Measuring the Economic Impact of Tariff Reforms: An Analytical Tool for Uzbekistan's WTO...

Measuring the Economic Impact of Tariff ReformsAn Analytical Tool for Uzbekistan's WTO Negotiations

Presented to

Cabinet of Ministers and Ministry of Foreign Economic Relationsof the Government of Uzbekistan

by

United States Agency for International Development

Prepared by

Montague Lord

With Svetlana Alzhanova and Andrey MoiseevBooz-Allen & Hamilton

April 1998

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Contents

Executive Summary ........................................................................... 1

1. Introduction................................................................................. 4

2. Trade Patterns ............................................................................ 7

2.1 Overall Structure of Trade ...............................................................72.2 Revealed Comparative Advantage...................................................92.3 Changing Trade Partners................................................................11

3. Trade Policy .............................................................................. 15

3.1 Tariff Structure...............................................................................153.2 Analytical Tools for Tariff Evaluation...........................................163.3 Non-Tariff Measures......................................................................183.4 Analytical Tools for NTM Evaluation ...........................................21

4. Foreign Trade Statistics .......................................................... 24

4.1 The Need for Reliable Data ...........................................................244.2 Mirror Statistics of Foreign Trade .................................................24

5. Measuring the Effects of Trade Liberalization ....................... 27

5.1 Quantitative Methods.....................................................................275.2 Types of Effects .............................................................................285.3 The Distribution of Gains and Losses............................................295.4 Specification of Effects..................................................................31

6. Modeling the Direct Impact of Trade Liberalization .............. 36

6.1 Methodology ..................................................................................366.2 The Demand for Imports................................................................376.3 Import Demand Estimates..............................................................38

iii

Contents (cont’d)

7. Results of Alternative Tariff Strategies .................................. 42

7.1 Objective of a Tariff Strategy ........................................................437.2 Direct Trade Effects .......................................................................437.3 Implications....................................................................................46

Annex: User Notes for Spreadsheet Model.................................... 48

References ........................................................................................ 53

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Tables2.1 Leading Import and Export Products, 1995-96.........................................82.2 Revealed Comparative Advantage of Uzbekistan's Exports, by Factor-

Intensity Category, 1996 .........................................................................102.3 Major Export Partners, 1994-96 .............................................................142.4 Major Import Partners, 1994-96..............................................................143.1 Average Nominal Rate of Protection for Commodity Groups in

Uzbekistan...............................................................................................174.1 Mirror Trade Data and Official Trade Statistics of Uzbekistan, 1996....266.1 Selection of Import Products for Model .................................................406.2 Import Demand Functions for Selected Products ...................................417.1 Effects of Trade Liberalization through 2020.........................................43

Figures2.1 Export Market Shares, CIS vs Non-CIS .................................................11

2.2 Import Market Shares, CIS vs Non-CIS .................................................12

5.1 Direct Effects of Preferential and Free Trade Systems ...........................30

7.1 Strategy A through 2020 .........................................................................44

7.2 Strategy B through 2020 .........................................................................45

7.3 Strategy C through 2020 .........................................................................45

7.4 Strategy D through 2020 .........................................................................46

7.5 Strategy E through 2020..........................................................................46

Boxes

3.1 Effective Rates of Protection ...............................................................19

3.2 Illustration of NTMs used in Uzbekistan, by Classification ................20

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Acronyms

CGE Computable general equilibrium (model)CIS Commonwealth of Independent StatesERP Effective rate of protectionGATT General Agreement on Tariffs and TradeGDP Gross domestic productHS Harmonized systemIMF International Monetary FundMFER Ministry of Foreign Economic RelationsMFN Most-favored nationNIS Newly independent statesNRP Nominal rate of protectionNTM Non-tariff measuresOMT Office of Market TransitionRCA Revealed comparative advantageTPSM Trade policy simulation modelUNCTAD United Nations Conference on Trade and DevelopmentUSAID United States Agency for International DevelopmentVAT Value-added taxVER Voluntary export restraintWTO World Trade Organization

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Executive SummaryAs part of its transition to a market economy, the Government of Uzbekistan has beenimplementing wide-ranging reforms aimed introducing structural adjustments into theeconomy. Its outward-oriented policies have focused on attracting significant inflowsof foreign capital in an effort to accelerate the transformation of the economy. TheGovernment has also sought to become part of the multilateral trading system byapplying for membership to the World Trade Organization (WTO), which, ifaccepted, could play a major role in bringing about the integration the country into theglobal economy. Once the Government completes the Memorandum on ForeignTrade Regime required by the WTO, it will prepare to negotiate tariff reductions, oneof the key areas of the WTO accession negotiations. The present study aims to assistthe Government in general, and the Cabinet of Ministers and the Ministry of ForeignEconomic Relations in particular, to assess the impact of alternative tariff reductionschemes on the economy through the development of an empirical and interactivemodel. The intent of the model is to offer an analytical tool from which to examinealternative liberalization strategies during the WTO negotiations, rather than to advisethe Government of Uzbekistan on any specific negotiation position. The majorfindings and implications of the study are briefly summarized in what follows.

Recent Trade Patterns and Policies

Uzbekistan's imports are considerably more diversified than its exports. Imports aremainly in the form of manufactures, and the contribution of both nuclear reactors andoptical instruments to total imports has fallen considerably in recent years. In exports,the importance of cotton has declined, as has that of mineral fuels, while theimportance of manufactures has increased. Uzbekistan’s revealed comparativeadvantage indices indicate that exports are concentrated in unskilled labor intensiveproducts. The country also has a comparative advantage in selected products that areskilled-labor and technology intensive, as well as in some that are natural resourceintensive. Structural adjustments and increased technology transfers from abroad islikely to produce dynamic changes in the comparative advantage of the country. Aspart of this process, Uzbekistan has increasingly diversified its trading partners inrecent years, and it has begun to focus its attention on non-CIS markets. Despite thisshift, however, Russia remains the country's main trading partner. Uzbekistan has alsoentered into preferential trade arrangements that maintain ties with CIS countries,including a free trade agreement whose protocol is currently being negotiated.

Despite important reforms in trade policy, Uzbekistan's trade regime continues to bedominated by a complex system of trade control measures, foreign exchange controlsand administrative procedures. The most recent change to the tariff structure wasmade in early 1998 when a fairly low duty was imposed on the majority of importedgoods. Despite this change, Uzbekistan accords preferential treatment to manycountries, and increases the tariff rates for those countries not enjoying most-favorednation status. As a result of various mechanisms through which tariffs are applied, the

Executive Summary

2

nominal rate of protection for all products is higher than the minimum tariff, viz. 9.4percent versus the 3 percent minimum. Uzbekistan also uses a wide range of non-tariff measures (NTMs) to regulate trade. NTMs that restrict exports and productionsare the most frequent type of non-tariff barrier employed in Uzbekistan, whileexchange controls, a type of NTM used to regulate the volume of imports, is the mostpervasive.

Measuring the Impact of Intervention

As Uzbekistan moves forward to join the WTO, it must assess its current level ofprotection and adopt a strategy based on its interests. Reliable trade statistics arefundamental to the measurement of trade liberalization effects, and the availability oftime-series data is especially critical for these assessments. In the absence of time-series data from official government sources, partner country statistics have been usedin the present study. The use of such data has limitations, however, given thedifferences in sources, reporting methodology, nomenclature and exchange rates. Themodel used in the study is based on a partial-equilibrium analysis that calculates thedirect and distributional effects of trade liberalization using detailed tariff-lineinformation. While feedback effects between the external and domestic sectorsresulting from trade liberalization can be measured by computable generalequilibrium models, these models do not consider inter-temporal issues related to theadjustment process from one steady-state solution to another, and parameter estimatesoften originate from secondary sources. In the exercise at hand, the econometricmodel captures the direct effects of Uzbekistan's trade liberalization in terms of tradecreation, trade diversion, balance of payments, government revenue and consumerwelfare.

The calculations of the direct effects of Uzbekistan's trade liberalization policies arebased on import demand relationships estimated for individual products at thedetailed tariff line. These estimates take into account changes in the levels of importdemand arising from market access concessions, and time-related adjustments arisingfrom the lagged response of imports to economic activity and price changes. Theaverage long-run income elasticity of demand for imports is near 6, while the averageprice elasticity of demand for imports is -2.7.

Aternative Tariff Reduction Strategies

Assuming that Uzbekistan negotiates its WTO accession as a transition economy andbased on experiences of other countries joining the WTO, the Government willprobably have considerable flexibility in structuring its tariffs. However, the actualreductions and the time frame for their implementation will largely depend on theagreement it reaches with its trading partners. Five alternative strategies forstructuring tariff reductions were examined as part of this study. The first strategyreducing all tariffs by a uniform 30 percent would increase imports by US$357million after a 10-year implementation period. Under this scenario about US$14million of trade based on preferences would shift to the multilateral trading system.

Executive Summary

3

The Government’s revenue from duties and indirect taxes would decrease by US$634million, and the welfare of consumers would increase by around US$14 million. Thesecond strategy based on a single tariff rate of 10 percent for all products would havean overall positive effect. The reason is that high rates of duty are currently applied tomany of the products chosen for the study sample. For those products, the currentstrategy would reduce tariffs of those high duty products and thereby increase thedemand for imports of those goods. As tariffs for some products rose, importerswould shift to preferential markets with the result that overall imports frompreferential suppliers would expand by US$3.8 million over the 10-yearimplementation period.

The third strategy involves a simple form of tariff escalation, which from animporter’s point of view promotes infant industries and those industries with exportpotential by allowing their inputs to be taxed at a lower rate than competing finishedproducts. In this study, tariffs on inputs were lowered by 50 percent and those on finalproducts by 25 percent. The results of such a differential reduction would expandimports of both of types of products. The fourth and fifth strategies incorporate twoand three tariff rates respectively, with the latter incorporating zero-rate tariffs onselected products. Under the two-tier tariff structure, a 5 percent tariff would beapplied to imports of inputs, and a 14 percent tariff would be applied to imports offinal products. Under the three-tier tariff structure, a zero tariff would be applied toselected products, and the same rates would apply to inputs and final products as inthe two-tier strategy. The results would be similar to those under the third strategy ofsimple tariff escalation, although the trade diversion effects would be smaller.

The impact of Uzbekistan's WTO membership on the structure of trade will mainlyderive from the effects of the tariffication of NTMs and the lowering of those tariffs.This, in turn, will reduce the costs of imported raw materials and capital goods usedfor productive activities, lower the prices for consumer goods, improve resourceallocation and stimulate economic growth. At the same time, Uzbekistan is likely toconfront some structural effects from new international trading relationships withWTO member countries. There is also likely to be a loss of differential tariff rateswith major CIS trading partners as those countries join the WTO and undertake tariffcuts on a MFN basis. Preferential trade arrangements will therefore become lessimportant for Uzbekistan’s trade as tariff differentials between member and non-member countries are reduced.

Uzbekistan's trade expansion with non-CIS countries is likely to reflect large tradediversion effects, as well as generally larger shipment levels as trade policy reformsare implemented. This expansion is already taking place. On the import side, it islikely that the economy will benefit from the increased availability of a greater varietyof goods from non-preferential markets at lower prices and possibly higher quality.On the export side, Uzbekistan will benefit from non-discriminatory trade practicesbased on most favored nation treatment in the multilateral trading system.

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1

Introduction

Background

Since its independence, the Government of Uzbekistan has taken substantive steps toliberalize trade and promote investment. Tariffs have been reduced, export taxes havebeen eliminated on all but sensitive products, and legislation on trade and investmenthas been revised. In 1994 Uzbekistan submitted its application to the World TradeOrganization (WTO), and the Government is currently preparing its Memorandum onForeign Trade that contains information on a broad range of the country's economicand trade-related issues. Once questions and comments have been addressed,negotiations will be initiated to address market access issues and other policiesaddressing trade and investment, including those affecting services and intellectualproperty rights.

Based on the experience of other countries requesting WTO membership, tariffreductions will be a key area in the negotiations that will take place betweenUzbekistan and its major trading partners that are WTO members. Uzbekistan willfirst be required to convert non-tariff measures to tariffs, then to reduce the tariffs andbind them to a ceiling rate. Exceptions above the ceiling rate will probably be allowedfor certain products but they will also be subject to negotiations. Tariff reductions willbe decided on a product-by-product basis and they will take place over an agreedperiod of time. In making decisions regarding tariff bindings and reductions, theGovernment of Uzbekistan will need to take into account many factors, such as theeffects on the balance of payments, fiscal revenue, infant industries, consumer goods,factor inputs for strategic industries, and safeguards for emergency situations.

To assist the Government of Uzbekistan to prepare for its tariff negotiations, theUnited States Agency for International Development (USAID) has offered technicalassistance in the development of an interactive modeling tool for the empiricalassessment of the effects of trade liberalization on the economy of Uzbekistan. Themodel provides estimates of the distributional effects of trade liberalization and thelikely changes in the levels of imports arising from market access concessions. On thebasis of these estimates, Uzbekistan may then formulate its own tariff policiesregarding bindings and reductions of tariff rates. The intent of the model is not toadvise the Government of Uzbekistan on a specific negotiation position regardingtariff bindings and reductions, but rather to offer an analytical tool from which toexamine alternative liberalization strategies. Model estimates were completed usingEVIEWS econometric software and were then incorporated into Excel worksheets toallow for flexibility and to ensure end-user access to the modeling tool. The study wasundertaken during April 1998 and was directed by Dr. Paul Davis, Director of the

Introduction

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Office of Market Transition (OMT) and Dr. Gary Linden, OMT Program Economist,at USAID/Almaty, and by Mr. F. Youwakim Fahrat of USAID's Trade andInvestment Project in Almaty. The Division for Cooperation with Financial andEconomic Institutions in the Cabinet of Ministers and the Ministry of ForeignEconomic Relations were the government counterparts for the study. This report doesnot necessarily reflect the views of USAID or the Government of Uzbekistan, and anyerrors or omissions are the sole responsibilities of the authors.

