SMART Philip Schuler International Trade Department May 5, 2010

Transcription

1 SMART 1 Philip Schuler International Trade Department May 5, 2010 WORLD BANK

2 SMART SMART is a partial equilibrium simulation software included in WITS. SMART deals with one market at a time. SMART can deal with several products at a time. 2

3 SMART: EXPORT SIDE SMART assumes by default infinite export supply elasticity (the importing market is a price taker; only the value of imports changes) You can run SMART with finite elasticity, which entails a price effect (the importer is large in world markets), in addition to the quantity effect 3

4 SMART: DEMAND SIDE The market maximizes its welfare through a two-stage optimization process: 1. Given a general price index, the level of total consumption (composite good) is chosen, based on the import demand elasticity; 2. Within the composite good, the level of spending is allocated among the different varieties, based on the relative price of each variety. The Armington substitution elasticity determines the between-variety response to change in the relative price. 4

5 SMART: TRADE EFFECTS A change in market access policy affects bilateral trade flows through: Trade creation: direct increase in imports following a reduction of the tariff Trade diversion: new distribution of market shares between exporters based on new relative prices Price effect: occurs only with finite export supply elasticity. It reflects the rise in world price for the good which demand increases following a tariff reduction 5

6 SMART: APPLICATION Question: what is the impact of a unilateral tariff cut MFN or preferential on import flows, tariff revenue and welfare? Assumptions: Tariffs are not prohibitively high Export supplies are infinitely elastic 6

7 SMART EXAMPLE #1 Reduce Lao PDR s tariffs on industrial products on an MFN basis (i.e., to all partners) 7

8 SMART EXAMPLE #1 USA eliminates its tariffs on imports of chapters 61 and 63 (garments and textile products) from Latin American countries SMART will estimate the impact on: The beneficiaries exports to USA The trade creation, tariff revenue and welfare change for the USA Other countries exports to USA on these chapters 8

9 SMART HANDS-ON 9

10 STEP 1: PREPARE DATA Click on the button corresponding to Step 1 to define the dataset 10

11 STEP 1: PREPARE DATA Choose the importing market on which a tariff cut will be applied Choose a year Choose the product categories on which simulation will be applied. Output report will display information at the most detailed level (6 digits or Tariff line level) 11

12 STEP 1: PREPARE DATA Save the dataset. You can reuse it later to apply other tariff change scenarios. 12

13 STEP 2: SET PARAMETERS Step 1 is now completed as indicated by the checked box We can now go for Step 2 by clicking on this button 13

14 STEP 2: SET PARAMETERS Here we are going to specify tariff cut, affected products as well as beneficiaries. Click on Country Groups to get access to the country selection panel and select Low and Middle Income Latin American Countries as beneficiaries. 14

15 STEP 2: SET PARAMETERS Affected products can be either all previously selected products in the dataset or only part of them. Here we choose to apply the tariff cut to all. Finally, we specify the cut type from the Custom rate adjustment panel. Here, we fix the new rate at 0. We next click on Apply to confirm the adjustment. Click on Done when all parameters are set. 15

16 STEP 3: REVIEW DATA TABLE WITS acknowledges the parameter definition Step 2 is now completed as indicated by the checked box Click this button to display the data table (Step 3 is optional) 16

17 STEP 3: REVIEW DATA TABLE This window allows to control that the parameters are properly set. For example, we can see that tariffs for Brazil and Colombia have indeed been cut to 0. 17

18 STEP 3: REVIEW DATA TABLE This window allows to save the simulation file for external modification. This may be necessary if you have more recent or better data on your side. You can then re-import modified data to SMART. 18

19 SMART: OUTPUT REPORTS Through a set of 5 output reports, WITS provides the following results: Trade Total Effect composed of: Trade Diversion Effect Trade Creation Effect Pre and Post Exports by Partner Pre and Post cut average duty rate Welfare change Tariff Revenue effect Price effect (if finite supply elasticity is specified) 19

20 RESULTS Results of the simulation are displayed using the View Options panel. 20

21 RESULTS Results show that total US textile imports increase. Latin American countries gain market share through two channels: First, imports from other countries are replaced with imports from LA (Trade Diversion). Second, total imports increase due to higher imports from LA (Trade Creation). 21

22 RESULTS Exporter view (under view options ) shows the total textile exports. For example, Argentina s textile exports increase while those of Bangladesh decrease. 22

23 SMART: RESULT SUMMARY Deals with 1 market and several products at a time; Deals with 2 categories of partners: Beneficiaries: imports increase through Trade diversion and Trade creation. Other partners: imports decrease through Trade diversion, Trade creation is always null. Market side, for a given product, Trade diversion always equals to zero. Tariff revenue falls with the tariff because of the value of import demand elasticities (could be different). Welfare increases when the tariff decreases. 23

24 SMART: FURTHER ANALYSIS Analysis can be extended by implementing a sensitivity analysis: Increase and decrease elasticities of substitution Increase and decrease elasticities of import demand Decrease elasticity of export supply 24

25 CHANGING SUPPLY ELASTICITY You can adjust elasticities by going back to step 2. Under the default scenario of infinitely elastic supply, a supply elasticity of 99 is assumed. We replace this with a value of 10, selecting all other settings as they were before.!!: Don t forget to click Apply after changing the settings 25

26 CHANGING SUPPLY ELASTICITY With the new supply elasticity of 10, the trade creation effect becomes smaller, but now there is also a positive price effect. Total trade effect is lower than under the scenario with infinitely elastic supply (see three slides back) 26

27 SMART: FURTHER ANALYSIS Analysis can be extended by implementing a sensitivity analysis: Increase and decrease elasticities of substitution (affects trade diversion); Increase and decrease elasticities of import demand (affect trade creation); Decrease elasticity of export supply (affect world price). 27