Tariff Reduction in a Small Open Economy

During the late 1990s, Pakistan managed to significantly liberalize its external sector, and by 2002, the average tariff rate was under 17 percent which was well below the average in comparative countries. Using a social accounting matrix (SAM) for 2002, we develop a computable general equilibrium (CGE) model to evaluate the impact of tariff reduction in Pakistan. Our analysis goes beyond the usual trade-focused general equilibrium studies for Pakistan, as we also conduct a detailed sensitivity analysis to check the robustness of welfare-related results. Our findings suggest an overall positive impact of slashing tariff rates on macroeconomic, and welfare indicators.