A new stylised approach of modelling non-tariff measures in a CGE model

In this paper we introduce a new approach of modelling the impacts of non-tariff measures (NTMs) in a computable general equilibrium (CGE) model. The operation and influence of NTMs on trade flows can be complex, making the direct impact on trade and welfare unclear. In our proposed approach, we exploit the benefits afforded by CGE models in their representation of economies to capture the relevant channels through which both trade costs are influenced by NTMs and final consumer demand is affected. NTMs may increase trade costs; however, they also affect consumer demand directly through changes in relative prices and indirectly through satisfying consumer preference for better health, safety, environment and other preferred attributes (for example, with a higher willingness to pay). The approach proposed in this paper incorporates increases in trade (through export) costs and changes in consumer preferences. Both variable and fixed trade costs are considered. The trade costs in our approach are imposed on exporters which can be characterised as effects on export supply. Consumer preferences are represented through the willingness-to-pay by consumers. The changes in consumer preferences and the increases in trade costs are calibrated to ABARES' estimated ad-valorem equivalents of tariffs associated with NTMs. After the calibration, our CGE model is then used to run a hypothetical scenario with a global removal of relevant NTMs to demonstrate the performance of the method and show the impacts of NTMs on trades.