Trade Reform and Household Welfare: The Case of Mexico

Abstract

August 2001 Results from a two-step simulation that uses a computable general equilibrium model and detailed consumption and income household data suggest that trade liberalization benefits people in the poorest deciles more than those in the richer ones.

Ianchovichina, Nicita, and Soloaga use a two-step, computationally simple procedure to analyze the effects of Mexico's potential unilateral tariff liberalization. First, they use a computable general equilibrium model provided by the Global Trade Analysis Project (GTAP) as the new price generator. Second, they apply the price changes to Mexican household data to assess the effects of the simulated policy on poverty and income distribution.

By choosing GTAP as the price generator, the authors are able to model Mexico's differential tariff structure appropriately: almost zero for North American Free Trade Agreement (NAFTA) members and higher tariffs for nonmembers. Even starting with low tariff protection, simulation results show that tariff reform will have a positive effect on welfare for all expenditure deciles. Under an assumption of nonhomothetic individual preferences, trade liberalization benefits people in the poorer deciles more than those in the richer ones.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the effects of trade policy on poverty. The authors may be contacted at [e-mail], [e-mail], or [e-mail].