Denise Eby Konan

Quantifying the Impact of Services Liberalization in a Developing Country

The authors consider how service liberalization differs from goods liberalization in terms of welfare, the level and composition of output, and factor prices within a developing economy, in this case Tunisia. Despite recent movements toward liberalization, Tunisian service sectors remain largely closed to foreign participation and are provided at high cost relative to many developing nations. The authors develop a computable general equilibrium (CGE) model of the Tunisian economy with multiple products and services and three trading partners. They model goods liberalization as the unilateral removal of product tariffs. Restraints on services trade involve both restrictions on cross-border supply (mode 1 in the GATS) and on foreign ownership through foreign direct investment (mode 3 in the GATS). The former are modeled as tariff-equivalent price wedges while the latter are comprised of both monopoly-rent distortions (arising from imperfect competition among domestic producers) and inefficiency costs (arising from a failure of domestic service providers to adopt least-cost practices). They find that goods-trade liberalization yields a gain in aggregate welfare and reorients production toward sectors of benchmark comparative advantage. However, a reduction of services barriers in a way that permits greater competition through foreign direct investment generates larger welfare gains. Service liberalization also requires lower adjustment costs, measured in terms of sectoral movement of workers, than does goods-trade liberalization. And it tends to increase economic activity in all sectors and raise the real returns to both capital and labor. The overall welfare gains of comprehensive service liberalization amount to more than 5 percent of initial consumption. The bulk of these gains come from opening markets for finance, business services, and telecommunications. Because these are key inputs into all sectors of the economy, their liberalization cuts costs and drives larger efficiency gains overall. The results point to the potential importance of deregulating services provision for economic development.

Joint Trade Liberalization and Tax Reform in a Small Open Economy: The Case of Egypt

We develop a computable general equilibrium model of the Egyptian economy. The model is suitable for analyzing the impacts of reforms in the tax system, the trade-policy regime, or both taken together. A two-sector, general-equilibrium model is presented diagrammatically to illustrate the separate and joint effects of distortionary capital taxes, consumption taxes, and tariffs. Thus, trade or tax reform may be undertaken conditionally upon maintenance of the other distortions or may be undertaken in a combined policy package. We compute the welfare gains from various policy changes, along with impacts on the real exchange rate and on real factor prices, allowing tax rates to vary endogenously to satisfy a fixed real revenue target for the Egyptian government. Scenarios include removal or unification of the consumption tax, the capital tax. Or both, and tariff unification, a free-trade agreement with the European Union, and unilateral tariff elimination. Welfare effects depend critically on the reform undertaken and the type of replacement tax. While both are important, neither trade-policy reform nor tax reform dominates. We also calculate interaction effects between policy regimes.

Intellectual Property Rights in China: The Changing Political Economy of Chinese-American Interests

We review the evolution of modern Chinese intellectual property right (IPR) laws and enforcement and explore economic and political forces involved in international conflicts over Chinese IPR protection. Our analysis considers why the US and China moved from conflict to cooperation over intellectual property rights. Structural and institutional aspects of the political economy of IPRs within each country are considered, and data on Chinese-US trade in intellectual property-intensive goods are examined. We conclude that although enforcement of IPRs within China continues to be relatively weak, Chinese IPR institutions are converging on those in the OECD nations.

Trade Liberalization in Egypt

A computable general equilibrium model of Egypt is developed to analyze proposed reforms in its trade policies, including a partnership agreement with the European Union. The model has multiple trading regions and allows for administrative trade barriers and tariffs. The paper reports computations of the revenue impacts of trade liberalization and the required changes in distortionary commodity taxes to maintain a fixed real government budget. Egypts greatest potential gains come from removing its administrative trade barriers while adopting globally free trade. The partnership agreement with the EU could lower or raise Egypts welfare, depending on prior trade reform. Copyright 1997 by Blackwell Publishing Ltd

Prospects for FDI in AFTA

A growing proportion of international trade within ASEAN occurs within multinational enter prises. This article reviews the present trade and foreign investment environment within ASEAN, and analyses the impact of an ASEAN Free Trade Agreement (AFTA) on foreign investment in the region. We anticipate that a reduction of regional trade barriers could make Southeast Asia a more attractive investment destination to service ASEAN consumers, and integrate production processes within the region. Some indications about potential changes in the allocations of investment within the region are also provided.

