1. GTAP Model: FTA, Foreign Transfers and Tax Policy

2. Motivation Trade liberalization entails revenue shortfalls.
Compensation could come from
Tax Replacement
Foreign Transfers
Questions:
Are tax replacement and foreign inflows the same?
Do they have similar implications?

3. Modeling Aid Inflows and Taxes
The three scenarios under the EU-Morocco FTA
Case 1: Fiscal deficit with no tax compensation.
tp exogenous and swapped with del_ttaxr
Case 2: Tax replacement compensating tariff revenue shortfall and zero-fiscal deficit.
- Prof. Hertel’s model
Case 3: Transfers to Morocco that compensate for tariff revenue shortfall of $1.4 bn.
Shock incomelack for Morocco (4.2%), for EU (-0.02%) and ROW (0%).
Walras condition is satisfied.

5. Aid is accompanied with a loss of competitiveness.....

6. which in turn encourages imports at the expense of exports.....

7. But... what about domestic production?
.....In this model, transfers discourage production....

8. Consumption absorbed the transfers.....
And generated some inflationary pressure.....

9. Summing up
Tax replacement and foreign inflows yield to different outcomes. Foreign inflows translated into
Consumption boost
Output decline
Loss of competitiveness
And mild inflation
But.... Welfare increased!!!!!!!