to agriculture in Honduras; however, since tariffs are not prohibitive, it is unlikely to be the only reason. Thus, the relatively low import dependence is likely to limit the extent of negative income shocks for farmers—although some groups of agriculture producers, such as domestic crop farmers, could be affected more than others (e.g., large scale coffee and banana producers).

Import dependence is much higher in manufacturing sectors, particularly for metals, minerals, machinery, and other manufacturing. Since 37 percent of Honduran manufacturing imports (excluding oil and mining) come from the United States, trade liberalization under DR-CAFTA is likely to have significant effects on prices of manufactured goods and could hurt domestic producers. At the same time, these activities source a large share of their intermediate inputs from each other or from imports (the share of intermediate inputs in total production of manufactures, excluding oil and mining, is 70 percent), and therefore lower input prices will work to offset the adverse effects of lower output prices for producers.

The last four columns of Table 5 show the composition of value added for each sector. Overall, there does not appear to be an obvious relationship between export orientation and import dependence on the one hand, and unskilled and skilled labor intensities on the other. Therefore, it is difficult to anticipate beforehand the likely effects of trade liberalization on factor returns. Note that the contribution of capital and land to total value added is very high in a number of farm activities, and somewhat low in several manufacturing sectors. One of the reasons for this is that SAM estimates of capital and labor shares in total value added sometimes contain sectoral biases (see, for example, Harrison et al., 2003). For instance, agricultural activities may exhibit a high share of capital in total value added because self-employed income may be classified as returns to capital. On the other hand, some manufacturing activities may show low capital shares due to low profitability.

# **5 Model Description**

The CGE model used in this paper is the World Bank’s prototype single-country model.<sup>16</sup> Production takes place under perfect competition and constant returns to scale, and is modeled in a nested constant elasticity of substitution (CES) fashion to reflect various substitution possibilities across inputs (see Figure 1). In the top nest, sectoral output ( _XP_ ) is produced as a CES combination of intermediate products ( _ND_ ) and value added ( _V A_ ). The elasticity of substitution may be set to zero, yielding the usual fixed-coefficients top-level output structure. The second, third, and fourth nests decompose intermediate inputs and value added into their respective components. Total intermediate demand is split into intermediate demand by commodity ( _XAp_ ), which is then decomposed into domestic ( _XD_ ) and imported ( _XM_ ) inputs. Total value added is composed of a capital-labor bundle ( _KL_ ), which in turn consists of a combination of unskilled labor ( _UL_ ) and capital and skilled labor ( _KSK_ ). The unskilled labor bundle is composed of workers who completed no more than a secondary level of education, while the capital-skilled labor bundle contains aggregate capital ( _KT_ ) and tertiary-skilled workers ( _SKL_ ). This nesting structure allows highly skilled workers to be complements to capital. At the bottom level of the value added production nests, factor demands ( _L_<sup>_d_</sup> and _K_<sup>_d_</sup> ) are functions of wages and rental rates, which can be both type(i.e., skilled and unskilled labor) and sector-specific.

> is roughly similar to the import dependence of US steel industry, where imports seem to have quite an impact. In addition, this sector is large and sources a large share of its imports from the US.

> 16 See van der Mensbrugghe (2005c) for detailed model documentation and van der Mensbrugghe (2005a) for the user’s guide.

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