The Vertical Multinational Enterprise and International Trade

This paper analyzes an endogenous vertical multinational enterprise by explicitly modeling a distortion in the intermediate goods sector. Firms invest abroad to lower the cost of multistage production. The implications for international trade and investment differ markedly from the conventional wisdom of multinationals. Particularly, intrafirm trade in intermediates implies vertical investment complements rather than substitutes for trade. The decision to become a multinational depends on the level on foreign factor prices, the nature of the competition with foreign suppliers, transport, tariffs, and subsidiary plant costs. Marginal change in tariff may result in unintended welfare jumps as firm configuration shifts.

Strategic taxation of the multinational enterprise: A new argument for double taxation

Abstract This paper analyzes the social welfare effects of multinational enterprise taxation by home and host governments. In a general equilibrium model, direct foreign investment arises to employ a firm-specific asset abroad. Either a tax credit or deduction for foreign taxes paid results in the host fully taxing locally earned economic profits. Welfare, endogenous market structure, and profit results are identical in tax credit and deduction regimes. Because it lowers host government taxation in the subgame-perfect equilibrium, double taxation of foreign-earned profits emerges as a weakly dominant strategy for the source government.

TRANSPORTATION AND TOURISM IN HAWAII: COMPUTABLE GENERAL EQUILIBRIUM MODEL

Using data from the state of Hawaii input-output (I-O) table, the economic impact of the transportation sector in Hawaii was described, modeled, and forecast under a number of alternative scenarios. Transportation is compared with the key economic sectors in the state in output, exports, household consumption, visitor spending, number of employees, and compensation of employees. Next, the overall transportation sector was disaggregated into key activities and functions to present a more complete picture of the important role of transportation in Hawaii. A computable general equilibrium (CGE) model of the economy with a special focus on transportation is developed. Because tourism is the states leading sector, the effects of both an increase and a decrease in visitor expenditures were modeled. Both measuring the economic importance of transportation in Hawaii and estimating probable consequences of potential economic changes are of interest. The visitor industry dominates Hawaiis economy, with small increases in visitor expenditures contributing significantly to the gross state product. Transportation industries, along with restaurant and accommodation services, account for a disproportionately large share of this growth. Key residential transportation sectors (transit and motor vehicles) contract in response to cost increases generated by a growth in visitor demand. The use of the I-O table and CGE modeling provides a useful analytical and planning tool for evaluating economic scenarios within a region such as Hawaii. The increased availability of both data sets and new modeling techniques offers opportunities to planners, engineers, and transportation policy makers.

The Need for Common Investment Measures within ASEAN

A growing proportion of international trade within the Association of Southeast Asian Nations (ASEAN) occurs within multinational enterprises. In an effort to liberalize trade policy within the region, policies governing direct foreign investment should also be evaluated. ASEAN governments have achieved a significant level of convergence in investment policy regimes through unilateral reforms. One outcome of this non-cooperative approach, however, has been an unusually high level of investment incentives within ASEAN. This article evaluates investment regimes within ASEAN and considers the likelihood of a regional agreement on investment measures.

Preferential Trade and Welfare with Differentiated Products

We consider analytically and numerically the welfare tradeoffs inherent in a preferential trade area (PTA) with products differentiated by region of origin. For a small open economy in such a setting, welfare gains are associated with higher trade volumes within the PTA. However, welfare losses are induced by declining tariff revenues on trade with nonmember countries. We show that both effects are concave, while one is a non-monotonic and the other a potentially non-monotonic function of pre-PTA partner trade shares. Therefore, the relationship between initial partner import shares and direct static welfare impacts of a PTA are theoretically ambiguous. This finding contrasts with conventional results in the homogeneous-goods case, whereby the smaller is the pre-agreement trade volume with a potential partner the more beneficial is a PTA.