International trade:a new scenario? A brief look from a

Brazilian practitioner

Fernando Coppe Alcaraz *

June 9th, 2017

IBRAC – 17th Seminar on International Trade

São Paulo - Brazil

1* SAIN-Ministry of Finance of Brazil. Speaking in his own capacity.

Some questionsSome questionsSome questionsSome questions

�Can international trade bring gains? (in theory)

Yes

� Has international trade brought gains? (empirical/in practice)

Yes.

� Does everybody win with trade? (and why are some people angry?)

No.

� What to do about it? More or less trade? Which other policies are relevant?

� What about Brazil?

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Gains from trade Gains from trade Gains from trade Gains from trade ---- theorytheorytheorytheory (1)(1)(1)(1)A simplified description

1. Factors move from less to more productive sectors and/or firms

2. Competitive push (to existing firms)

3. Access to high tech inputs and machines at lower costs

4. Larger markets - > Economies of scale

As a result - > More productivity, lower costs

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Gains Gains Gains Gains from trade from trade from trade from trade ---- theorytheorytheorytheory (2)(2)(2)(2)A simplified description

Moreover:

5. More varieties of goods and services (at lower prices)

As a result -> higher consumer welfare

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Gains Gains Gains Gains from trade from trade from trade from trade ---- some some some some empirical conclusionsempirical conclusionsempirical conclusionsempirical conclusions

� Open economies grow faster than relatively closed economies &

� Salaries and working conditions are generally better in companies that trade than in those that do not (OECD, 2012)

�Global trade and GDP growth are positively correlated (OECD, 2017)

�Rising trade ratios are correlated with overall increases in productivity over the long run (Newfarmer and Sztajerowska, 2012 and Cline, 2004)

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Trade and poverty Trade and poverty Trade and poverty Trade and poverty

More trade is correlated with less poverty

Change in Openness and Income of the Poor, 1993-2008Developing/emerging economies

Sources: IMF (2017) and OECD (2017)

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Trade leading to less intercountry inequalityTrade leading to less intercountry inequalityTrade leading to less intercountry inequalityTrade leading to less intercountry inequality

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Sources: IMF, Lakner and Milanovic (2013). Reproduced from OECD (2017)

Does everybody win with trade? No.

Winners:

�those who are comparatively more efficient/own the most abundant factors of production etc..

�Potentially everybody in the long run (provided the right policies are in place)

Losers (at least in the short run):

�Those who are comparatively less efficient/provide/own the less abundant factor of production (e.g. unskilled labor in the USA).

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Protectionism is not the solution

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Protectionism is not the solution (1)Protectionism is not the solution (1)Protectionism is not the solution (1)Protectionism is not the solution (1)

� If Europe, US and China raised MFN trade costs on all goods by 10 percentage points - > estimated impacts:

� minus 1.4% in world GDP

� minus 6% in global trade,

With the countries imposing the trade barriers lowering their own GDP the most (OECD 2016).

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OECD (2016), OECD Economic Outlook November 2016, OECD publishing, Paris

Protectionism is not the solution Protectionism is not the solution Protectionism is not the solution Protectionism is not the solution (2)(2)(2)(2)

� With the rising importance of Global Value Chains, goods and services cross borders many times in the form of inputs and final products. - > Trade barriers become more costly.

�With GVCs, specialization now in tasks - > trade in tasks

See examples on next slides

- >

� Low trade costs become more and more important.

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WWWWhat are value chains? hat are value chains? hat are value chains? hat are value chains?

The iPod The iPod The iPod The iPod exampleexampleexampleexample

Source: Stephen Gelb – WTI (2014).

14Source: OECD (2012)

So, what to do? So, what to do? So, what to do? So, what to do?

Freer trade (in Agriculture, Services, some industrial goods)

Plus

The right policies to:

� Increase and speed up the benefits of trade and,

� Reduce adjustment costs

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Which policies?Which policies?Which policies?Which policies?

� More trade: Trade facilitation and investment facilitation (WTO etc.) fewer barriers in areas still highly protected (services, agriculture, some industrial goods – tariffs as regressive taxes)

� More and deeper international rules in related areas: Corporate Social responsibility/corruption/tax evasion (BEPS) etc. -> Fairness

Other domestic policies:

� Connect people to jobs: education, identify and train people in new skills, flexible labor markets.

� Safety net: unemployment benefits, training, healthcare.

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What about Brazil?

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What about Brazil?What about Brazil?What about Brazil?What about Brazil?

�One of the most closed economies to trade in the world.

�This is true in both policy variables (1) as well as in trade/GDP (2).

�This has not improved in the recent past

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TariffsTariffsTariffsTariffs

Highest tariffs Lowest tariffs

1. Gabon17.80

1. Georgia 0.42

2. CAR(Central

African Republic) 17.28

2. Norway 0.72

3. Chad 17.043. Chile 1.17

4. Cabo Verde 14.824. Albania 1.24

5. Dominica 13.875. Iceland 1.31

6. Brazil 13.666. Mauritius 1.43

Source: World Bank - Tariff rate, applied, simple mean, all products (%) – WTO members.

