# **1. Introduction**

Careful analysis of the adjustment impacts of trade reform is essential to policy makers in developing countries as they seek to improve the structure of incentives within an outward looking trade and competitiveness strategy. The need to adjust will arise in a number of areas. An immediate concern, especially in low-income countries, is the impact on tax revenues. Tariffs are typically an important source of tax revenues in lowincome countries, often reflecting the weakness of the domestic tax base and of other tax instruments. In addition, changes in output in different sectors and associated impacts on employment are likely to be an important aspect of the political economy driving support and opposition to trade reform. Further, trade reform entails changes in prices and an important consideration is how these will affect households, especially the poorest. A good understanding of the potential adjustment implications of trade reform can contribute to the design of better trade reform strategies and to the discussion and implementation of policies that can reduce the impact of adjustment, especially when the costs are concentrated upon particular groups in society. The latter is of particular importance in countries that lack social safety nets with broad coverage.

In response the World Bank has developed a simple spreadsheet tool called TRIST (Tariff Reform Impact Simulation Tool) that can be used by policy makers in client countries to analyze the adjustment implications of trade reform<sup>2</sup> . The tool was initially developed to provide better estimates of the impact of changes in tariffs on government revenues, imports, protection and prices. Unlike other tools it does not require any proprietary software, programming skills or internet access. It is free and easy to use, transparent, with a simple underlying trade model, and flexible, in that it can quickly address different trade policy scenarios. It uses detailed data on actual revenues collected from trade whereas other tools use hypothetical revenues from applying duty rates on paper. It also includes all taxes levied on trade, not just tariffs, and so shows the change in trade tax revenues, which is more relevant than the change in tariff revenues alone. When suitable data are available, it can provide information on the short-term relative vulnerability of different sectors in the domestic economy in terms of output and employment.<sup>3</sup> It can also be linked to household budget data to trace the influence of changes in prices following trade reform to household expenditures and the costs of attaining the given consumption bundle. The objective of the model is to assist policy makers in identifying issues relating to adjustment to trade reform. It cannot provide an assessment of whether a particular policy change is beneficial or not. This purpose would require a more sophisticated economy-wide model.

> 2 Brenton et al (2007) describes the initial motivation, development and application of the model. 3 As discussed below, TRIST should not be used to project either the aggregate impact of tariff reform on domestic production and employment. Given its nature as a partial equilibrium model, its purpose is rather to identify sectors that are likely to be hardest hit as part of the direct short term adjustment to increased competition in import markets and to contribute to the design of policy interventions that seek to cushion these direct adjustment costs.

2