Besides the study by Artuc et al. (2019), little is known about how trade barriers affect local labor markets in Sri Lanka. This report consequently tries to fill a gap by assessing the impact of Sri Lanka’s potential trade policy changes not only on household income (through wages and sector of employment) but also on consumption through sectoral price changes (see chapter 3). This is done with a computable general equilibrium (CGE) model linked to a microsimulation in a top-down approach, which is expanded to cover subnational regions. We also discuss economic implications of paratariff liberalization using both the CGE model and the Household Impacts of Tariffs (HIT) database and simulation tool (see box 2.2 for more details).
BOX 2.2 Understanding Winners and Losers with the Household Impacts of Tariffs Database Trade reforms affect households in their role as microcommunities of consumers, producers, wage earners, and taxpayers. This means that the effects on a particular household depend on its income and consumption portfolios, which not surprisingly can vary greatly. Until recently, there has been a lack of readily available data to measure these impacts, information that is vital for identifying winners and losers and, in turn, informing policy reforms. But the Household Impacts of Tariffs (HIT) database can now shed light on this issue. The HIT database is a publicly available household survey–based data set covering 54 developing countries. It was constructed by harmonizing representative household surveys with import tariff data from the United Nations Conference on Trade and Development. The sample comprises all low-income countries for which relevant nationally representative household survey data (that is, data with information on both household incomes and consumption spending) are available and a number of middle-income countries. It contains granular data for each percentile of the income distribution on the income derived from and consumption of 53 agricultural products. It also keeps track of spending on five different types of manufacturing goods and services, as well as transfers and wage income disaggregated by single-digit sector, 10 different types of nonfarm household enterprise sales, and various types of transfers. Tariffs vary both across countries and across products. The average tariff across countries is 14.2 percent. Tariffs are highest on average in Bhutan (48.4 percent) and lowest in Iraq (5.0 percent), whereas countries with higher levels of gross domestic product per capita tend to have lower tariffs. As for products, the highest average tariff is 39.4 percent, but this masks considerable differences across countries: Sri Lanka levies a 125 percent tariff on cigarettes, and in Jordan the tariff on beer is 200 percent. What would the HIT tell us about how agricultural trade reforms would affect welfare in developing countries? The HIT analysis first estimates the impact of a change in tariffs on prices and then assesses how much the resulting price changes affect consumption costs and incomes in different households. The sum of these impacts is how much a household’s real income changes. These simulations measure only the first-order (short-term) impacts of tariff liberalization and do not capture second-order adjustments such as changes in the availability of products, changes in (Box continues on the following page.)
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The Distributional Impacts of Trade
