.

1. The Evolution of Estimates of
the Welfare Gains from Trade
Liberalization
David G. Tarr
Presentation at the EERC Final Conference
Hilton Hotel, Kiev, Ukraine
May 21, 2016

2. First paper to develop a methodology to estimate
the costs of trade restrictions was by Max Corden.
• W. Max Corden (1956), Economic Record.
• Very simple model by today’s standards
• Partial equilibrium, homogeneous goods, perfectly elastic foreign
supply curve.
• Welfare costs were Harberger triangles of consumer deadweight loss
plus producer deadweight losses plus possible rent transfer to rent
dissipation.
• Steve Magee (1972) did a single model estimate of aggregate gains to
the US economy of tariff reduction

4. First application to a real industry seeking
protection: Steel Trigger Prices
• I was the first to apply the methodology to an applied policy question in a
particular sector:
Costs of “trigger prices” in steel in the US in 1977 (compared to tariffs and
quotas).
Trigger prices transferred the tariff revenue to the foreign suppliers and
quadrupled the costs of the protection compared with tariffs—were
equivalent to quotas.
Done just before publication of a 3 year, 600 page study for the the US
Federal Trade Commission on the international steel industry
NY Times front page article on the estimates and testimony before Congress
But we failed to derail or delay the implementation of trigger prices

5. Did multiple applied case studies with testimony
before the US International Trade Commission
• For the US Federal Trade Commission, Morris Morkre and I did studies as
industries that petitioned for protection. (calculations done with a desk
calculator)
• Also provided these to the Council of Economic Advisors when they were
required to estimate the economic impacts of protection.
• We collected the first five in a small book with the theory.
• Morris Morkre and David G. Tarr (1980), The Effects of Restrictions on United
States Imports: Five Case Studies and Theory
• Went like hotcakes. Print run of 2000 gone in first 2 weeks
• Second printing of 2500 gone in next two months . Then told requestors it was out
of print.
• Corden said it was the first time he had seen applications of his methodology

6. Did multiple applied case studies with testimony
before the US International Trade Commission
• Continued with the applications with increased intensity in the early
Reagan years (1980-1985).
• Produced a follow-up small book
• David G. Tarr and Morris Morkre (1984), Aggregate Costs to the United
States of Tariffs and Quotas on Imports," General Tariff Cuts and Removal
of Quotas on Automobiles, Steel, Sugar, and Textiles
• One case was the quotas (“voluntary export restraints”) on Japanese autos
• The Chairman of the President’s Council of Economic Advisors said my study
had a significant impact on the decision by Reagan to end the quotas when
the divided cabinet met to decide the quotas.
• These studies popular in international trade textbooks: e.g., Peter Lindert,
Wilfred Ethier, Dominick Salvatore

7. 1980s—Imperfect Competition Revolution in International
Trade and Beginning of Computable General Equilibrium
Modeling of Trade Policy
• 1. Richard Harris (1984), “Applied General Equilibrium Analysis of Small
Open Economies with Scale Economies and Imperfect Competition,” The
American Economic Review.
• Analysis of impact on Canada of its free trade agreement with the US.
• First paper to numerically evaluate trade policy with imperfect competition
in general equilibrium.
• 2. ORANI model in Australia—the most successful CGE model ever
developed in terms of its trade policy use.
• Developed with support of the Australian Productivity Commission. Peter
Dixon, Ken Pearson, Alan Powell, Maureen Rimmer and others.
• 3. Smith and Venables (1988), "Completing the Internal Market in the
European Community: Some Industry Simulations", European Economic
Review.

8. Jaime de Melo and I produced the first CGE model of the US
for trade policy: 5 journal articles and a book
• Review of Economics and Statistics (1990):
• Found that the quotas in autos, steel and textiles and apparel
had reversed 40 years of tariff reductions in terms of welfare
costs of trade restrictions.
• International Economic Review (1993), Applications to imperfect
labor markets; the estimates challenged the theoretical allegations of
Larry Summers and Alan Krueger that labor market distortions in
the US are a basis for industrial policy
• Melo, Jaime de and David G. Tarr (1992), A General Equilibrium
Analysis of US Foreign Trade Policy, Cambridge, MA.: MIT Press.
• Also contains imperfect product market applications and is cited
over 450 times in the literature.