Scope of the Study

The present report examines the overall structure of trade in Uzbekistan and existingtrade policies, and it sets out a modeling framework for examining alternativeliberalization strategies. It reports on some of the direct effects on the economy fromalternative tariff reduction schemes that include both across-the-board tariff cuts andtariff reductions where the degree of intervention increases with the level ofprocessing of the products.

Following this chapter, the report is organized as follows:

Chapter 2 examines Uzbekistan's recent trade patterns in terms of leading productimports and major trading partners. It also assesses the country's internationalcomparative advantage in various industries. The recent shift in geographic marketsfor both imports and exports is examined, and the importance of preferential tradeagreements is highlighted.

Chapter 3 provides a broad overview of current trade policies in Uzbekistan andidentifies recent changes that are important from a modeling viewpoint. Empiricaltools to analyze tariffs and non-tariff measures are also presented, and these will beuseful to the analysis of new tariff structures as detailed trade statistics becomeavailable.

Chapter 4 discusses the need for reliable trade data when undertaking policy analysisand presents an overview of the sources of data that were used in the study. Issuesarising from the use of partner country statistics are also addressed.

Chapter 5 explains the types of quantitative methods generally used in quantifyingtrade liberalization schemes, and it discusses the types of effects that are normallyassociated with liberalization. Those effects are described in the context of a partialequilibrium model and its representation in the spreadsheet.

Introduction

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Chapter 6 presents the methodology used in the model from a theoretical viewpoint,then applies that methodology to the data made available for this study. Accordingly,import demand estimates are presented, and the implication of changes in tariffs isdiscussed for key products.

Chapter 7 presents five illustrative strategies that Uzbekistan could consider whenexamining tariff reductions. The direct effects of trade liberalization are comparedacross those alternative strategies, and both the overall impact and product-specificimpact are discussed under each scenario. Finally, the implications for tradeliberalization on Uzbekistan's trade with WTO members and preferential tradepartners are addressed.

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Trade PatternsSince its independence, Uzbekistan has altered the commodity and geographiccomposition of its trade. It has also entered into bilateral, plurilateral and multilateraltrade agreements that will have important implications for its future trade patterns.The preferential trade agreements will also play a role in redefining Uzbekistan's tariffstructure, since the margin between the prices of goods from preferred and non-preferred suppliers is likely to change as a result of tariff negotiations. This chapterprovides background information on Uzbekistan's recent trade patterns as a startingpoint to the modeling exercise undertaken in the study. It defines the major importedand exported products, as well as major trading partners. At the request of theGovernment of Uzbekistan, the chapter also describes the methodology forcalculating revealed comparative advantage indices and it presents the results of thosecalculations.

2.1 Overall Structure of Trade

Table 2.1 shows Uzbekistan's leading import and export products in 1995-96. Ingeneral terms, imports are considerably more diversified than exports. Manufacturedgoods dominated the top import products, although cereals and sugar are alsoimportant. While the types of products imported did not change significantly during1995-96 in terms of their general categories in manufactures or natural-resource basedproducts, the composition of individual imports did change. For example, in 1996 thepercentage contribution to total imports of the leading import product, nuclearreactors, dropped by more than 10 percentage points when compared with 1995. Also,imports of optical instruments did not register as a major import in 1996 relative tothe previous year. Overall, imports were more diversified in 1996 than in the previousyear.

Cotton, manufactures and natural resource mineral products made up Uzbekistan's topexports in 1995-96. Important changes occurred in cotton between these two years:the contribution of this product to the total value of exports fell from two-thirds toone-half of the total. The value of mineral fuels exports also declined considerably in1996, whereas the importance of other manufactured articles increased substantiallyduring the period. While the lack of time series data for imports hinders longer-termanalysis, the available data indicate important changes in the composition ofUzbekistan's trade.

2. Trade Patterns

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Table 2.1Leading Import and Export Products, 1995-96('000 $US and %)

IMPORTS 1995 1996HS Value Contribution HS Value Contribution

Ranking Chapter Description ('000 US$) to Total (%) Chapter Description ('000 US$) to Total (%)

1 84 Nuclear reactors, boilers 843,231 30.7 84 Nuclear reactors, boilers 895,694 19.82 10 Cereals 244,580 8.9 10 Cereals 478,735 10.63 87 Vehicles and parts 191,050 7.0 85 Electrical machinery and equipment 330,408 7.34 85 Electrical machinery and

equipment184,627 6.7 87 Vehicles and parts 316,954 7.0

5 90 Optical, photographic instruments 139,194 5.1 73 Articles of iron or steel 179,178 4.06 17 Sugars and sugar confectionery 101,561 3.7 17 Sugars and sugar confectionery 164,537 3.67 96 Misc. manufactured articles 86,521 3.1 88 Aircraft, spacecraft and parts 127,681 2.88 72 Iron and steel 75,542 2.7 19 Preparations of cereals 114,428 2.59 73 Articles of iron or steel 68,528 2.5 39 Plastics and plastic articles 109,839 2.4

10 94 Furniture and bedding 59,752 2.2 72 Iron and steel 100,608 2.2

Sub-Total 1,994,587 72.6 2,818,062 62.4Total Imports 2,747,866 100 4,518,691 100

EXPORTS 1995 1996HS Value Contribution HS Value Contribution

Ranking Chapter Description ('000 US$) to Total (%) Chapter Description ('000 US$) to Total (%)

1 52 Cotton 1,889,569 67.0 52 Cotton 1,828,326 49.02 27 Mineral fuels, mineral oils 435,396 15.4 96 Misc. manufactured articles 818,794 21.93 74 Copper and copper articles 119,532 4.2 27 Mineral fuels, mineral oils 276,605 7.44 31 Fertilizers 56,091 2.0 21 Misc. edible preparations 153,756 4.15 88 Aircraft, spacecraft and parts 27,409 1.0 71 Natural or cultured pearls 120,707 3.26 85 Electrical mach. and equipment 26,527 0.9 74 Copper and copper articles 112,480 3.07 20 Preparations of vegetables, fruit 25,861 0.9 31 Fertilizers 81,078 2.28 72 Iron and steel 21,236 0.8 88 Aircraft, spacecraft, and parts 71,996 1.99 81 Other base metals 20,816 0.7 72 Iron and steel 29,228 0.8

10 84 Nuclear reactors, boilers 15,299 0.5 85 Electrical machinery and equipment 21,693 0.6

Sub-Total 2,637,736 93.5 3,514,664 94.2Total Exports 2,821,326 3,731,397

Source: State Statistics Department.

2. Trade Patterns

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2.2 Revealed Comparative Advantage

Uzbekistan's revealed comparative advantage (RCA) indices are classified byfactor-intensity category for 1996 in Table 2.2.1 The RCA indices have beenconstructed for industrial and agricultural goods at the SITC 2-digit level and areinterpreted according to whether their value is greater than one, suggesting acomparative advantage in that product, or less than one, suggesting a comparativedisadvantage. These calculations are based on the Heckscher-Ohlin modelwhereby countries export goods that are intensive in the factors with which theyare abundantly endowed.

The RCA index used in this study was developed by Balassa (1965) and isspecified as follows:

RCAij = (Xij / Xj) / (Xi / X) …(2.1)or

RCAij = (Xij / Xi) / (Xj / X) …(2.2)

where,Xij = exports of product i from country j.Xi = exports of product i from the world.Xj = total exports from country j.X = total exports from the world.

The RCA index compares a country's exports of a product (normalized withrespect to the value of its total exports) to the share of that product in world trade.The normalization with respect to the value of total exports adjusts for countrysize. In this way small country output can be compared with that of large countriesin a region. The index also scales for product significance as a way of accountingfor the importance of trade in one good relative to that of all products. It also takesinto consideration several market ratios when adjusting for country size andproduct significance, and gives useful information depending on how the terms inthe formula are arranged. In equation (2.1), the index is expressed as the share ofthe product with respect to total exports for the specific country or region (Xij/Xj),given the same world's share (Xi/X). Equation (2.2) considers the share of theproduct with respect to world exports of the same good (Xij/Xi), given the relativesize of the country or region (X/Xj). In general, the first interpretation is importantwhen analyzing country RCA indices in terms of the degree of exportconcentration across products. The second one is useful when assessing regionalRCA indices, since it compares the importance to exports of a specific product ina region with that of the world.

1 The classification of exports according to their factor-intensity is based on the works of Murray(1987) and Fukasuku (1991).

2. Trade Patterns

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Table 2.2Revealed Comparative Advantage of Uzbekistan's Exports,by Factor-Intensity Category, 1996

Factor-Intensity Category SITC Section RCA Value

Unskilled Labor Intensive: 3.35Yarn and textile products 65 15.54General industrial machinery 74 0.06Furniture 82 0.03Metalworking machinery 73 0.02Plumbing Heating and Lighting equipment 81 0.01Travel goods and handbags 83 0.01Clothing 84 0.00Footwear 85 0.00

Human Capital/Technology Intensive: 0.11Fertilizers, manufactured 56 5.88Aircraft 79 0.73Inorganic chemicals 52 0.30Manufactures of metal 69 0.15Organic chemicals 51 0.11Machinery for special industry 72 0.06Chemical materials and products 57.59 0.05Electrical machinery 77 0.05Misc. manufactured goods 89 0.05Non-electrical and electrical machinery 71 0.04Medicinal and pharmaceutical products 54 0.03Rubber manufactures 62 0.03Telecommunications equipment 76 0.03Essential oils and perfume materials 55 0.02Road vehicles 78 0.02Dyeing, tanning and coloring materials 53 0.01Paper manufactures 64 0.01Plastic materials 58 0.00Office machines and equipment 75 0.00Precision instruments 87 0.00Photo equipment 88 0.00

Natural Resource-Based: 0.66Non-ferrous metals 68 1.54Mineral fuels 32-35 0.90Food and live animals 00-09 0.64Crude materials, excl. fuel 21-29 0.64Animal and vegetable oils 41-43 0.58Iron and steel 67 0.25Non-metallic mineral manufactures 66 0.18Leather and leather manufactures 61 0.04Wood and cork manufactures 63 0.00Beverages and tobacco 11-12 0.00

Agricultural Products 00-26,41-43,61 0.65Industrial Products 27-29,32-35,51-89 0.71

Source: Calculations based on data from State Statistics Committee and United Nations, COMTRADE data base.

2. Trade Patterns

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On aggregate, Uzbekistan has a comparative advantage in unskilled laborintensive products. It also has a comparative advantage in some products withinother factor intensity categories, for example, fertilizers in the human capital andtechnology intensive group. In unskilled labor intensive products, the country hasa comparative advantage in yarn and textile products. In the natural resource-based product group, it has a comparative advantage in non-ferrous metals.

By their very nature, RCA indices can only provide a general indication about theexport performances of countries. There are a number of limitations of the indexthat strongly suggest the need for industry studies and investment feasibilitystudies that are beyond the scope of the present study. One of these limitations isthat the values of the RCA index cannot differentiate between trade driven by acountry's comparative advantage and that which is motivated by trade policies,real exchange rate changes, and commercial policy arrangements, among others.Thus it is possible that a country' export performance reflects not so much itscomparative advantages (in terms of factors of productivity or endowments), asfor example the effects of preferential arrangements which could artificiallyincrease exports during the period under consideration. In the case of Uzbekistan,the influence of government supports in key export sectors on the RCA indices islikely to be significant.

Yet another limitation is the lack of time series data in Uzbekistan. Time seriesdata are especially important as Uzbekistan shifts from import-substitutionpolicies to outward-oriented initiatives. This new direction in trade policy,together with an improved trade and investment regulatory framework in thecontext of the WTO, will permit Uzbekistan to export products that more closelyconform to the country’s factor endowments, and to more fully exploit its comparative advantage in the production of particular goods.

2.3 Changing Trade Partners

Major Trading Partners - - Sincedeclaring its independence in 1991,Uzbekistan has maintained stronglinks with its traditional tradingpartners, although in recent yearsboth its import and export marketshave become increasinglydiversified. In 1996 exports tocountries outside the Common-wealth of Independent States (CIS)accounted for nearly 80 percent of

Uzbekistan's total exports, compared with 38 percent in 1993 (see Figure 2.1).

Figure 2.1Export Market Shares: CIS vs. Non-CIS

0% 20% 40% 60% 80% 100%

1993

1994

1995

1996CIS Non-CIS

2. Trade Patterns

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Similarly, imports from non-CIS countries expanded between 1993 and 1996: in1996 they accounted for 68 percent of Uzbekistan's total imports, compared with45 percent three years earlier (see Figure 2.2). According to Lücke (1997),Uzbekistan's recent trade patterns reflect similar changes that have occurred inother CIS countries. Before 1992, trade with OECD countries was limited becauseof preference for trade with other socialist countries, and also because OECDcountries imposed quantitative restrictions on many types of imports from thecentrally planned economies. At the same time, OECD exports of manytechnologically advanced goods were subject to restrictions imposed by CIScountries for strategic reasons.

