Economic research and trade policy analysis
A Quantitative Assessment of Electronic Commerce
This paper tries to assess quantitatively the role of electronic commerce in economic activity and in trade and tariff revenue collection. The share of value added that potentially lends itself to electronic trade represents around 30 percent of GDP most importantly distribution finance and business services. Electronic commerce is also likely to boost trade in many services sectors significantly. Despite the growing importance of electronic commerce for economic activity and trade tariff revenue loss from electronic commerce is likely to be minimal. Trade in potentially digitizable media goods which currently faces a tariff in some countries represents less than one percent of total world trade. The revenue collected on these products amounts to less than one percent of total tariff revenue in most countries. Even if some of this trade moved “online” tariff revenue loss would be only a very small share of tariff revenue.
The EU Model and Turkey
The customs union between the European Union (EU) and Turkey which entered into force in January 1996 extended and deepened the Association Agreement signed in 1964 and which foreshadows full EU membership for Turkey. In a number of areas the new relationship goes beyond the minimum requirements for a customs union: Turkey is also having to implement a number of measures which are part of the acquis communautaire similar to those applicable within the EU. This paper addresses the question whether this adoption of the EU model is beneficial to Turkey and third countries. The importance of this issue is the spreads of this model through the extension of the EU itself and the building of an increasing web of partnerships between the EU and other countries in Central and Eastern Europe as well as Mediterranean countries. Moreover other regions are looking at the EU model as a way in which to deepen their own preferential trading arrangements.
Financial Services Trade, Capital Flows, and Financial Stability
This study argues that trade policies regarding financial services are an important—but often neglected—determinant of capital flows and financial sector stability. Financial services trade liberalisation which promotes the use of a broad spectrum of financial instruments and allows the presence of foreign financial institutions whilst not unduly restricting their business practices results in less distorted and less volatile capital flows and promotes financial sector stability. The study finds significant evidence in favour of this claim through an empirical analysis of GATS commitments in 27 emerging markets. For example countries which experienced financial crisis during 1991-97 show a combined indicator of financial services trade restrictiveness three times as high (= less favourable for financial stability) as countries without a crisis. The study' s findings have two important policy implications. Firstly liberalising international trade in financial services can be a market-based means to improve the "quality" of capital flows and to strengthen financial systems. This would complement other policies including financial regulation. Secondly even in countries where the financial system is weak and where immediate full-fledged financial sector liberalisation is not advisable certain types of financial services trade could be liberalised as such trade strengthens the financial system without provoking destabilising capital flows.
A Simple Trade Policy Perspective on Capital Controls
This note discusses capital controls using insights from the trade policy literature. It highlights some key issues that have been neglected in the current international debate on capital controls. Capital is tradable in the same way as many goods and services are. As a result much of the analysis pertaining to trade and trade policy in goods and services applies with equal force to capital movements. Free trade is typically the best trade policy no matter whether it is trade in goods services or capital. But if investor behaviour and the prevailing policy environment are not conducive to immediate free trade the choice of instrument for controlling capital flows becomes important. Tariffs and other price-related restrictions are preferable to quantitative restrictions or prohibitions because: (i) they cause less rent seeking and (ii) they do not insulate the domestic market from price changes and innovations in international markets.
Preferential and Non-Preferential Trade Flows in World Trade
This paper quantifies the extent of preferential trade as a share of total world trade in different regions of the world and for two periods. Results show that: i) preferential trade represented 40% of world trade in the period 1988-1992 and it slightly increased to 42% during the period 1993-1997; ii) during the second period agricultural products generally benefited more from the existence of preferential trade agreements than industrial products (maybe due to GATT-exemption); iii) the regional distribution of preferential trade is relatively uneven with a significant share of preferential trade in Western Europe (around 70 per cent) relatively low values in the Western Hemisphere (around 25 per cent) very low shares in Asia and Oceania (around 4 per cent) and average values in the rest-of-the-world (Eastern Europe and Africa); iv) the largest increase in shares of preferential trade between the two periods has occurred in the Western Hemisphere and in Eastern-Europe and Africa; v) at the country level there is an inverted-u-shape relationship between the share of preferential trade and the size and GDP per capita of individual countries; vi) countries which are highly open to trade tend to have a larger share of preferential trade on total trade in the period 1993-1997 suggesting that preferential and non-preferential trade can be seen as complements.
Does Globalization Cause a Higher Concentration of International Trade and Investment Flows?
It has sometimes been argued that "globalization" benefits only a small number of countries and that this leads to greater marginalization of excluded countries. This paper argues that globalization is not necessarily biased towards greater concentration in international trade and investment flows. Marginalization is more likely to be explained by domestic policies in relatively closed countries. The paper shows that among relatively open economies the concentration of international trade and investment flows has declined over the last two decades whereas the opposite is true among relatively closed economies. Thus marginalization is not intrinsic to globalization. Key Words: Globalization international trade and investment flows concentration.
