
1
1.02
1.04
1.06
benchmark FTA low sigma FTA high sigma
Ecuador Goods Export share of Rest of the World
0.60490.6191
0.5940
0.5
0.55
0.6
0.65
0.7
benchmark FTA low sigma FTA high sigma
EcuadorCereal Imports from Rest of the World
1.0000
0.9517
0.9939
0.9
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorFlower Imports from Rest of the World
1.00001.0331
1.1127
0.9
0.95
1
1.05
1.1
1.15
1.2
benchmark FTA low sigma FTA high sigma
EcuadorOther Primaries Imports from Rest of the World
1.00001.0155
1.0682
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorShrimp Imports from Rest of the World
1.1098
1.00001.0353
0.9
0.95
1
1.05
1.1
1.15
1.2
benchmark FTA low sigma FTA high sigma
ECUADOR - IMPORTS FROM REST OF THE WORLD
EcuadorTextile Imports from Rest of the World
1.0000 1.00021.0076
0.9
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorChemicals Imports from Rest of the World
1.00001.0167
1.0016
0.9
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorTransports Imports from Rest of the World
0.8253
0.98131.0000
0.8
0.85
0.9
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorOther Manufacturing Imports from ROW
1.0000 1.0026
1.0303
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorService Imports from Rest of the World
1.0000 1.0044
1.0537
0.9
0.95
1
1.05
1.1
benchmark FTA low sigma FTA high sigma
EcuadorGoods Import share of Rest of the World
0.75320.7638
0.7320
0.6
0.65
0.7
0.75
0.8
benchmark FTA low sigma FTA high sigma
EcuadorConsumer Welfare under Partial Liberalization
1.0037 1.00171.0000
0.9400
0.9600
0.9800
1.0000
1.0200
1.0400
benchmark low sigma high sigma
ECUADOR - WELFARE ANALYSIS
EcuadorGovernment Welfare under Partial Liberalization
0.9705 0.9669
1.0000
0.9400
0.9600
0.9800
1.0000
1.0200
1.0400
benchmark low sigma high sigma
EcuadorSocial Welfare under Partial Liberalization
0.9992 0.99711.0000
0.9400
0.9600
0.9800
1.0000
1.0200
1.0400
benchmark low sigma high sigma
EcuadorSocial Welfare under FTA
1.0002 0.99591.0000
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
EcuadorConsumer Welfare under FTA
1.0062 1.00231.0000
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
EcuadorGovernment Welfare under FTA
0.9611 0.9544
1.0000
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
Experiment 3
¤ We observe that Tariff Revenues are an important com-
ponent of the Ecuadorian Government Total Revenues.
¤ Losing these Tariff Revenues might be of particular in-
terest for the Ecuadorian Government.
¤ We ask the question: “By how much would the Value
Added Tax (VAT) rate have to be raised in order to com-
pensate the loss of Tariff Revenues?”
Dataσimp=1 σimp=10 σimp=1 σimp=10σexp=1 σexp=1 σexp=1 σexp=1
from US 111,333 29,186 31,604 0 0from ROW 278,530 290,700 272,470 289,440 271,360
Effective VAT rate 8.92%9.25% 9.39% 9.47% 9.64%
Tariff Revenue
Compensatory Effective VAT Rate
ECUADOR EXPERIMENTS III : FISCAL POLICY TO COMPENSATE TARIFF REVENUE
Tariffs
Partial Liberalization Total Liberalization
Benchmark
Experiment – For Slovenia
� Slovenia and EU 15 eliminate its tariffs on each others
imports.
