Three essays in computable equilibrium analysis : tariff, pricing, and shipping

Abstract

This thesis consists of three studies on developing computable equilibrium models in international trade research. In the first study, we apply a computable general equilibrium model to analyze the impact of import tariff reduction on national economies in China. Under the Belt & Road initiative, China will conclude more Free Trade Agreements with other counties, and establish more Free Trade Zones. It is expected that the Chinese import tariff rate may continue to decrease. Based on the social accounting matrix of 2012, the model results show that, with the equilibrium of international balance of payment, such a tariff reduction can increase imports, exports, GDP, and resident consumption. In particular, the tariff reduction can bring down the trade surplus and price of GDP. It indicates that the tariff reduction can release the pressure of currency appreciation and resist inflation. In the second study, we develop an equilibrium model to investigate the pricing mechanism in the Asian liquified natural gas (LNG) market. The market is experiencing a heated debate on whether to retain the oil-indexed pricing mechanism. As the spot gas prices in Asia decoupled from the oil prices, more researchers argued that the oil-indexed pricing mechanism failed to reflect the market fundamentals of Asian LNG. A more efficient pricing benchmark is needed to replace the oil-indexation in pricing LNG. To solve the problem, we investigate the possibility of using the Japan-Korea-Marker (JKM) price as the Asian LNG pricing benchmark. The model incorporates the risk-averse importer and exporter, who optimize their risk-profit tradeoffs by deciding their portfolios composed by long-term contract (LTC) and spot trade. Based on the model, we are able to compare the pricing efficiency and the risk-profit tradeoff of importer/exporter under different benchmarks (the oil price versus the JKM price). The results suggest that the JKM price is more efficient than the oil price as being the pricing benchmark. In particular, the JKM benchmark is favored for both exporters and importers when they are low risk-averse. The third study explores whether shipping can affect the international iron ore trade. For this purpose, we establish an equilibrium model with endogenous shipping freight rates. This model captures the strategic behaviors and the interactions among importers, exporters, and carriers. Different from models in literature focusing on other resource trades, this model considers the heterogeneity of iron ores and the production capacity allocation of exporters. In this three-party equilibrium model, importers and exporters are described as a Cournot fashion, incorporating the endogenous freight rates derived from a carrier module. The result proves that the proposed model performs better compared with those with exogenous shipping freight rates and production capacity constraints. Using the model, we simulate a scenario of importers' budget reduction. The results show that shipping can slightly dampen the decline of iron ore trade volumes caused by the importers' budget reduction. This dampening effect varies by freight rates.