Tariffs for capital goodsTariffs for capital goodsTariffs for capital goodsTariffs for capital goodsBrazil vs G20 countriesBrazil vs G20 countriesBrazil vs G20 countriesBrazil vs G20 countries

G20: developing countries G20 – Developed/high-income countries

Brazil 13.1 South Korea 5.89

China 9.10 Australia 2.59

India 7.80 EU 2.01

Indonesia 5.44 USA 1.61

Saudi Arabia 4.15 Canada 0.90

Russia 4.00 World average 5.87

Mexico 2.91

Source: World BankTurkey 2.11

South Africa 1.99

Local Content RequirementsLocal Content RequirementsLocal Content RequirementsLocal Content Requirements (LCRs)

� Brazil is second only to Indonesia in the number of LCRs imposed since the onset of the global crisis in 2008 (OECD 2014)

�Inovar Auto (cars), Informatics Law, PADIS (semiconductors), Manaus, PPBs, preferences in governmental procurement etc.

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Trade agreementsTrade agreementsTrade agreementsTrade agreements

�Few outside Latin America (Israel, India, South African Union, Palestine)

�Most with developing countries

�Shallow (usually only goods, many only grant preferences – no free trade)

Example: Mercosur-India (only 450 items, out of 9k-10k, mostly with 10%-20% preferences)

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Antidumping dutiesAntidumping dutiesAntidumping dutiesAntidumping duties ((((2013-Aug 2016)

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Approx. 80% on imports of inputs

This has led/contributed toThis has led/contributed toThis has led/contributed toThis has led/contributed to…………

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Highest proportions

(trade/GDP)

Lowest proportions

(trade/GDP)

1. Hong Kong 400.9 1. Sudan 19.1

2. Luxembourg 391.5 2. Nigeria 21.4

3. Singapore 326.1 3. Argentina 22.9

4. Malta 278.3 4. Brazil 27.4

5. Ireland 216.25. Pakistan 27.6

Source: World Bank. World Development Indicators. Retrieved in Feb 2017.

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Média dos Membros do G20* Brasil

Labor Productivity - per hour

worked (% change)Source: conference-board.org

� There are other factors, of course.. But trade is definitely important:

� Brazil in the World Economic Forum Global Competitiveness Index (GCI) (2016-2017 Edition):

GCI – General Index 81st out of 138 countries

GCI - Goods market

efficiency pillar

128th out of 138 countries

GCI – Imports/GDP (sub

pillar)

136th out of 138 countries

Industrial sector/GDPIndustrial sector/GDPIndustrial sector/GDPIndustrial sector/GDPMiddle-income countries

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Source: World Bank in Araújo and Flaig (2017)

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What to do? Some ideas/suggestions from empirical studies

and current government actions

What to do (1)What to do (1)What to do (1)What to do (1)

�Reduce tariffs on capital and IT goods

Effect on GDP: SE/CAMEX CGE simulation (2017): zeroing tariffs = + BRL 2.69 billion

IMF simulation. Effects on investment: to be published

Preliminary discussions in the government – no consensus so far

�Review/Reduce Mercosur Common External Tariff

(depends on Mercosur partners)

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What to do (2)What to do (2)What to do (2)What to do (2)

�More carefully scrutinize the imposition of antidumping duties: Ongoing work by CADE has shown negative effects of AD on productivity in Brazil (to be published – Kannebley Jr, Remédio and Oliveira)

Government: Public Interest Test (GTIP)

�Negotiate trade agreements which are i) deeper and ii) with important trading partners (EU, USA etc.)

Government: EU, Mexico in progress.

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What to do What to do What to do What to do (3)(3)(3)(3)

�Review/Reduce Local content requirements

Government:

Review in progress due to: i) WTO panel; ii) Some programs expire in 2017.

Gov. Procurement margins of preference: Expired/Decrees not renewed.

Study by OECD economists*: No LCRs + Minimum OECD tariffs + zeroing indirect tax residues in exports = +GDP, +Exports, +Labor Demand

” [major] winners [would be] manufacturing sectors, which manage to increase production by 2.6% in case of full liberalisation”. They gain because they can add imported inputs to their products and use imported machines in their production.

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Araújo and Flaig (2017). Journal of Economic Integration.

Thank You

Obrigado

Fernando Coppe Alcaraz

fernando.alcaraz@fazenda.gov.br

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Extra SlidesExtra SlidesExtra SlidesExtra Slides

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Industrial sector/GDP (%) Industrial sector/GDP (%) Industrial sector/GDP (%) Industrial sector/GDP (%) –––– Middle income countriesMiddle income countriesMiddle income countriesMiddle income countries

Source: Araújo and Flaig (2017). Journal of Economic Integration.

Tariffs Tariffs Tariffs Tariffs are/can be are/can be are/can be are/can be regressive regressive regressive regressive taxes taxes taxes taxes (extra)(extra)(extra)(extra)

� Tariffs are regressive taxes that tend to be “toughest on the poor” (Gresser, 2002), because, especially in developed countries, they tend to be higher in cheaper goods.

�In 2012, US tariffs were 8.5% for leather dress shoes, rising to 20% for running shoes and peaking at more than 60% for some cheap sneakers (Gresser, 2012).

�In 2002, each year, a US single parent making USD 25,000 a year was losing 3 days’ pay to tariffs—twice as much as a single high-income employee making USD 110,000 (Gresser, 2002).

�In food: agricultural sectors less liberalized than industrial goods. The poorer a person is, the more s/he spends in food. This also disproportionally hurts exporters from developing countries.

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