Regional Trade Arrangements and Optimal Tariff Calculation according to Armington Hypothesis

Document Type : Research Paper

Authors

Department of Economics, Faculty of Economics and Social Science, Shahid Chamran University of Ahvaz, Ahvaz, Iran.

Abstract

Disciplined international competition and formal agreements worldwide would potentially prevent the mistakes of domestic policies, thereby resulting in more stable economic growth. This article aims to investigate the results of concluding agreements between the regional countries, especially regarding the Iraqi market as a target market, using a Computable General Equilibrium (CGE) Model. To this end, the model parameters were calibrated, and then different aspects of concluding the agreement were examined. The welfare effects were investigated by estimating the competitive equilibrium model. Next, the simulation results were analyzed according to the non-cooperative Nash equilibrium model by considering the interaction of countries and the methods of weighted coefficients and LP-Metric using GAMS software. The results indicate that concluding a regional agreement, in terms of welfare according to the general equilibrium model using the Armington hypothesis, would have the best possible result when the agreement is concluded between Iran, Turkey, and Iraq. The results of the scenario using the Nash tariff war to create trade rules with non-member countries also revealed that the welfare situation of countries is far worse compared to the competitive equilibrium. It was also found that the welfare level achieved by concluding an agreement between all the studied countries was as low as possible compared to other scenarios of the present study.

