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Estimating Trade Policy Effects with Structural Gravity
The objective of this manuscript is to serve as a practical guide for estimations with the structural gravity model. After a brief review of the theoretical foundations, we summarize the main challenges with gravity estimations and we review the solutions to address those challenges. Then, we integrate the latest developments in the empirical gravity literature and we offer six recommendations to obtain reliable partial equilibrium estimates of the effects of bilateral and non-discriminatory trade policies within the same comprehensive, and theoretically-consistent econometric specification. Our recommendations apply equally to analyses with aggregate and disaggregated data. Interpretation, consistent aggregation methods, and data challenges and sources for gravity estimations are discussed as well. Empirical exercises demonstrate the usefulness, validity, and applicability of our methods.
Are Stricter Investment Rules Contagious?
We argue that the trend toward international investment agreements (IIAs) with stricter investment rules is driven by competitive diffusion, namely defensive moves of developing countries concerned about foreign direct investment (FDI) diversion in favor of competing host countries. Accounting for spatial dependence in the formation of bilateral investment treaties (BITs) and preferential trade agreements (PTAs) that contain investment provisions, we find that the increase in agreements with stricter provisions on investor-state dispute settlement and pre-establishment national treatment is a contagious process. Specifically, a developing country is more likely to sign an agreement with weak investment provisions if other developing countries that compete for FDI from the same developed country have previously signed agreements with similarly weak provisions. Conversely, contagion in agreements with strong provisions exclusively derives from agreements with strong provisions that other FDI-competing developing countries have previously signed with a specific developed source country of FDI.
Mapping of Safeguard Provisions in Regional Trade Agreements
This study surveys safeguard provisions on trade in goods in 232 regional trade agreements (RTAs) notified to the GATT/WTO up to 31 December 2012. In particular, it identifies those RTAs that modify the conditions applicable to the RTA partner (either substantively or procedurally) in the event that a global safeguard is invoked. In the case of bilateral (or intra-RTA safeguards), the study analyses provisions governing injury assessment, causation, conditions for the invocation of a measure and the types of measures that may be employed. We use the yardstick of GATT Article XIX and the WTO Safeguards Agreement to determine whether the provisions applicable to bilateral safeguard measures are more or less stringent than the corresponding multilateral rules. The study also includes an inventory of infant industry, balance of payments, and special safeguards applicable to agricultural products found in RTAs. We demonstrate through various examples that safeguard provisions have become more prescriptive in recent years, though little homogeneity in their design is found even for a given country. In the case of global safeguards, roughly a quarter of RTAs provide for the possible exclusion of the RTA partner, subject to certain criteria, thus discriminating against non-parties. In the case of bilateral safeguards, some RTAs use looser language to define the trigger mechanism to invoke a safeguard and to determine injury standards, thus potentially offering greater scope to use such measures. We found wide variety in the types of bilateral safeguard measures that are permitted in RTAs. A number of more recent RTAs tighten the conditions for application of a bilateral safeguard through limiting the duration of the safeguard measure, allowing the use of tariff-based measures only, and binding the use of the measure to the transition period. Other RTAs specify neither the length of the bilateral safeguard measure nor the conditions for its reapplication, thus providing greater scope to impose such measures than in the multilateral context.
The Shifting Contours of Trade in Knowledge
This paper charts the evolution and diversification of trade in knowledge that has taken place in the quarter-century since the WTO TRIPS Agreement came into force. Entirely new markets have come into being, potentially redefining the very character of 'trade'.
Plurilateral Trade Agreements
There are essentially two types of plurilateral trade agreements (PAs) among WTO Members, n exclusive and an open variant. While the benefits of the former agreements are shared among participants only, the latter are implemented on an MFN-basis, thus profiting non-signatories as well. The most prominent examples are the Information Technology Agreement (1996) and the Fourth and Fifth Protocols under the GATS (1997) on telecom and financial services, respectively. To preclude ‘free riding’, their entry into force was made contingent on the participation of a ‘critical mass’ of countries. The respective benchmarks, usually market shares of some 80% or more, are quite challenging, however. To promote more widespread use of plurilaterals, given the plethora of pressing policy concerns, whether investment-, competition- or labour-related, and the persistent stalemate in the Doha Round negotiations, the conclusion of exclusive agreements is thus being (re-)considered in ongoing policy discussions. This article takes a sceptical view, since any such PA would need to be agreed by consensus among all 160-odd WTO Members. It may prove more rewarding to further explore the potential of open agreements to address policy concerns among interested Members either in the form of co-ordinated improvements of their current schedules or, if not covered by existing treaty frameworks, as ‘WTO-extra’ understandings.
