The Effect of Tariff Reduction in Agricultural Sector on Macroeconomic Variables: Using Global Trade Analysis Project (GTAP)

مجله اقتصاد و توسعه کشاورزی

Article 8, Volume 29, Issue 3, October 2015, Pages 308-318   

Document Type: Research Article

DOI: 10.22067/jead2.v0i0.45448

Authors

H. Heidari¹; N. Davoudi^{* 2}; M. Pasha Zanousi³

¹Economics, Department of Economics, Urmia University

²Urmia University

³urmia university

Abstract

Introduction: Economic effects of membership in the WTO in recent years, has been one of the most important issues for Iranian economy. If Iran joins the WTO, in this process, tariff reduction in agricultural sector will be one of the policies which has to be employed. Therefore, investigating economic effects of tariff reduction or even its elimination in this sector will be necessary in running effective policies to minimize the probabilistic losses of accession. Tariffs on agricultural products in Iran are determined merely on the basis of annual country economy, and have no long term strategy. Government is just obliged to impose effective tariffs on agricultural products imports, in order to protect local productions. On the other hand, according to the census of population and housing, the share of agricultural sector in employment has reduced during the past decade. Moreover, Iran central bank information indicated the reduction in the share of agricultural sector in GDP for the past decade. Declining the share of agriculture in production and employment, considering the high number of university graduates in the field of agriculture along with rising unemployment rate of this group, motivated this study to investigate the effect of tariff reduction in this sector on macroeconomic variables.
Materials and Methods: This study analyzed the welfare effects of import tariffs reduction in agricultural sector from Iran most important commercial partners and vice versa, using the Global Trade Analysis Project (GTAP), based on computable general equilibrium (CGE) model. Moreover, the effects of tariffs reduction, is investigated on output, price level and transfer of production factors between different economic sectors. In order to simulate the above model, we used GTAP version 8 which covers 57 commodities and 113 regions with economic information of these regions. This model uses Social Accounting Matrix of countries as data information. Our model includes 3 regions: Iran, ECO and CIS countries as commercial partners of Iran, and the rest of the world, 5 production factors: land, skilled labor, unskilled labor, capital, and natural resources, and finally, 3 production sectors: agriculture, industry, and services. Two scenarios are simulated in this study: first, 50 percent imports value tariff reduction, and zero import tax target rate on intermediate goods for agriculture production in Iran is been considering. For the second scenario, we set a zero target rate for all cases mentioned above. It should be noted that according to Social Accounting Matrix gathered for Iran currently, the average tariff rate on imports of agricultural products from selected commercial partners is 27.67 percent and 7.82 percent from Iran to these countries.
Results and Discussion: Results showed that 50 percent reduction in tariffs, increases social welfare, while full elimination of agricultural tariffs leads to a loss in welfare. The welfare analysis illustrated that the efficiency of resource allocation in agriculture sector increased in the first scenario, while in the second scenario, the share of efficient allocation of resources in welfare was negative. Despite equal reduction in tariff rate on the value of imports from these countries to Iran and vice versa, trade balance of Iran has been worse, while it was beneficial for trade balance of her commercial partners. However, agricultural sector had positive share in trade balance of Iran, but the negative effect of industrial sector on trade balance, totally, reduced trade balance of Iran in large quantities. The first scenario increased agricultural production, but increased production was lower in the second scenario..However, the industrial sector production was slightly reduced. On the other hand, more production in agriculture lead more production factors demand, such as skilled and unskilled labors, and capital using in this sector. Moreover, price of production factors has been increased due to increasing demand for these factors.
Conclusion: According to our results, 50 percent tariff reduction on agricultural productions imports policy among Iran and her commercial partners will be beneficial for both sides in terms of welfare and agricultural production. However, with this information in hand, full elimination of these tariffs had no positive results. Therefore, policy makers, on the way to join WTO, should impose the policy of 50 percent reduction in tariffs in short time, subject to bilateral agreement. According to the prospect of the accession toward full elimination of agricultural tariffs, to minimize the welfare losses due to it, this is essential to apply other protective strategies such as subsidies and production facilities to intermediate goods producers for agricultural sector.

Keywords

Intersectoral transferring of production factors, Agricultural sector tariff; Reallocation of resources; GTAP; Welfare

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