Modeling of Duty Drawback by Means of Domestic Final Consumption Subsidy

M. Lips, F.W. van Tongeren, A.A. Tabeau

    Research output: Contribution to conferenceAbstractAcademic

    Abstract

    Under the Duty Drawback regime (DD) all imports, which are used to produce exports, are exempted from tariffs. In the case of a tariff reduction the DD regime plays an important role. General equilibrium models are suitable tools to analyze such policy changes. Normally, they do not distinguish between a production for domestic use and one for exports. Accordingly, they cannot depict the DD regime explicitly. So the question arises how to modify general equilibrium models in order to consider the DD regime. The suggested approach requires neither a change of the general equilibrium model nor an adjustment of the database. It is based on the assumption that the DD regime leads to a discrimination of the domestic final consumption. The latter comprises the private consumers, the government and the agent, who buys investment goods. Since only domestic final consumers are affected by a tariff cut of DD goods, we imitate such a policy change with a virtual subsidy. Instead of changing import tariffs we introduce subsidies for the domestic final consumption. Accordingly, analyzing a tariff reduction, the tariff rate for commodities under the DD regime is not altered. The appropriate exogenous changes of the consumer subsidies are the result of a specific shock calculation. Therefore, three steps are necessary: First, we calculate the consumption of DD goods for all domestic final consumers. Besides the direct consumption of imported goods DD imports may also be used as inputs for the domestic production, whose products are bought by the final consumer. Second, without DD regime it is assumed that all users pay the same tariff rate on imports. Accordingly, if the tariff revenue is divided through the total imported value, the tariff rate results. Under the DD regime it is different since only the domestic final consumption is paying tariffs. Therefore, all tariff revenue of DD sector should be assigned to domestic final consumption only. As a consequence, the adjusted tariff rate of DD goods for the domestic final consumption is higher than the normal one. Finally, the adjusted tariff rate and the consumption of DD commodities enables the calculation of subsidy shocks for the domestic final consumption. To illustrate the approach we analyzes twice a unilateral 50 percent tariff cut for DD goods in Bangladesh. We use both the normal procedure and the suggested approach. The effects on model results are different and emphasize the importance to take the DD regime explicitly into consideration. In particular, model results for goods, which are mainly used in export-oriented industries, depend strongly on the applied depiction of the DD regime.
    Original languageEnglish
    Publication statusPublished - 2004

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