## Tariff-Tax Reforms in Large Economies

_IMF Working Papers, May 1, 2012_

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## Bibliographic details
- Authors: Juha Tervala, Giovanni Ganelli
- Published: May 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475503944.001

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### Summary and research question
- Studies tariff-tax reforms in a calibrated two-region global New Keynesian model composed of a developing and an advanced region.
- Focuses on how tariff reductions interact with consumption taxes under alternative reform designs (revenue-neutral reforms and "point-for-point" reforms) and with nominal rigidities.

### Main findings
- In the baseline calibration, a revenue-neutral reform that lowers tariffs in developing countries can reduce domestic welfare.
- The welfare loss in developing countries arises because the increase in welfare from higher output is dominated by welfare losses stemming from the deterioration of the terms of trade.
- The same revenue-neutral reform increases output and welfare in the advanced countries and in the world as a whole.
- The highlighted effects differ from prior literature that typically uses a small open economy framework and therefore do not capture these two-region interactions.
- Nominal rigidities have important implications for adjustment dynamics:
  - In the case of a "point-for-point" reform, price stickiness implies that the international dynamics of output is reversed compared to a revenue-neutral reform.

### Policy-relevant implications
- Tariff reductions in large developing economies may not unambiguously raise domestic welfare if implemented as revenue-neutral reforms; terms-of-trade effects can outweigh output gains.
- Assessments of tariff-tax reforms for large economies should account for general equilibrium international terms-of-trade effects rather than rely on small open economy intuition.
- The presence of nominal rigidities and the design of the reform (revenue-neutral versus point-for-point) critically affect short- and medium-run adjustment dynamics and cross-border spillovers.

### Model and keywords
- Model: Calibrated two-region global New Keynesian model (developing region and advanced region).
- Subjects: Consumption, Consumption taxes, International trade, Labor, Labor supply, National accounts, Tariffs, Taxes, Terms of trade.
- Keywords: Consumption, consumption tax, Consumption taxes, expenditure switching, Global, imperfect competition, Labor supply, liberalization effort, open economy macroeconomics, point-for-point reform, reform fall, tariff rate, tariff reduction, Tariff-tax reform, Tariffs, Terms of trade, terms-of-trade effect, trade liberalization, trade negotiations, WP.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/tariff-tax-reforms-in-large-economies-25948_