# 2) The purpose of UTAS

UTAS allows users to take full ownership of the tool and to develop it further to address varying country needs. It offers solutions to several challenges that typically complicate policy makers’ assessment of the impact of tariff reforms on production costs in a flexible and time‐efficient manner.

First, previous studies assessing the impact of tariffs on firms’ production costs and effective protection have generally relied on firm‐level survey or census data on manufacturing that allow disaggregating firms’ consumption of intermediate inputs. These data are then used to extract firms’ input cost shares and weigh input tariffs accordingly, and to subsequently attain firm‐level estimates of tariff‐related cost.<sup>4</sup> Most often, however, such highly disaggregated firm‐level data are not readily available, as they tend to include sensitive information and are expensive and time‐consuming to collect. The alternative pursued in UTAS is to build on economy‐wide input‐output (I/O) tables that provide a disaggregation of production costs by sector. Although more aggregated than firm‐level data, I/O tables are available in most countries and allow policy makers to attain a quick overview of varying input cost shares across sectors.<sup>5</sup> Yet the use of I/O tables is not without its challenges. Sector classifications of most I/O tables cannot be matched easily with available tariff‐schedules typically classified at a much finer product level on the basis of the Harmonized System (HS) tariff nomenclature of the WTO. UTAS overcomes this problem by drawing on pre‐defined concordance tables between HS codes and a range of commonly used I/O sector classifications (e.g. GTAP, ISIC or NAICS). A key function of UTAS is therefore to help users handling different sets of data to combine tariff schedules with I/O sectors’ input cost shares and to calculate tariff‐related input costs and effective protection rates for different sectors.

Second, a common problem to both firm‐level data and I/O tables is that it involves assigning weights to each input tariff according to a firm’s/industry’s _current_ reliance on that particular input. To date, most academic research has followed this approach (e.g. Amiti and Konings, 2007; Topalova and Khandelwal, 2011; Yu, 2014). The drawback of pursuing such a weighting approach is that it will understate the true cost impact of an upstream tariff reduction, as it does not consider substitution effects that could kick‐in, if tariffs were to be removed. Moreover, _new_ intermediates, which are used only after an input tariff is removed, will not be taken into account, as they will carry an effective weight of zero. Diakatoni and Escaith (2012) underline that the failure of taking into account substitution effects also puts the calculation of effective protection rate on weak theoretical grounding. In practice, a strategy to assess the magnitude of this bias could for example involve the use of a proxy I/O cost structure pertaining to a different country that is deemed less distorted by tariffs and is assumed to represent the sectors’ I/O structure in the absence of input tariffs. This implies assuming technological convergence across countries or across groups of countries with similar characteristics. By allowing for an easy switch between different I/O tables, UTAS enhances policy makers’ ability to carry out such sensitivity analyses and allows benchmarking results against the use of different I/O tables in a straightforward manner.

Third, studies that have calculated upstream tariff costs and effective protection rates have generally done so on the basis of direct input requirements alone. This omits the possibility of input tariffs affecting production costs indirectly through the value chain. To the extent that producers in upstream sectors are able to pass on changes in tariff costs to downstream producers, the true cost impact of a tariff on an upstream activity will be underestimated, if solely direct requirements are considered. UTAS automatically re‐calculates I/O tables that take into account direct and indirect requirements

> 4 An example is Amiti and Konings (2007) or Rahardja and Varela (2014).

> 5 GTAP has input output information on over 120 countries.

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