Comparison and analysis of tariff reduction of infrastructural sectors and its economic impact: ACGE approach

Abstract

BACKGROUND AND OBJECTIVE: The reduction of tariffs in Public infrastructure sectors is believed to be one of the key factors in addressing the socio-economic challenges of high unemployment, income inequality, and poverty. The primary objective of this paper is to design a general equilibrium model for infrastructural sectors among Germany, France, Italy, United Kingdom, China, USA, Australia, Japan and Korea, and evaluate potential economic impact of tariff reduction. METHODS: The research method of this paper was to construct a Computational General Equilibrium model to assess the economic effects. The global trade analysis project model was calibrated and discussed in this paper. The global trade analysis project database was used to validate the model. FINDINGS: Simulation result showed that tariff removal in infrastructure has the most significant effects in China, Japan, and Korea’s economic growth and employment than other countries. Gross Domestic Product, output price, and social welfare increase significantly in China compared to other countries. Gross Domestic Product increases in China by 616%, decreases in Japan and Korea 77% and 7% after mutual tariff reduction on infrastructure sectors. Meanwhile, China’s export on infrastructural sector increases by 1.71%, Japan and Korea’s export increases by 0.75% and 0.05%. On the other hand, export decreases in Germany, France, Italy, UK, USA and Australia. Finally, social welfare increases in China by $2.26 billion and Japan by $239 million. CONCLUSION: The presence of tariff reduction in infrastructure sectors will likely strengthen the market share of most of the simulated regions. These findings may provide policy-makers with crucial information for better understanding about new tariff policy. Computable General Equilibrium analysis in infrastructure sectors had paid little attention in past and this paper tries to fill the gaps and attempts to find the benefit of mutual tariff policy among countries based on global trade analysis project model.