The report's on-line summary had contrasted the net gains to developing countries from the Doha Round trade agreement with the tariff losses these countries would face. I wrote, "Do the authors compare projected net gains from trade to tariff revenue losses? If so, that would be misleading."
Tim writes by email:
I'm afraid Parke Wilde may have misconstrued the point of our comparison of estimated net gains from trade liberalization with tariff losses for developing countries. The point was not that the two numbers are directly comparable, as on a true balance sheet. Rather, the point was that the net gains estimated by the trade models include a host of hidden costs that are effectively assumed away in the modeling. One of those is losses in government revenues from reduced or eliminated tariffs. How are they assumed away? The models assume fixed fiscal balances, which means in practice that such losses in government revenue are assumed to be made up in lump sum taxes. In developing countries, where governments on average get about 20% of their revenues from tariffs and where the infrastructure and income base for taxation do not yet exist, that is an absurd assumption. (It's pretty absurd for other countries as well, including the U.S. When was the last substantial tax increase happily approved by our government?) So the "net gains" account for the tariff losses, they just do so in a way is unrealistic and that makes them invisible. Our goal was to make them visible.
For a developing country negotiator evaluating his/her country's prospects under the proposed WTO agreement, pulling out those hidden costs from the modeling is very germane to the decision. Comparing those hidden costs to the small projected income gains from such an agreement is a simple and clear way to put such numbers in meaningful perspective. Countries are not oil companies, and their "management" does not run in any direct way on their "profits" from economic activities. Signing away 20% of your government's operating income in a trade agreement that promises only limited income gains may be a good economic decision in some extreme circumstances, but it should be one made with the full knowledge of its costs.
Meanwhile, if you like the "fixed fiscal balances" assumption in the modeling, you'll love the "fixed employment" assumption, which ensures that in the modeling world if not the real world, trade liberalization can't cause unemployment.
Deputy Director, GDAE