Russia is Uzbekistan's mostimportant trade partner, absorbingUS$531 million of Uzbekistan'sexports and supplying nearly US$1billion of goods to the Uzbekmarket in 1996. Switzerland, theUnited Kingdom, Germany and theNetherlands are Uzbekistan's majorEuropean trading partners, andKorea and the United States are themost important partners in their

respective regions (see Tables 2.1 and 2.2).

Bilateral, Plurilateral and Multilateral Trade Agreements - - Uzbekistan hasentered into 25 bilateral trade agreements with 20 foreign countries, six of whichare CIS countries. These agreements are generally concerned with the granting ofterms for mutual economic cooperation. Many of the agreements reciprocallygrant most-favored nation (MFN) treatment for products traded betweenUzbekistan and another country, while others establish a free trade regime, such asthe one between Uzbekistan and Azerbaijan. Uzbekistan has also entered into twomultilateral agreements related to foreign trade in goods and services, both ofwhich facilitate trade between Uzbekistan, Azerbaijan, Georgia andTurkmenistan. One of the agreements is intended to regulate goods in transit; theother is to coordinate railway transportation.

Uzbekistan is also a member of several agreements on economic integration withCIS member countries. One of the most significant agreements of this type is theCIS Economic Union Agreement between nine CIS countries: Uzbekistan,Azerbaijan, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia andTajikistan. This agreement commits its members to undertake measures for thecreation of a customs union, a monetary union, a free trade area for goods andservices, and a common market for capital and labor. It also commits its membersto formulate and implement a uniform foreign economic policy. The Coal andMetal Association Agreement, signed between Azerbaijan, Armenia, Belarus,

Figure 2.2Import Market Shares: CIS vs. Non-CIS

0% 20% 40% 60% 80% 100%

1993

1994

1995

1996CIS Non-CIS

2. Trade Patterns

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Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine andUzbekistan, was established to promote the coal and metal industries whilemaintaining fair competition and discouraging the creation of monopolies. Thethird agreement is the Central Asian Economic Area Agreement havingUzbekistan, Kazakhstan and Kyrgyzstan as its signatory countries. In addition toestablishing a framework to foster economic integration, this agreement strives toeliminate customs duties, gradually reduce import levies and other restrictions,and simplify customs procedures. To date, Uzbekistan has not entered intocustoms union agreements with other CIS countries.

Uzbekistan has also entered into one free trade area agreement, the CIS FreeTrade Agreement, with the same countries as with the Coal and Metal AssociationAgreement and Turkmenistan. A protocol is currently being negotiated that wouldprohibit import or export duties, taxes or levies, or quantitative restrictions ongoods originating in the territory of one party and destined for the territory ofanother party. Until such a protocol is executed, the signatory countries are able tospecify which goods should be included in the scheme on a bilateral basis.

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Table 2.3Major Export Partners, 1994-96

Exports ('000 US$) % of Total Exports

1994 1995 1996 1995 1996

Russia 778,800 584,771 531,317 15.7 11.6United Kingdom 174,989 236,567 367,746 6.4 8.0Switzerland 224,007 425,352 328,718 11.4 7.2USA 20,743 12,467 282,503 0.3 6.1Korea 40,142 146,826 267,464 3.9 5.8Turkmenistan 174,300 150,407 174,081 4.0 3.8Netherlands 153,012 156,782 132,843 4.2 2.9China 76,972 35,524 127,395 0.9 2.8Kazakhstan 311,800 238,079 119,920 6.4 2.6Germany 32,385 35,837 94,261 1.0 2.0Kyrgyzstan 102,000 68,334 83,807 1.8 1.8Turkey 42,370 109,651 44,114 2.9 1.0

Exports to Main Partners 2,131,519 2,200,597 2,554,168 59.2 55.6Total Exports 2,666,695 3,720,026 4,590,234 100 100


Table 2.4Major Import Partners, 1994-96

Imports ('000 US$) % of Total Imports

1994 1995 1996 1995 1996

Russia 779,200 720,023 992,462 24.9 21.0Germany 176,777 374,711 578,382 13.0 12.2USA 94,641 30,439 435,090 1.0 9.2Korea 26,357 435,905 326,169 15.1 6.9Kazakhstan 193,100 217,753 222,276 7.5 4.7Switzerland 320,643 118,609 181,646 4.1 3.9United Arab Emirates 4,396 70,087 182,747 2.4 3.9United Kingdom 18,073 27,898 105,912 1.0 2.2Netherlands 51,877 24,292 67,866 0.8 1.4Japan 23,659 44,789 55,178 1.6 1.2Turkey 67,478 90,447 35,854 3.1 0.8

Imports from Main Partners 1,756,200 2,154,954 3,183,582 74.5 67.4Total Imports 2,595,150 2,892,720 4,721,071 100 100


15

3

Trade Policy

Substantive changes in trade policies and customs reforms have taken place inUzbekistan since 1994. Most tariff rates have been progressively reduced and thenumber of products subject to licensing has gradually been lowered. Nonetheless, acomplex system remains in place for foreign exchange controls and administrativeprocedures that regulate the flow of goods between Uzbekistan and its major tradingpartners. This chapter reviews current trade policies in Uzbekistan and theirimplications for the modeling exercise at hand. A description of analytical tools fortariff structures and non-tariff measures is also presented so that additional analysesof further trade reforms in Uzbekistan can be undertaken at a later date, should theGovernment so desire.

3.1 Tariff Structure

Uzbekistan's present tariff structure reflects reforms that took place in 1995-97. It ismainly aimed at protecting domestic manufacturers and improving the country'ssystem for regulating imports. In 1995 the Government introduced new tariff ratesranging from 5 to 100 percent for 61 categories of goods or groups of products. Themajority of goods became subject to 5, 10 or 20 percent tariff rates. The 100 percentrate was only imposed on used motor vehicles. In 1996 the maximum import customsduty was set at 30 percent, with exceptions that included duties on new automobileimports of between 40 and 60 percent, depending on engine size. Further reformswere implemented in 1998 when a 3 percent minimum duty was imposed on theimportation of all goods.

The duty rates refer to ad valorem tariffs, where the rates are expressed as apercentage of the value of the goods. Ad valorem tariffs are the easiest rates to use ina tariff scheme due to their transparency and they can be extended to modelingexercises without difficulties. Specific duties fixed as a value for a physical unit arealso used in Uzbekistan, as are a combination of ad valorem tariffs and specific dutiesfor certain products.

Uzbekistan accords different tariff treatment to different foreign countries or groupsof countries. The aforementioned tariff structure applies to imports of 32 countriesreceiving MFN treatment. Duty rates applied to imports of other countries notreceiving MFN treatment are double the MFN rates. No customs duties are levied onimports that originate from the customs territories of countries that are signatories tothe CIS Free Trade Area Agreement. Uzbekistan also waives tariffs under certainconditions and for certain goods. For example, goods imported under

3. Trade Policy

16

intergovernmental and credit agreements concluded on behalf of the Government ofUzbekistan are not subject to import duties, nor are goods imported with fundsallocated from the state budget by the Government. Likewise, there are no duties ongoods imported within certain limits and conditions to satisfy state needs, or goodsimported by foreign legal entities that have invested at least US$50 million into theeconomy of the country (where the imported goods derive from the foreign legalentity’s own production).

A value-added tax (VAT) of 20 percent is also applied to all imported productsoriginating from non-CIS countries. Uzbekistan considers goods originating from theCIS as having already been subject to a VAT in the originating country, and exemptsimports from this tax to avoid double taxation. Certain products that are considered tobe basic foodstuffs (e.g., flour, sugar, butter, powdered milk and vegetable oils) aresubject to a lower VAT of 10 percent. Excise taxes are also levied on certain goodsoriginating in countries with which Uzbekistan has not entered into free tradeagreements, and they range from 10 to 75 percent. A number of additional taxes areapplied to imports as charges for services. Fees for customs procedures are charged atad valorem rates against the value of imports reported in customs invoices, whilecustoms service fees and fees for the issuance of customs certificates are directlyrelated to the cost of the service.

3.2 Analytical Tools for Tariff Evaluation

Nominal Rate of Protection - - The level of protection from the existing tariffschedule can be assessed from the average nominal rate of protection (NRP). Theaverage tariff for all products is given by the formula:

t = jwjtj …(3.1)

where wj is the share of the j-th product in total imports, and tj is the tariff on productj. Equation (3.1) is, in effect, a weighted average of all the rates applicable to productimports, insofar as it includes preferential rates and duty-free imports, as well as fullytaxed imports.

Table 3.1 shows the statutory NRP for products at the HS section level, and is basedon the March 1998 tariff schedule, using disaggregated import data. The averageNRP for all products is 9.3 percent, while that for agricultural products is 8.5 percentand that for non-agricultural products is 9.4 percent. There are considerabledifferences in rates among products within the sections of Harmonized System (HS).The high average tariff on footwear, headgear and artificial flowers (HS Section XII)reflects the high tariffs on footwear and headgear. Similarly, the high rates on textilesand products are the cause of elevated tariffs on cotton, fibers and textile articles.

Table 3.1

3. Trade Policy

17

Average Nominal Rate of Protection for Commodity Groups in Uzbekistan

(Effective March 1998)Trade-

HS WeightedSection Description Average

I Live animals and animal products 3.3%II Vegetable products 4.4%III Animal or vegetable fats and oils 3.0%IV Prepared foodstuffs; beverages, tobacco 15.3%V Mineral products 8.6%VI Chemical products 7.4%VII Plastic and rubber products 3.0%VIII Hides and skins, leather, leather products 20.2%IX Wood, cork and products 3.0%X Pulp of wood, paper and paperboard 6.9%XI Textiles and products 28.1%XII Footwear, headgear, artificial flowers 29.6%XIII Stone and plaster, glass and glassware 15.2%XIV Semi-precious stones and metals, jewelry 10.5%XV Base metals and products 4.5%XVI Machinery and appliances, electrical equip. 7.7%XVII Vehicles, aircraft, transport equipment 12.7%XVIII Optical, medical and musical products 10.4%XIX Arms and ammunition 3.0%XX Miscellaneous manufactured products 13.3%

All products 9.3%Agricultural Products 8.5%Non-Agricultural Products 9.4%

Note: Nominal protection is measured as the ratio of customs revenue to the value of imports.Source: Based on data from the State Statistics Committee.

Fairly low rates apply to the product components of wood and cork products (HSSection IX) and animal and vegetable oils (HS Section III).

Effective Rate of Protection - - While the measurement of nominal protection isuseful for assessing the extent to which reform measures translate into tariffreductions of different commodity categories, by its very nature the measure onlyconsiders the effect of tariff changes on the price of the final good produced. Also, thenominal rate of protection disregards changes in the degree of protection that affectsthe price paid for inputs into the production process. The effective rate of protection(ERP) addresses this shortcoming by also considering tariffs applied to imports of rawmaterials and intermediate goods that affect the price of the final good. The ERP of aneconomic activity sums up the overall impact of the tariff structure on the incentivestructure. While a tariff imposed on an imported product protects domestic producers

3. Trade Policy

18

of that good, a tariff on the inputs used in the production of the product raises its costand consequently reduces the degree of protection on the product. Box 3.1 describesthe calculation of the ERP that can be extended to Uzbekistan in the event that theinput-output data necessary for the analysis become available. The ERP is particularlyimportant in tariff negotiations since inputs are effectively being taxed, and tariffreductions will therefore have an impact on the profitability of industries andultimately their competitiveness both at home and abroad.

3.3 Non-Tariff Measures

Non-tariff measures (NTMs) encompass a wide range of policies and instruments thatare unrelated to tariffs and that affect the quantities and prices of both imports andexports. UNCTAD uses a coding system to classify over 100 NTMs, and omitsmeasures applied to production or exports. Laird and Guzman (as reported in Lord,1998) classify NTMs in five broad categories according to the intended motives of themeasures. These categories are useful for the classification of NTMs currently ineffect in Uzbekistan, which are summarized in Box 3.2. The first category includesmeasures to control the volume of imports. While no import quotas are used inUzbekistan, company registration can be considered a type of operating license that ineffect regulates the volume of goods brought into the country. The Ministry ofForeign Economic Relations (MFER) grants company registration after registrationprocedures are completed. Once registration is obtained, companies are required tofile import registration contracts and receive approval from the MFER. Contracts canbe denied if the products to be imported are considered of low quality, ecologicallyharmful, or if the import price is too high. Companies must also obtain ‘import transaction passports’, which are documents with a description of the import contractand terms, signed by the importer, a bank official and a customs officer. In addition,an import licensing system exists for arms and military equipment, precious metalalloys and precious stones, radioactive substances, and audio and video products. Thestated intention of the licensing system is to protect public health, the environmentand national security, rather than to restrict the quantity of imported goods.

