GTAP Model: FTA, Foreign Transfers and Tax Policy

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GTAP Model FTA, Foreign Transfers and Tax Policy
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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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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. Hertels 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.

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Aid is accompanied with a loss of
competitiveness.....
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which in turn encourages imports at the expense
of exports.....
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But... what about domestic production?
.....In this model, transfers discourage
production....
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Consumption absorbed the transfers.....
And generated some inflationary pressure.....
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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!!!!!!!