Trade Liberalization and Taxation: A Multi-Sector Dynamic CGE Model for the United Arab Emirates

This paper develops a forward looking, multi-sector, dynamic computable general equilibrium model with oil for the United Arab Emirates. The model addresses three issues. The first is trade liberalization, where the UAE unilaterally lowers import taris. This has a favorable impact on welfare as domestic production is expanding, although labor-intensive sectors face a cost disadvantage and they are shrinking. The second issue, government revenue diversification, is simulated by increasing the indirect tax rate on goods to make the government less dependent on oil. This has an adverse effect on welfare as the economy is shrinking and production shifts from domestic production to exports, especially for labor-intensive sectors. Finally, a higher oil price has a favorable impact on welfare and overall, the economy is expanding, but more because of increased consumption and less because of increased production. This paper is the first attempt to address these issues in a dynamic forward looking general equilibrium context of the UAE and the Arab Gulf region