LDC Export Diversification, Employment Generation and the "Green Economy"
"Pro-poor" tourism is arguably one of the best green options for addressing LDC poverty, employment and economic diversification initiatives. Although often neglected as a serious policy option -- and consequently most of its potential still remains untapped -- tourism is the leading export for at least 11 LDCs, and the 2nd or 3rd largest export for another 11 or more. It is also a major source of new employment, especially for women, youth and the rural poor in general. While difficult to measure accurately, tourism's pro-poor impacts are directly related to the achieved level of inter- and intra-sectoral linkages. Taking export diversification, employment generation and the "green economy" in turn, the working paper analyzes feasible LDC alternatives, reaching the conclusion (within the limits of data availability) that -- in contrast with the current overemphasis on agriculture and manufacturing -- green tourism is demonstrably one of the areas of greatest current comparative advantage and development potential for the majority of LDCs, via its extensive upstream and downstream linkages/multiplier effects, employment-generating and poverty alleviation capacities, opportunities for export "test marketing" of new products, sustainability, and largely untapped export opportunities. An economy wide, primarily private-sector approach is an essential element for maximizing tourism benefits -- including its multiple linkages with agriculture and manufacturing -- together with a significant coordinating governmental role to minimize negative externalities. Unfortunately, there is no automatic guarantee that expanding tourism will significantly increase poverty alleviation or local employment generation: the necessary mechanisms must be explicitly included in tourism planning and implementation.
International Rules for Trade in Natural Resources
This paper investigates the scope for international rules to address market failures in trade in natural resources and the associated international transactions of prospecting and investment in resource exploitation. We argue that several market failures are likely to have substantial costs. However, due to the distinctive features of natural resources, the market failures are particular to them. The ad hoc approaches which have attempted to address them to date leave scope for a more systematic and comprehensive approach by the WTO, but the distinctive features of natural resources imply that this could not simply be an application of the rules appropriate for other forms of trade.
The Value of Bindings
One of the goals of the multilateral trading system is to enhance the stability and predictability of the environment in which traders operate. Binding tariffs at the WTO reduces the scope for their discretionary use. But, countries have bound tariffs at ceiling levels often substantially above the level of applied tariffs. Therefore, whether the ceiling rate at which countries have committed at the WTO is sufficient to diminish trade policy volatility is an empirical question. Using a recently built database on applied tariffs covering over 100 countries for the period 1996 to 2009, we find evidence that countries do vary tariffs. We find evidence that applied tariffs of tariff lines that are bound are more likely to be decreased and less likely to be increased, and that this “taming” effect of the binding decreases with the level of the water (i.e. the gap between bound and applied tariff). This finding is robust to controlling for political economy determinants of tariffs and to factors related to the economic cycle.
Lessons from the First Two Decades of Trade Policy Reviews in the Americas
The Trade Policy Reviews conducted in the Western Hemisphere over 1989-2009 contain a wealth of information that puts in clear evidence the considerable improvements achieved in most American countries during the first two decades of operation of the Trade Policy Review Mechanism. Those Reviews show that trade liberalization came hand-in-hand with internal reforms, and was generally of an autonomous nature and an intrinsic component of improved economic management. Trade liberalization slowed down during the second decade under review, with tariffs having come down mostly during the earlier years. The use of non-tariff barriers also fell over time although at a slow pace in some of the smallest Members, which found it difficult to implement the more complex trade policy instrument applied by larger countries. Export and other government assistance schemes proliferated throughout the continent but were often characterized by a lack of unity in the criteria used to assign and apply them. The review period also witnessed enormous changes in the services sectors, where reforms usually proved more complex than in the goods area. The multilateral and other international trade agreements contributed to the stability of trade policies and the general rejection of protectionism, although backtracking did occur in a number of cases. Because the commitments made during the Uruguay Round negotiation now fall short of the more liberal trade regimes that came to be over the review period, most Members in the Americas could presently raise trade and investment barriers without violating multilateral rules. Thus, the pressing need to conclude the Doha Development Agenda in order to lock in the considerable trade policy liberalization achieved during past years, and to strengthen the multilateral trading system.