3. Trade Policy

19

Box 3.1Effective Rates of Protection

The effective rate of protection (ERP) can be defined for a product j as thepercentage excess of domestic value added, V over the international market valueadded, W, i.e., that which would have been realized in the absence of the existingtariff structure:

ERPj = (Vj - W j) / W j …(1.1)

The main determinant of the ERP level is the relationship between the nominal ratesof protection of outputs and inputs, although the share of tradeable inputs in anyselected activity, or the technical coefficient, also influences the level of the ERP.Practically, the ERP could be calculated either through detailed informationconcerning the activities at the firm level, or through the data supplied by input-output tables. If input-output tables are available, the ERP can be calculated in thefollowing manner:

Let W j = Pj(1 - iaij)Vj = Pj[(1+tj) - iaij(1+ti)]

where:aij is the technical coefficient of input in activity j, i.e., the value of input i per unitvalue of output in activity j;

tj = the nominal rate of protection of production of j;ti = the nominal rate of protection of input i.

Then from equation (1.1) we can express the level of effective protection as follows:

ERPj = {Pj[(1+tj) - iaij(1+ti)] / Pj(1 - iaij)} - 1 …(1.2)

Rearranging terms yields the formula used to estimate the level of effectiveprotection:

ERPj = (tj - iaijti) / (1 - iaij) …(1.3)

The results of the calculations are typically compared with those for the NRP, andare assessed in terms of the degree of effective protection across industries. Forexample, the results could indicate that effective protection is high for industries withlow nominal tariffs on inputs, or that effective protection exceeds nominal protectionwhen the nominal tariff on the output exceeds that applied to the input. The resultscould also indicate that negative effective rates of protection occur in certainindustries, implying that value added in the activity concerned is actually lower thanunder free trade conditions, or that effective protection is high for industries with hightechnical coefficients of tradable inputs. In any case, ERP analysis is an effectivetool for analyzing Uzbekistan's tariff structure, and will be especially important in itsWTO tariff negotiations.

3. Trade Policy

20

Exchange controls are includedwithin the first category ofmeasures. While they are mainlybalance of payments constraints,this type of measure effectivelyoperates as a quota. Exchangecontrols create a perfectly priceinelastic demand curve, and over-ride tariff-based policies as long asthe quota is below the equilibriumsolution for import demand. Theimplications for modeling a tradeliberalization scheme is that thevolume of goods that is importedat that fixed price needs to besubtracted from the equilibriumsolution if, and only if, themarket-based solution for theamount of goods that would beimported at that equilibrium pointis greater than the actual amountimported. Since exchange controlsoperate like a quantitativerestriction (e.g., quota), they aredisallowed under WTO rules.They have therefore beenexcluded from the modeldeveloped as part of this study.

The second category includes measures to control the price of imported goods. Suchmeasures cover reference price mechanisms, variable levies, anti-dumping andcountervailing duties, seasonal tariffs and tariff quotas. Voluntary export restraints(VERs) are also included in this category. None of these measures are currently ineffect in Uzbekistan, although legislation permits the application of anti-dumping andcountervailing duties under certain circumstances. The third category includesmonitoring measures whose intention is to avoid unfair trading practices by exporters,such as dumping and subsidization. These measures include licensing arrangements,which are applied in Uzbekistan on importers and exporters to control the volumetraded goods.

The fourth category addresses production and export measures, and includes subsidiesor restrictions on exports by means of taxes or prohibitions. Uzbekistan's exportlicensing system is included in this category. The number of items requiring exportlicenses has gradually diminished during the last three years and now includes fourproducts (cotton, oil and ferrous and non-ferrous metals). Export quotas are in effect

Box 3.2Illustration of NTMs Used in Uzbekistan, byClassification

Type of Trade Measures CurrentlyControl Measure Used in Uzbekistan

1. Import Volume Controls • Company registration• Import transaction passports• Exchange controls

2. Import Price Controls Legislation is currently ineffect that permits theapplication of anti-dumpingduties and countervailingmeasures.

3. Monitoring Measures • Import and export licensing

4. Production and Export • Export licensingMeasures • Export quotas

• Excise taxes• Export contract registration• Company registration• Land dedicated to production of wheat• Exemption or reduction in corporate income tax• Exemption from prepayment or opening letter of credit• Exemption from excise andVAT taxes

5. Technical barriers • Certification• Pre-shipment inspection

3. Trade Policy

21

for the same four products for which export licenses are required, and these quotas areestablished annually by the Cabinet of Ministers based on production-consumptionbalance forecasts. Certain goods, mainly home appliances, are subject to excise taxwhen exported from Uzbekistan. Excise taxes are only applied, however, in caseswhen such goods are exported to countries that impose excise taxes on goodsexported to Uzbekistan. An export contract registration system and a companyregistration system are also in place. Production measures that are currently in effectreflect Uzbekistan's import-substitution policy on grain imports: some land that waspreviously used for cotton production is now devoted to the production of wheat andother grains.

Exemption from corporate tax, which is considered an indirect subsidy, is granted tolegal entities with foreign participation that manufacture goods for export or import-substituting goods. Other measures related to exports include the exemption ofprepayment or the opening of a letter of credit for those enterprises exporting goods oftheir own production for freely convertible currency. Also, in cases where enterprisesexport 30 percent or more of their production, the corporate income tax rate is one-half the otherwise applicable rate. Enterprises exporting their own production to CIScountries for hard currency are exempt from excise and VAT taxes if otherwise is notstipulated in any international agreement signed by Uzbekistan.

The fifth category deals with technical barriers that are imposed at the frontier andthat are intended to ensure that imported products conform to the same standards asthose for domestically-produced goods. Examples of this type of NTM include testingrequirements, and packaging and labeling requirements, and standardization.Uzbekistan requires certification for many fresh vegetables, meat and fish products,fertilizers, products made of rubber and plastic, certain clothing articles, glasswareand ceramics, among other products. Current customs regulations in Uzbekistanprovide for pre-shipment inspection by independent consulting firms to confirm theconformity of the imported goods with quality, quantity, price level and other contractterms. Pre-shipment inspection is not applicable to the importation of goods undercontracts having a total value of less than US$50,000 or the importation of specificgoods under licenses issued by the MFER.

3.4 Analytical Tools for NTM Evaluation

The possible impact of the removal of the various types of NTMs currently in use inUzbekistan, with the exception of foreign exchange control measures, on the tradeliberalization simulation that is the subject of this study was not taken into account inthe modeling exercise for several reasons. First, the General Agreement on Tariffs andTrade (GATT) does not ban the use of all NTMs and in fact sets out exceptions andrules on their use. However, the application of certain important NTMs, such asexport subsidies and agriculture support mechanism, which apply to Uzbekistan'strade regime, will likely be limited or eliminated under WTO rules. As previously

3. Trade Policy

22

mentioned, the use of foreign exchange controls will probably be prohibited, sincethey in effect act as a quantitative restriction to imports. Second, it is highly likely thatmany of the measures will remain in effect while tariff reductions are beingnegotiated with the WTO. As pointed out by Laird (1996), it is unlikely that theGovernment of Uzbekistan, as other governments, will remove permanent controls ontechnical barriers to trade in arms, drugs or other sensitive products, although suchbarriers are likely to become more harmonized and conform to internationalstandards.

Third, the quantification of NTMs requires specific data on prices and volumes ofindividual products and information on special arrangements between trading partnersthat are not readily available in Uzbekistan. Fourth, certain NTMs, such as thecompany registration and contract registration systems act as informal barriers totrade, which are difficult to measure in terms of monetary costs and costs in time. Theremoval of these types of NTMs merits separate discussion from the modelingexercise due to their wide use and importance in Uzbekistan. Nonetheless, anoverview of tools is presented below that can be used to assess the broad effects of aneconomy-wide liberalization of NTMs, rather than sector-specific liberalization, orthe removal or reduction of a specific type of NTM applied to a particular product.The general methods described below for measuring the presence of size of the NTMsfollows the classification set out by Deardorff and Stern (1997) and Laird (1996).

Frequency-Type Measures - - The trade coverage ratio and frequency index are twotype of measures that indicate the frequency or occurrence of NTMs. For countriesthat are signatories to the GATT, data needed to calculate these measures on a tariff-item basis are available for public use in the UNCTAD Data Base on Trade ControlMeasures. The trade coverage ratio measures the percentage of trade subject toNTMs for an exporting country j at a desired level of product aggregation:

Cij = [(DitViT)/(ViT)] * 100 …(3.2)

where, if an NTM is applied to the tariff line item i, the dummy variable Di takes thevalue of one and zero otherwise; Vi is the value of imports in item i; t is the year ofmeasurement of the NTM; and T is the year of the import weights.

The frequency index shows the percentage of import transactions covered by aselected group of NTMs for an exporting country, and is calculated as:

Fjt = [(DitMit)/(Mit)] * 100 …(3.3)

where Di reflects the presence of an NTM on the tariff line item, Mi indicates whetherthere are import from the exporting country j of good i and t is the year ofmeasurement of the NTM.

The results of calculations of these types of measures over a period of time will likely

3. Trade Policy

23

show trends in whether or not the use of NTMs has increased or decreased, orwhether their incidence is more concentrated in certain products or groups ofproducts. According to Deardorff and Stern (1997), the drawbacks associated with thetrade coverage and frequency ratios are that: (a) shortcomings could arise from howNTMs are defined due their inconsistency in reporting and the level of aggregationused; (b) effects the might deter price and quantity decisions of importers are nottaken into account; (c) NTMs are mainly border measures and therefore ignore theeffects of internal governmental measures such as administrative procedures andmonitoring measures; and (d) the ratios do not take into account the possibleeconomic impact of NTMs on prices, production, consumption and internationaltrade.

24

4

Foreign Trade Statistics

The purpose of this chapter is to highlight the importance of reliable trade statisticsthat form the basis of economic analysis undertaken by governments, the internationaldonor community and other organizations in the private and public sectors. It alsodescribes the source of data used in this study, and compares that information withofficial data from the Government of Uzbekistan.

4.1 The Need for Reliable Data

The changes that are currently underway in transforming the former planned economyof Uzbekistan to a market-based one highlight the importance of reliable tradestatistics. Fundamental to these changes is the increased number of parties involvedin trade that require information in a detailed and timely manner, and the type ofinformation needed by these parties. For government agencies, the reliability offoreign trade statistics is important in estimating the terms of trade, performingprojections of economic trends and undertaking economic analysis such as the presentassessment of the impact of trade liberalization on the Uzbek economy.

Foreign governments and international organizations also require reliable data forlending operations and for defining and designing technical assistance programs.Both national and international universities and research institutions rely on validtrade data to undertake research. These institutions, like the Uzbek governmentagencies, also required time-series data to measure the trend and magnitude in trade.Domestic and foreign investors use foreign trade statistics as an indicator of rawmaterials supplies (as in the case of imports) and the potential for exports, andimporters and exporters also depend on trade statistics to identify potential marketsand develop their respective industries.

4.2 Mirror Statistics of Foreign Trade

In the absence of time series of official trade statistics, which were not available at thetime this study was undertaken, mirror statistics or statistics on Uzbekistan's tradeprovided by its trading partners during the period 1992-96 were used. In general,mirror statistics provide valuable insights into trade patterns and the magnitude ofunreported trade, and they also bring out discrepancies arising from differences inreporting methodologies. Discrepancies between the two sources of data could be dueto several factors. To the extent that the trade of Uzbekistan reported by its partners

4. Foreign Trade Statistics

25

was significantly less than that reported by the national statistical authorities, then thedifference implies that the mirror statistics lack data from important trading partners.This discrepancy is highlighted in several instances in Table 4.1, where it is evidentthat Uzbekistan's major CIS trading partners do not report statistics to the UnitedNations. If, in contrast, the data reported on Uzbekistan's trade by its partners weresignificantly greater than that reported by the national statistical authorities, then thedifference could imply that trade is by-passing customs authorities. This situation alsooccurs in certain instances, as demonstrated in Table 4.1. Such discrepancies could beattributed to border transactions with Uzbekistan's neighboring countries that areunreported. This so-called traditional trade could be legalized and thereby broughtinto customs data collection procedures.

Discrepancies between partner-country data and official trade data could also be dueto other factors (Yeats, 1995). For example, re-exports and transshipments fromUzbekistan to countries not included in the sample of partner statistics are excluded.The exchange rate applied to convert the trade flows into US dollars could alsoaccount for the discrepancy between the two data sets. In Uzbekistan, an officialexchange rate is applied to government imports and exports, and non-cashtransactions. An illegal, black market rate operates quite openly, and is used as a basisfor many trade transactions. The frequency of valuing foreign transactions in a foreigncurrency and the volatility of exchange rates could make an important differencebetween the two data sources. Likewise, the nomenclature used to classify trade couldcontribute to the difference between the data sets at the disaggregated product level.Of equal importance are the changes in data collecting and reporting that have takenplace since Uzbekistan gained its independence, which could have an impact on thereliability of trade statistics and could also explain the large differences betweenofficial and partner country data.

