trade and domestic policies in an open economic setting introduction slides for lessons. course in...
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Trade and domestic policies in an open economic setting
Introduction
Slides for lessons.Course in Trade and Domestic Policies in an Open Economic Settting
Prof. Jose-Maria Garcia-Alvarez-Coque
Why this subject may be useful? No country is self-sufficient in everything.
All measures have costs and distributive effects.
Endless debate between “globaphiles” and “globaphobes”.
National policies have international impacts.
Is a common regulation needed?
Regional or multilateral strategies?
Main questions•How measuring international trade and prices?•What are the main trends in world agricultural trade?•How globalisation of agricultural markets is arranged at international level? Why international rules are need?
•What are the main arguments for trade liberalisation?•What are the factors explaining why a country is an exporter or an importer?
•What is the impact of trade measures on consumers, producers, State and general efficiency?
•What are the political factors explaining why do governments do what they do?
•What is the international impact of domestic policies?•How trade distortions can be measured?•Why agricultural trade is from being free in current days?
Trade and market concepts
Main questions:
The first: How measuring international trade?:
– Let’s consider the international prices. They represent what the commodity can earn as an export or what it costs to the economy as an import. (If Syria goes to the world market, what price?).
Does a world market exists?
Commodity prices?
Unit values?
Seasonality and short-term variations.
–
The second question How using trade data?
– Two extremes: data are too scarce or too abundant.
– Please, use your common sense. If you have a theory, use the data needed to test such theory (sounds simple, but it is an “art” and requires some practice, but there are many more difficult things in life).
–
Border price: calculation problems Choosing the appropriate border price:
– FOB (free on board), CIF (Cost, insurance and freight)
– Average prices? Choosing the exchange rate.
Small country assumption: price taker?
Is Syria a small country?
A couple of trade concepts:Terms of Trade
Average export price / Average import price
It is an indicator of relative profitability of exports against imports.
So, it might allow to see the relative performance of Syria against other countries.
Take care that the average export price depends on diversification of exports and concentration on low value or high value products.
Terms of trade can be applied to other types of transaction: eg. inter-sectoral terms of trade.
Mediterranean countries. Terms of trade
Source: FEMISE (2002)
A couple of trade concepts:Parity prices
How estimating international prices where transport and handling costs appear?
Import parity price = Price of a major exporter + transport and handling costs from that market.
Export parity price = Price of a major market - transport and handling costs to that market.
Thorugh parity prices you see a “net” international price adjusted by transport and handling costs.
Parity prices: Example Assume that international price (estimated at one representative market is about 100 US$/100 Kg). Assume that transport and handling costs are 50 US$/100 Kg. Calculate import and export parity prices.
IPP = 150; EPP = 50.
Trade can only hapen when domestic prices are outside the interval (50, 150).
Trends in world agricultural trade
1. Declining importance of agricultural trade
Source: WTO
2. Trade mainly takes place between developed countries
World agricultural trade is dominated by intra-zone trade
19 per cent of world agricultural trade is among NAFTA partners. 41 per cent is among EU Member States.
Major agricultural exporters
Source: WTO
3. Declining trend in real agricultural prices (with sharp variations)
Real agricultural price indices (1980 = 100)
Source: WTO
4. Trade is increasingly dominated by TNCs
Wal-Mart General Motors and Ford have a bigger turnover than Africa’s entire combined GDP.
500 corporations control over 70 percent of world (agricultural + industrial) trade.
A large proportion of international exchange by transnational companies takes place inside a given corporation (or between branches of this corporation).
TNCs: Increasingly important in agricultural trade.
Question: TNCs operating in Syria?
5. Developing countries evolving as food importers.
6. Declining share of developing countries in the export market
7. Growing importance of high-value products
Processed and Non traditional exports.
Emerging actors: a challenge for the Mediterranean region?
8. Poverty keeps significantPeople earning less than 1 dollar per day
0
100
200
300
400
500
600
East Asia Trans.Ec. LatinAm. MENA South As. Subsah.A.
1987
1998
9. Rural population keeps important
International trade and Economic Globalisation (I)
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About globalisation It is not so new.
It has evident advantages and disadvantages:
– Engine for wealth and prosperity.
– But, financial volatility and social effects.
Some macro developments 1870 - 1914: rapid growth of global economy.