Infrastructure Provision and Africa’s Trade and Development Prospects
Transitioning from the post-2008 financial meltdown to a sustained period of global growth and prosperity involves a major challenge: how to ensure the effective management of international economic interdependence. Trade, growth, good governance and sustainable development constitute essential ingredients to any solution, as is a fairer distribution of the gains of trade. Two issues stand out in this conversation. The first concerns the unfinished business of the global fight against the scourge of poverty, which impacts one region more than most: Africa. At the same time, a key pre-requisite for economic performance - affordable and efficient public infrastructure and services – remains lacking in this region – notably, in Sub-Saharan Africa. To address this, the region itself has initiated a major, long-term, continent-wide infrastructure development programme which is intended to fix this problem sustainably - namely, the Programme for Infrastructure Development in Africa (PIDA). Its success foreshadows an economic transformation that will potentially usher in an emergent Africa in the 21st century. Secondly, in one area of economic activity – trade in government procurement markets - the revised WTO Agreement on Government Procurement (GPA) is emerging as a multi-dimensional tool of trade, governance and development. The thesis of this paper is that GPA participation by African countries - a prospect which, to date, they have declined to take up - holds strong potential to reinforce the positive effects of PIDA and to contribute to the region's growth and development more generally. Developing this thesis, the paper examines the possible application of the GPA to support Africa's infrastructure programme, drawing on its three dimensions of instrument of governance, market access instrument, and 'policy space' instrument in support of the development, financial and trade needs of developing countries. Based on the analysis, the paper concludes that the potential benefits outweigh the potential costs of participation in the GPA by African countries, and, accordingly, that the GPA merits consideration by the region in this regard. A successful implementation of the infrastructure programme also portends a significant expansion in the size of the African government procurement market. Were African countries to accede to the Agreement in this context, it would constitute not only a big rise in membership numbers, but also a significant expansion in the value of market access under the Agreement. The broad outlines of a potential win-win scenario for both African countries and GPA Parties thus begin to emerge. The paper, nonetheless, acknowledges that delivering these benefits would involve significant practical and political challenges. It concludes that if the challenges can be overcome and the mutual benefits delivered, the revised GPA would have been demonstrated as an effective tool for balancing flexibility and reciprocity in the government procurement sector, consistent with sustainable development principles, with the capability to deliver win-win benefits for a broad range of stakeholders, in the post-2015 era.
Trade in Mineral Resources
This paper provides a review of current thinking on the economics of international trade in mineral resources. There is not a great deal written on this topic, and so my review is necessarily broad rather than deep. In some cases I am only able to cite related and even tangential literature. I first define what is meant by trade in mineral resources. I then discuss patterns of trade in mineral resources. The paper then moves on to the five topics requested by the World Trade Organization: theoretical and empirical literature on international trade in minerals; trade impacts of mineral abundance and the resource curse; the political economy of mineral trade in resource-abundant states; non-economic considerations associated with strategic mineral resources; and the impact of domestic market structure and regulation on production and trade in minerals.
What Constrains Africa's Exports?
We examine the effects of transit, documentation, and ports and customs delays on Africa’s exports. We find that transit delays have the most economically and statically significant effect on exports. A one day reduction in inland travel times leads to a 7 percent increase in exports. Put another way, a one day reduction in inland travel times translates into 1.5 percentage point decrease in all importing-country tariffs. In contrast, longer delays in the other areas have a far smaller impact on trade. We control for the possibility that greater trade leads to shorter delays in three ways. First, we examine the effect of trade times on exports of new products. Second, we evaluate the effect of delays in a transit country on the exports of landlocked countries. Third, we examine whether delays affect time-sensitive goods relatively more. We show that large transit delays are relatively more harmful because of high within-country variation.
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.
Trade in Tasks, Tariff Policy and Effective Protection Rates
Albeit nominal tariffs have been decreasing in the past decades, the rise of global manufacturing along global value chains lead to their accumulation along the international supply chain. The calculation of effective protection rates provides important insights on the impact of nominal protection on the international competitiveness of industries in a trade in tasks perspective. Building on the results of the OECD-WTO Trade in Value-Added TiVAdatabase, the paper analyses the evolution of effective protection in about 50 developed and developing countries from 1995 to 2008. The paper reviews also the role of preferential agreements on effective protection as well as the impact of tariffs on the production costs of services. A final chapter is dedicated to exploring the underlying patterns that may exist beyond the EPR profiles.
