Tariff escalation, export shares and economy-wide welfare: A computable general equilibrium approach

The current literature suggests that tariff escalation (TE) lowers the competitiveness of processing sectors. Coffee and cotton are agricultural products that face the problem of TE in developing countries, where we observe low global coffee product export shares but high global cotton textile export shares, posing a question on TE's impact on competitiveness. This paper employs a computable generalised equilibrium (CGE) modelling approach to examine the impact of TE on export shares of processed coffee and cotton textiles. We modify the standard GTAP (global trade analysis project) model to solve for global export shares and simulate the impact of eliminating TE on coffee and cotton to analyse economy-wide trade and welfare implications. Results show that TE has mixed effects on export shares, depending on the initial economic structure. Findings reveal that the elimination of TE on cotton and coffee may generate potential global gains of over US$ 0.7 billion, mainly from the cotton sector. Given the relative size of these sectors in global agriculture, the magnitude of gains is not small. This underlines the need for the policy-makers to examine, address and evaluate the prevalence of TE on a sectoral basis in ongoing WTO negotiations.