9. 1990s—Golden Age for CGE Modelers
Applications to NAFTA and the Uruguay Round
• About 20 CGE evaluations of NAFTA (published in US ITC volume)
• About 8 well known CGE evaluations of the Uruguay Round—including Joe Francois for the GATT
• Harrison, Rutherford and Tarr (1997), “Quantifying the Uruguay Round,” Economic Journal. Became the
classic reference on Uruguay Round results. Cited about 550 times in the literature
• The methodological advance was that we were able to develop model variants of our own model that
produced the results of 6-7 other papers. So we could explain intuitively why the different models obtained
the different results in terms of elasticities, parameter choices or model assumptions.
• Policy Results showed that “What You Do Is What You Get” (WYDIWYG).
• The big winners from the Uruguay Round were the countries who made the commitments to reduce their
own barriers: EU, US, Japan, So. Korea
• Market access alone provided little benefits and losses sometimes
• Reduction of barriers by the industrialized countries was a welfare loss for many developing countries: the
reduction of agriculture subsidies was a loss for the “net food importing” countries; and the removal of the
textile and apparel quotas resulted in net losses exporting developing countries due to lost rents.

10. Major developments in the 1990s: GAMS,
GTAP and IFPRI model
• 1. The GAMS modeling language became available in the late 1980s. Added
enormous modeling flexibility for good economists-programmers.
• GAMS became the programming language of choice for all who published
in good journals after 2001.
• 2. Sherman Robinson and the IFPRI CGE model, focusing on agriculture was
applied to many African countries. CRTS, Armington style small open
economy model.
• The GTAP consortium started and grew enormously. Based on the
Australian based GEMPACK software, the model is limited to CRTS and
Armington.
• GTAP dramatically reduced entry costs of CGE modeling and led to a
resistance of journals to CGE modeling papers by the year 2000. After
2001, papers in good journals had to be innovative.

11. Regionalism and poverty assessments also generated
demand for CGE evaluation of Trade policies
• Harrison, Glenn W., Thomas F. Rutherford and David G. Tarr (2003), “Trade Liberalization,
Poverty and Efficient Equity,” Journal of Development Economics, Vol. 71 (1), June, 97-
128. (Based on work in Turkey)
• Harrison, Rutherford and Tarr (2002), “Trade Policy Options for Chile: The Importance of
Market Access,” World Bank Economic Review.
• Harrison, Rutherford and Tarr and Angelo Gurgel (2004), “Trade Policy and Poverty
Reduction in Brazil,” The World Bank Economic Review.
• Harrison, Rutherford and Tarr (1997), "Economic Implications for Turkey of a Customs
Union with the European Union," European Economic Review.
• Harrison, Rutherford and Tarr (1996), "Increased Competition and Completion of the
Market in the European Union: Static and Steady State Effects," Journal of Economic
Integration, winner of $10,000 Daeyang Prize.
•

12. 1990s. Trade Policy in Countries making the Transition from planned
to market Economies—the most exciting part of my career
• Unique historical period for economists to work on the transition from planned to market
economies.
• First worked in Poland and Hungary in 1989-1991. Then former Soviet Union-13 of the 15
countries
• Surprised at first at the redundancy of import restraints: quotas; foreign exchange rationing;
monopoly importing; licenses, often in markets with multiple other distortions, like subsidies and
price controls. Results were sometimes opposite of what policy-makers intended, like implicit
import subsidies from the price controls.
• Impacts evaluated in
• Tarr, David G. (1990), "Quantifying Second Best Effects in Grossly Distorted Markets: The Case
of the Butter Market in Poland," Journal of Comparative Economics.
• Tarr, David G. (1994), "The Welfare Costs of Price Controls for Cars and Color Televisions in
Poland: Contrasting Estimates of Rent-Seeking from Recent Experience," The World Bank
Economic Review
• Tarr, David G. (1990), "Second-Best Foreign Exchange Policy in the Presence of Domestic Price
Controls and Export Subsidies," The World Bank Economic Review.

