In recent decades many countries have dismantled trade barriers and opened their economies to international competition. Trade liberalization is seen to promote economic efficiency, international competitiveness, and an expansion of trade, perhaps especially in imperfectly competitive markets.¹ Yet despite this progress in trade liberalization, as evidenced by the conclusion of the Uruguay Round in 1994 and the establishment of the World Trade Organization (WTO) in 1995,² trade barriers are still widespread. Some economies and some sectors (e.g., agriculture in many industrial countries) remain relatively insulated from the global economy by a variety of nontariff and tariff barriers, even as import substitution continues to lose ground as a strategy for economic development.

The argument that trade liberalization enhances economic efficiency and accelerates growth is now nearly universally accepted. However, because freer trade may lead to a loss of tax revenue as tariffs and other trade taxes are cut, it is important to evaluate the revenue implications of trade liberalization, focusing on what has actually happened to revenue during liberalization, with a view to drawing policy implications. Clearly, for countries with significant fiscal imbalances, any loss of revenue would be an important consideration.³ Moreover, for many developing countries, taxes on international trade are a large source of revenue. Indeed, an impetus for this paper was the observation, in a recent evaluation of IMF-approved Structural Adjustment Facility (SAF) and Extended Structural Adjustment Facility (ESAF) programs, that some countries had targeted an increased reliance on revenue from international trade taxes or, in any event, had attained higher ratios of international trade tax revenue to GDP at the end of the SAF/ESAF-supported adjustment period. This had occurred despite an apparent commitment to trade liberalization (Abed and others, 1998). Many of these countries are in Africa, where despite a declining, if uneven, trend, trade taxes accounted for about 5 1/2 percent of GDP on average in 1995 (Figure 1).⁴

A recent IMF study of trade liberalization in general in countries undergoing IMF-supported programs (IMF, 1998) also finds a range of fiscal outcomes from liberalization. The study concludes that some programs could have targeted more extensive trade reform if greater attention had been given to supporting fiscal policies and to revenue-neutral trade measures.

Changes in a country's trade policy can be diffi-cult to summarize, because they may entail modifications in complex tariff structures and quantitative restrictions and have complex interactions with domestic taxes. Some researchers have tried to develop a trade restrictiveness index that attempts to transform a given pattern of trade protection into an equivalent uniform tariff (Anderson and Neary, 1994). In a similar vein, IMF (1997) develops a 10-point scale that combines measurements of the restrictiveness of tariffs and nontariff barriers. Here the approach is to view trade liberalization as a broad set of movements (i.e., considerably more complex than simple tariff reductions) toward a less distorting environment. Given the extensive range of countries considered, however, the analysis of necessity relies on aggregate data rather than on calculated indices.

Against this background, the present paper begins by reviewing the ways in which the revenue impli-cations of trade liberalization tend to depend on the country's initial conditions and reform strategy, especially in cases where tariff structures may be complex and highly restrictive.⁷ Of course, in the later stages of reform, tariff reductions are bound to be associated with revenue losses. Accordingly, this paper suggests a set of best practices for domestic tax reform, which would over time offset revenue losses from reductions in trade taxes. Finally, the paper attempts, through an analysis of policy in six selected countries, a review of revenue trends in a larger sample of countries, and econometric analysis, to determine how countries have balanced these various constraints in practice.