� Note: In this case Slovenia’s tariffs with the ROW change:
Slovenia adopts EU 15’s tariff schedule
Dataσimp=1 σimp=10 σimp=1 σimp=10σexp=1 σexp=1 σexp=1 σexp=1
Primary 0.030 0.010 0.010 0.000 0.000Food & Beverage 0.092 0.010 0.010 0.000 0.000
Textile 0.015 0.010 0.010 0.000 0.000Leather 0.023 0.010 0.010 0.000 0.000
Wood Product 0.004 0.010 0.010 0.000 0.000Transport 0.006 0.010 0.010 0.000 0.000
Other manufacture 0.006 0.010 0.010 0.000 0.000Service 0.000 0.000 0.000 0.000 0.000Primary 0.030 0.030 0.030 0.117 0.117
Food & Beverage 0.092 0.092 0.092 0.195 0.195Textile 0.015 0.015 0.015 0.071 0.071Leather 0.023 0.023 0.023 0.030 0.030
Wood Product 0.004 0.004 0.004 0.028 0.028Transport 0.006 0.006 0.006 0.029 0.029
Other manufacture 0.006 0.006 0.006 0.034 0.034Service 0.000 0.000 0.000 0.000 0.000Primary 0.117 0.010 0.010 0.000 0.000
Food & Beverage 0.195 0.010 0.010 0.000 0.000Textile 0.071 0.010 0.010 0.000 0.000Leather 0.030 0.010 0.010 0.000 0.000
Wood Product 0.028 0.010 0.010 0.000 0.000Transport 0.029 0.010 0.010 0.000 0.000
Other manufacture 0.034 0.010 0.010 0.000 0.000Service 0.000 0.000 0.000 0.000 0.000Primary 0.100 0.100 0.100 0.100 0.100
Food & Beverage 0.040 0.040 0.040 0.040 0.040Textile 0.040 0.040 0.040 0.040 0.040Leather 0.040 0.040 0.040 0.040 0.040
Wood Product 0.040 0.040 0.040 0.040 0.040Transport 0.040 0.040 0.040 0.040 0.040
Other manufacture 0.040 0.040 0.040 0.040 0.040Service 0.000 0.000 0.000 0.000 0.000
EU ta
riff r
ate
RO
W ta
riff r
ate
Benchmark
Tarif
f rat
e on
EU
Tarif
f rat
e on
RO
W
SLOVENIA NUMERICAL EXPERIMENT : JOINING THE EU
Tariffs
Partial Liberalization with EU Joining The EU
SloveniaPrimary Goods Exports to EU
1.0000
1.09071.1232
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaFood & Beverage Exports to EU
1.0000
1.2183
1.1786
0.95
1
1.05
1.1
1.15
1.2
1.25
benchmark Join EU low sigma Join EU high sigma
E
SloveniaTextile Exports to EU
1.0000
1.05901.0809
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Leather Product Exports to EU
1.0000
1.04951.0291
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SLOVENIA - EXPORTS TO EU
SloveniaWoods Product Exports to EU
1.0000 1.01011.0375
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Transports Exports to EU
1.0000
1.03781.0232
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaOther manufacturing goods Exports to EU
1.0000
1.04331.0217
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaService Exports to EU
1.0000 1.01170.9782
0.85
0.9
0.951
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaPrimary Goods Import from EU
1.0000
1.2585
1.0563
0.9
1
1.1
1.2
1.3
benchmark Join EU low sigma Join EU high sigma
SloveniaFood & Beverage Import from EU
1.0000
1.9636
1.1147
0.8
1
1.2
1.4
1.6
1.8
2
benchmark Join EU low sigma Join EU high sigma
SloveniaTextile Import from EU
1.0000
1.0452
1.0859
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Leather Product Imports from EU
1.0000
1.04901.0356
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SLOVENIA - IMPORTS FROM EU
SloveniaWoods Product Imports from EU
1.00000.9587
1.0179
0.85
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Transports Imports from EU
1.0000 0.98991.0255
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaOther manufacturing goods Imports from EU
1.0000 0.97591.0188
0.85
0.9
0.951
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaService Imports from EU
1.0000
0.8900
1.0252
0.8
0.85
0.9
0.95
1
1.05
1.1
benchmark Join EU low sigma Join EU high sigma
Slovenia Goods Export share of EU
0.6181 0.62340.6057
0.5
0.55
0.6
0.65
0.7
benchmark Join EU low sigma Join EU high sigma
Slovenia Goods Import share of EU
0.6997 0.71190.6925
0.6
0.65
0.7
0.75
0.8
benchmark Join EU low sigma Join EU high sigma
SloveniaPrimary Goods Exports to Rest of the World
1.00000.9627 0.9678
0.85
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaFood & Beverage Exports to Rest of the World
1.0000 0.98100.9721
0.85
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaTextile Exports to Rest of the World
1.0000 0.97130.9747
0.85
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Leather Product Exports to Rest of the World
