inputs—a provision that works in the opposite direction of the local content provisions in terms of encouraging Kazakhstan input use by multinational oil producers. A policy being considered by some in the government is to provide a VAT exemption to multinational oil producers in the purchase of their domestic inputs. The VAT exemption would be implemented to offset the impact of the elimination of local content policies<sup>2</sup> The net impact of simultaneously eliminating local content and providing a VAT exemption on multinational purchases of Kazakhstan inputs may be neutral on the use of Kazakhstan inputs in the oil sector.

We argue that the gains to Kazakhstan from WTO accession derive from five principal effects: (1) improved access to the markets of non-CIS countries in selected products. Kazakhstan has already negotiated most-favored nation (MFN) status on a bilateral basis with most of its important trading partners, so Kazakhstan’s exporters will not see an immediate reduction in the tariffs they face and this effect may not be expected to be large. But Kazakhstan will have improved rights under antidumping and countervailing duty investigations in its export markets, which is the source of the improved access we model;<sup>3</sup> (2) tariff reduction on goods will induce improved domestic resource allocation and increase the number of varieties of imports in imperfectly competitive sectors. The latter will increase total factor productivity in downstream sectors due to a Dixit-Stiglitz-Ethier externality; (3) reduction in barriers against multinational service providers will increase the number of service varieties available in Kazakhstan. The variety increase will increase total factor productivity (or lower the quality adjusted costs) in sectors that use business services; (4) elimination of local content policies in the oil sector and simultaneous exemption of the VAT for multinational oil company purchases of Kazakhstan inputs; and (5) positive effects on the investment climate from increases in the rate of return to capital. We model this impact in a comparative steady state model, which produces an upper bound estimate of the gains from an increase in capital stock due to trade liberalization.

This paper follows the recent innovative structure of Jensen, Rutherford and Tarr (forthcoming) in that it numerically assess the liberalization of barriers against foreign direct investors in business services in a multi-sector applied general equilibrium model. Dixit-Stiglitz variety-productivity effects are key to the results.

This paper is innovative in that we extend the Jensen, Rutherford and Tarr analysis to examine the impact of local content policies. Modeling local content policies requires a modeling framework that distinguishes domestic from foreign firms, and one where foreign firms have a domestic presence through foreign direct investment. We also use that framework to examine a policy option being considered in Kazakhstan: the waiver of the VAT on domestic inputs into oil and gas; the intent is to place domestic inputs on an equal VAT footing with imported inputs in the crude oil and gas sector, as multinationals in the sector are reported to have negotiated a waiver of the VAT on imported inputs.

We estimate that the gains to Kazakhstan (measured as Hicksian equivalent variation) from WTO accession are 6.7 percent of Kazakhstan consumption (or 3.7 percent of GDP) in the medium run, and could be as high as 17.5 percent of Kazakhstan consumption (9.7 percent of GDP) in the long run (using our comparative steady state model). To understand the sources of these gains, we execute several

> 2 Multinationals oil companies have reportedly negotiated the VAT exemption on imported inputs as part of their investment agreements. So imposing the VAT on multinational use of imported inputs is not an option for the government, nor may it be appropriate from the easiness of tax administration point of view (as the MOF would need to process many refunds as the bulk of oil and gas is exported).

> 3 WTO accession will grant an “injury determination” to Kazakhstan in antidumping cases in WTO members countries. In addition, the US has decided to treat Kazakhstan as a market economy in antidumping cases, which will improve the rights of Kazakhstan exporters in these cases in the US. But market economy status may be denied in particular cases, so it will be necessary to see how this is implemented in practice.

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