Economic research and trade policy analysis
Foreword
The World Trade Report 2005 follows the pattern established in previous years and takes up a number of key trade policy issues facing the international trading system for analysis and discussion. The underlying objective of the Report is to contribute to a deeper understanding of trade policy issues facing governments. The core topic in this year’s report is standards and international trade. Shorter essays have been prepared on three other topics – the use of quantitative economic analysis in WTO dispute settlement international trade in air transport services and offshoring services.
Environmental Quality Provision and Eco-Labelling
This paper is a literature survey of some relevant issues arising from environmental quality provision and eco-labelling schemes. First of all it is shown how the two topics are strictly related. Firms adopting a production process (or producing a good) more environmentally friendly than others (environmental quality provision aspect) may want to make it public (eco-labelling aspect). The survey addresses the question of optimal environmental quality provision (also as a policy tool) and firms compliance. With regard to eco-labelling its impacts on market structure are analysed. It hasn’t been possible to consider all issues like for example that of moral hazard in providing non truthful information. Different issues related to trade are also analysed even if the literature is not abundant on this yet. In the literature both aspects of environmental quality provision and eco-labelling are analysed using product differentiation models. The usual result is that multiple equilibria arise depending also on the parameters. Models are also not robust to different assumptions. Environmental quality provision and eco-labelling are also compared to more traditional policy instruments like taxes (or subsidies) and standards. From the empirical evidence it can be concluded that information plays a crucial role both for consumers’ and producers’ decisions. Consumers are willing to pay a higher price to be informed about the greenness of a good and a label can really be a determinant in their choice of which brand to purchase. On the supply side disclosing information about the environmental performance of a firm can affect investment decisions and its stock value.
Turning Hills into Mountains?
Over the past months it has become increasingly clear that the services negotiations under the Doha Development Agenda will not produce significant improvements on current commitments unless major new impetus is provided. In an introductory section this paper discusses various impediments from the perspective of participating governments that may explain the lack of negotiating momentum to date. It then provides an overview of existing commitments under the GATS (by sector mode of supply and level of development) and of the initial offers that had been tabled by early 2005. Despite the substantial benefits that may be associated with the liberalization of services trade the GATS has obviously not yet lived up to ambitious expectations. For example on average across all WTO Members only one-third of all services sectors have been included in current schedules of commitments; and many entries have been combined with significant limitations on market access and national treatment or with the complete exclusion of particular types of transactions (modes of supply) from coverage. While the ongoing services negotiations provide an opportunity to complement the rule-making efforts of the Uruguay Round with genuine market opening many governments apparently have found it difficult despite generally more restrictive access regimes and thus potentially higher gains from liberalization than in merchandise trade to undertake or envisage economically significant bindings across a broad range of services. Five years after the inception of the services round current negotiating arrangements based mainly on (bilateral) exchanges of requests and offers may need to be complemented by common points of reference to provide greater focus and guidance.
Developing Countries in the WTO Services Negotiations
The aim of this paper is to analyse developing countries’ participation so far in the current round of services negotiations under the Doha Development Agenda. The paper analyses developing countries’ negotiating positions as evidenced by their multilateral negotiating proposals; their initial offers; and to the extent allowed by the incomplete and sketchy information available their participation in bilateral market access negotiations. A number of basic themes are raised: the essential role of services for economic development; the high costs imposed by trade protection; the benefits of liberalization; the need to make use of the WTO forum to enhance credibility and sustain domestic regulatory reform programmes; the challenges of regulatory reform and the importance of appropriate sequencing; and the benefits arising from seeking further market access overseas in those areas where developing countries have a comparative advantage.