Exchange Rate Regimes and the Stability of Trade Policy in Transition Economies
This paper examines the interplay between exchange rate regimes and policies and commercial policy in six transition economies. In all these economies the rate of protection afforded domestic industry by the exchange rate has been eroded by high rates of inflation and insufficient growth in productivity. As a result there has been pressure on governments to increase trade barriers and each country examined has had recourse to various means of restricting imports. We argue that more flexible management of the nominal exchange rate would be a preferable way of dealing with the real appreciation of these countries’ currencies.
Can Bilateralism Ease the Pains of Multilateral Trade Liberalization?
Using the influence-driven approach to endogenous trade-policy determination we show how a free-trade agreement (FTA) with rules of origin can work as a device to compensate losers from trade liberalization. The FTA constructed in this paper is characterized by external tariff structures that are negatively correlated across member countries ensuring efficiency gains and through reduced average protection compatibility with the multilateral trading system's requirements. It is also politically viable and we demonstrate that in the countries concerned governments are willing to include its formation in the political agenda in spite of the fact that in equilibrium political contributions from producer lobbies decline after the agreement.
A Multilateral Agreement on Investment
Much has been recently written about the Multilateral Agreement on Investment (MAI) that has been negotiated by OECD countries. Perhaps even more has been said by the critics of those who would like to see an agreement of this kind extended among other countries. There has indeed been a great deal of "toing" and "froing" about the desirability of MAI and even misunderstandings about its merits. The principal question of this paper is whether there is any need for MAI. There are arguments in favour and against and this paper provides a short review. On balance the positive aspects of a multilateral agreement should outweigh the negative ones. The novelty of the paper is the attempt to address the critical voices. Given the lukewarm reaction in some countries it would seem sensible to pay more attention to these arguments – a feature that may only now become something of pressing need in the light of the difficulties encountered in the OECD negotiations.
Managing Capital Flows in Transition Economies with a Case-Study of Central and Eastern Europe
Management of capital inflows has unexpectedly become a major challenge in transition economies. These countries were expected to have an insatiable demand for foreign capital and an excess demand for capital inflows was therefore predicted by most observers. Foreign investors are also known to be very selective in their choice of markets and these countries were a big unknown. Moreover macroeconomic policy in these countries has been dominated by the objective of disinflation. We explain in this paper the reasons why some transition countries have been an attractive market for foreign investors and how important has foreign capital been for these countries. But the bulk of the paper provides an assessment of government policies to manage foreign capital inflows. We evaluate the policies against the background of different government objectives and in terms of the actual policy instruments used by the monetary authorities the timing and sequencing and the costs of these interventions. We argue that the initial responses to capital surges were poor; the authorities were reluctant to adjust their original policies and learn from the experiences elsewhere. Eventually their policy responses were changed but until the costs of inertia became too high. The authorities have effectively used sterilization policies more flexible exchange rate policies combined with tight monetary and fiscal policies. They also understood that an effective management of capital flows must start from well functioning markets and have been prepared to adopt structural policies whenever market imperfections could be identified.
Why are Trade Agreements more Attractive in the Presence of Foreign Direct Investment?
This paper argues that interests of nationals and owners of home-based foreign capital in the formation of a Trade Agreements (TA) are not antagonistic except under rather particular assumptions on initial tariffs among potential members. Further if initial tariffs are endogenously determined through an industry-lobbying process then TA that would have been immiserising in the absence of Foreign Direct Investment (FDI) may be welfare-enhancing in the presence of foreign-owned firms. The rationale is linked to the effect that the entry of FDI has on the pre-TA tariff through contributions to the incumbent government. These results may help explain recent integration programs between developed and developing countries.
Fiscal Policy Cycles and the Public Expenditure in Developing Countries
The paper studies empirically the fiscal policy instruments by which governments try to influence election outcomes in 24 developing countries for the 1973-1992 period. The study finds that the main vehicle for expansionary fiscal policies around elections is increasing public expenditure rather than lowering taxes and public investment cycles seem particularly prominent. Institutional mechanisms which constrain discretionary expenditure policies and which strengthen fiscal control are therefore worthwhile considering to prevent opportunistic policy making around elections.
Tying Governments' Hands in Commodity Taxation
In the 1970s taxation of "windfall" profits from primary products and intervention in trade and production tempted governments into expansionary fiscal policies whilst stifling the private sector and depressing growth. However the experience of the recent coffee boom has so far been more favourable: those African countries which liberalized and left a large share of the “windfall” with the private sector and which committed themselves to fiscal austerity via adjustment programs have shown better results in terms of fiscal stability private sector responses and economic growth than countries which did not reform. These findings suggest that constraints on discretionary government policies are desirable and that domestic institutions and international commitments could serve this purpose.