After WW1 volatility, inflation and recessions.
During the 1940s, the Bretton Woods institutions are created:
– IMF: financing problems of countries with negative balance of payments.
– World Bank: financing modernisation, restructuring and
development.
Between 1940s and 1970s: “a golden age of capitalism”.
Oil price shocks in 1970s, debt crisis for developing countries in the 1980s.
During 1990s, some economic growth but financial instability.
The GATT and the WTO
The GATT is signed in 1947.
General Agreement on Tariffs and Trade.
The GATT was an agreement, not an organisation.
The organisation is the WTO, but it was not created until 1995, until a long process of negotiations called Uruguay Round.
Is the GATT looking for trade liberalisation?
Some GATT aspects:
– The Most Favoured Nation (MFN).
– National Treatment.
– Tariffication.
– Prohibition of quantitative restrictions.
– Antidumping and safeguards.
Agriculture and the GATT The Agricultural “Waiver” in the 1950s.
The Uruguay Round starts: 15 negotiating chapters, including agriculture.
After Uruguay Round there are imperfect rules for agriculture, but at least there are rules Is the bottle half full or half empty?
Agreement of Agriculture, Article 20: continuation of the reform process.
Current issues:
– Non-trade concerns.
– WTO scope
– The “double standards” issue for developing countries
International trade and Economic Globalisation (II)
Regional vs multilateral choices
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Regional integration and Art. XXIV Regional agreements: contradicting MFN?
GATT Article XXIV allows for an exception.
Tariffs to be abolished in “substantially” all sectors in countries involved. This has open the door to “free interpretation”.
Two types of agreements
Customs Unions. Members set up common external tariffs.
Free Trade Areas. Members do not charge tariffs on each others’ products but they set their own tariffs against outside world. It needs Rules of Origin.
Examples: AFTA, NAFTA, Mercosur, EU, Association Agreements……………..
There are deeper steps of integration, like the European Monetary Union……...
Total agricultural trade and trade with the EU of selected Mediterranean countries
Million dollars
Exports Imports
1992 2000 1992 2000
Total Mediterranean countries 43.749 79.629 79.807 137.571
from/to EU 23.553 35.612 47.231 73.789
share in total (%) 53.8 44.7 59.2 53.6
from/to Mediterranean countries 2.122 4.241 1.725 3.832
share in total (%) 4.9 5.5 2.2 2.8
Which stategy?
There are still some reasons to join a regional agreement:
– Lowering transaction costs of negotiations.
– Harmonisation of standards. Global public goods: environment, human rights, poverty alleviation, peace…….
– Anchoring reforms. But, who takes the leadership?
North-South integration
It is now recommended as a boost for economic modernisation.
But, there is the risk of a vertical relation between the “hub” and the “spokes”.
South-South integration helps to break the radial “hub and spoke” system.
–
Status of agreements with the EUAlgeria Signature 12/01
Cyprus Pre Accession
Egypt Signature 01/01
Israel Signature 11/95 Effect 06/00
Jordan Signature 11/97 Effect 03/02
Lebanon Signature 12/01
Malta Pre Accession
Morocco Signature 02/96 Effect 05/00
Syria Negotiation since 1998
Tunisia Signature 02/95 Effect 03/98
Turkey Pre Accession
Total GDP
(2000)
million US $
3565
8281
8698
16488
16984
19462
33345
53306
98725
18892
105054
558558
0 100000 200000 300000 400000 500000 600000
Malta
Jordan
Cyprus
Lebanon
Syria
Tunisia
Morocco
Algeria
Egypt
Luxemburg
Portugal
Spain
International trade theory (I)
Name one proposition in Economics which is both true and non-trivial. Samuelson’s answer: “the comparative advantage”. “That is logically
true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine
for themselves or to believe it after it was explained to them”.
40
Comparative advantages
Ricardo’s theory. An intuitive explanation.
Absolute advantage. Countries A and B.
What if country A has absolute advantage in everything?
Comparative advantage must not be confused with absolute advantage.
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A numerical example
• A is better in everything but it is relatively more productive at making cloth.
• Opportunity costs of cloth in country A (1/2) are lower than in country B (6/3). Country A has comparative advantage in producing cloth.