4. Foreign Trade Statistics

26

Table 4.1Mirror Trade Data and Official Statistics of Uzbekistan, 1996('000 US$)

IMPORTSMajor Trading Partner Official Statistics Mirror Statistics Difference

Russia 992,462 na NaGermany 578,382 469,086 -109,296USA 435,090 350,038 -85,052Korea 326,169 493,833 167,664Kazakhstan 222,276 na NaSwitzerland 181,646 25,640 -156,006United Arab Emirates 182,747 na NaUnited Kingdom 105,912 59,661 -46,251Netherlands 67,866 60,308 -7,558Japan 55,178 81,538 26,360Turkey 35,854 229,859 194,005

Imports from Main Partners 3,183,582 1,769,963 -1,413,619Total Imports 4,721,071 2,309,581 -2,411,490

EXPORTSMajor Trading Partner Official Statistics Mirror Statistics Difference

Russia 531,317 na NaUnited Kingdom 367,746 4,038 -363,708Switzerland 328,718 8,987 -319,731USA 282,503 165,359 -117,144Korea 267,464 196,104 -71,360Turkmenistan 174,081 na NaNetherlands 132,843 663 -132,180China 127,395 151,518 24,123Kazakhstan 119,920 na NaGermany 94,261 136,196 41,935Kyrgyzstan 83,807 131,564 47,757Turkey 44,114 56,479 12,365

Exports to Main Partners 2,554,169 850,908 -1,703,261Total Exports 4,590,234 1,405,970 -3,184,264na … Not reported by trading partner.Sources: Mirror data from United Nations COMTRADE data base; official statistics from StateStatistics Department of Uzbekistan.

27

5

Measuring the Effects of Trade Liberalization

The model developed as part of this study uses a partial equilibrium approach, incontrast to the principal alternative methodology based on a computable generalequilibrium model. The partial equilibrium approach to modeling is well accepted asan appropriate tool to measure the effects of trade liberalization, and has been usedwidely by trade analysts in international organizations such as the InternationalMonetary Fund (IMF), the World Bank and the United Nations Conference on Tradeand Development (UNCTAD). This chapter describes the effects that can bemeasured by the partial equilibrium approach, which are included in the spreadsheetmodel to illustrate the impact of tariff reductions by Uzbekistan under alternativescenarios.

5.1 Quantitative Methods

Two broad methods are used to quantify the effects of trade liberalization, whether fora single economy, a region or the world. The first relies on product-specificeconometric models using partial equilibrium analysis. The other method useseconomy-wide or fully integrated models of economies or worldwide trade. Themethod selected will depend on the type of analysis and level of detail required by themodeling framework.

The partial equilibrium method calculates the direct effects of trade liberalizationbased on detailed tariff line information. Econometric-based models of this type areoften used to assess the effects of WTO membership and are based on statisticallyestimated parameters so that data-generating processes are consistently represented.The dynamic effects of trade liberalization can be deduced from numerical solutionsof the equations that make up the model for detailed tariff line information. This typeof method was chosen for this study.

The economy-wide approach uses computable general equilibrium (CGE) models tomeasure possible feedback effects between the external and domestic sectors resultingfrom trade liberalization. While these models do not consider inter-temporal issuesrelated to the adjustment process from one steady-state solution to another, they doconsider how tariff cuts will influence other sectors through changes in relative pricesof factors of production and the final products themselves. These linkages affect theallocation of domestic resources and influence the competitive position of a country’s production in its domestic and foreign markets. Nevertheless, CGE parameterestimates often originate from secondary sources and are therefore not internallyconsistent with the system of equations used to represent the data-generating

5. Measuring the Effects of Trade Liberalization

28

processes of markets such as those of Uzbekistan and its principal trading partners.

5.2 Types of Effects

There are several effects of trade liberalization that can be deduced from partial andgeneral equilibrium models. The direct effects captured by partial equilibrium analysiscan be separated in the following components:

Trade Creation Effect refers to the change in the level of domestic demand forimported inputs and final goods from trading partners resulting from tariff-associated foreign price reductions relative to domestically-produced goods.

Trade Diversion Effect is the substitution of imports from one set of suppliers forimports from other sources. For Uzbekistan, that substitution refers to thesubstitution between supplies originating from members of preferential tradearrangements and those originating from foreign suppliers subject to MFN rates.

Balance of Payments Effect refers to the total change in imports resulting fromboth the trade creation and trade diversion effects.

Government Revenue Effect is the change in customs fees resulting from tariffcuts plus the change in indirect tax revenue resulting from the change in indirecttaxes collected on imports, exclusive of customs fees charged for services. Thiseffect includes both the lower revenue per unit of imports and the higher importvolumes resulting from the trade creation effect.

Consumer Welfare Effect refers to the gains that consumers obtain from lowerprices on imported goods when tariffs are lowered.

The indirect effects that can be measured within the general equilibrium frameworkdepend on the level of disaggregation of the model, but as a minimum provideinformation about the following components:

Sectoral Production Effect refers to changes in domestic output levels associatedwith the improved allocation of resources brought about by the freer movementsof factors of production.

International Competitiveness Effect arises from the increased access to lower-cost factors of production for export-oriented goods, and the resultingimprovement in the export prices relative to competing suppliers to foreignmarkets.


29

Terms of Trade Effect is brought about from the changes in prices of tradables thatarise from exchange rate effects and other changes in the foreign and domesticeconomies.

5.3 The Distribution of Gains and Losses

The direct effects of Uzbekistan's liberalization efforts are shown in Figure 5.1 in thecontext of both its preferential trade arrangements and its MFN tariffs. Uzbekistan'simport demand function is given by Md and, assuming that the import supply curve isperfectly elastic with respect to prices, its import supply functions are shown by thehorizontal lines at (1+t)Pw, the price of imports inclusive of the MFN tariffs, Prb, theduty-free price of imports from preferential suppliers, and Pw, the free-trade price ofthe lower-cost producers from other countries.

Under the preferential arrangements the duty-free import price, Prb, from suppliers inthose countries is above that of low-cost producers from other sources but below thetariff-inclusive price. Producer revenue for the suppliers from preferential and non-preferential suppliers is D+F+G, and Government revenue expands to the area B + C,and consumer surplus increases to A+H.

If Uzbekistan were to completely liberalize its trade and allow duty-free entry ofgoods from all sources, then it would be able to buy the lowest priced goods from anysource. In moving from a preferential system to multilateral trade liberalization,Uzbekistan would achieve a trade creation effect equal to the area I. There wouldalso be a trade diversion effect on preferential trading partners represented by the areadenoted G + F as importers purchased goods from lower-priced suppliers in othercountries.

In the remainder of this chapter and the next, we will show how the different effectsof MFN tariff reductions under preferential trade systems can be quantified. Thefollowing chapters examine alternative tariff reduction strategies for Uzbekistan.While these calculations are limited to the direct effects of the reductions, the tariffline calculations for the principal products imports provide some suggestions on theirultimate impact on Uzbekistan’s traditional and emerging industries.


30

Figure 5.1

Direct Effects of Preferential and Free Trade Systems

Im p o rtp ric e s

(1 + t)P w

P rb

P w

Im p o rt q u a n tity

W ith M F N T a riff: C o n s u m e r s u rp lu s : A F o re ig n p ro d u c e r re v e n u e : D G o v e rn m e n t re v e n u e : B + C D e a d w e ig h t lo s s : E + F + H

W ith P re fe re n tia l S y s te m : C o n s u m e r s u rp lu s : A + H F o re ig n p ro d u c e r re v e n u e : D + G + F G o v e rn m e n t re v e n u e : B + C D e a d w e ig h t lo s s : E

W ith M u ltila te ra l F re e T ra d e : C o n s u m e r s u rp lu s : A + B + C + E + F + H F o re ig n p ro d u c e r re v e n u e : D + G + I G o v e rn m e n t re v e n u e : N o n e D e a d w e ig h t lo s s : N o n e

M d

B

A

C

D

E

F

G

H

I


31

5.4 Specification of Effects

5.4.1 Trade Creation Effect

The import price of a product is equal to the trading partner’s export price plus transportation and insurance charges plus the ad valorem tariff applied to the good.The import price, Pm, of a product i can therefore be expressed as follows:

Pmij = Px

ij (1 + ti) … (5.1)

where Px is the export price of the product i originating from non-preferentialsupplying country, j, which implicitly includes freight and insurance, and t is the advalorem tariff rate applied to the product.

Since for small markets such as Uzbekistan the foreign market export supply to thatmarket is likely to be perfectly price elastic, in the short run the percentage change inimport demand associated with a change in tariff is equal to: 8

Mij/Mij = ps [ti/(1+ti)] …(5.2)

where ps is the price elasticity of import demand in the short run.

Similarly, in the long run the percentage change in imports of the productcorresponding to a change in the associated ad valorem tariff is equal to:

Mij/Mij = p [ti/(1+ti)] …(5.3)

where p is the price elasticity of import demand in the long run.

The trade creation effect is obtained when equation (5.3) is multiplied on both sidesof the equation by M:9

Mij = p [ti/(1+ti)] Mij …(5.4)

8 The ‘small market’ assumption is important for the calculations that follow. In calculating each ofthe different effects of tariff reductions, the assumption means that the Uzbekistan market representsa fairly small proportion of its trading partners’ total exports and, hence, that the import supply schedule is infinite with respect to prices. Prices of each of Uzbekistan’s imported products are therefore changed by the full amount of any tariff reduction on the products. Were the import supplyschedule to be less than perfectly elastic with respect to prices, a change in tariffs would lead to lessthan proportional changes in prices and smaller increases in the volume of imports than wouldotherwise occur under a perfectly price elastic import supply schedule.

9 Similar calculations have been used by the UNCTAD Trade Policy Simulation Model (Laird andYeats, 1986) and International Monetary Fund (1984).


32

The magnitude of trade creation is therefore shown to depend on (a) the priceelasticity of demand for imports, (b) the share of imports from other (non-preferential)sources, (c) the percentage change in the reduction of the MFN rate, and (d) the levelof imports of the individual products.

Since we are interested in aggregating the results of (5.4) across products, the USdollar value of the trade creation effect is calculated by multiplying both sides of theequation by the price of each product:

Vij = p [t/(1+t)] Mij + P/P …(5.5)

which gives the value of the trade creation effect from which we can derive the totalvalue of the trade creation effect (Vj = i Vij).

5.4.2 Trade Diversion Effect

Trade diversion occurs when imports from one source are substituted for importsfrom another source in response to relative price changes between the two sources. Inpractice, MFN tariff reductions give rise to trade diversion effects in countriesparticipating in preferential trade arrangements. The reason is that MFN tariffreductions lower the import prices of goods originating from countries that are notpart of the preferential arrangement relative to those that enjoy preferential treatment.As prices fall for imports of the non-preferential sources, there is a tendency for thequantity demanded of those imports to rise relative to those of countries enjoyingpreferential treatment.

Uzbekistan is a signatory to more than 25 trade agreements containing preferentialtrade provisions that are likely to be eroded by the members’ participation in the WTO. These agreements establish trade preferences on a bilateral, plurilateral andmultilateral basis with both CIS and non-CIS countries (for details, see Chapter 2).Tariff reductions on a MFN basis by Uzbekistan will reduce the margin of preferenceprovided to preferential trading partners by the full amount of the reductions. As aresult, the quantity of goods demanded from the preferential trading partners willprobably decrease and the demand for the same goods from non-preferential sourceswill probably increase by an equivalent amount.

The amount of the erosion of preferential trade resulting from MFN tariff reductionsdepends on the extent to which importers respond to relative price changes. Theamount by which trade in a particular good will shift from the preferential suppliers tonon-preferential suppliers will depend on the elasticity of substitution between goodsoriginating from preferential and non-preferential sources.

The elasticity of substitution assumes product differentiation and requires thecalculation of separate import and export demand functions for individual markets(for an application, see Lord, 1991). A simpler approach is offered by Rousslang and


33

Parker (1984) based on own-price elasticity estimates of the type estimated in thepresent study.10 The own-price elasticity approximates the cross price elasticity ofsubstitution as follows:11

sjk = - p (Vj /V) …(5.6)

where the parameters and variables are defined as follows:

sjk is the cross price elasticity of substitution between the preferential-rate

supplier k and the non-preferential rate suppliers j;

p is the own price elasticity of demand for imports j;

Vij is the value of imports from the non-preferential suppliers; and

Vi is the total value of imports of the product i into Uzbekistan.

Then the trade diversion effect is given by:

Mik = - p (Vij/Vi) [ti/(1+ti)] Mik …(5.7)

where Mik is the change in the volume of imports from preferred sources due to thepreference erosion. The value of the effect is equal to:

Vjk = - p (Vij/Vi) [ti/(1+ti)] MikPik …(5.8)

The preference erosion for a trading partner k is shown to depend on (a) the priceelasticity of demand for imports from that source, (b) the share of imports from other(non-preferential) sources, and (c) the percentage change in tariff reductions fromnon-preferential sources. These calculations refer to imports of individual products.Following Shiells, Subramanian and Uimonen (1996), we approximate the priceelasticity of demand for imports from preferential-rate suppliers by estimates of theprice elasticity of import demand from all supply sources, denoted p.

10 The approach was first devised by Baldwin and Murray (1977) and used in the UNCTAD TradePolicy Simulation Model (TPSM), as described by Laird and Yeats (1986). More recently it hasbeen applied by Shiells, Subramanian and Uimonen (1996) to measure the effects of the UruguayRound on Egypt and Morocco. The latter application uses a variation of the Baldwin-Murrayapproach developed by Rousslang and Parker (1984) to compute cross-price elasticities based onown-price elasticity estimates. More generally, Laird and Yeats (1990) provide alternative methodsfor calculating the effects of the erosion in preferential trade arrangements.

11 In the Baldwin-Murray (1977) approach the level of imports from non-preference receiving countriesis compared with the apparent value of domestic consumption, defined as domestic output of theproduct plus imports less exports. Since data on domestic consumption is not available forUzbekistan, imports were used as a proxy.