Multilateral Approaches to Market Access Negotiations
Market access negotiations in merchandise trade at the multilateral level cover tariffs and non-tariff measures (NTMs). While tariffs have been substantially reduced in earlier rounds they remain high in certain areas and further reductions involve a number of complex technical issues. Some formulae approaches not used in the Uruguay Round seem more favourable to developing countries. Elimination or phased reductions of NTMs in agriculture is one of the main areas for further market access negotiations in trade in goods. However most NTMs are now the subject to negotiations on the rules under which they may be applied e.g. in the areas of contingency protection and technical barriers to trade.
Transition Economies, Business and the WTO
Transition economies are going through a process of changing the role of the state allowing a greater role for the private sector. This is consistent with the market-oriented approach of the WTO. Remaining state agencies and enterprises will need to adapt their ways of doing business including in their approach to procurement of goods and services for economic and legal reasons. There is some hesitation about privatization as for foreign direct investment and where accepted about the precise timing. Where privatization of basic service monopolies occurs the role of the state shifts towards a regulatory function. In some private sector activities a non-interventionist approach to competition may be justified by market considerations while in others a pro-active policy may be necessary to ensure the benefits of economic liberalization.
Financial Services and the WTO
This paper analyses the results of the financial services negotiations under the General Agreement on Trade in Services (GATS) at the World Trade Organization (WTO). It shows that the negotiations have contributed to more stable and transparent policy regimes in many developing and transition countries. The wide range of market access and non-discrimination commitments should advance the process of progressive liberalization. The commitments do not compromise the ability of countries to pursue sound macroeconomic and regulatory policies. However other aspects of the outcome do raise some concerns. First there has been less emphasis on the introduction of competition through allowing new entry than on allowing (or maintaining) foreign equity participation and protecting the position of incumbents. Secondly even where immediate introduction of competition was not deemed feasible not much advantage has been taken of the GATS to lend credibility to liberalization programmes by precommitting to future market access.
Fiscal Policy Cycles and the Exchange Regime in Developing Countries
The paper studies empirically fiscal policies around elections in 25 developing countries as affected by the exchange regime. It is argued that countries with flexible exchange regimes are less likely to engage in expansionary fiscal policies before elections because such policies can result in devaluations and inflation which affects government popularity adversely. The empirical results show that governments indeed try to improve their re-election prospects with the help of expansionary fiscal policies only in countries with fixed exchange rates and adequate reserve levels. For some countries this raises doubts about the usefulness of fixed exchange rates for stabilizing the macro economy unless reforms of the institutional framework reduce the scope for election-oriented fiscal expansion.
Reform in Basic Telecommunications and the WTO Negotiations
This paper examines liberalization of the basic telecommunications sector in a number of Asian countries and the role of the General Agreement on Trade in Services (GATS) in this process. It begins by explaining the working of the GATS as a mechanism for multilateral liberalization efforts. It then presents a description of the reforms taking place in the telecom regimes of selected Asian countries and of the commitments these countries made in the recent GATS negotiations. The paper explores the reasons why governments have taken advantage of the GATS negotiations to make multilateral market-opening commitments even though they were not pursuing export interests. The paper also considers the limits to what was achieved by way of liberalization commitments in the negotiations. Allowing greater foreign equity participation without liberalizing the conditions of entry may raise national welfare concerns. Furthermore certain governments could have taken greater advantage of the opportunity under GATS to precommit to future liberalization.
EU Import Measures and the Developing Countries
The EU's import policies towards developing countries are complex stemming from important sectoral and country variations in policy. Average tariffs are modest and while there are tariff peaks and escalation in some areas of interest to developing countries these are being reduced as a result of the implementation of the results of the Uruguay Round. The use of non-tariff measures has fallen particularly as a result of agricultural tariffication and is being further reduced in textiles and clothing. The elimination of VERs has not led to an increase in the use of alternative measures. Contingency protection falls more heavily in chemicals iron and steel certain textile items and certain electrical consumer goods and on Asian Central and Eastern European and former Soviet Union countries. The operation of various factors appears to be working to mitigate the use of trade defence measures in recent years helping to counter pressures that seem likely to arise as liberalization proceeds.
Regulatory Autonomy and Multilateral Disciplines
A major challenge for the multilateral trading system is to secure the benefits of trade liberalization without infringing on the freedom of governments to pursue legitimate domestic objectives. The difficulty lies in distinguishing between two types of situations. In one a non-protectionist government cannot prevent certain domestic policies from incidentally discriminating against foreign competitors. In the other a protectionist government uses a legitimate objective as an excuse to design domestic policies which inhibit foreign competition. The challenge is to devise rules which are sensitive to the difference between these two situations exonerating the former while preventing the latter. The approach suggested in this paper is to create a presumption in favour of the economically efficient policy measure with departures inviting justification.