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GTAP Model: FTA, Foreign Transfers and Tax Policy

GTAP Model: FTA, Foreign Transfers and Tax Policy. Motivation. Trade liberalization entails revenue shortfalls. Compensation could come from Tax Replacement Foreign Transfers Questions: Are tax replacement and foreign inflows the same? Do they have similar implications?.

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GTAP Model: FTA, Foreign Transfers and Tax Policy

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  1. GTAP Model: FTA, Foreign Transfers and Tax Policy

  2. Motivation • Trade liberalization entails revenue shortfalls. • Compensation could come from • Tax Replacement • Foreign Transfers • Questions: • Are tax replacement and foreign inflows the same? • Do they have similar implications?

  3. Modeling Aid Inflows and Taxes • The three scenarios under the EU-Morocco FTA Case 1: Fiscal deficit with no tax compensation. • tp exogenous and swapped with del_ttaxr Case 2: Tax replacement compensating tariff revenue shortfall and zero-fiscal deficit. - Prof. Hertel’s model Case 3: Transfers to Morocco that compensate for tariff revenue shortfall of $1.4 bn. • Shock incomelack for Morocco (4.2%), for EU (-0.02%) and ROW (0%). • Walras condition is satisfied.

  4. Aid is accompanied with a loss of competitiveness.....

  5. which in turn encourages imports at the expense of exports.....

  6. But... what about domestic production? .....In this model, transfers discourage production....

  7. Consumption absorbed the transfers..... And generated some inflationary pressure.....

  8. Summing up Tax replacement and foreign inflows yield to different outcomes. Foreign inflows translated into Consumption boost Output decline Loss of competitiveness And mild inflation But.... Welfare increased!!!!!!!

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