The Impact of Mode 4 on Trade in Goods and Services
This paper estimates the impact of liberalization of temporary movements of individual service suppliers on trade in goods and services. In particular the paper looks at the impact of the so-called forth mode to provide a service on trade in services under the other three modes: cross-border service supply (Mode 1) consumption abroad (Mode 2) and commercial presence abroad (Mode 3). Estimates are obtained using a gravity model of trade augmented for a measure of temporary movements of service suppliers. Estimates of the size of a country’s Mode 4 trade in services are based on specific information regarding the number of temporary foreign workers occupied in the service sector and their estimated average earnings thus overcoming the limitations of traditional measures of Mode 4 based on remittances or compensation for employees. We find a positive and significant effect of temporary movements of service providers on merchandise trade and services trade under Mode 1 and 3. No significant relationship is found between services trade under Mode 2 and Mode 4.
Coherence
The starting point for this study is that appropriately designed and sequenced trade liberalization measures and a well crafted set of trade rules can make a positive contribution to growth and development. But the extent of that contribution also depends on other policies. The notion of coherence has been deployed in this study to characterize a situation in which relevant policies are pulling together in the same direction. In a world of multiple policy objectives and priorities and one where no consensus exists on the ideal policy set the concept of coherence cannot be given operational precision – rather it is indicative of the reality that policies are inter-dependent and that poor policy or neglect in one area can undermine the efficacy of efforts in another. Coherence cannot be uniquely defined unless a set of policy objectives is formally established and the objectives ranked in terms of priorities that indicate how trade-offs are to be made when these are necessary. A precise specification of a fully coherent policy set would also identify the exact nature and timing of all relevant government interventions. Any such undertaking is well beyond the scope of this study. Instead coherence in this context simply refers to the idea that mutually supportive approaches in related areas of policy are likely to produce greater harmony between intent and outcome. Coherence as discussed here is a matter of degree and more coherence means that the benefits of sound trade policies are greater than they would be without supportive policies in other areas.
Trade and trade policy developments
The expansion of global output and trade gained considerable momentum in the second half of 2003 resulting in an annual average increase of world GDP and world merchandise exports of 2.5 per cent and 4.5 per cent respectively. These changes represent stronger than expected improvements when compared with the preceding year although trade growth remained below the average rate recorded in the 1990s. These annual results were negatively affected by a combination of unusual temporary factors and longer-term structural weaknesses in a number of major economies (in particular the state of the banking system in Japan and the labour markets in Western Europe). One of the influencing temporary factors was the emergence of the severe acute respiratory syndrome (SARS) in East Asia. Although SARS remained a limited epidemic relative to malaria and the acquired immunity deficiency syndrome (AIDS) it had a dramatic short-term impact on the movement of people and on the tourism industry in the region. The build up of tensions resulting in the military conflict in Iraq weakened consumer and business confidence in many regions in the first quarter of the year. In OECD countries the composite leading (business) indicator hit its lowest level in March 2003 then displayed a trend increase from May 2003 onwards. The major stock markets showed a similar development dropping sharply until March but recovering thereafter and then expanding sharply until the end of the year.
Foreword
The World Trade Report 2004 is the second annual publication in the WTO Secretariat’s new series. As I indicated last year the World Trade Report seeks to deepen public understanding of current trade policy issues and to contribute to more informed consideration of the options facing governments. Like last year the Report begins with a review of recent world trade developments. This is followed by three shorter essays – on trade preferences the temporary movement of natural persons and geographical indications. The main topic of the Report this year is coherence.
Executive summary
The first Section of the World Trade Report 2004 discusses recent developments in the structure value and volume of international trade in goods and services and trade prospects for 2004. It also includes analyses of non-reciprocal preferences the international movement of persons supplying services and geographical indications. The second Section of WTR 2004 then examines the subject of policy coherence stressing the importance of complementary national policies to enable trade liberalization to create larger benefits for society. It focuses on four important areas of economic policymaking. They are: i) the macroeconomy; ii) the state of infrastructure and infrastructural services particularly in areas linked closely to trade performance (transport telecommunications financial services and business services); iii) market structure with special emphasis on the level of competition and presence of externalities; and iv) the quality of institutions. The last part of the second Section of the Report then explores the international dimensions of coherence identifying the role of international cooperation in supporting coherent policy formulation at the national level particularly in the field of trade policy.