13. Trade Policy in Countries making the Transition from planned to
market Economies—EERC allowed me to remain engaged in Ukraine
• We avoided CGE modeling until about the year 2000; focused more on policy papers in work on the
Transition countries.
• Selected policy papers some of which became the World Bank view on the subject
• Michalopoulos, Constantine and David G. Tarr (1992), Trade and Payments Arrangements for States of the
Former USSR, The World Bank.
• Michalopoulos and Tarr (1997), “The Economics of Customs Unions in the Commonwealth of Independent
States,” Post-Soviet Geography and Economics. (based on Kyrgyzstan mission)
• H. Shatz and D. Tarr (2002), “Exchange Rate Overvaluation and Trade Protection: Lessons from Experience,”
in Development, Trade and the WTO: A Handbook, Washington: World Bank. Based on paper for the mission
to Kazakhstan.
• Tarr, David G. (2002), "On the Design of Tariff Policy: Arguments for and Against Uniform Tariffs,” in
Development, Trade and the WTO: A Handbook, The World Bank. Based on a paper for the Russian
government.
• Tarr, David G. (1994), "The Terms-of-Trade Effects of Moving to World Prices on Countries of the Former
Soviet Union," Journal of Comparative Economics
•
Michalopoulos, Constantine and David G. Tarr, editors, (1994), Trade in the New Independent States, Studies of Economies in Transition No. 13, Washington, D.C.: The World Bank

14. Do Dynamic Effects increase the estimated
gains from trade liberalization
• 1. NO if the model is constant returns to scale.
• Rutherford, Thomas F. and David G. Tarr (2003), “Regional Trading Arrangements
for Chile: Do the Results Differ with a Dynamic Model?” Economie Intenationale;
Also in Trade and Integration, 2003.
• 2. Rutherford, Thomas F. and David G. Tarr (2002), “Trade Liberalization, product
variety and growth in a small open economy: a quantitative assessment,” Journal
of International Economics.
•YES if the model is Romer style endogenous growth. Welfare gains of between
10 and 35 percent of consumption from tariff reductions. Much larger than the
“Harberger constant” of less than one percent in CRTS models.
• Only paper to assess welfare gains of trade liberalization in a Romer style
endogenous growth model.

15. Impact of Services Liberalization with FDI and
Endogenous Productivity Effects
• Services are 70% of GDP in industrialized countries.
• Foreign competition is majority based on FDI, less on cross-border.
• Surprisingly, almost no model evaluations of FDI in services. Uruguay
Round motivated some modelers to extend their models to consider these
issues
• Petri and the MIRAGE models did it in perfect competition.
• But large amount of econometric evidence that services liberalization with
increased access to services increases productivity of using sectors. (Sasha
to discuss)
• Brown and Stern (2001), Review of International Economics and Dee et al
(2003) did it in highly stylized models (just one services sector) but no
endogenous productivity effects.

16. Most important Papers came out of our
Russia WTO project
• Markusen, James R, Thomas F. Rutherford and David G. Tarr (2005), Trade and Direct
Investment in Producer Services and the Domestic Market for Expertise,” Canadian Journal of
Economics, 38(3): 758-777..
• Jensen, Jesper, Thomas F. Rutherford and David G. Tarr (2007) “The Impact of Liberalizing
Barriers to Foreign Direct Investment in Services: The Case of Russian Accession to the World
Trade Organization,” Review of Development Economics, Vol. 11 (3), August, 482-506.
• Rutherford, Thomas F. and David G. Tarr (2008), “Poverty Effects of Russia’s WTO Accession:
modeling ‘real households’ with endogenous productivity effects,” Journal of International
Economics, Vol 75 (1), 2008, pp 131-150.
• Rutherford, Thomas F. and David G. Tarr (2010), “Regional Impacts of Liberalization of
Barriers against Foreign Direct Investment in Services: the case of Russia’s accession to the
WTO,” Review of International Economics, Vol. 18(1), February, 30-46.
• Böhringer, Christoph, Thomas F. Rutherford, David G. Tarr and Natalia Turdyeva (2015),
“Market Structure and the Environmental Implications of Trade Liberalization: Russia’s
Accession to the World Trade Organization,” Review of International Economics.

17. Two methodological breakthroughs in the
Russia WTO accession work
• We developed the first model to assess services liberalization with FDI
and endogenous productivity effects (the Dixit-Stiglitz variety effect).
• Methodological breakthrough: we incorporated all 55 thousand
households of the Russian household survey as agents in the model.
JIE paper
• Estimated gains from WTO accession in Russia about 6 times larger
with this type of model compared to perfect competition.
• Also applied the model in Kazakhstan, Ukraine, Malaysia, and with
regional extensions in Belarus, Armenia, Kenya and Tanzania.

