It is all in the details: A bilateral approach for modelling trade agreements at the tariff line

Policymakers are increasingly relying on computable general equilibrium (CGE) models to provide economy-wide impacts of trade agreements; however, these assessments often make the simplifying assumption of complete bilateral tariff elimination. But agreements typically involve partial tariff elimination for sensitive sectors-which are often differentiated at the tariff line. As such, applying a uniform tariff reduction in a CGE sector that encompasses many products could introduce bias. We propose a tariff line approach for modelling exemptions for sensitive goods in CGE models with the aim of reducing this bias. This approach is tested for the Canada-EU trade agreement, and systematically compared to standard approaches to bilateral trade liberalisation in CGE analysis. We find that more common approaches might systematically overestimate trade and welfare impacts by neglecting partial liberalisation in selected sectors and/or not considering substitution across tariff lines.

Automated summary

Policymakers increasingly use CGE models to assess the economy-wide impacts of trade agreements, but the simplifying assumption of complete bilateral tariff elimination can introduce bias. A proposed tariff line approach aims to reduce bias by modeling exemptions for sensitive goods in CGE models, which was tested in the Canada-EU trade agreement and compared to standard approaches in CGE analysis. Common approaches may systematically overestimate trade and welfare impacts by neglecting partial liberalization in specific sectors and not considering substitution across tariff lines.