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Modelling International Relationships in Applied General Equilibrium: MIRAGE
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MIRAGE describes imperfect competition in an oligopolistic framework à la Cournot . It accounts for horizontal product differentiation linked to varieties, but also to geographical origin (nested Armington – Dixit-Stiglitz utility function). A new calibration procedure allows the available information on these aspects to be used efficiently. The modelling is done in a sequential dynamic set-up, where the number of firms by sector adjusts progressively, and where installed capital is assumed to be immobile, even across sectors. Capital reallocation therefore only results from the combined effect of depreciation and investment. It makes it possible to describe the adjustment lags of capital stock, and the associated costs.
Compared to previous applied CGE trade models, MIRAGE has in addition three main distinctive features, aimed at improving the description of trade policies' main transmission channels:
• FDIs are explicitly described, with a modelling both theoretically consistent (with agents' behaviour, and with domestic investment setting), and consistent with the empirical results about FDIs' determinants and their order of magnitude;
• a notion of vertical product differentiation is introduced, by distinguishing two quality ranges, according to the country of origin of the product;
• trade barriers are described by the MAcMaps database (see Bouët, Fontagné, Mimouni and Pichot, 2002), that provides with a measure of ad-valorem tariffs, and of the advalorem equivalent of specific tariffs, tariff quotas, prohibitions and anti-dumping duties, at the bilateral level, for 137 countries with 220 partners. Preferential agreements are taken into account in a quasi-exhaustive way. This information, available at the level of 5 000 to 10 000 products (HS6 or HS10 classification, according to the country), is used to describe the initial level of trade barriers, but also to build scenarios.
Assumptions concerning the changes in these barriers can thus be made at the product level, possibly depending on their initial level. Only then are these data aggregated in the model's nomenclature, according to a procedure designed to limit the extent of the endogeneity bias. As a result, MIRAGE is based on a description of trade barriers that, besides its precision, preserves the bilateral dimension of the information, contrarily to what is commonly done in applied modelling.
Except for data on trade barriers, the model uses GTAP 5 database (see Dimaranan and Mac Dougall, 2002). This allows a wide flexibility in choosing the sectoral and geographical aggregations of MIRAGE, that may be changed for each application. For the sake of illustration, simulations are carried out to evaluate the impact of removing trade barriers between the EU and its periphery, defined in a broad sense as CEECs, Maghreb and Turkey. The results using the standard version of MIRAGE show that significant trade creation would take place between the two areas, mainly in agriculture and agro-food, in EU's vehicle exports, and in the periphery's textile and clothing exports. However, the welfare impact in the medium-term (after 13 years) would be (insignificantly) negative for the periphery: the asymmetric nature of the scenario (due to the higher initial bilateral barriers imposed by the periphery) would indeed induce a terms of trade loss for the periphery and, most of all, the removal of trade barriers with the EU only would confer the periphery a very inefficient protection structure, preventing this area from benefiting from such a liberalisation. In contrast, the welfare impact would be slightly positive for the EU.
These results are compared to those obtained using different assumptions in four key areas: vertical product differentiation, the nature of competition, the dynamic set-up, and FDIs. The differences appear to be significant, illustrating in particular the contribution of FDIs and of the pro-competitive effect to the impact on welfare. Vertical differentiation also matters, and it is of particular importance in shaping the trade effects. Finally, introducing a technological externality linked to FDIs is shown to have an overwhelming impact on welfare. This validates the cautious approach taken in MIRAGE of not introducing any externality in the standard version, for the sake of robustness.
Jean-Christophe Bureau
Lionel Fontagné
Jean Fouré
Christophe Gouel
Houssein Guimbard
Sébastien Jean
Nicolas Lagarde
Cristina Mitaritonna
Stéphanie Monjon
Maria Priscila Ramos