Acknowledgements
The World Trade Report 2004 was prepared under the general direction of Deputy Director-General Dr. Kipkorir Aly Azad Rana. Patrick Low Director of the Economic Research and Statistics Division led the team responsible for writing the Report. The principal authors of the Report were Bijit Bora Zdenek Drabek K. Michael Finger Marion Jansen Alexander Keck Patrick Low Hildegunn Kyvik Nordås Roberta Piermartini and Robert Teh. Barbara D’Andrea of the Economic Research and Statistics Division co-authored Section IB.2. Jeffrey Gertler of the Legal Affairs Division contributed to the writing of Section IB.1. Mukela Luanga of the Economic Research and Statistics Division provided critical input to a number of the principal authors. Trade statistics and tariff information were provided by the Statistics Group of the Economic Research and Statistics Division coordinated by Guy Karsenty Julia de Verteuil Andreas Maurer and Jürgen Richtering.
World Trade Report 2004
The World Trade Report is an annual WTO publication focused on trade trends and policy issues. The 2004 edition reviews recent trade developments and examines issues including coherence in trade and macroeconomic policies geographical indications and the liberalization of trade in services through the temporary movement of natural persons.
The GATS Turns Ten: A Preliminary Stocktaking
The paper discusses the experience to date with the implementation and application of the General Agreement on Trade in Services (GATS) some ten years after its entry into force. One striking observation is the smooth functioning of the Agreement which has created far less tensions and frictions including at Ministerial Meetings than its difficult negotiating history might have suggested. This is due in large part to a high degree of flexibility at several levels: Members have more scope than under the GATT to depart from common horizontal obligations in particular the MFN principle; they are able to adjust the breadth and depth of their trade commitments (market access and national treatment) to particular sector conditions; and they face less constraints if any in the use of trade-related policies such as subsidies export restrictions or domestic regulatory interventions. An additional source of flexibility is the uncertainty still surrounding a few core concepts of the Agreement and their sometimes daring application in individual schedules. While the ongoing negotiations also provide an opportunity for technical corrections of scheduling problems the basic (built-in) flexibility elements of the Agreement - including the bottom-up approach of undertaking sector commitments and the possibility of inscribing limitations under individual modes - will of course persist. (Their actual relevance may nevertheless differ significantly between 'old' Members and countries negotiating their accession to the WTO.) Given the broad reach of of the Agreement in terms of membership sector application and modal coverage flexibility may be considered a conditio sine qua non. There is little reason to believe that a more rigid structure would have been acceptable to Uruguay Round participants and even if so that it would have proven stable and resilient over time. However flexibility may come at a cost: lack of meaningful obligations across a reasonably broad range of service sectors. Vested interests may find it far easier than under the GATT to defend their privileges and defy more rational and harmonized trading conditions. While the paper discusses formula-based approaches that have been proposed to improve the quantity and/or quality of sector commitments within the existing framework of GATS there should be no illusion about the scope for technical solutions to what constitutes a political and institutional challenge.
Infrastructure and Trade
This paper explores the role that quality of infrastructure has on a country's trade performance estimating a gravity model that incorporates bilateral tariffs and a number of indicators for the quality of infrastructure. The paper looks at the impact of the quality of infrastructure (road airport port and telecommunication and the time required for customs clearance) on total bilateral trade and on trade in the automotive clothing and textile sectors. In order to obtain unbiased estimators multilateral resistances for tariffs and remoteness are introduced in the gravity equation. Moreover the robustness of the results is tested by estimating a fixed-effect model where bilateral indexes of the quality of infrastructure are included. The results can be summarised in four main findings: (i) bilateral tariffs generally neglected in gravity regression of bilateral flows have a significant negative impact on trade; (ii) quality of infrastructure is an important determinant of trade performance; (iii) port efficiency appears to have the largest impact on trade among all indicators of infrastructure; (iv) timeliness and access to telecommunication are relatively more important for export competitiveness in the clothing and automotive sector respectively.