18. 05
10152025
-5 -2 1 4 7 10 13 16
Welfare gains as a percent of consumption from WTO accession
Central model CRTS model
Observations in a range from - 5 % to 25 % are shown.
Central and CRTS models comparison. 55098 households sampled.
Figure 3. Distributions of estimated welfare gains from Russian WTO accession.

19. 2013: Handbook of Computable General
Equilibrium Modeling, 2 Volumes
• CGE modeling makes it into the Elsevier Handbook series.
• My chapter summarizes the Russia work
• Tarr, D.G. (2013), “Putting Services and Foreign Direct Investment with
Endogenous Productivity Effects in Computable General Equilibrium
Models,”. in Handbook of Computable General Equilibrium Modeling,
Peter B. Dixon and Dale W. Jorgenson (eds.), Amsterdam: North
Holland, Elsevier B.V., pp. 303–377.
• Still no multi-country, multi-sector model in the literature with FDI
and endogenous productivity effects in services.

20. Two Volumes of my Collected Works: one
published, second at the publisher
• I have worked in about 30 countries doing trade policy.
• Usually a report to the government where realism and attention to current issues are
paramount; and then a rewritten academic style paper for a journal.
• Journal articles based on single country studies collected in Volume 1:
• Tarr, David G. (2014), Applied Trade Policy Modeling in 16 Countries: Insights and Impacts
from World Bank CGE Based Projects, Singapore: World Scientific Publishers.
• Vol. 2 contains my papers in mathematical economics; my policy papers for the World
Bank Handbook and related papers; and more of the transition economics papers.
• Tarr, David G. (forthcoming), Trade Policy for Transition and Development, Singapore:
World Scientific Publishers.
• The introductions provides summaries of the background and more on the policy
discussions.
• Introductions are available upon request.

21. Work in Progress—Do the Krugman or Melitz Models Really
add more to the estimated welfare gains over perfect
competition with Armington?
• Arkolakis, Costinot and Rodriguez-Clare (2010) argued that the Melitz,
Krugman and Armington models produced the same welfare gains.
• And we don’t need a CGE model because they were able to reduce
the welfare calculation to two readily available summary statistics
• Key to the result was that the parameters in the different models
were adjusted such that the trade response was held constant across
the model types based on a gravity model estimate. They argue that
the models would be inconsistent with the data if they are
inconsistent with the gravity model estimate.

22. Costinot and Rodriguez-Clare (2013) show the
earlier result breaks down with complexity
• Arkolakis, Costinot and Rodriguez-Clare (2010) model was very restrictive.
For example, it contained a single sector, only one factor of production, no
intermediates, no foreign direct investment, no labor leisure choice.
• Costinot and Rodriguez-Clare (2013) showed the equivalence of welfare
effects breaks as the restrictive assumptions are dropped.
• E.g., Costinot and Rodriguez-Clare (2013) show that welfare gains are
larger in the Krugman model compared with Armington when there are
multiple sectors or with intermediate goods.
• Melitz and Redding (2015) argue that endogenous entry and exit decisions
provides another margin of adjustment that augments the gains from trade
compared to the Krugman model.

23. Role for CGE models in further research
• Melitz and Redding: welfare calculations cannot be based on the simple summary statistics of
Arkolakis et al., if there are even small departures from their restrictive assumptions.
• And authors have not yet extended their simple measures to assess many extensions to their
models that are relevant to the real world.
• This includes models where the factor intensities differ across regions, foreign direct investment
in services, barriers like AVEs of NTBs and barriers that differ across sectors, import of primary
factors such as specialized inputs, different factor endowments across sectors within regions and
across regions, different market structures across sectors within a region and unbalanced trade.
• The more realistic models are too complex for closed form solutions, at least
to date.
• This leaves an important role for CGE models.
• But consistency with gravity models is an important lasting result from
Arkolakis et al and we will adapt the parameters of our CGE models
accordingly

24. • I am personally motivated to work on this to complement my 40 years
of research in this literature with the latest methodology.
• How important is heterogeneous firms quantitatively compared to
Krugman and Krugman compared to Armington when the comparison
is fair in the sense of Arkolakis et al.?
• Project has been funded by the Research Committee of the World
Bank
• First draft of a paper to be delivered in June 2016 at the GTAP
conference.