Keywords

Main Subjects

References

Abrego, M. L., Amado, M. A., Gursoy, T., Nicholls, G. P., & Perez-Saiz, H. (2019). The African Continental Free Trade Agreement: welfare gains estimate from a general equilibrium model. Retrieved from https://www.imf.org/-/media/Files/Publications/WP/2019/WPIEA2019124.ashx.
Armington, P. S. (1969). A Theory of Demand for Products Distinguished by Place of Production. Staff Papers-International Monetary Fund, 159-178. https://www.elibrary.imf.org/downloadpdf/view/journals/024/1969/001/article-A007-en.pdf.
Beckman, J., Ivanic, M., & Shaik, S. (2023). How bilateral trade deals get in the way of multilateral agreements: Why WTO is marginalized. Journal of Policy Modeling, 45(5), 877-894. Retrieved from https://www.sciencedirect.com/science/article/am/pii/S0161893823000480.
Blonigen, B. A., & Wilson, W. W. (1999). Explaining Armington: what determines substitutability between home and foreign goods? Canadian Journal of Economics, 1-21. Retrieved from https://pages.uoregon.edu/bruceb/Explaining_Armington.pdf.
Chandran, D. S. (2011). Trade Compatibility between India and ASEAN countries.  SSRN, 1932266. Retrieved from https://mpra.ub.uni-muenchen.de/33138/1/MPRA_paper_33138.pdf.
Dennis, A. (2006). The impact of regional trade agreements and trade facilitation in the Middle East and North Africa region. World Bank Policy Research Working Paper, 3837. Retrieved from https://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-3837.
Dicaprio, A., Santos-Paulino, A. U., & Sokolova, M. V. (2017). Regional trade agreements, integration and development. UNCTAD Research Paper, 1. Retrieved from https://unctad.org/system/files/official-document/ser_rp2017d1_en.pdf.
Dixit, A., & Norman, V. (1980). Theory of international trade: A dual, general equilibrium approach. Cambridge: Cambridge University Press. Retrieved from https://books.google.com/books?hl=en&lr=&id=QEnEAgAAQBAJ&oi=fnd&pg=PA1&dq=Dixit,+.
Ghosh, M. (2002). The revival of regional trade arrangements: a GE evaluation of the impact on small countries. Journal of Policy Modeling, 24(2), 83-101. Retrieved from  https://www.researchgate.net/profile/Madanmohan-.
Gorman, W. M. (1958). Tariffs, retaliation, and the elasticity of demand for imports. The Review of Economic Studies, 25(3), 133-162. Retrieved from https://academic.oup.com/restud/article-abstract/25/3/133/1552242.
Huang, H., Whalley, J., & Zhang, S. (2013). Multiple Nash equilibria in tariff games. Applied Economics Letters, 20(4), 332-342. Retrieved from https://www.tandfonline.com/doi/abs/10.1080/13504851.2012.701003.
Johnson, H. G. (1953). Optimum tariffs and retaliation. The Review of Economic Studies, 21(2), 142-153. Retrieved from https://academic.oup.com/restud/article-abstract/21/2/142/1555371.
Kee, H. L., Nicita, A., & Olarreaga, M. (2008). Import demand elasticities and trade distortions. The Review of Economics and Statistics, 90(4), 666-682. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=590925.
Kemp, M. C., & Wan Jr, H. Y. (1976). An elementary proposition concerning the formation of customs unions. Journal of International Economics, 6(1), 95-97. Retrieved from https://d1wqtxts1xzle7.cloudfront.net/33089983/60b7d529e7842499a0-.
Krishna, P. (2003). Are regional trading partners “natural”? Journal of Political economy, 111(1), 202-226. Retrieved from https://sais.jhu.edu/sites/default/files/JPE-FTA-Published.pdf.
Krugman, P., Helpman, E., & Razin, A. (1991). International trade and trade policy. Is Bilateralism Bad. Retrieved from https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=.
Larch, M., Tan, S. W., & Yotov, Y. V. (2023). A simple method to ex-ante quantifies the unobservable effects of trade liberalization and trade protection. Journal of Comparative Economics, 51(4), 1200-1213. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0147596723000604.
Lee, S. H., & Kim, C. S. (2012). A CGE analysis of the ASEAN+ 3 free trade agreement under different market structures. Hitotsubashi Journal of Economics, 201-215. Retrieved from https://ideas.repec.org/a/hit/hitjec/v53y2012i2p201-215.html.
Mansur, A. H. (1984). Numerical Specification of Applied General Quilibrium Models: Estimation, Calibration, and Data. Applied General Equilibrium Analysis, 69-137. Retrieved from https://cir.nii.ac.jp/crid/1570572699490109312.
Mc Daniel, C. A., & Balistreri, E. J. (2003). A review of Armington trade substitution elasticities. Économie Internationale, 9495(2), 301-313. Retrieved from https://cepii.fr/IE/rev9495/rev9495mcdaniel.pdf.
McDougall, R. (1997). Global Trade, Assistance, and Protection: The GTAP 3 Data Base. Retrieved from https://www.gtap.agecon.purdue.edu/databases/v3/v3_doco.asp.
McMillan, J., & McCann, E. (1981). Welfare effects in customs unions. The Economic Journal, 91(363), 697-703. Retrieved from https://uwo.scholaris.ca/server/api/core/bitstreams/50140587-8342-4e76-82e5-2ac07fff713c/content.
Nabuhiro, H., Gasawa, K., & Hashimoto, H. (2010). Textbook of computable general equilibrium modelling: simulating general equilibria. London: Palgrave Macmillan. Retrieved from https://content.e-bookshelf.de/media/reading/L-7604016-c63db9cf62.pdf.
Nash, J. F. (1950). The bargaining problem. Econometrica, 18(2), 155-162. Retrieved from https://rasmusen.org/GI/reader/12a.nash.bargaining.1950.pdf.
Rasoulinezhad, E. (2019). The sanctions and geographical shift in trading partners: Evidence from Iran and Russia through a gravity model. Iranian Economic Review, 23(3), 593-610. Retrieved from https://ier.ut.ac.ir/article_71782_16b8d54c78c2bf27c68f1ce8aeb56df1.pdf.
Rasoulinezhad, E., & Popova, L. (2017). An estimation of the impact of economic sanctions and oil price shocks on Iran-Russian trade: Evidence from a gravity-VEC approach. Iranian Economic Review, 21(3), 469-497. Retrieved from https://ier.ut.ac.ir/article_62926_477bbad4b4907c606e6bd123eead1a87.pdf.
Shaikh, F. M., Bhatti, N., Syed, A. A. S. G., & Ram, N. (2015). Impact of Pak-India Relationship on Rice Trade on Economy of Pakistan by Using Computable General Equilibrium Model (CGE). Romanian Statistical Review Supplement, 63(7), 55-74. Retrieved from https://www.researchgate.net/profile/Muhammad-Memon-41/publication/326975512_IMPACT_OF_PAK-.
Amogne, H. S., & Hagiwara, T. (2021). Impact of alternative regional trade arrangements on the Ethiopian economy. Journal of Economic Structures, 10(1), 2. Retrieved from https://link.springer.com/content/pdf/10.1186/s40008-020-00232-2.pdf.
Shirazi, H., Azarbaiejani, K., & Sameti, M. (2016). The effect of economic sanctions on Iran's exports. Iranian Economic Review, 20(1), 111-124. Retrieved from https://ier.ut.ac.ir/article_58273.html.
Shoven, J. B., & Whalley, J. (1992). Applying General Equilibrium. Cambridge: Cambridge University Press. Retrieved from https://books.google.com/books?hl=en&lr=&id=CBt6kS2-.
Summers, L. (1991). Regionalism and the world trading system. Policy Implications of Trade and Currency Zones, 295-301. Retrieved from https://www.kansascityfed.org/Jackson%20Hole/documents/3765/1991-S91SUMME.pdf.
Trefler, D. (1995). The case of the missing trade and other mysteries. The American Economic Review, 1029-1046. Retrieved from https://web.mit.edu/14.54/www/handouts/Trefler95.pdf.
Viner, J. (2014). The customs union issue. Oxford: Oxford University Press. Retrieved from https://books.google.com/books?hl=en&lr=&id=eHlCAgAAQBAJ&oi=fnd&pg=PP1&dq=Viner,+J.
Wonnacott, P., & Lutz, M. (1989). Is there a case for free trade areas? Free Trade Areas and US Trade Policy, 59, 84. Retrieved from https://www.scirp.org/reference/referencespapers?referenceid=1406658.
Yi, C. D. (2020). The computable general equilibrium analysis of the reduction in tariffs and non-tariff measures within the Korea-Japan-European Union free trade agreement. Japan and the World Economy, 56, 101037. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S0922142520300384.
Iranian Economic Review
Volume 30, Issue 1
March 2026
Pages 176-205

Files

Share

How to cite

Statistics