34

5.4.3 Balance of Payments Effect

The balance of payments effect is the sum of the value of changes in individualproduct imports. It can be calculated from the sum of the trade creation and tradediversion effects:

V = [1 - (Vik/Vi)] p [ti/(1+ti)] Vi …(5.9)

The liberalization of trade will undoubtedly stimulate an increase in the volume ofimports. As long as the absolute value of the price elasticity of import demand isgreater than unity, a lowering of import prices resulting from a tariff cut will lead to amore-than-proportional rise in the volume of imports. Consequently, for thoseproducts having a price-elastic import demand schedule, tariff reductions will lead toa net increase in the value of imports over the level that existed before the tariff cuts.

Despite the expansion of imports, Uzbekistan's trade balance is unlikely tosubstantially deteriorate. Offsetting the anticipated increased in the volume of importsfrom tariff cuts will be both the generally lower foreign market prices following thegeneral liberalization of the world economy and the lower trade barriers thatUzbekistan's exports will confront in trading partner markets that have themselvesundertaken tariff reductions under their WTO arrangements.12 Moreover, the presentcalculations also exclude the possible expansion in exports resulting from the generalequilibrium effects on Uzbekistan's international competitiveness.

5.4.4 Government Revenue Effect

The magnitude of changes in the Government customs fees will depend on theoffsetting movements arising from (a) lower MFN tariffs and (b) higher levels oftrade with trading partners subject to MFN tariffs. The customs revenue effect iscalculated from the trade creation effect:

T/T = t/t + M/M … (5.10)

where T denotes the customs revenue.

In addition, a value-added tax (VAT) of 20 percent is applied to the value of imports,exclusive of customs fees, that originate from non-CIS countries.13 Hence, when the

12 For a recent survey of the magnitude of the price and volume changes in world trade associated withthe WTO agreement, see Whalley and Hamilton (1996).

13Under the national treatment rule of the WTO, countries are prohibited from discriminating betweenimported products and equivalent domestically-produced goods, both in matters concerning the levyof internal taxes and the application of internal rules and regulations. Thus a country cannot apply


35

indirect tax rate is r = 0.2, the indirect tax revenue effect, R, equals rPx(1+t)M. Thepercentage change in indirect tax revenue is therefore given by:

R = [t/(1+t) + M/M] R … (5.11)

Hence, the total change in the Government revenue is equal to:

G = (t/t + M/M) T + [t/(1+t) + M/M] R …(5.12)

5.4.5 Consumer Welfare Effect

Consumers gain from lower prices of imported goods when tariffs are reduced. Forthe pre-tariff-cut level of imports Cline et al. (1978) has noted that the import pricesresulting from tariff reductions simply represent a transfer to consumers of revenueformerly collected by the Government in the form of customs duties and indirecttaxes. There is, however, a welfare gain from the trade creation effect.

This effect is normally calculated as the average increase in the quantity of imports,M, valued at the average between the tariff incidence before and after liberalization.Hence the consumer welfare effect, W, is given by:14

W = - t M/2 … (5.13)

The resulting calculation is the value of imports of individual products that can besummed to measure the total consumer welfare effect from the new tariff schedule.Since we are interested in aggregating the results of (5.13) across products, the USdollar value of the consumer welfare effect is calculated by multiplying both sides ofthe equation by the price of each product.

customs duties and then levy an internal tax such as sales tax or VAT at rates higher than thosepayable on products of national origin.

14 Note that the earlier assumption of a perfectly price elastic supply schedule implies that tariff cuts arefully passed on to import prices. Otherwise, Laird and Yeats point out that the domestic price ofimports would not decline by the full extent of the tariff change and there would also be a producerwelfare effect implicit in equation (5.11).

36

6

Modeling the Direct Impact of TradeLiberalization

After a brief introduction summarizing the present partial equilibrium model, thischapter sets out the econometric specification for the import demand relationship inthat model. The specification was used to estimate the equations for the Uzbekistanmodel using EVIEWS software. The estimates were then incorporated into thespreadsheet model. This chapter presents those estimates, and it highlights some ofthe results. Once official government trade statistics become available for a longertime series than was available for the construction of the present model, they can beused to update the present results.

6.1 Methodology

The calculations of the direct effects of Uzbekistan's trade liberalization policies arebased on import demand relationships estimated for individual products at thedetailed tariff line. These estimates take into account changes in the levels of importdemand arising from market access concessions, and time-related adjustments arisingfrom the lagged response of imports to economic activity and price changes. By itsvery nature, the econometric-based modeling approach discussed in Chapter 5provides internally consistent empirical results at a detailed level.

The present partial equilibrium approach excludes the consideration of feedbackeffects between the external and domestic sectors, and therefore fails to take intoaccount the sectoral adjustments that are likely to accompany trade liberalization. Inparticular, tariff cuts will probably influence other sectors through changes in relativeprices of factors of production and the final products themselves. These linkages will,in turn, affect the allocation of domestic resources and influence the competitiveposition of Uzbekistan's products in the domestic and foreign markets.

The approach used to estimate the foreign demand for selected products in Uzbekistanis adopted from Lord (1988, 1989a, 1989b, 1990, 1991, 1992), and has been appliedelsewhere to measuring the effects of the WTO agreements on trade of other countries(Boye and Lord, 1994, 1995, 1996a, 1996b). Estimates are provided for the short-runand long-run effects on imports from income and price changes, as measured by realgross domestic product (GDP), the import price of each product and the real exchangerate. Observed import prices includes tariffs. Consequently, tariff-reduction policies,such as those to be implemented under Uzbekistan's agreement with the WTO, caneasily be modeled by the explicit separation of the tariff rate from the price variable in

37

the import demand equation.

6.2 The Demand for Imports

The demand for imports of Uzbekistan has a long-term response to income changes,and a short-term response to the constant price of each product. As such, imports havea long-term response to income changes, while they have a transient response to pricechanges. The reason for this transient response is that the relative price of a product,say that of perishables, can alter the import demand for that product in the short run.In the long run, however, the price of perishables relative to that of competingproducts or all other goods in general cannot continually deviate from one another,since otherwise consumers would permanently switch from that product to another.

An important characteristic of the import demand for any one product is that its long-term response to the growth of domestic income is not necessarily proportional. Thissuggests that the dynamic specification of the import demand equation should notintroduce any restrictions that would impose long-run unitary elasticity with respect toincome. In contrast, the model should encompass long-term proportionality responseswhen they exist.

A second feature of the present modeling approach is that the dynamics for importdemand relationships can be restricted to one period since the adjustment of importsto price and income changes tends to decline exponentially over time. The third andfinal important characteristic is that prices of traded goods are measured in US dollarterms. If prices of imports were measured in local currency units, then the demand forimports by Uzbekistan would also be directly affected by the real exchange rate,which would take into account changes in both the relative prices of domestic andforeign goods and the nominal exchange rate, as well as the foreign market price ofthe product.

The dynamic specification for imports, M, in terms of income, Y, and the price of theproduct, P, relative to the general price index, D, can be expressed as:

mt = 0 +1mt-1 + 1yt + 2yt-1 + 1(p-d)t + 2(p-d)t-1 + t ...(6.1)

where lower case letters denote logarithms of corresponding capital letters, e.g., (p-d)= ln(P/D), and the expected signs of the coefficients are 0 1 1; 1 and 2 0; 1

and 2 0. Income is treated as (weakly) exogenous for the parameters of interest inequation (6.1).

The use of the logarithmic specification in equation (6.1) provides a means by whichthe elasticity can be calculated directly from the estimated equation; the results areconsistent when the elasticities remain constant over time. Tests of parameterconstancy provide a means of validating that hypothesis.

38

On a steady-state growth path, the long-run dynamic equilibrium relationship implicitin equation (6.1) is:

y p

M = kY P/D ...(6.2)

where y = (1 + 2)/(1-1) and p = (1 + 2)/(1-1).

The results of the estimates provide quantitative measures of the impact thatUzbekistan's market access concessions could have on its trade. Since data limitationsrestrict the application of the model, it is useful to review some of the widely usedempirical models which equation (6.1) encompasses. These embedded models havebeen described by Hendry, Pagan and Sargan (1984) as follows:

(a) Static Model (1 = 2 = 2 = 0): mt = 0 + 1yt + 1(p-d)t

(b) Distributed Lag Model (1 = 0 ): mt = 0 + 1yt + 2yt-1 + 1(p-d)t + 2(p-d)t-1

(c) Partial Adjustment Model (2 = 2 = 0): mt = 0 + 1 mt-1 + 1yt + 1(p-d)t

(d) First-Difference Model (1 = 1, 1 = - 2): mt = 0 + 1yt + 1pt

6.3 Import Demand Estimates

Table 6.1 lists the products that were selected from a group of the 100 most importantimported products in terms of their value. Data series covering the period 1992-96were selected for the products on the basis of their data reliability and completeness(i.e., lack of missing observations or major outliers). Together, the products selectedaccount for about 30 percent of Uzbekistan's imports. Aircraft, combine harvesters,milling industry products, radiators for motor vehicles, and radio parts, which areincluded in Uzbekistan's top 10 imported products, were excluded from the model dueto data inconsistencies in individual data series. It is highly probably that time-seriesdata based on official government statistics would yield different results, and hence adifferent set of products to be modeled.

The import demand relationships for individual product estimates are presented inTable 6.2. The average price elasticity of demand is -2.7. A small number of productshave price inelastic demand schedules. Among these are refrigerators, televisionreceivers and textile machines. Most of the products selected for the model are priceelastic. Sweet biscuits, beer, tires and butter have particularly high price elasticities,reflecting the sensitivity of the demand for these products to price changes. Theaverage income elasticity for the products is 5.9, which mainly reflects the strongincome-related response in the demand for cereals, buses, fungicides and petroleum

39

oils. Apart from these products having relatively high income elasticities, most otherproducts have income elasticities that are near unity.

The estimates are based on limited time-series estimates using annual data. Parameterconstancy tests could not be performed for lack of data, but it is reasonable to assumethat the responsiveness of imports to price and income changes will vary over time.Nevertheless, the present estimates provide fairly accurate information on the shortand medium-term responsiveness of the selected imports to price changes that arelikely to result from tariff reductions. It should be noted, however, that if theequations for the selected products were to be re-estimated using data provided by theUzbekistan State Statistics Department, the elasticities would be different than thosepresented in this report. Also, the long-run response to prices would differ from thosereported, since the present estimates are based on data from the United Nations.

40

Table 6.1Selection of Imports for Trade Model

Volume ValueHSCode Description Quantity Units '000 US$ % Contribution

100190 Wheat and meslin 798 '000 tons 191,018 4.2100110 Durum Wheat 387 '000 tons 100,985 2.2843149 Parts of cranes and work-trucks 4,789 tons 98,435 2.2870210 Diesel powered buses 273 units 57,938 1.3170199 Refined sugar 392 '000 tons 54,698 1.2844520 Textile spinning machines 206 units 51,741 1.1401120 Tires for buses or trucks 180,997 units 40,946 0.9260800 Zinc ores and concentrates 106,275 tons 39,881 0.9190530 Sweet biscuits, waffles and wafers 69,577 tons 39,148 0.9210690 Food preparations na na 37,770 0.8870899 Motor vehicle parts 2,786 tons 29,258 0.6852810 Butter 76,282 units 28,720 0.6040500 Digital auto data processing machines 8,619 tons 26,128 0.6847120 Fungicides 14,576 units 24,907 0.6380820 Washing and cleaning preparations 1,395 tons 23,614 0.5340220 Chewing gum 13,154 tons 23,246 0.5170410 Telephonic or telegrap. switching apparatus 3,776 tons 22,315 0.5851730 Herbicides 471 units 22,255 0.5380830 Automobiles w/engines > 1500-3000 cc 1,231 tons 22,090 0.5870323 Beer 1,793 units 20,463 0.5220300 Parts for line telephone or line telegraphy 5,170 '000 dal. 19,553 0.4851790 Uncooked pasta 247 tons 19,517 0.4190211 Toilet soap 24,556 tons 18,623 0.4340111 Television receivers 11,211 tons 18,403 0.4271000 Petroleum oils 39,390 tons 17,024 0.4841989 Machinery, plant/laboratory equipment 11 units 16,151 0.4070190 Potatoes 35,572 tons 14,297 0.3190110 Preparation of cereals 3,130 tons 14,014 0.3151710 Margarine 6,670 tons 13,734 0.3170490 Sugar confectionery 5,251 tons 13,544 0.3844630 Machines for weaving fabrics 1,160 units 13,293 0.3380810 Insecticides 924 tons 12,759 0.3848590 Machinery parts, non-electrical 1,336 tons 12,356 0.3620520 Mens/boys cotton shirts 538,199 units 11,719 0.3220210 Waters incl. mineral water 86,687 000 dal. 11,123 0.2847192 Input or output units 17,600 units 11,097 0.2847330 Parts of automatic data processing machines 883 tons 10,984 0.2840999 Parts for diesel and semi-diesel engines 3,809 tons 9,626 0.2180632 Chocolate 1,938 tons 8,851 0.2870322 Automobiles w/engines > 1000-1500 cc 983 units 8,673 0.2640519 Footwear 2,496 '000 pairs 8,598 0.2852520 Transmission apparatus 8,385 units 8,474 0.2841821 Refrigerators 76,685 units 8,264 0.2330610 Dentifrices 1,903 tons 8,179 0.2

Total value of selected products 1,264,410 28.0Total value of imports 4,518,691

Note: Criteria for including data series in the model were that (1) data series from UN data base must have complete data, and(2) data series from UN data base must appear reliable.Source: State Statistics Department.

