and domestic output.<sup>9</sup> The extent to which imports from the EU are actually competing with locally produced products is an important empirical issue that requires further attention.

# **Box 1.  The TRIST Simulation Tool**

The Tariff Reform Impact Simulation Tool (TRIST) comprises a partial equilibrium modeling framework and a database containing detailed information on imports and revenues from tariffs, excises and VAT levied at the border. The data for Nigeria were collected directly from the Nigerian Customs authority, at the most detailed level of product (HS 10 digit) and source country aggregation for the most recent year available which is 2006. The data are used in the TRIST framework at the most detailed and disaggregated tariff line level. However, for ease of presentation, the results presented here are aggregated to the 3-digit ISIC classification level.

TRIST simulates the response of imports and other variables to changes in the tariff rate. The underlying model assumes imperfect substitution between different import sources (different varieties)—that is, goods imported from different countries, although similar, are imperfect substitutes (shirts from the EU are an imperfect substitute for shirts from China). Within this so called Armington assumption the representative Nigerian consumer determines the level of imports of a good through a two-stage process. First, given an import price index, she chooses the level of total spending/consumption on a “composite import good,” (say imported shirts). The relationship between changes in the import price index and the impact on total imports is determined by a given “demand elasticity.” Then, within this composite good, she allocates spending among the different sources of the good, depending on the relative price of each variety (say, choose relatively more shirts from the EU and less from China). The extent of the betweensource allocative response to a change in the relative price is determined by the “substitution elasticity.” The base elasticities used in this exercise were collected from the GTAP database. However, as the true values for the exporter substitution and demand elasticities are subject to some uncertainty, a sensitivity analysis is conducted for a broad range of parameter values (see Appendix B).

In TRIST, a preferential liberalization of a given tariff affects not only the overall price level of the good but also the relative prices of the different varieties. Through the import demand elasticity and the substitution elasticity, it will lead to changes in the aggregate level of spending on that good, as well as, changes in the composition of the sourcing of that good. Both channels affect bilateral trade flows. The framework estimates the potential impact of a given tariff reform scenario on both source specific and total imports, at the product level. It also computes the changes in the overall applied tariff rate as well as the change in tax revenue collected at the border (tariff, VAT and excise). Tariff revenue can be affected directly though changes in tariff rates, but also indirectly through the resulting import response (which alters the tax base). Revenues from VAT and excise taxes are also affected by the change in imports and by a change in their tax base because they are levied on the duty inclusive value of imports. TRIST can also report the impact of the policy change on consumer welfare (or consumer surplus), which represents the extra welfare that the consumer obtains from consuming her original import bundle at the lower new price, and from the extra imports she can afford at the new price. The net welfare impact of a preferential liberalization is then determined by the difference between the loss in tariff revenues and the gain in consumer surplus.

_Source_ : Brenton, Hoppe and von Uexküll (2007) and <u>http://go.worldbank.org/2P8FPC0760</u>

> 9   Thus, TRIST is better at capturing the short-term sectoral effects of a given policy experiment, than at making predictions about the economy-wide medium term impact.

11