Cloth Food Country A 1 2 Country B 6 3
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Is it right that both countries specialise and trade?
Assume that at the international market: (price of cloth/price of food) = 1.
Country A: With 1 hour work gets 1/2 units of home food, but with 1 hour work in cloth Country A gets 1 unit of foreign food.
Country B: With 1 hour work gets 1/6 units of home cloth, but with 1 hour work in food Country B gets 1/3 units of foreign cloth.
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Foreign trade expands consumption possibilities
• Production possibilities
L = 1 Qc + 2 Qf
(line PF)
• Without trade consumption possibilities are constrained by PF.
• With trade, consumption possibilities expand to TF
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Right statements?
“Free trade is only beneficial if your country has a higher productivity”.
“What can we do if cannot be more efficient than anyone else?”
“Trade exploits a country where workers receive lower wages”.
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The Hecksher-Ohlin model(factor-proportions theory)
Ricardo model only looks at differences in labour productivity.
Two basic concepts:
–Factor intensities.
– Abundant resources.
H-O result: Countries tend to export goods that are intensive in the factors that are abundantly supplied in those countries.
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Implications of the H-O model
Factor price equalisation.
– With trade international prices converge.
– If country A exports cloth because it is labour-intensive and labour is abundant (cheap), trade will increase relative price of labour in coutry A.
– If country B exports food because it is land-intensive and land is abundant (cheap), trade will increase relative price of land in country B.
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And...
Biased specialisation.
– An increase in the supply of one factor expands production possibilities but in favour of the output of the good intensive in that factor.
– What about Syria. Which factor has increased its supply? What would happen if this supply suddenly goes down?
International trade theory (II)
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Economies of scale
Many industries are characterised by increasing returns or economies of scale.
Economies of scale may be:
–Internal to the firm.
– External to the firm but internal to the industry.
Economies of scale can be given by history or accident.
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Imperfect competition
Economies of scale usually lead to imperfect competition.
A case of imperfect competition is dumping.
A case of dumping is reciprocal dumping: two monopolistic firms dump into each other’s home market.
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Intra-industrial trade
“One-way trade: Inter-industrial trade.
“Two-way trade: intra-industrial trade.
Two-way trade seems good:
– Larger choice of varieties.
– Less strong effect on income distribution.
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Two reasons for two-way trade
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One-way trade of selected countries
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Some theory for preferential trade Assume three countries with the following costs for wheat:
– US: 80US$/t, EU: 120US$/t; Morocco: 160US$/t
– Suppose that formerly Morocco applies a 60US$/t tariff.
– Assume that the tariff is phased out on EU imports.
Trade deviation: the efficient supplier is removed. Significant risk in some cases.
Trade creation: the partner replacing domestic production. This improves efficiency.
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FDI and regional integration Two strategies for TNCs:
– “Vertical” or “outsourcing”. Needs incentives to attract FDI such as low production costs or market access in industrial economies.
– “horizontal or “market seeking”. Needs large consumer markets. Again this calls for South-South integration.
Domestic factors:
– Institutional background and investment climate.
– Endowment of human resources.
– Presence of efficient local firms.
– Fiscal incentives
Trade policy interventions
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Types of policies with impact on trade
Direct interventions on trade Tariffs
Import quotas
Tariff-quota
Sanitary and phyto-sanitary measures
Other non-tariff barriers
Export subsidies
Voluntary export constrains
State or Parastatal trading
Multiple exchange rates
Domestic interventions with impact on foreign trade
Production subsidies
Input subsidies
Investment grants
Commodity programs
Tax exemptions
Consumers subsidies
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Producer surplus
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Consumer surplus
60
Analysis of tariffs Tariffs can be specific, ad valorem, or more complex.
Basic analysis of the economic impact of tariffs:
Small country case
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Welfare analysis of the tariff
Indicators Without Tariff With Tariff Change
Consumersurplus
b+c+d+e+f+g f+g - (b+c+d+e)
Producersurplus
a a+b +b
State revenue none d +d
Total welfare a+b+c+d+e+f+g a+b+d+f+g -(c+e)
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Quotas Quantitative limits. In some cases even “voluntary” (VER).
Prices keep high, like tariffs.
But, there is no tariff revenue: a quota-rent appears.
