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Estimated Economic Effects of Proposed Import Relief Remedies for Steel

Executive Summary
I. Introduction
II. How Did We Get Here?
III. Estimated Impacts of the Proposed Remedies
Appendixes
Technical Appendix

A.        Introduction

B.        General structure

C.        Taxes and policy variables

D.        Trade and transport costs   

E.        The production structure

F.         The composite household and final demand structure

G.        Labor markets

This appendix provides an overview of the basic structure of the computable general equilibrium (CGE) model employed for assessment of U.S. import restraints on steel.  While this appendix provides a broad overview of the model, it does not provide a detailed discussion of mathematical structure. Rather, the reader is referred to Hertel (1996: http://www.agecon.purdue.edu/gtap/model/Chap2.pdf) ^[18] for a detailed discussion of the basic algebraic model structure represented by the core of the models code.  The model is implemented in GEMPACK -- a software package designed for solving large applied general equilibrium models.  The model is solved as an explicit non-linear system of equations, through techniques described by Harrison and Pearson (1994). ^[19]   More information can be obtained at the following URL -- http://www.monash.edu.au/policy/gempack.htm.  Social accounting data are based on the Global Trade Analysis Project (GTAP) dataset, with updates necessary to benchmark the economic model to the year 2000.  (The default GTAP benchmark year is 1997).  Updated economic data are taken from public sources provided by the U.S. Department of Labor, the International Monetary Fund, the AISI, and the U.S. Department of Commerce.

The general conceptual structure of a regional economy in the model is represented in Figure A.1.  Within each region (both the U.S. and the rest of world are modeled explicitly as regional economies) firms produce output, employing land, labor, natural resources, and capital, and combining these with intermediate inputs.  Firm output is purchased by consumers, government, the investment sector, and by other firms.  Firm output can also be sold for export.  Land and natural resources are only employed in some sectors, while capital and labor (both skilled and unskilled) are mobile between all production sectors.  Capital is fully mobile within regions.  However, capital movements between regions are not modeled, but rather are held fixed in all simulations.  Labor mobility and wage setting are discussed below.

All demand sources combine imports with domestic goods to produce a composite good, as indicated in Appendix Figure A.1.  These are called Armington composites.  Armington composites represent a combination of imported and domestic goods, which serve as imperfect substitutes for each other.  The relevant set of trade substitution elasticities are presented in Appendix Table A.1.

The model includes 2 regions (the United States and the rest of world) and 15 sectors.  The list of sectors is shown in Appendix Table A.1.  A more detailed definition of these sectors is provided in Appendix Table A.2.

Taxes are included in the theory of the model at several levels.  Production taxes are placed on intermediate or primary inputs, or on output.  Some trade taxes are modeled at the border. Additional internal taxes are placed on domestic or imported intermediate inputs, and may be applied at differential rates that discriminate against imports.  Their actual application in the model reflects underlying social accounting data.  Where relevant, taxes are also placed on exports, and on primary factor income.  Finally, where relevant (as indicated by social accounting data) taxes are placed on final consumption, and can be applied differentially to consumption of domestic and imported goods.

Trade policy instruments are represented as import or export taxes/subsidies.  This includes applied most-favored nation (MFN) tariffs, antidumping duties, countervailing duties, and other trade restrictions.  We model steel import quotas explicitly, with quota rents collected by the exporting country.  (This is identical to having an endogenous export tax, whose value is a function of the trade level determined by the export quota). 

International trade is modeled as a process that explicitly involves trading costs, which include both trade and transportation services.  These trading costs reflect the transaction costs involved in international trade, as well as the physical activity of transportation itself.  Those trading costs related to international movement of goods and related logistic services are met by composite services purchased from a global trade/transportation services sector, where the composite "international trade services" activity is produced as a Cobb-Douglas composite of regional exports of trade and transport service exports. Trade-cost margins are based on reconciled f.o.b. and c.i.f. trade data, as reported in the underlying GTAP dataset.

The basic structure of production is depicted in Appendix Figure A.2.  Basically, intermediate inputs are combined into a composite intermediate, and this composite intermediate is in turn combined with value added to yield a final product.  For example, in the auto sector, steel is combined with plastics, machinery, and other physical inputs, and through value added activities (involving workers, equipment, and energy) yields automobiles as final output.  At all stages this is represented by CES production functions.  The value-added substitution elasticities are presented in Appendix Table A.1.

Final demand is determined by an upper-tier Cobb-Douglas preference function, which allocates income in fixed shares to current consumption, investment, and government services. This yields a fixed savings rate.  Government services are produced by a Leontief technology, with household/government transfers being endogenous. The lower-tier nest for current consumption is specified as taking a constant difference elasticity (CDE) functional form.  The regional capital markets adjust so that changes in savings match changes in regional investment expenditures.  (Note that the Cobb-Douglas demand function is a special case of the CDE demand function employed in the model code.  It is implemented through GEMPACK parameter files.)