41

Table 6.2Import Demand Functions for Selected Products

HS Price Income Summary StatisticsCode Description Elasticity Elasticity R2 D.W.

100190 Wheat and meslin -0.92 0.70 0.99 2.5100110 Durum Wheat -1.60 5.06 0.99 3.4843149 Parts of cranes and work-trucks -1.20 -- 0.99 3.2870210 Diesel powered buses -0.91 18.69 0.24 3.5170199 Refined sugar -1.01 0.58 0.88 2.1844520 Textile spinning machines -0.33 0.41 0.82 1.1401120 Tires for buses or trucks -5.77 0.73 0.74 1.6260800 Zinc ores and concentrates -3.58 0.14 0.41 1.5190530 Sweet biscuits, waffles and wafers -8.13 0.60 0.74 1.9210690 Food preparations -2.84 -- 0.99 2.1870899 Motor vehicle parts -0.81 0.16 0.83 2.3852810 Butter -10.90 -- 0.73 2.3040500 Digital auto data processing machines -1.56 -- 0.96 3.1847120 Fungicides -4.11 14.36 0.99 2.9380820 Washing and cleaning preparations -0.92 -- 0.94 1.3340220 Chewing gum -8.76 0.87 0.75 1.8170410 Telephonic or telegrap. switching apparatus -2.90 17.64 0.99 2.1851730 Herbicides -0.43 0.45 0.39 3.1380830 Automobiles w/engines > 1500-3000 cc -0.30 0.45 0.46 1.9870323 Beer -3.30 -- 0.97 2.5220300 Parts for line telephone or line telegraphy -1.21 -- 0.78 2.4851790 Uncooked pasta -0.63 0.20 0.35 1.1190211 Toilet soap -- -- 0.80 3.0340111 Television receivers -0.40 0.48 0.63 1.5271000 Petroleum oils -3.12 18.40 0.99 1.8841989 Machinery, plant/laboratory equipment -4.43 90.17 0.69 2.4070190 Potatoes -2.60 -- 0.61 3.3190110 Preparation of cereals -1.35 5.05 0.41 2.1151710 Margarine -3.79 -- 0.92 2.5170490 Sugar confectionery -2.29 0.42 0.77 2.7844630 Machines for weaving fabrics -3.47 0.63 0.60 2.1380810 Insecticides -1.15 0.51 0.97 1.4848590 Machinery parts, non-electrical -0.73 -- 0.87 2.8620520 Mens/boys cotton shirts -0.74 0.27 0.49 3.0220210 Waters incl. mineral water -3.77 -- 0.99 2.9847192 Input or output units -2.96 0.82 0.89 2.9847330 Parts of automatic data processing machines -3.89 1.34 0.93 3.0840999 Parts for diesel and semi-diesel engines -1.45 0.49 0.89 1.3180632 Chocolate -6.00 0.65 0.78 1.9870322 Automobiles w/engines > 1000-1500 cc -1.59 0.42 0.77 0.9640519 Footwear -1.61 0.40 0.91 2.2852520 Transmission apparatus -1.53 -- 0.86 3.3841821 Refrigerators -0.47 0.10 0.74 3.3330610 Dentifrices -4.85 0.75 0.72 3.2

a/ The lagged dependent variable was the only explanatory variable of significance in this equation.

-- Indicates that variable was not significant and was therefore was omitted from equation.

Note: See model spreadsheet for complete statistics of regression results.

42

7

Results of Alternative Tariff Strategies

As part of the WTO accession negotiations, Uzbekistan will be required to lock intariffs on individual products at rates that cannot be raised without consulting itstrading partners, or by compensating them through the reduction of other tariffs.Undoubtedly, one of the major contributions of tariff bindings is the greaterpredictability that they provide on market access conditions. Uzbekistan will haveconsiderable flexibility in structuring its tariff reductions, although the actualreductions will depend in large part on the agreement of its trading partners with newtariff proposals. This chapter examines five alternative tariff reduction strategies andthe different types of effects they could have. These strategies and effects arequantified in the accompanying model spreadsheet.

Strategy A Apply a uniform reduction to tariffs for all products

Example: Determine an average percentage rate by which to reduce tariffs andreduce each tariff by that amount.

Strategy B Adopt a single rate for all products based on a new overall unweightedaverage tariff rate for all products.

Example: Lower the current unweighted average tariff for Uzbekistan's selectedproducts by a specified amount, and apply the new unweighted average tariff to allgoods.

Strategy C Apply a lower tariff to raw materials and intermediate products thanto final goods.

Example: Cut tariffs on factor inputs by a uniform 50 percent and those onfinished goods by a smaller rate.

Strategy D Adopt a two-tier tariff rate system, the first rate applicable to factorinputs, the other applicable to final products.

Example: Tariff rates are determined for factor inputs and for final products.

Strategy E Eliminate tariffs for certain products.

Example: Implement zero-rate tariffs for certain products, such aspharmaceuticals, medical equipment, construction equipment, agricultural

7. Results of Alternative Strategies

43

equipment, furniture, paper, steel and toys. For the other products, define the tariffon inputs and the tariff on final products.

7.1 Objectives of a Tariff Strategy

The strategy that Uzbekistan adopts should favor a simplified tariff structure to ensurethat importers can take full advantage of the improved market access conditions thatwill result from trade liberalization. Weighing the tariff regime in favor of atransparent system has been supported by the IMF’s trade policy advice to the newlyindependent states (NIS) (for a review of those trade policy, see Leidy and Ibrahim,1996). A new tariff structure should also be examined in terms of the impact it willhave on the economy. Given that the model used in this exercise is a partialequilibrium model, a revised tariff structure can be examined in terms of its effects on(a) trade creation, (b) trade diversion, (c) government revenue, and (d) the balance ofpayments.

Finally, as required of all countries, tariff bindings on agricultural products areassumed to cover 100 percent of the HS tariff lines for those types of products. Forindustrial products, the bindings are assumed to equal 75 percent of the tariff lines inthose types of products, which is the average of the 26 developing countries includedin the WTO Integrated Database (as reported by Shiells, Subramanian, and Uimonen,1996). The time-path of the estimated changes in Uzbekistan’s trade will depend notonly on the adjustments that occur in tariff reductions, but also on the implementationperiod of the tariff reductions.

7.2 Direct Trade Effects

Table 7.1Effects of Trade Liberalization through 2020(millions of US$)

Trade Trade Balance of Government ConsumerCreation Diversion Payments Revenue Welfare

TC TD BP GR CWFree Trade 2,484 -45.9 -2,438 -539 356Strategy A 357 -13.8 -343 -635 14Strategy B 1,428 0.4 -1,428 573 109Strategy C 838 -13.7 -824 88 24Strategy D 1,152 -1.5 -1,150 318 74Strategy E 1,123 -2.0 -1,121 298 68

This section evaluates the impact of five alternative trade liberalization schemes onthe level and distribution of Uzbekistan's trade using data from the United Nations for44 imported products. The simulations apply the same timeline of tariff reductions(10 years), which allows the dynamics underlying the adjustment of trade to the tariff


44

cuts to be evaluated. Table 7.1 summarizes the tariffs to be applied to the 44 selectedproducts as a result of the alternate liberalization schemes, while Tables 7.2-7.6 showthe impact of the different schemes on trade creation, trade diversion, balance ofpayments, government revenue and consumer welfare.

7.2.1 Effects of Uniform Tariff Reduction: Strategy A

A 30 percent tariff cut on each product would lead to a US$357 million increase inimports after a 10-year implementation period. About $14 million of preferential tradewould shift to the multilateral trading system. The Government’s revenue from duties and indirect taxes would decrease by US$634 million, and consumers would benefitby US$14 million.

The largest increases in trade would takeplace in beer, chewing gum, sweet biscuitsand mineral water. In those cases whereimporters have a low response to pricechanges (i.e., where the price elasticity ofimport demand is less than unity), the valueof imports would actually fall. This wouldoccur in wheat, buses, textile machines,automobiles, herbicide, motor vehicle partsand television receivers. The results forthese products may, however, be misleading

since there could be an asymmetrical response to price changes. For example, whenprices of automobiles and television receivers rise, consumers may reduce theirpurchases of those goods by a less-than-proportional amount of the price rises.However, when prices fall they may expand their consumption of those goods by anamount that is more than proportional to the price declines.

7.2.2 Effects of Tariff Reductions to a Single Rate: Strategy B

The application of a single tariff rate of 10 percent to all products, representing anaverage 30 percent tariff cut on all products, would have an overall positive effect onimports. The reason is that high rates of duty are currently applied to many of theproducts chosen for the study sample. For those products, the current strategy wouldlower their duties and raise imports of those goods. As tariffs for some productsdeclined, importers would shift to preferential markets with the result that overallimports from preferential suppliers would expand by US$3.8 million dollars over the10-year implementation period.

-800 -600 -400 -200 0 200 400

(mill. US$)

CW

GR

BP

TD

TC

Figure 7.1Effects of Strategy A through 2020


45

The reduction in imports from non-preferential suppliers would lead to lowergovernment collection of duties andindirect taxes, and consumer welfarewould be reduced as the cost of importsrose. Imports of some products withcurrently high tariff rates would,nevertheless, expand. A 25 percent tariff ispresently applied to sugar and imports ofthis product would increase considerablyunder a 6.4 percent tariff rate. Similar

increases would take place in milk, buttermilk, footwear, poultry legs, and cigarettes.Despite the sharp cutback in the tariff applied to liquor and spirits, the lowresponsiveness of these imports to price changes would result in a lower value ofimports. The response of this product to price reductions is suspect, however, since asmentioned earlier there may be an asymmetrical response to price movements inliquor and spirits.

7.2.3 Effects of Tariff Reductions with Tariff Escalation: Strategy C

Tariff escalation usually results in larger effective rates of protection since high tariffsimposed on final products are combined with low tariffs on inputs. From theexporter’s point of view, tariff escalation effectively acts as a disincentive to

exporting products having a higher value-added content as opposed to raw materials.In contrast, from an importer’s point of view, tariff escalation promotes infantindustries and those industries with exportpotential by allowing their inputs to betaxed at a lower rate than competingfinished products, which are taxed at ahigher rate.

The simplest form of tariff escalationunder the WTO negotiations involves lowering tariffs on inputs by a larger percentagerate than those on final products. If the tariff rates on the selected group ofUzbekistan's imports of raw materials and intermediate goods (i.e., inputs) werelowered by 50 percent and those on final goods were reduced by 25 percent, importswould expand for both of these types of goods.

-1000 -500 0 500 1000

(mill. US$)

CW

GR

BP

TD

TC

Figure 7.3Effects of Strategy C through 2020

-1500 -1000 -500 0 500 1000 1500

(mill. US$)

CW

GR

BP

TD

TC

Figure 7.2Effects of Strategy B through 2020


46

7.2.4 Effects of Tariff Reductions to Two-Tier and Zero TariffStructures: Strategies D and E

The application of two and three tariffrates, with the latter incorporating zerotariffs on medical equipment yieldspositive results for the creation of trade.Under a two-tier tariff structure, a 5percent tariff would be applied toimports of inputs, and a 14 percent tariffwould be applied to imports of finalproducts. Under the three-tier tariffstructure that includes a zero tariff rate,a zero tariff would be applied to medicalequipment. For the other products, a 5percent tariff would be applied to inputsand a 14 percent tariff would be appliedto final products. The overall cutback intariffs under these two strategies wouldequal 30 percent. The results are similarto those shown under the option withtariff escalation (Strategy C), althoughthe trade diversion effects are smaller.

7.3 Implications

The impact of Uzbekistan's WTO membership on the structure of trade and on theoverall economy will largely derive from the effects of lowered tariffs. The revisedtariff structure will reduce the costs of imported raw materials and capital goods usedfor productive activities, lower the prices for consumer goods, improve resourceallocation, and stimulate economic growth. At the same time, Uzbekistan is likely toconfront some structural effects from the new international trading relationships withWTO member countries. First, there is likely to be a loss of differential tariff rateswith major CIS trading partners as those countries join the WTO and undertake tariffcuts on a MFN basis. Preferential trade arrangements are therefore likely to becomeless significant to Uzbekistan as tariff differentials between member and non-membercountries are lowered.

Second, Uzbekistan's trade potential with non-CIS countries, and specifically, withmarket economies, is likely to be realized by shifting trade from CIS countries totrade with other countries, rather than increasing the level of total trade. While thisshift will represent a challenge, Uzbekistan has already begun to diversify its marketsand strengthen trade with non-traditional partners. The country will continue tobenefit from the increased availability of different types of goods from non-

-1200 -600 0 600 1200

(mill. US$)

CW

GR

BP

TD

TC

Figure 7.4Effects of Strategy D through 2020

-1200 -600 0 600 1200

(mill. US$)

CW

GR

BP

TD

TC

Figure 7.5Effects of Strategy E through 2020


47

preferential markets at possibly lower prices and higher qualities. Imports of cheaperfactor inputs from these sources will improve the country’s competitiveness in bothits domestic and foreign markets. On the export side, Uzbekistan will benefit fromnon-discriminatory trade based on MFN treatment, which ensures that no WTOtrading partner will be able to discriminate against Uzbekistan by imposing highertrade barriers against it than are applied to other countries. Uzbekistan will alsobenefit from non-discriminatory trade based on national treatment, which ensures thatits exports are guaranteed treatment equivalent to that given to domestic products.