E-commerce and Developing Country-SME Participation in Global Value Chains
Two far-reaching developments have increased the trade opportunities for SMEs in developing countries. Firstly, the rise of the internet and advances in ICT have reduced trade-related information and communication costs. Secondly, the international fragmentation of production has increased the opportunities for SMEs to specialize in narrow activities at various stages along the production chain.
Investment Policies and Telecommunications Regimes
The revolution in the telecommunication industry of recent years raises a number of interesting economic questions with significant policy implications. One of these questions is the extent to which foreign investments in the telecommunication industry is accompanied by policies that are conducive to cross–border investments. These policies can be both domestic and international. The discussion in this paper is limited to the latter by concentrating on the role of the WTO and other international agreements. The purpose of the paper is to evaluate the GATS/Telecom Agreement. This is done by looking at the guiding principles for negotiating market access for foreign investors, by comparing the Agreement with the Telecom Agreement under NAFTA and by discussing the merits of the multilateral approach to negotiating foreign investment in the telecommunication sector. The WTO GATS/Telecom Agreement comes out rather well from this evaluation exercise.
The Long and Winding Road
The paper chronicles the negotiating history of the recently concluded Trade Facilitation Accord. Analysing the various stages of the decade-long effort to get the Agreement off the ground, it examines what was at stake in the negotiations, how they evolved and why they finally succeeded - despite many obstacles and detours along the way. The study also suggests ways in which the exercise has broken new ground – for Trade Facilitation rule-making at the global level, for how WTO Members negotiate agreements, and for the world trading system as a whole.
Mercosur
MERCOSUR is one of the most important examples of renewed world-wide interest in regional trade agreements. It may be seen as a consolidation of unilateral reforms undertaken in conjunction with major macroeconomic adjustments. The paper reviews the objectives of MERCOSUR and assesses its achievements, focusing on institutions and fulfilment of commitments. It concludes that considerable progress has been made to achieving a customs union and even beyond that towards a common (but not EU-style single) market, but there are a number of areas where progress is still to be made.
Trade in Healthcare and Health Insurance Services
The General Agreement on Trade in Services (GATS) is broader in policy coverage than conventional trade agreements for goods and, at the same time, offers governments more flexibility, in various dimensions, to tailor their obligations to sector- or country-specific needs. An overview of existing commitments on healthcare and health insurance services shows that WTO Members have made abundant use of these possibilities. While most participants elected not to undertake bindings on healthcare services at the end of the Uruguay Round, nor to make offers in the ongoing negotiations, insurance services have been among the most frequently committed sectors. If there is a common denominator, regardless of the Members concerned (except for recently acceded countries), it is the existence of a lot of 'water' between existing commitments and more open conditions of actual access in many sectors. This may also explain, in part, why there have been very few trade disputes under the GATS to date - far fewer than under the GATT in merchandise trade. Also, governments appear to be generally hesitant in politically and socially sensitive areas to take action in the WTO. There are indications, however, that the same 'players' have acted differently in other policy contexts. For example, it appears that under recent preferential trade agreements (PTAs) the European Communities has been even more cautious in committing on hospital services and protecting scope for (discriminatory) subsidies than under the GATS. Yet, this is not necessarily true for the obligations assumed by many countries, including individual EC Member States, under bilateral investment treaties (BITs). These treaties overlap with the GATS, as far as commercial presence is concerned, and may be used by aggrieved investors to challenge policy restrictions in host countries. However, though frequently invoked, BITs do not meet the same standards, in terms of transparency, open (consensual) rulemaking and legal certainty, as commitments under the GATS.
International Supply Chains and Trade Elasticity in Times of Global Crisis
The paper investigates the role of global supply chains in explaining the trade collapse of 2008-2009 and the long-term variations observed in trade elasticity. Building on the empirical results obtained from a subset of input-output matrices and the exploratory analysis of a large and diversified sample of countries, a formal model is specified to measure the respective short-term and long-term dynamics of trade elasticity. The model is then used to formally probe the role of vertical integration in explaining changes in trade elasticity. Aggregated results on long-term trade elasticity tend to support the hypothesis that world economy has undertaken in the late 1980s a “traverse” between two underlying economic models. During this transition, the expansion of international supply chains determined an apparent increase in trade elasticity. Two supply chains related effects (the composition and the bullwhip effects) explain also the overshooting of trade elasticity that occurred during the 2008-2009 trade collapse. But vertical specialization is unable to explain the heterogeneity observed on a country and sectoral level, indicating that other contributive factors may also have been at work to explain the diversity of the observed results.