Speaker: Will Martin, World Bank
(joint with David Laborde and Dominique van der Mensbrugghe)
Abstract: Traditional weighted-average measures of trade distortions are widely used in analyzing global and regional reforms, despite well-known deficiencies. This paper develops and applies optimal aggregators for the real-world case of multiple countries and commodities with much more detailed information on trade than on production and consumption. The approach reflects the fact that different aggregators are needed for the cost of imported goods and for tariff revenues. Using simple, graphical techniques, we show that optimal aggregation captures two sources of additional gain from liberalization - one from differences between tariff and revenue aggregators, and one from changing weights. Applications confirm that the technique is straightforward enough for widespread use, and point to roughly a doubling of the welfare gains when using the highest possible level of international commodity disaggregation, with larger gains in developing regions than in the industrial countries. The measured income gains increase along the entire path of liberalization, with slightly larger increases in the earlier stages, where the gaps between the responses of the expenditure and tariff revenue aggregators are largest. Sensitivity analysis suggests that, for global trade reform, the ease of substitution between tariff lines is much more important than that between varieties from different countries.