Special and Differential Treatment in the WTO
Special and differential treatment (S&D) for developing countries continues to be a defining feature of the multilateral trading system. This paper seeks to address key aspects of what has become an increasingly entangled and multi-faceted discussion. The paper begins by reviewing the historical context in which the relationship of developing countries with the multilateral trading system evolved. The paper distinguishes several elements in the case typically made for S&D. It argues that concerns about graduation — the definition of which countries qualify for special treatment —have complicated progress on this issue suggesting that a focus on measures rather than on country status would obviate this difficulty while at the same time increasing the analytical underpinning of the case for special and differential treatment. The paper explores various forms of S&D and develops arguments for particular approaches to the design and management of access to S&D. An illustration is provided of how a more analytical approach would work by defining eligibility automatically in relation to measures rather than countries.
Institutions, Trade Policy and Trade Flows
This paper analyses to which extent domestic institutions affect trade flows. We use two complementary approaches one focusing on the size of total trade flows and one focusing on bilateral trade patterns (gravity equation). Besides we control for two other domestic policy variables: trade policy and domestic infrastructure. We find that the quality of institutions has a positive and significant impact on a country’s level of openness. Domestic tariffs have no statistically significant impact on their own but do affect total trade flows when combined with good institutions. Domestic institutions also have a positive and significant impact on bilateral trade flows but the parameter of our institution variables is reduced by almost a half and may turn insignificant when the quality of domestic infrastructure is included in the regression.
National Environmental Policies and Multilateral Trade Rules
This paper provides an overview of institutional economic and legal aspects of the relationship between national environmental policies and the multilateral trading system. In particular it analyses some of the difficulties the WTO Dispute Settlement System faces when having to evaluate disputes on national environmental policies that have an impact on trade. From an economist's point of view it would be desirable that optimal environmental policies i.e. policies that correct existing market failures be ruled consistent with multilateral trade law. This paper argues that WTO law in theory provides appropriate tools to ensure rulings that are consistent with economic thinking. Yet the paper also argues that economists have a rather imperfect knowledge of the precise welfare effects of different types of environmental policies. In practice therefore it is questionable whether economists are able to give adequate guidance to legal experts when it comes to the evaluation of national environmental policies. This is one of the reasons why there continues to be some degree of uncertainty as to the possible interpretations of certain WTO rules in the context of environmental disputes.
Vertical Specialization and the Quality of Infrastructure
This paper explores the role of producer services and ICT on international outsourcing. The motivation for outsourcing is to focus on core business and improve efficiency and outsourcing companies usually outsource a number of functions and the efficiency gains depend on the ability for the suppliers to deliver the required quality at the right time. The timeliness of delivery and the fulfilment of quality standards depend critically on the availability of producer services. I therefore argue that international outsourcing can best be understood within an analysis framework of many suppliers that are interdependent and the O-ring theory of production is such a theory. The paper first presents and modifies this model and then explores its predictions in an empirical analysis of the determinants of international vertical specialization as defined by an index developed by Hummels et al. (2001). The index is calculated for a cross-section of 52 countries and 5 sectors and regressed on a number of variables affecting the timeliness of delivery. It is found that vertical specialization is sensitive to trade barriers and infrastructure quality and cost of infrastructural services. The relative importance of trade barriers and various indicators of infrastructure vary between sectors. Vertical specialization in the electronics sector appears to be most sensitive to trade barriers and the density of the telecommunication network. This is also the case for the motor vehicles sector but the size of the parameters is somewhat lower. The chemicals sector is most sensitive to the restriction on maritime services while for textiles and clothing the aggregated measure of infrastructure had the highest explanatory power. Only in the electronics sector did the wage level (GDP per capita was used as a proxy) matter for vertical specialization.