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Annex

User Notes for Spreadsheet Model

The analytical model contained in the accompanying spreadsheet file was developedwith the assistance of USAID as a quantitative tool to assist the Government ofUzbekistan in assessing the effects of trade liberalization on its economy. As such,the model incorporates estimates that take into account the benefits of tradeliberalization and changes in the levels of import absorption arising from marketaccess concessions. On the basis of these estimates, Uzbekistan may then formulateits own tariff policies regarding bindings and reductions of tariff rates. The intent ofthe model is not to advise the Government of Uzbekistan on a specific negotiationposition regarding tariff bindings and reductions, but rather to offer an analytical toolfrom which to examine alternative liberalization strategies.

1 Layout of Spreadsheet Model

The spreadsheet model is organized according to pages that are listed in an outlinecontained in the second page of the spreadsheet file. Each page following the pagenamed 'Summary2' represents a step in the sequence that the user should follow whenaltering the model with new data. Some steps require the user to input new data orenter parameters to be used in the calculations. Other steps require no action from theuser since the results are automatically calculated from other information. Thefollowing paragraphs explain in a sequential manner the contents of each page of thespreadsheet file, and make reference to the corresponding chapter in theaccompanying report that provides the theoretical background and methodology usedin the model.

2 Summary of Results

The pages named 'SUMMARY1' and 'SUMMARY2' present an overview of themodel calculations. The 'SUMMARY1' page shows the total impact on the importvolume, value and price of products from the five alternative trade liberalizationstrategies discussed in Chapter 5 of this report. Note that the title of the table andgraph should be changed on both pages if the user changes the end date of thesimulation on subsequent pages. The note referring to the number of years for theimplementation period should also be changed if altered by the user on subsequentpages.

Annex. User Notes for Spreadsheet Model

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3 Organization of Data

Step 1: Collect import-value data from official government sources for the mostrecent year available and enter those data into the page named 'Imports_Top100'. Thedata should then be ranked in a descending order. For illustrative purposes, thepresent model uses 1996 data for all imports collected from the State Statistics Officeof the Government of Uzbekistan. The 100 products were chosen and then rankedaccording to their import value. For future extensions of the model, any number ofproducts can be selected.

Step 2: Choose a subset of import products having acceptable time-series data thatwill be used as the basis for the spreadsheet model (see the paged named'Imports_Selection'). The criteria for selecting the time series are that: (1) the dataseries must be complete (i.e., there should be no missing data points in any givenyear), and (2) the data series must be reliable (e.g., there should be no large outliers inthe time series). The user should keep in mind that a minimum of five data points arerequired for regression analysis and that either quarterly data or annual data can beused. Data for the period 1992-96 from the United Nations, COMTRADE databasewere used in the illustrative spreadsheet model, since time series data were notavailable from the Government of Uzbekistan at the time the present study wasundertaken.

Once the products are selected, the user should enter the data in the page named'Estimation' as follows:

Input the volume and value data series for each product, and calculate the unitprice series for each product.

Maintain consistency among series names: for example, Q1 refers to thevolume series for the first product, V1 refers to the value series for the firstproduct, and P1 refers to the price series for the first product.

Change the years listed under 'Actual Data' and 'Estimated Data', and thedescriptions of the series.

Update the date for pre-determined variables, such as GDP and the pricedeflator.

Step 3: Determine the share of the selected subset of imports originating frompreferred suppliers. The user can either input the share in Cell D7 of the page named'Imports_Preferred', or calculate that share. Since import data for preferred supplierswere not available at the time of model preparation, it was assumed that Uzbekistanimports 20 percent of the selected goods from preferred suppliers. This information isused later in the model to calculate the trade diversion effect, as described in Chapter5 of the report.


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4 Regression Analysis

Step 4: First copy the time-series data for the volume, value and price data for eachproduct and the data for pre-determined variables from the 'Estimation' page to theeconometric software program EVIEWS, which is used to estimate equations for themodel. The user should refer to pages 104-106 of the EVIEWS User's Manual fordetails on uploading the data. Once a workfile has been created in EVIEWS, the usershould estimate an import demand equation for each data series, naming thoseequations EQ1 for the first product, EQ2 for the second product, etc. In theillustrative model developed as part of this study, 44 equations were estimated andsaved with the time-series data in a workfile named 'uzbek.wf1'.

The specification for the import demand equation is defined in equation (6.1) ofChapter 6 in this report. The order in which the search for the final equation mining isperformed is as follows:

Find the initial equation by specifying the dependent and independent variablesaccording to the series names defined by the user and following the instructions inthe EVIEWS manual on page 151. Ensure that a logarithmic specification is usedto allow calculation of elasticities:

Object/New Object/EquationLOG(Q1) LOG(P1/PD) LOG(Y)

where LOG(Q1) is the logarithm of the dependent variable, i.e., the quantity ofimports of Product 1; LOG(P1/PD) is the logarithm of the independent variable,the price of imports of products 1 divided by the deflator; and LOG(Y) is thelogarithm of the independent variable, income.

After viewing the initial estimate in EVIEWS, the user should ensure that: (1) thesigns on the price and income variables are correct; (2) the t-statistics indicate thatthe variables are significant; and (3) that the test statistics are reasonable.

The user should then view the graph of the estimate in EVIEWS by issuing thecommands View/Actual,Fitted,Residual/Graph. If there are outlying data points,the user should either reset the range of the equation or possibly include a dummyvariable.

If necessary, the user can add a lagged dependent variable to the equation or alagged income variable, or delete the constant as a last resort. As an example, thefinal equation generated for the first product of the model developed as part ofthis study was as follows:

LOG(Q1) LOG(P1/PD) LOG(Y(-1)) D95


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EVIEWS automatically saves each equation, overwriting previous estimates. The usershould then transfer the equation results to the spreadsheet page named'Regression_Results' by issuing the following commands in EVIEWS: Freeze/Edit +/-Then the user should highlight the first coefficient and type Ctrl+C to copy the data,and paste (Ctrl+V) the data to the corresponding column in the 'Regression_Results'page of the spreadsheet model in the appropriate column. For example, the coefficientof -0.924303 was copied and then pasted to the column named 'ln(P/D)' in the'Regression_Results' page. The test statistics can be typed in by hand or copied in asimilar manner.

5 Entering Regression Results into the Spreadsheet Model

Step 5: Working from the coefficients entered in the page named'Regression_Results', enter the formula to estimate the first year of volume data forthe first product, and copy that formula throughout the estimated time period. In thepresent model, the following formula was entered in cell I23 and copied from cellsI24 to I46:

=EXP(Regression_Results!G$9*LN(Estimation!J23/D23)+Regression_Results!J$9*LN(Estimation!C22)) = 934,089

The user can perform a check to verify that the formula entered is correct: first returnto EVIEWS and issue the commands View/ Actual,Fitted,Estimated / Table,Graphand choose Graph. Then, the user should make note of the last value of fitted data.Return to the spreadsheet and in a cell below the data series containing the formula,enter the anti-log of that fitted value. If the result matches the value calculated fromthe formula, then the calculation is correct. If a lagged variable is included in theequation, the match will not be exact. For example, this test yielded the followingresults for the import volume estimate for product 1 in our spreadsheet model:

=EXP(13.7354) = 923,014

The price series is held constant throughout the estimated period, and the value seriesis derived from the volume and price series. The same sequence of steps should beperformed for each product.


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6 Defining Parameters for Selected Products

Step 6: Input the current import tariff for each selected product in the page named'Current_Tariffs'. On the same page, define whether each product is an input or finalproduct by typing 'input' or 'final product' next to its description.

7-13 Alternative Tariff Reduction Strategies

Steps 7-13: After changing the years in the column header for actual and estimateddata on each page, the user should follow the instructions noted at the top of eachpage. For example, Step 7 on the page name 'Base' requires no action on the part ofthe user. Step 8 on the page named 'Free Trade' first requires the user to copy theformula with the regression result entered from the 'Estimation' page to the firstestimated year in the volume series for every product and copy that formula to the lastyear of estimated data. The cell address of the price variable must then be changed toreflect the price variable on that page.

Step 9 on the page named 'StrategyA' requires the user to first copy the equationfrom the page named 'Estimation' as in the previous step and change the cell addressof the price variable to reflect the price series on this page. The same procedure isfollowed for every product. Then, the user must enter the amount of the tariff cut inCell C10 and the number of years for the implementation period in Cell C11. Theuser should make similar changes in Steps 10-13, following the instructions noted atthe top of the page. It is suggested that the user enter the same number for the tariffcut on each page so that the results can be compared across scenarios.

14-28 Results of Alternative Tariff Reduction Strategies

Steps 14-28: The results of the model simulations for alternative tariff reductionstrategies are presented in Steps 14-26. There is no action required of the user. Tobetter understand the results presented in Steps 16-21, the specifications for thedifferent types of effects are presented in the page named 'Specifications', which areelaborated upon in Chapter 5 of this report. Summaries of the simulation results arepresented at the beginning of the spreadsheet model in the pages named'SUMMARY1' and 'SUMMARY2'.

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References

Balassa, B. (1965), "Trade Liberation and `Revealed' Comparative Advantage",The Manchester School of Economic and Social Studies, 33: 99-124.

Baldwin, R.E. and T. Murray (1977), “MFN Tariff Reductions and Developing Country Trade Benefits under the GSP”, Economic Journal 87.

Boye, G. and M. Lord (1994), “The Impact of GATT/WTO MembershiponAgricultural Trade in the Philippines.” Report presented toUSAID/Philippines. September 1994.

Boye, G. and M. Lord (1995), “The Economic Impact of GATT/WTO Membership on Jordan: An Assessment”. Report presented toUSAID/Jordan. July 1995.

Boye, G. and M. Lord (1996a), "The Economic Impact of WTO Membership onKazakstan." Report presented to USAID/Almaty. December 1996.

Boye, G. and M. Lord (1996b), "The Economic Impact of WTO Membership onKyrgyzstan." Report presented to USAID/Almaty. December 1996.

Deardorff and Stern (1997), "Measurement of Non-Tariff Barriers". Paris. OECDWorking PaperGD(97)129.

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Laird, S. (1996), "Quantifying Commercial Policies". World Trade Organization,Trade Policies Review Division. Staff Working Paper TPRD-96-001.

Laird, S. and A. Yeats (1986), “The UNCTAD Trade Policy Simulation Model: A Note on the Methodology, Data and Uses”. Geneva: UNCTAD Secretariat.Discussion Paper No. 19. CE.86-57273.

References

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Laird, S. and A. Yeats (1990), Quantitative Methods for Trade-Barrier Analysis.New York: New York University Press).

Leidy, M. and A. Ibrahim (1996), “Recent Trade Policies and an Approach to Further Reform in the Baltics, Russia, and Other Countries of the FormerSoviet Union”. Washington, DC. IMF Working Paper WP/96/71 (July1996).

Lord, M. (1988), “Imperfect Competition and Optimal Trade Policies”. Paper presented at the North American Meeting of the Econometric Society.New York, 28-30 December.

Lord, M. (1989a), “Product Differentiation in International Commodity Trade”. Oxford Bulletin of Economics and Statistics. Vol 51 (1).

Lord. M. (1989b), “Optimal Trade Policies in Developing Countries”.Paperpresented at the Conference on International Trade of the AppliedEconometrics Association. Montreal, 27-29 September.

Lord, M. (1990), “The Impact of Trade Liberalization in Agricultural Products”. In Trade Liberalization in the 1980s. Edited by H.W. Singer, N. Hatti, andR. Tandon. New World Order Series, Vol. 8. New Delhi: Indus PublishingCompany.

Lord, M. (1991), Imperfect Competition and International Commodity Trade:Theory, Dynamics, and Policy Modelling. Oxford: Clarendon Press.

Lord, M. (1992), “Imperfect Competition and Developing Countries’ Trade”. Paper presented at the American Economic Association Meetings, NewOrleans, 3-5 January.

Lord, M. (ed.) (1998), The Handbook of Latin American Trade in Manufactures.Cheltenham: Edward Elgar Publishing.

Lücke, M. (1997), "Accession of CIS Countries to the World TradeOrganization". Kiel Institute of World Economics, Working Paper No.796.

Murray, T. (1987), "Post-War Industrialization: Patterns and Performance",World Bank Background Paper.

Roussslang, D. and S. Parker (1984), “Cross-Price Elasticities of U.S. ImportDemand”, Review of Economics and Statistics LXVI (3): 518-23.

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Shiells, C.R, A. Subramanian and P. Uimonen (1996), “Effects of the Uruguay Round on Egypt and Morocco”. Washington, DC: IMF Working PaperWP/96/7 (January 1996).

Whalley, J. and C. Hamilton (1996), The Trading System After the UruguayRound. Washington, DC: Institute for International Economics.

Yeats, A. J. (1995), "Are Partner-Country Statistics Useful for Estimating'Missing' Trade Data?" Washington, DC: World Bank Policy ResearchWorking Paper No. 1501.

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