GLOBAL SUBSIDIES INITIATIVE

Download: Is trade pessimism justified? Opening the "black box" of trade modeling 
By Antoine Bouët and Valdete Berisha Krasniqi

June 2006: In the early years of this decade, as the World Trade Organization's Doha Round negotiations began to take shape, simulations of the welfare gains from complete liberalization of merchandise trade were suggesting the world economy would be as much as $800 billion richer with an ambitious and successful Round, and that approximately two-thirds of these gains would be appropriated by developing countries. Over the last two years, however, simulations of the welfare gains from full multilateral trade liberalization have yielded much smaller values than were being touted only a few years ago. Moreover, the gains for developing countries appear now to be vanishingly small.

The rationale for liberalizing trade - reducing or eliminating tariffs and certain subsidies - is built on fundamental assumptions about the world economy, and mathematical representations of how producers and consumers react to changes in relative prices, changes to policy, etc. Trade economists have incorporated these assumptions and relationships into large economic models that are solved with the aid of computers. At the heart of most large, multi-country modeling efforts are so-called computerized general equilibrium (CGE) models. With data on trade and other variables, these CGE models can be used to make predictions about changes in economic variables were trade to become more liberal.

While experts understand the reasons for the downward revisions in these trade models, many trade negotiators remain confused. Adding to their confusion are some important variations in the simulation results carried out by different modelers. Meanwhile, critics point to the many limitations of the models and the estimates they generate, and question the extent to which they should be informing trade policy at all.

Recognizing the need for a stocktaking of the situation, the International Institute for Sustainable Development (IISD) and the World Trade Organization (WTO) decided to jointly organize a one and a half day technical workshop on modeling the gains from trade liberalization. Held in June 2006, the workshop had the twofold aim of developing a consensus view on why the model results have changed yet still differ, and identifying research priorities. A second meeting was also held with WTO delegates to report on the general findings of the technical workshop and to provide an opportunity for constructive dialogue between the invited experts and trade negotiators.

Two of the participants at the WTO-GSI seminar—Will Martin, Lead Economist in the World Bank's Trade and Development Research Group, and Frank Ackerman, Director of the Research and Policy Program at the Global Development and the Environment (GDAE) Institute at Tufts University—have provided their own perspectives on the issues that were discussed. Those commentaries are available in the July 2006 issue of the Subsidy Watch newsletter.

Why the model results have changed

International Food Policy Research Institute: Opening the Black Box
This paper, produced for the joint WTO-IISD seminar on modeling, draws on a more in-depth analysis (Bouët, 2006) to explain how the main global trade models currently in use capture the benefits from trade liberalization. The main empirical tool for these assessments has been the use of multi-country Computable General Equilibrium (CGE) models. In this accessible overview, Bouët explores the strengths and weaknesses of these models, and the reasons why their results are often so different.

The WTO: Demystifying Modeling Methods for Trade Policy
As in Bouët's paper mentioned above, WTO economists Roberta Piermartini and Robert Teh offer a non-technical analysis the strengths and limitations of CGE models. The structure and data that go into the models determines their results, and this paper provides a useful survey of how the models vary in these respects. But the paper also explores how these models can be used as tools for policy makers. "Models are a distillation of economic theory and so the use of models ensures that policy-making is guided by a correct understanding of how economies function," state the authors. That requires that the modelers understand the needs of policy makers, and that policy makers understand the limitations and caveats that accompany the models.

The types of models

Global Trade Analysis Project (GTAP)
The GTAP project is well known and valued among the modeling community. Coordinated by the Center for Global Trade Analysis, and housed in the Department of Agricultural Economics at Purdue University, GTAP produces analytical data bases, economic models, and innovative methodologies which have had a major impact on the sophistication of trade modeling. In fact, changes to its data bases explain many of the changes to the modeling results.

UNCTAD's Agriculture Trade Policy Simulation Model
The Trade Analysis Branch of the United Nations Centre for Trade and Development (UNCTAD) has developed its own global model to simulate scenarios from WTO negotiations on agriculture, covering 175 countries and some 36 different commodities. Designed to be user-friendly, with a graphical interface and extensive instructions, UNCTAD's Agriculture Trade Policy Simulation Model (ATPSM) is a tool intended for researchers and trade negotiators who may not have extensive training in modeling.

Centre d'études prospectives et d'informations internationals: Mirage Model
Centre d'études prospectives et d'informations internationals (CEPII) has developed the so-called Mirage model, a CGE model that boasts several innovations. A multi-region and multi-sector model, it incorporates imperfect competition, product differentiation by variety and by quality, and foreign direct investment, in a sequential dynamic set-up. It also draws upon a very detailed measure of trade barriers and of their evolution under given hypotheses.

The modeling debate

Carnegie Endowment: Winners and Losers
Headlines were made this year when Sandra Polaski, former U.S. secretary of state's special representative for international labor affairs, released her study Winners and Losers: Impact of the Doha Round on Developing Countries. The results revealed a sharp contrast to those released during the early stages of the Doha Round negotiations, and sparked much debate over the value of a new WTO agreement. The reports message is clear: "any of the plausible trade scenarios will produce only modest gains for the world; agricultural trade is not a panacea for most poor countries; the poorest countries may actually lose from any agreement; and additional special measures will be needed to ensure that the least developed countries succeed."

World Bank Trade Research
Of all players in the debate over the expected benefits trade liberalization, the research from the World Bank is some of the most influential. A series of research papers by World Bank economists have tracked the Doha Round negotiations from the beginning and the falling numbers in these studies have caught the attention of trade policy community. Still, the World Bank numbers are perceived as optimistic by some critics, although it should be kept in mind that the highest figures come from "full trade liberalization", not a Doha Round scenario. A recent report authored by Will Martin, the lead economist in the Bank's trade research group, concluded that the "abolition of tariffs, subsidies and domestic support programs would boost global welfare by nearly $300 billion per year by 2015."

Global Development and Environment Institute (GDAE)
The Global Development and Environment Institute, a program at Tufts University, has taken a more skeptical view of the benefits that would arise from a Doha Round agreement, compared with the other modelers mentioned in this list. Researchers at GDAE, led by Research Director Frank Ackerman, have highlighted the flaws and limitations in the global trade models. As its most recent policy brief argues, the Doha Round is looking increasing like a bad deal for many developing countries: "some countries will experience a loss in national production after opening their manufacturing and services sectors to rich-country competition, and all face the loss of autonomy to pursue the kinds of national development policies that have proven effective in the past."

Oxfam
Oxfam has released a research report, by Lance Taylor and Rudiger von Arnim (both of the New School for Social Research, New York) that presents a review and critique of the most widely used trade models based on computable general equilibrium (CGE) models. The emphasis throughout Modelling the Impact of Trade Liberalisation: A Critique of Computable General Equilibrium Models is on methodology. The authors set out concise analytical arguments explaining what they see as the fundamental weaknesses of CGE models, paying particular attention to the way that these models conceptualize and measure welfare. The authors also argue that the manner in which the World Bank uses CGE modeling is highly problematic, making implausible assumptions about elasticities, the exchange rate, and macro causality. Using a table-top, two-region and three-sector CGE model which represents sub-Saharan Africa and the rest of the world, the authors illustrate that the results of modeling are radically different when alternative – and, they contend, more plausible – assumptions are made.