The basic structure of demand is based on Armington preferences, as illustrated in Appendix Figure 2.  Under this approach, goods are differentiated by country of origin, and the similarity of goods from different regions is measured by the elasticity of substitution.  Formally, within a particular region, we assume that demand goods from different regions are aggregated into a composite import according to the following CES function:

(1)      

In equation (1), M_j,i,r is the quantity of M_j from region i consumed in region r.  The elasticity of substitution between varieties from different regions is then equal to s^M_j , where s^M_j=1/(1‑r_j). Composite imports are combined with the domestic good q^D in a second CES nest, yielding the Armington composite q. 

(2)      

The elasticity of substitution between the domestic good and composite imports is then equal to s^D_j, where s^D_j=1/(1-b_j). At the same time, from the first order conditions, the demand for import M_j,i,r can then be shown to equal

₍₃₎           

where E^M _j,r represents expenditures on imports in region r on the sector j Armington composite. 

In practice, because we have a two region model (the U.S. and rest-of-world), the two Armington CES nests are collapsed to a single nest. This implies that the substitution elasticities in equations (1) and (2) are equal.  These elasticities are reported in Appendix Table 1.

            Starting from our benchmark equilibirum, we model a recessionary, or soft labor market, with an allowance for unemployment.  To allow for limited labor market flexibility and unemployment, we employ a labor market specification where wages are held fixed and employment levels adjust.  The result is that, as firms experience rising costs, they release workers to compensate.

Appendix Figure A.2 Armington Aggregation Nest

Appendix Table A.1  Model parameters

note:  The same trade elasticity of substitution for steel is reported by K.A. Reinert and D.W. Roland-Holst (1992), "Disaggregated Armington Elasticities for the Mining and Manufacturing Sector," Journal of Policy Modeling, 4:5.

(p) 1110 Agricultural & livestock production (paddy rice only)

(p) 1120 Agricultural services (servicing paddy rice production only)

(p) 1110 Agricultural & livestock production (wheat only)

(p) 1120 Agricultural services (servicing wheat production only)

(p) 1110 Agricultural & livestock production (grains except wheat & rice only)

(p) 1120 Agricultural services (servicing production of grains, except wheat & rice only)

(p) 1110 Agricultural & livestock production (non‑grain crops only)

(p) 1120 Agricultural services (servicing non‑grain crops production only)

(p) 1110 Agricultural & livestock production (wool only)

(p) 1120 Agricultural services (servicing wool production only)

(p) 1110 Agricultural & livestock production (other livestock production only)

(p) 1120 Agricultural services (servicing other livestock production only)

(p) 3116 Grain mill products (processed rice only)

3111 Slaughtering, preparing and preserving meat

3112 Manufacture of dairy products

3113 Canning and preserving of fruits and vegetables

3114 Canning, preserving & processing of fish, crustaceans and similar foods

3115 Manufacture of vegetable and animal oils & fats

(p) 3116 Grain mill products (except processed rice)

3117 Manufacture of bakery products

3118 Sugar factories and refineries

3119 Manufacture of cocoa, chocolate & sugar confectionery

3121 Manufacture of food products n.e.c.

3122 Manufacture of prepared animal feeds

3131 Distilling, rectifying & blending spirits

3132 Wine industries

3133 Malt liquors and malt

3134 Soft drinks & carbonated waters industries

3140 Tobacco manufactures

1130 Hunting, trapping & game propagation

1210 Forestry

1220 Logging

1301 Ocean and coastal fishing

1302 Fishing n.e.c.

Mining

2100 Coal mining

(p) 3540 Manufacture of miscellaneous products of petroleum and coal (briquettes only) **

(p) 2200 Crude petroleum & natural gas production (oil only)

(p) 2200 Crude petroleum & natural gas production (gas only)

(p) 3530 Petroleum refineries (LPG only) **

2301 Iron ore mining

2302 Non‑ferrous ore mining

2901 Stone quarrying, clay and pits

2902 Chemical and fertiliser mineral mining

2903 Salt mining

2909 Mining and quarrying n.e.c.

3710 Iron and steel basic industries

3720 Non‑ferrous metal basic industries

3811 Manufacture of cutlery, hand tools and general hardware

3812 Manufacture of furniture and fixtures primarily of metal

3813 Manufacture of structural metal products

3819 Manufacture of fabricated metal products except machinery & equipment n.e.c.

3511 Manufacture of basic industrial chemicals except fertilisers

3512 Manufacture of fertilisers and pesticides

3513 Manufacture of synthetic resins, plastic materials and man‑made fibres except glass

3521 Manufacture of paints, varnishes and lacquers

3522 Manufacture of drugs and medicines

3523 Manufacture of soap and cleaning preparations, perfumes and cosmetics

3529 Manufacture of chemical products n.e.c.

3551 Tyre and tube industries

3559 Manufacture of rubber products n.e.c.

3560 Manufacture of plastic products n.e.c.

(p) 3530 Petroleum refineries (except LPG) **

(p) 3540 Manufacture of miscellaneous products of petroleum and coal (except briquettes) **