License holders get rights to take the quota-rent
• Transparency is not a quality of the quotas
• Isolation from trade intensified.
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An example of VER
Source: Procotol 1, annexed to the Euro-Egyptian Association Agreement.
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Tariff-Rate Quotas (TRQs) TRQs: an amount of imports benefitting from lower tariffs.
Created with good intentions: avoid that tariffication becomes prohibitve.
In practice, a great deal of managed trade remains in the TRQs.
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WTO members applying TRQsM ember
Number of tariff quotas
M ember Number of
tariff quotas
Australia 2 M alaysia 19
Barbados 36 M exico 11
Brazil 2 M orocco 16
Bulgaria 73 New Zealand 3
Canada 21 Nicaragua 9
Colombia 67 Norway 232
Costa Rica 27 Panama 19
Czech Republic 24 Philippines 14
Ecuador 14 Poland 109
El Salvador 11 Romania 12
EC-15 87 Slovak Republic 24
Guatemala 22 Slovenia 20
Hungary 70 South Africa 53
Iceland 90 Switzerland 28
Indonesia 2 Thailand 23
Israel 12 Tunisia 13
Japan 20 United States 54
Korea 67 Venezuela 61
Latvia 4 All (37) M embers 1371
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Binding tariff levels (averages)
Applied tariffs are often lower than the bindings.
World average in-quota tariff is 62%.
Over-quota tariffs are often prohibitive.
Country
In-quota Over-quota
All Ag MFN tariffs
Australia 7 27 2.5
Canada 8 203 4.6
Czech Republic 27 49 18.9
EU 8 45 19.5
Hungary 21 39 22.2
Iceland 51 223 48.4
Japan 20 274 11.7
Korea 21 366 62.2
New Zealand 0 7 8.7
Norway 216 239 123.7
Poland 25 56 52.8
United States 10 29 9.0
OECD Average 36 120
World
Political Economy ofTrade Policies
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Why protection?
Economic reasons.
Non Economic reasons:
– Political process
– Food Security
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Economic arguments (I) Protection of infant industry.
Market failures
– Domestic distorsions in factor markets; externalities. Protection leading to second-best solutions.
– Two objections to this argument: Addressing the source of the problems may be more efficient.
Responses to protection policies are unknown.
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Economic arguments (II) Protection may improve terms of trade
– Optimum tariff.
Contingent protection
– Counteract “unfair” trading actions of other countries.
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Political arguments Industrial countries protect agriculture, at a high cost for their societies. Is democracy failing?
– Public fails to understand the true costs.
– Political activities as a public good. The costs for collective action are very high for particular individuals (Olson’s paradox).
– Interest groups “buy” policies.
A negative outcome: protection encourages “rent-seeking”.
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Food Security (FS) FAO definition of FS is based on availability, stability and access.
Trade can contribute to improve FS.
But, trade-reliance may bring some problems.
Trade-reliance does not rule out a food self-reliance policy.
Self-sufficiency does not solve all FS problems.
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Some basic recommendations Be aware of political factors,
But, there may be alternatives cheaper than the existing policies.
And think about the most direct ways of addressing market failures.
–
Domestic policies in an open
economy
75
Decoupling
Decoupled policies mean no to encourage farmers’ incentives to increase yields or production.
No measure is fully decoupled.
However, WTO negotiators agreed on a “green box” with a list of seemingly decoupled measures.
76
Buying interventions Market price support by state or parastatal agencies. Examples: CCC, FEOGA, …..
Gradually eliminated but still important.
High cost of operation: how disposing surpluses?
Economic effects are similar to export subsidies, but at a higher cost.
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Direct payments Growing importance in industrial economies
Typical example: deficiency payment system.
It is even more costly than intervention buying.
Usually accompanied with supply controls.
Recent moves to further decoupling in the EU and the US:
• 1992 CAP reform,
• Agenda 2000
• US Farm Bill (FB) 1996
• A move back?: US FB 2001
78
Why do direct payments distort international markets?
Surpluses tend to increase.
However, budget support is more transparent than intervention buying: this makes reform politically easier.
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General criticisms on EU and US domestic policies
"Intense disappointment" over the $180 billion farm bill (Cairns Group).
“the new American agriculture policy has created the "most profound" division between Europe and the United States” (Javier Solana, EU).
