Fourth, at times policy makers will want to consider the impact of a change in tariffs defined at the product level. To this end, module _Sim III_ allows users to define an entirely new tariff schedule and simulate how the change in the tariff schedule affects costs and effective protection rates across sectors. The tool then calculates two sets of upstream tariffs: the first on the basis of the original tariff schedule and the second on the basis of the new/revised tariff schedule. The difference in the two sets of upstream tariffs is then used to assess the cost impact of the tariff changes in each sector.

# 5) Using UTAS for trade policy analysis

How do changes in tariffs affect production costs and effective protection rates across sectors? This question lies at the core of UTAS. An in‐depth understanding of the impact of tariff reform on downstream production costs and on effective rather than only nominal protection rates is important for countries seeking to boost their competitiveness. Yet while the academic literature provides important guidance on how intermediate input tariff reductions affect downstream firms’ performance in terms of export competitiveness, productivity or diversification, the available research is not always easy to translate into quantifiable estimates for policy purposes in a timely manner. In this section we discuss two practical examples to illustrate how UTAS can be used to assist policy makers in analyzing the implications of tariff reforms, followed by a series of additional considerations that should be considered when using UTAS for policy simulations.

## 5.1) Declining tariffs on intermediate inputs in textiles and apparel manufacturing in Nepal

Textiles and apparel are Nepal’s most important merchandise exports. Over the last decade, however, Nepal’s exports of textiles and apparel have stagnated. In 2017 they amounted to US$342 million compared to US$362 a decade earlier, according to figures from UN Comtrade. A key trade policy question therefore is how growth in textiles and apparel can be reinvigorated to boost the country ́s exports base. Key among possible measures is the reduction of tariffs and para‐tariffs on intermediate goods to reduce production costs of domestic firms and promote adoption of cheaper or better quality inputs from wherever they are most efficiently sourced. In parallel, this should be combined with a gradual reduction in these sectors’ output tariffs to lower effective protection levels accorded to these sectors, which will reduce the overall anti‐export bias and promote a greater outward orientation of firms active in these sectors.

We use UTAS to assess the impact that such a strategy would have on the textiles and wearing apparel sectors and rely on data from GTAP to account for the production structure in these sectors in Nepal. Data on import duties are taken from the UN TRAINS. For simplicity, all our simulations are based on the product homogeneity modeling framework of UTAS, which assumes a complete tariff pass‐ through on domestic prices.<sup>11</sup> The following policy questions guide our exposition. Screenshots of UTAS are included to facilitate a step‐by‐step replication of our results in UTAS.

### Q1: Which tariffs have the greatest impact on upstream production cost?

The _Tariff‐ranking_ module allows users to establish which tariff lines at the HS 6‐digt level have the largest impact on a particular sector. We use the module to determine the 20 tariffs with the highest impact for the apparel and textiles sectors, respectively. In the _Tariff‐ranking_ module this is done by clicking on the ‘Change Data’ icon and selecting the appropriate sector and the number of tariff lines to be considered in the analysis (see Figure 5).

> 11 Less restrictive assumptions are considered in the example of Section 5.2

10