Agriculture Reference
In-Depth Information
Manufacturing, particularly light manufacturing, is the main beneficiary
of the trade liberalisation, together with the transport sector. This result—
which is contrary to intuition from the Heckscher-Ohlin-Samuelson (HOS)
trade model—derives from the model's departure from the HOS model
in two ways: first, there is extensive use of intermediate inputs from
the same sector (intra-industry trade); and second, competing imports
are differentiated from home products. Under these assumptions, the
tarff reductons on mported ntermedate nputs have a drect effect
on the home ndustry's total cost. The ndrect effect of the reductons
n tarffs on competng but dfferentated products depends on the
elasticity of substitution between imports and home-produced goods. For
manufacturing, the input-cost effect of tariff reductions is considerably
greater than the mpact from the loss of protecton aganst competng
mports. Cost reductons of smlar orgn are the reason for the gans
accrung to the domestc transport sector.
As the reforms cause the most substantal reductons n protecton n
Chna's food-processng sector and therefore lead to long-run contractons
in rice and 'other crops', there is substantial relocation of employment
from agriculture to the manufacturing, energy and transport and other
servces sectors.
Smulatons of short-run effects
For the short-run base-case simulation, China is assumed to maintain a
fixed exchange rate against the US dollar and rigid capital controls, while
nominal wages are 'sticky'. The other regions specified in the model have
inflation and CPI targeting, no capital controls, full short-run nominal
wage rigidity in the industrial countries and fully flexible nominal wages
elsewhere. Government spending in all regions is assumed to absorb a fixed
proportion of GDP and the rates of direct and indirect taxes are constant,
so that government deficits vary in response to shocks.
Five different macroeconomic regimes were simulated to study the
mpact of the trade reforms.
Rigid capital controls and fixed tax rates; monetary policy targets
the CPI, and the exchange rate floats.
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