Tax Policy and Trade Liberalization: An Application to Mexico

IMF Working Papers, December 1, 1992

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Tax Policy and Trade Liberalization: An Application to Mexico

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Bibliographic details

• Authors: Andrew Feltenstein
• Published: December 1, 1992
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451853025.001

Summary

• A dynamic general equilibrium model of an open economy is constructed and used to examine issues of trade liberalization in Mexico.
• The analysis focuses on the fiscal implications of quotas and tariffs and the effects of their removal.
• Key caution: the results are highly sensitive to behavioral shifts in exports given the nature of the trade reform being undertaken.

Major findings

• In the short run, there may be negative revenue effects from tariff liberalization.
• To compensate for revenue losses from tariff reduction, it may be necessary to raise domestic taxes in the short run.
• The magnitude and direction of fiscal effects are highly sensitive to behavioral shifts in exports; such shifts are quite likely.

Policy implications and recommendations

• Prepare for possible short-run fiscal revenue shortfalls following tariff liberalization.
• Consider temporary or permanent adjustments to domestic tax policy to offset tariff revenue losses.
• Monitor export behavior closely during and after trade liberalization, since export responses critically affect fiscal outcomes.