THE EFFECT OF ARMINGTON STRUCTURE ON WELFARE EVALUATIONS IN GLOBAL CGE-MODELS

In this paper, the welfare results in trade liberalisation scenarios in global CGE models (like GTAP)are analysed. The default modeling strategy in trade is the Armington assumption with bilateral tradeflows in industries. The negative terms of trade effects that often dominate the negative welfareoutcome in simulation experiments are decomposed to imports and exports price effects. Thenumerical examples show that even in unilateral liberalisation with decreasing import tariffs, thewelfare effects are dominated by domestic price level changes that also drive the exports prices. Thenumerical examples are built around simple GTAP tariff cut experiments with 3x3 country andcommodity aggregation. The inherent feature in this type of models is that they support arguments forunilateral market access, like preferences, at the expense of multilateral trade liberalisation.