The Impact of Common External Tariffs on Household's Welfare in a Rich African Country with Poor People

Abstract

The poverty impact of trade policy has been ambiguous because of their differential effects on economic agents due to the transmission mechanism through which they operate. In this context, this paper uses Nigeria’s micro- and macro-economic data to investigate the poverty effects of Common External Tariff (CET) of the Economic Community of West African States (ECOWAS). The poverty effects were evaluated from the perspective of households as producers and consumers. The empirical strategy proceeds with two steps: first, by determining the extent of the tariff pass-through to domestic prices; and lastly, evaluating the impact of the price change on household welfare. The findings indicate that domestic prices declined due to the higher tariff pass-through. This decline was higher in states closer to ports and borders, which face lower trade costs. The ECOWAS CET had net positive effects on the welfare of households, largely due to the gains from the expenditure basket. The expenditure gains from the adoption of the trade policy outweigh losses incurred in their purchasing power through lower income. Therefore, this study provides evidence that the price transmission mechanism, household characteristics and geographical location are important determinants in assessing trade policy effects in Nigeria.