“One of the biggest obstacles to creating vital opportunities for poor farmers” (Developing countries at the Food Summit.
“The 15-nation European Union is notorious for giving lavish subsidies to its seven million farmers” (US authorities).
. "We're all free traders and we're all hypocrites” (Peter Scher, former trade negotiator, Clinton Administration).
Measures of protection and support
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Measuring protection
Protection indicators measure distortions due to trade policy interventions.
Some indicators:
– Nominal Protection Coefficient (NPC)
– OECD support estimates (PSE, CSE, TSE)
– WTO Aggregate Measure of Support
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Nominal Protection Coefficient Ratio between (average) domestic price and border parity prices.
Adjustments are needed by transport and marketing costs to make comparison possible at the same spot.
NPC can be adjusted by exchange rate (ER) distortions:
–Gross NPC (or simply NPC). Official ER.
– Net NPC: border prices are converted by equilibrium or shadow ER.
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Producer Support Estimate (PSE) Gross transfers from consumers and taxpayers to support agricultural producers arising from agricultural policies. Two types of components:
– Market Price Support (MPS): Price gap x Total production
– Other transfers from taxpayers to producers
Net of feed costs.
Percentage PSE
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General Services Support Estimate Transfers to general services provided to agriculture collectively.
GSSE represents transfers that are not received by producers individually, and do not affect farm revenues.
Examples:
– Agricultural training and extension.
– Improvement of off-farm collective infrastructures.
– Depreciation of Public storage.
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Consumer Support Estimate (CSE) gross transfers to (from) consumers of agricultural commodities, arising from policy measures which support agriculture.
Includes MPS + Transfers from consumers to the budget and quota-rents.
But it is net of
– transfers from taxpayers
– excess feed cost: MPS on crops used in animal feeding.
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Total Support Estimate (TSE) All transfers from taxpayers and consumers arising from agricultural policies, net of budgetary receipts.
Including:
– Transfers from consumers to producers +
– Transfers from taxpayers to producers +
– Transfers from taxpayers to general services +
– Transfers from taxpayers to consumers
Also TSE = PSE + GSSE + transfers from taxpayers to consumers.
Also TSE = transfers from consumers + transfers from taxpayers - import receipts (or renta-quotas).
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A particular case: MPS + consumer subsidies
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WTO Aggregate Measure of Support
Indicator used in WTO negotiations
AMS is different from the PSE. The AMS:
– excludes “green box” and “blue box”
– only defines MPS when administered prices exist.
– uses fixed reference (international) prices.
– ignores negative transfers. Also, de minimis clause.
– Does not adjust for excess feed costs.
Selected topics
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Allocation of import quotas. The banana case
1993: Creation of the Single Market in the EU: need for a common import regime.
Two tariff quota:
– For traditional ACP countries (preference)
– For Latin America and non-traditional ACP.
Traditional operators of domestic banana and ACP suppliers were allocated 30 percent of licenses for importing from Latin America.
The banana Framework Agreement
The panel. Towards a tariff-only regime.
91
Tariff escalation (TE) : Low tariffs on intermediate goods and high tariffs on final product.
Increases effective protection of value added.
Encourages final goods.
In industrial economies, TE difficulties export diversification of developing countries.
In developing countries: textile case.Country Date Textile fibres Thread Textile,
Fabric, etc. Clothing and accessories
Algeria 1998 10.5 35.2 44.5
Egypt 1998 11.1 44.7 42.7
Jordan 2000 7.5 24.6 34.2
Morocco 2000 4.8 38.0 44.8
Tunisia 1998 20.8 37.8 42.6
Turkey 1997 2.2 8.6 11.8
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Variable tariffs: the entry prices Ideally, tariffs should be constant and predictable.
Entry price applies to some fruit and vegetables and seasons and.
Additional tariffs when import value undercuts the entry prices.
Administrative problems: Importers tend to declared higher CIF prices than the entry prices.
Possible co-ordination in the exporting country for increasing export prices.
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Rules of origin (ROO): making preferences complex
FTAs needs ROO
Products adquire origin with “sufficient transformation”
What is sufficient transformation?
– Bilateral cumulation.
Problems with ROO
– Administrative costs
– Possible trade diversion
– “Hub and spoke” trade
Easing the ROO: diagonal cumulation.