# **Policy Research**

# Trade Pollcy

# WPS 951

This paper-a productof theTrade Policy Division, Country Economics Department-is partof the Bank's research on "The Impact of EC 1992 and Trade Integration in Selected Mediterranean Countries (RPO 675-64)," funded by the Research Support BudgeL Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Dawn Ballantyne, room N10-019, extension 38004 (August 1992,34 pages text plus 34 pages appendices).

Turkey undertook a major liberalization of trade policy in the 1980s. Import quotas have virtually disappeared, the Turkish lira was made convertible, and tariffs are gene.rally lower. Those changes and the export subsidies that remain have, on the whole, removed the anti-export bias from Turkey's external incentive regime.

Using a 40-sector computable general equilibrium model, Harrison, Rutherford, and Tarr consider several more trade liberalization options available to the Turkish govemmenL They conclude that uniformity of tariffs and export subsidies would substantially improve Turkey's welfare.

Although the "Ramsey" optimal import taxation would call for non-uniform import taxes inversely proportional to the elasticity of import demand in each sector, the _observed_ dispersion of the tariff structure in Turkey is inconsistent with optimal departures from uniform protection. In fact, in Turkey uniformity achieves an extremely high proportion of the benefits of full trade liberalization because, in the absence of a general anti-export bias, the principal distortion remaining in the trade regime derives from _dispersion_ of the tariff and (especially the) export subsidy structure.

Like Turkey, an increasing number of developing countries - including Chile, Indonesia, Mexico, and Poland - have in recent years undertaken extensive trade liberalization. It is no longer clear that these economies retain an anti-export bias in their trade regime. Perhaps the most important policy conclusion the authors reach is that one must be wary of advocating piecemeal reform of tariffs or export subsidies alone. In Turkey, piecemeal across-the-board tariff reductions do not always improve welfare; they must generally be coordinated with reductions in export subsidies to ensure improved welfare. The authors counterfactually assume that Turkey's tariffs are at the 1985 level (about twice the 1989 level of the authors' benchmark model) - which reintroduces an antiexport bias. In this case, piecemeal tariff reduction to the 1989 level is beneficial.

In Turkey, even small export subsidies are not always be,neficial, despite the rule of thumb that small export subsidies are a welfare-enhancing offset to the anti-export bias of import tariffs. Why? Because export subsidies in Turkey are highly dispersed, and piecemeal reductions in the export subsidies reduce that dispersion. When the authors counterfactually impose uniformity of tariffs and export subsidies, they resurrect the rule of thumb that small export subsidies are beneficial as a piecemeal policy for offsetting the anti-export bias.

Policymakers in developing countries have occasionally applied export subsidies in individual sectors with high tariffs as a means of encouraging exports in a sector that may otherwise rely only on the highly protected domestic market. The authors show that in Turkey high export subsidies in sectors with - high tariffs are particularly counterproductive because at the multisector level the distortion introduced by the export subsidy (by encouraging too many resources into the protected sector) dominates the reduction in the overall anti-export bias.

Turkey's proposed policy of harmonizing its tariff to the European Community's common external tariff would yield only small welfare changes, which would be small losses as the European Community interprets harmonization. Why? Because harmonizing to EC tariffs will require lowering Turkish tariffs from already low levels, in the presence of export subsidies almost as large as the existing averagc effective tariff rate. But harmonizing to the EC tariff structure can be beneficial if at the same time export subsidies are removed or reduced.

The Policy Research Working Paper Series disseminates the findings of work under way in the Bank. An objective of the series is to get these fmdings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

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