Assessing the Impact of Tariff Liberalization on Priority Goods in Azerbaijan

The analysis, conducted in response to the Ministry of Economic Development's request, focuses on 14 agricultural and non-agricultural goods, including white sugar, plant-oil, chicken, and furniture. These priority goods constitute a significant component of non-oil exports, with total exports reaching close to $450 million in 2010. The analysis highlights the potential gains from a full free trade regime for Azerbaijan, which would involve reducing tariff rates to zero. The simulation results show that reducing tariff rates by 10%, 50%, and 100% leads to a corresponding 0.3%, 1.3%, and 2.6% increase in imports. The impact of reducing tariff rates on imports is negligible, with the total revenue from levying tax and duties on imports and domestic production showing a relatively small decline in absolute value. The analysis also reveals that tariff liberalization will have a profound trade diversion impact, with the CIS being the net loser. Trade will be diverted from the CIS trading partners (Russia, Belarus, Uzbekistan, and Ukraine) to the rest of the world, such as Turkey, EU, and Iran. The exporter substitution effect is more pronounced for white sugar than for any other priority products, with Azerbaijan finding it more beneficial to divert its imports of sunflower products, plant oil, sugar, ethylene, juice, and furniture from the CIS to the rest of the world. The simulation results also show that a full free trade regime does not have an appreciable impact on the prices of aluminum, ethylene, polysulfide, cotton, and plant-oil. There are moderate price impacts for sunflower, white sugar, and propane, with prices reduced between 3%-5.5%. The price reduction for tomato juice is about 7.5%, and that for sunflower oil and fruit juices is between 10.5%. The analysis emphasizes the importance of trade liberalization in promoting economic growth and development in Azerbaijan. By reducing tariff rates and promoting trade, Azerbaijan can maximize the welfare of its citizens and propel its economy to its long-term path for rapid economic growth. The successful experiences of Korea, Taiwan, and Singapore provide an excellent guide for designing a strategy for rapid economic growth. The analysis also highlights the need for a balanced growth of agriculture, manufacturing, and service sectors, which requires the true relative prices to guide resource allocation among various industries and economic activities. Trade liberalization enables economic forces to highlight the true costs and benefits of productive resources in the country and to propel Azerbaijan's economy to its long-term path for rapid economic growth. The total revenue from levying tax and duties on imports and domestic production shows a relatively small decline in absolute value if the tariff rates are lowered towards zero. In particular, the total revenue loss due to instigating full free trade is only 3.8 million dollars. On the other hand, lowering the tariff rate by 50% leads to an effective tariff rate of 8.5% and about 1.3 million dollars loss in total revenue. The analysis concludes that tariff liberalization will have a profound impact on Azerbaijan's trade and economy, with the potential to promote economic growth and development. However, the impact of reducing tariff rates on imports is negligible, and the loss of tariff revenue due to full trade liberalization is also negligible.