Creating a Disaggregated CGE Model for Trade Policy Analysis: GTAP-MVH

AuthorMaureen Rimmer,Peter B. Dixon,Nhi Tran
Publication Date01 Feb 2020
DOI10.1177/0015732519886785
SubjectArticles
Creating a
Disaggregated CGE
Model for Trade Policy
Analysis: GTAP-MVH
Peter B. Dixon1, Maureen Rimmer1
and Nhi Tran1
Abstract
Thousands of economists spread across almost every country use the GTAP
model to analyse trade policies including trade wars and trade agreements.
GTAP has an impressive regional coverage (140 countries), but the standard
commodity coverage (57 commodities/industries) can cause frustration when
tariffs on narrowly defined products are being negotiated. This article sets out
a method for disaggregating commodities/industries in computable general equi-
librium models such as GTAP and applies it to GTAP’s motor vehicle sector.
The method makes use of readily available highly disaggregated trade data sup-
plemented by detailed input–output data where available and data from a variety
of other sources such as commercial market reports.
JEL Codes: C68, F13, F14, F17
Keywords
GTAP disaggregation, motor vehicle sector, intra-NAFTA tariffs
Introduction
For over 50 years, computable general equilibrium (CGE) models have been used
in analysing the effects of changes in trade policies and have now become a stand-
ard tool.1 CGE-based analyses have been helpful in identifying indirect effects.
While it may be obvious that the motor vehicle industry in the US benefits from
Article
1 Centre of Policy Studies, Victoria University, Melbourne, Australia.
Corresponding author:
Peter B. Dixon, Centre of Policy Studies, Victoria University, Melbourne, VIC 3011, Australia.
E-mail: Peter.Dixon@vu.edu.au
Foreign Trade Review
55(1) 42–79, 2020
© 2020 Indian Institute of
Foreign Trade
Reprints and permissions:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/0015732519886785
journals.sagepub.com/home/ftr
Dixon et al. 43
higher tariffs on imported finished vehicles, it may not be so obvious that export-
oriented activities such as US higher educational services are harmed. As captured
by a CGE model, the vehicle industry and higher education are linked via the real
exchange rate. Less imported vehicles strengthen the exchange rate and hurt the
export prospects of industries such as higher education.
The world’s best known and most widely used CGE trade model is GTAP.2 Its
full database consists of mutually consistent input–output tables, trade flows and
protection rates in 140 countries. Documentation of GTAP’s theory and data can
be found in Hertel (1997), Corong, Hertel, McDougall, Tsigas, and van der
Mensbrugghe (2017) and Aguiar, Narayanan, and McDougall (2016). Flexible
aggregation programmes are available to form versions of GTAP with managea-
ble regional disaggregation highlighting regions of interest for particular applica-
tions. Later in this article we describe simulations with a 10-region version of
GTAP. The regions are shown in Table 1.
While GTAP’s regional detail is more than adequate for most purposes, the
standard commodity/industry detail does not fully meet the requirements for
convincing analysis to support contemporary trade negotiations. The database
for the standard GTAP model distinguishes 57 sectors. At this level of disag-
gregation, key sectors in trade negotiations are often represented as a single
amalgam of activities at various stages of a supply chain. For example, the pro-
duction of all motor vehicle products in each country is represented in standard
GTAP as a single sector, denoted by motor vehicles (mvh). This means that
there is no recognition of differences between brakes, transmissions, interior
trimming, finished vehicles, etc., in input requirements, sales patterns and rates
of protection.
In the second section, we set out a method for disaggregating commodities/
industries in computable general equilibrium models such as GTAP and apply it
to GTAP’s motor vehicle sector. The method makes use of readily available highly
Table 1. Regions in the GTAP-MVH Model
No. Regions
1 USA
2 Canada
3 Mexico
4 Japan
5 South Korea
6 China
7 Germany
8 EU26 (= EU28 less Germany and the UK)
9 UK
10 Rest of the World (ROWs)
Source: Author’s own.
44 Foreign Trade Review 55(1)
disaggregated trade data supplemented by detailed input–output data where available
and data from a variety of other sources such as commercial market reports. Using our
disaggregation method, we split GTAP’s mvh sector into nine commodities/indus-
tries to create GTAP-MVH. In the third section we describe illustrative simulations
with GTAP-MVH, showing the effects of tariffs imposed by North American Free
Trade Agreement (NAFTA) countries on finished vehicles while leaving tariffs on
parts unchanged. Concluding remarks are given in the fourth section.
Transforming Standard GTAP into GTAP-MVH
In simplified form (omitting taxes and international transport margins), the data-
base for the GTAP model is represented by Table 2. Part A is referred to as the
NATIONAL matrix for region d. It shows flows of domestic commodities and
imported commodities (undifferentiated by region of origin) to industries in
Table 2. Database for a GTAP Model
Part A. NATIONAL Matrix for Region d
Industries in
Region d
Final Demands in
Region d
(excludes exports)
Total
Demand
in d
mvh
Domestic inputs mvh (a) (c)
(e)
Imported inputs mvh (b) (d)
(e)
Primary factors
Industry outputs in d
Part B. TRADE Matrix for Commodity c
Destination Region
USA Canada ROW
Source
region
USA
International flows of commodity c (zero diagonals)
Canada
ROW
Source: Author’s own.

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