Trade Policy Options for Chile: A Quantitative Evaluation

48 Pages Posted: 20 Apr 2016

See all articles by Glenn W. Harrison

Glenn W. Harrison

Georgia State University - J. Mack Robinson College of Business

Thomas F. Rutherford

Centre for Energy Policy and Economics

David G. Tarr

International School of Economics at Tbilisi State University

Date Written: January 27, 1997

Abstract

Welfare in Chile would be improved by moving toward uniformity in the value-added tax and lowering the Chilean tariff to between 6 and 8 percent. Chile is currently evaluating a wide range of possible trade policies. Using a global computable general equilibrium model, Harrison, Rutherford, and Tarr examine a range of trade policy and complementary tax policy options for Chile.

They focus on Chile's principal preferential trade policy options: a free-trade area with MERCOSUR, a customs union with MERCOSUR, and a free trade area with NAFTA. They also examine such options as complementary tariff reduction with nonpartner countries in combination with implementing the free trade area options; unilateral or global trade liberalization; and the optimum unilateral tariff.

Their principal policy conclusions:

Lowering Chile's tariffs preferentially or multilaterally leads to only small gains as Chile starts with a rather efficient external trade regime, uniform tariffs of 11 percent.

Largely because of its efficient uniform tariff, preferential tariff reduction will reduce Chilean welfare through trade diversion, unless Chile can improve its access in the markets of partner countries.

NAFTA offers enough access to benefit Chile; MERCOSUR does not, once the trade diversion costs of MERCOSUR are taken into account.

Under their preferred-elasticity scenario, Chile can convert the MERCOSUR agreement from a loss to a gain if it lowers its external tariff to between 6 and 8 percent. Doing so will also increase the gains from a potential agreement with NAFTA.

Chile's current value-added tax imposes distortionary costs because collection rates are not uniform. Chile will gain if it can collect the VAT more uniformly.

Tariff reductions from trade reform will require an increase in domestic taxes, so greater uniformity in domestic taxes (less distortion in replacement taxes) will maximize the benefits from trade reform. Welfare will be improved by moving toward uniformity in the VAT and lowering the Chilean tariff to between 6 and 8 percent.

This model ignores dynamic gains from trade liberalization, the result of importing either a greater variety of products or more technologically advanced products.

This paper - a product of the International Trade Division, International Economics Department - is part of a larger effort in the department to examine the impact of regional trade integration in developing countries.

Suggested Citation

Harrison, Glenn William and Rutherford, Thomas F. and Tarr, David G., Trade Policy Options for Chile: A Quantitative Evaluation (January 27, 1997). Available at SSRN: https://ssrn.com/abstract=604922

Glenn William Harrison

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
407-489-3088 (Phone)
253-830-7636 (Fax)

HOME PAGE: http://www.cear.gsu.edu/

Thomas F. Rutherford

Centre for Energy Policy and Economics ( email )

ETH-Zentrum
Zurich, CH-8092
United States
+41 (0)44/632 6359 (Phone)
+41 (0)44/632 1622 (Fax)

HOME PAGE: http://www.cepe.ethz.ch/

David G. Tarr (Contact Author)

International School of Economics at Tbilisi State University ( email )

16 Zandukeli Street
Tbilisi, 0108
Georgia

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