3843 Manufacture of motor vehicles

3844 Manufacture of motorcycles and bicycles

3841 Ship building and repairing

3842 Manufacture of railroad equipment

3845 Manufacture of aircraft

3849 Manufacture of transport equipment n.e.c.

3821 Manufacture of engines and turbines

3831 Manufacture of electrical industrial machinery and apparatus

3832 Manufacture of radio, television and communication equipment and apparatus

3833 Manufacture of electrical appliances and housewares

3839 Manufacture of electrical apparatus and supplies n.e.c.

3822 Manufacture of agricultural machinery and equipment

3823 Manufacture of metal and wood working machinery

3824 Manufacture of special industrial machinery and equipment except metal and wood working machinery

3825 Manufacture of office, computing and accounting machinery

3829 Machinery and equipment except electrical n.e.c.

3851 Manufacture of professional and scientific,and measuring and controlling equipment, n.e.c.

3852 Manufacture of photographic and optical goods

3853 Manufacture of watches and clocks

5000 Construction

3211 Spinning, weaving & finishing textiles

3212 Manufacture of made‑up textile goods excluding wearing  apparel

3213 Knitting mills

3214 Manufacture of carpets & rugs

3215 Cordage, rope & twine industries

3219 Manufacture of textiles n.e.c.

3220 Manufacture of wearing apparel, except footwear

3311 Sawmills, planing & other wood mills

3312 Manufacture of wooden & cane containers & small caneware

3319 Manufacture of wood & cork products n.e.c.

3320 Manufacture of furniture & fixtures, except primarily  of metal

3411 Manufacture of pulp, paper & paperboard

3412 Manufacture of containers & boxes of paper and   paperboard

3419 Manufacture of pulp, paper & paperboard articles n.e.c.

3420 Printing, publishing & allied industries

3231 Tanneries & leather finishing

3232 Fur dressing & dyeing industries

3233 Manufacture of products of leather & leather  substitutes,except footwear and wearing apparel

3240 Manufacture of footwear, except vulcanised or moulded rubber or plastic footwear

3610 Manufacture of pottery, china and earthenware

3620 Manufacture of glass and glass products

3691 Manufacture of structural clay compounds

3692 Manufacture of cement, lime and plaster

3699 Manufacture of non‑metallic mineral products n.e.c.

3901 Manufacture of jewellery and related articles

3902 Manufacture of musical instruments

3903 Manufacture of sporting and athletic goods

3909 Manufacturing industries n.e.c.

4101 Electric light and power

4102 Gas manufacture and distribution

4103 Steam and hot water supply

4200 Water works and supply

6100 Wholesale trade

6200 Retail trade

6310 Restaurants, cafes, and other eating and drinking  places

6320 Hotels, rooming houses, camps and other lodging places

7111 Railway transport

7112 Urban, suburban and inter‑urban highway passenger transport

7113 Other passenger land transport

7114 Freight transport by road

7115 Pipeline transport

7116 Supporting services to land transport

7121 Ocean and coastal transport

7122 Inland water transport

7123 Supporting services to water transport

7131 Air transport carriers

7132 Supporting services to air transport

7191 Services incidental to transport

7192 Storage and warehousing

7200 Communication

0 Activities not adequately defined

8101 Monetary institutions

8102 Other financial institutions

8103 Financial services

8200 Insurance

8310 Real estate

8321 Legal services

8322 Accounting, auditing and bookkeeping services

8323 Data processing and tabulating services

8324 Engineering, architectural and technical services

8325 Advertising services

8329 Business services, except machinery and equipment rental and leasing, n.e.c.

8330 Machinery and equipment rental and leasing

9411 Motion picture production

9412 Motion picture distribution and projection

9413 Radio and television broadcasting

9414 Theatrical producers and entertainment services

9415 Authors, music composers and other independent artists  n.e.c.

9420 Libraries, museums, botanical and zoological gardens,and other cultural services, n.e.c.

9490 Amusement and recreational services n.e.c.

9511 Repair of footwear and other leather goods

9512 Electrical repair shops

9513 Repair of motor vehicles and motorcycles

9514 Watch, clock and jewellery repair

9519 Other repair shops n.e.c.

9520 Laundries, laundry services, and cleaning and dyeing  plants

9530 Domestic services

9591 Barber and beauty shops

9592 Photographic studios, including commercial photography

9599 Personal services n.e.c.

9100 Public administration and defence

9200 Sanitary and similar services

9310 Education services

9320 Research and scientific institutes

9331 Medical, dental and other health services

9332 Veterinary services

9340 Welfare institutions

9350 Business, professional and labour associations

9391 Religious organisations

9399 Social and related community services n.e.c.

9600 International and other extra‑territorial bodies