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Modelling heterogeneous firms and non-tariff measures in free trade agreements using Computable General Equilibrium

Author

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  • Jafari, Yaghoob
  • Britz, Wolfgang
Abstract
A vast body of literature supports with empirical evidence the findings of Melitz (2003) which has led to various attempts to integrate it into Computable General Equilibrium (CGE) models to distinguish the intensive and extensive trade margin and to consider love of variety effects as well as variable and fixed costs of bilateral trade. These viewpoints are especially important for modern free trade agreements (FTAs) analysis where impacts depend largely upon changes in non-tariff measures (NTMs) affecting trade cost. However, existing Melitz extensions for CGEs seem to struggle with numerical stability problems limiting sectoral and regional detail. That greatly reduces their usefulness for policy relevant analysis. We, therefore, develop a Melitz extension for a modular CGE with a focus on a numerical stability. Using the Transatlantic Trade and Investment Partnership (TTIP) proposal as an illustrative example, we treat 22 manufacturing out of 57 sectors based on Melitz in an application with ten global regions and compare our findings to an Armington specification. Our results confirm the larger welfare and trade changes under the Melitz setting suggested both by theory and by empirical findings. We finally compare the sensitivity of trade and welfare impact when the same cost savings associated with reduced NTMs are differently allocated to variable and fixed cost of bilateral trade. We find in our application that the change in traded quantities is more sensitive to bilateral variable cost while welfare increases are more driven by reduced fixed cost, reflecting love of variety effects. Overall, the application underlines that our numerically robust implementation of the Melitz model in a CGE allows applications with high sectoral detail and thus opens the door to a more widespread application in impact assessments.

Suggested Citation

  • Jafari, Yaghoob & Britz, Wolfgang, 2018. "Modelling heterogeneous firms and non-tariff measures in free trade agreements using Computable General Equilibrium," Economic Modelling, Elsevier, vol. 73(C), pages 279-294.
    • Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:279-294
    DOI: 10.1016/j.econmod.2018.04.004
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    2. Botero García, Jesús Alonso & Hurtado, Alvaro & Montañez Herrera, Diego Fernando, 2021. "The productivity of the agricultural sector and its effects on economic growth: a CGE analysis," Conference papers 333318, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Wei, Hao & Tu, Yue & Zhou, Peng, 2023. "Technical barriers to trade and export performance: Comparing exiting and staying firms," Economic Modelling, Elsevier, vol. 126(C).
    4. Irfan Aleem & Bushra Faizi, 2021. "Non-tariff Measures, Overall Protection and Export Competitiveness: Evidence from Pakistan and Regional Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(3), pages 251-282.
    5. Jafari, Yaghoob & Britz, Wolfgang & Guimbard, Houssein & Beckman, Jayson, 2021. "Properly capturing tariff rate quotas for trade policy analysis in computable general equilibrium models," Economic Modelling, Elsevier, vol. 104(C).
    6. Ghodsi, Mahdi, 2023. "Exploring the ‘non-tariff measures black box’: Whose regulatory NTMs on which products improve the imported quality?," International Economics, Elsevier, vol. 173(C), pages 45-67.
    7. Ana Sanjuan Lopez & Marie-Luise Rau & Geert Woltjer, 2019. "Exploring alternative approaches to estimate the impact of non-tariff measures and further implementation in simulation models," JRC Research Reports JRC113883, Joint Research Centre.
    8. Zhao, Xin & Calvin, Katherine V. & Wise, Marshall A. & Iyer, Gokul, 2021. "The role of global agricultural market integration in multiregional economic modeling: Using hindcast experiments to validate an Armington model," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 1-17.
    9. Wolfgang Britz & Dominique van der Mensbrugghe, 2018. "CGEBox: A Flexible, Modular and Extendable Framework for CGE Analysis in GAMS," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 3(2), pages 106-177, December.
    10. Yaghoob Jafari & Wolfgang Britz, 2020. "Brexit: an economy-wide impact assessment on trade, immigration, and foreign direct investment," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 17-52, February.
    11. Yaghoob Jafari & Mihaly Himics & Wolfgang Britz & Jayson Beckman, 2021. "It is all in the details: A bilateral approach for modelling trade agreements at the tariff line," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(3), pages 415-442, September.
    12. Wolfgang Britz & Hasan Dudu & Ilaria Fusacchia & Yaghoob Jafari & Roberto Roson & Luca Salvatici & Martina Sartori, 2019. "Economy-wide analysis of food waste reductions and related costs," JRC Research Reports JRC113395, Joint Research Centre.

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    More about this item

    Keywords

    Trade policy; Imperfect competition; Heterogeneous firms; Non-tariff measures; Simulations;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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