Properly capturing tariff rate quotas for trade policy analysis in computable general equilibrium models

Abstract

Computable general equilibrium (CGE) models are generally used to conduct trade policy analysis; however, given the complexity in data collection and modeling, tariff rate quotas (TRQs) are often simplified in these models. However, TRQs are crucial for trade negotiations because they are rarely completely liberalized and often the obstacles to negotiations. We propose an approach to model TRQs explicitly and at the product level within CGE models and compare with previous approaches that considered an explicit (or implicit) representation at the tariff line or sector level. Using the Canada–EU trade agreement as an example, we find significant aggregation bias if TRQ shocks are implemented at the aggregate sectoral level. This bias is only partially eliminated if TRQs are implicitly represented by ad-valorem equivalents at the tariff line. Our findings suggest the need to represent TRQs explicitly at the relevant commodity detail in trade impact assessments.