Impacts of Import Tariff Reforms on Mongolia's Economy: CGE Analysis with the GTAP 8.1 Data Base

Abstract

Foreign trade plays an essential role in Mongolia's economy and the country has been pursuing a relatively liberal foreign trade policy during the course of its transition toward a market economy. However, aiming at supporting domestic industries and encouraging manufacturing and higher value-added production in the country, Mongolia's recent trade policy favors raising its customs duty rates up to the WTO bound levels. An analysis of the effects of Mongolia's import tariff reforms on the country's economy using the standard CGE Model and GTAP Data Base (Version 8.1) revealed that although the country's domestic production would expand as a result of the import tariff reforms, they would result in losses of the country's total welfare, as the allocative efficiency losses are greater than the terms-of-trade gains. Therefore, it is required to spend the additional import tax revenues properly in order to compensate for such losses. In addition, the increased import tariffs had a similar effect to a real exchange rate appreciation and resulted in decreased exports. However, in the case of Mongolia raising import tariffs to its WTO bound rates, the country's industrial output would expand along with the increased exports of Mongolia's major manufacturing industries, such as leather, meat, dairy, cashmere and wool products.