1.0000 0.98040.9848
0.85
0.9
0.951
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SLOVENIA - EXPORTS TO REST OF THE WORLD
SloveniaWoods Product Exports to Rest of the World
1.0000 0.97160.9689
0.85
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Transports Exports to Rest of the World
1.0000 0.97090.9805
0.85
0.9
0.951
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaOther manufacturing goods Exports to ROW
1.0000 0.97120.9742
0.85
0.9
0.951
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaService Exports to ROW
1.0000 0.97350.9642
0.85
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaPrimary Goods Import from Rest of the World
1.0000
0.6136
0.9597
0.2
0.4
0.6
0.8
1
1.2
benchmark Join EU low sigma Join EU high sigma
SloveniaFood & Beverage Import from Rest of the World
1.0000
0.4861
0.9464
0.2
0.4
0.6
0.8
1
1.2
benchmark Join EU low sigma Join EU high sigma
SloveniaTextile Import from Rest of the World
1.0000 0.9903
0.8055
0.6
0.7
0.8
0.9
1
1.1
benchmark Join EU low sigma Join EU high sigma
Slovenia Leather Product Imports from Rest of the World
1.0000
1.1475
1.0201
0.95
1
1.05
1.1
1.15
1.2
benchmark Join EU low sigma Join EU high sigma
SLOVENIA - IMPORTS FROM REST OF THE WORLD
SloveniaWoods Product Imports from Rest of the World
1.0000
1.0745
1.0051
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
Slovenia Transports Imports from Rest of the World
1.0000
1.0988
1.0116
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaOther manufacturing goods Imports from ROW
1.00001.0300
1.0000
0.9
0.95
1
1.05
1.1
1.15
benchmark Join EU low sigma Join EU high sigma
SloveniaService Imports from EU
1.0000
1.3085
1.0401
0.9
1
1.1
1.2
1.3
1.4
benchmark Join EU low sigma Join EU high sigma
Slovenia Goods Export share of Rest of the World
0.37660.3943
0.3819
0.3
0.35
0.4
0.45
0.5
benchmark Join EU low sigma Join EU high sigma
Slovenia Goods Import share of Rest of the World
0.3003 0.28810.3075
0.2
0.25
0.3
0.35
0.4
benchmark Join EU low sigma Join EU high sigma
SLOVENIA - WELFARE ANALYSIS
SloveniaConsumer Welfare under Partial Liberalization
1.0072 1.00101.0000
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
SloveniaGovernment Welfare under Partial Liberalization
1.0000 0.99541.0000
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
SloveniaSocial Welfare under Partial Liberalization
1.0057 0.99981.0000
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
SloveniaConsumer Welfare under EU membership
1.00051.0000 1.0105
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
SloveniaGovernment Welfare under EU membership
1.00111.0000 1.0116
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
SloveniaSocial Welfare under EU membership
1.00071.0000 1.0107
0.94
0.96
0.98
1
1.02
1.04
benchmark low sigma high sigma
Summary of Results – Ecuador
¤ Fraction of Ecuador’s exports to US increases.
¤ Imports of textiles and transport equipment from US
show explosive growth.
¤ Small, but positive, gains in welfare for the consumer.
¤ Big losses in welfare for the government. This drives
down Social Welfare.
Summary of Results – Slovenia
� Fraction of Slovenia’s exports to EU increases.
� Imports of primary goods, food & beverage and textile
from EU show huge increase.
� Slovenia’s trade with non-EU countries basically shuts
down in many sectors (particularly Primaries, Food &
Beverage, Textiles).
� Positive gains in welfare for both the consumer and the
government. Social welfare improves by upto 1.1%.
Future Work
¤ Introduce substitution in foreign trade partners, i.e. a
utility function of the form:
[logx
ρxban,f + ... + logx
ρxser,f + logx
ρxinv,f + logx
ρxf,f
]/ρx
¤ Elasticity of substitution differentiated by sector, i.e.
ρban,m 6= ρcer,m 6= ... 6= ρser,m
¤ Better estimates for foreign tariffs.
¤ Ultimate goal: a dynamic model. A static model misses
the dynamic aspects (capital flows, foreign direct invest-
ment, productivity gains) that trade liberalizations of the
types studied here imply.
¤ Also: think about the differences that an FTA and a
customs union imply for free trade. Which one promotes
more free trade?
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