Using tariff indices to evaluate preferential trading arrangements : an application to Chile

The author presents a tariff index that uses constant-elasticity-of-substitution aggregators of tariff line data to calculate how preferential tariff reductions affect both prices and average tariff rates. A simple general-equilibrium model with sector-specific factors of production can be combined with the tariff indices to calculate how a preferential trade arrangement affects sectoral output, factor prices, and general welfare. The general equilibrium model is simple enough that it can be calculated on an Excel spreadsheet, and is flexible enough to be used with different ranges of available domestic data. The author presents an example of the model, simulating the effects of free trade agreements between Chile and MERCOSUR countries and between Chile and NAFTA countries. Calculations for the case of Chile show that the index is simple to calculate because of its recursive structure, which allows large amounts of detailed tariff line data to be aggregated for use with domestic production data that is available only at a more aggregated level. The author finds that results using the tariff aggregators may differ substantially from those derived using simpler averages of tariff reductions. Reductions in import prices using the index were 10 to 30 percent larger than those calculated using a simple average of tariffs. Ignoring the information available in tariff line data could lead to a substantial overestimate of the average tariff rate on imports after a preferential reduction. The tariff index could be extended to incorporate the role of quantitative restrictions. The general equilibrium model could be usedto consider the effects on domestic production of allowing reallocation of capital between industries over time.