09 Trade presentation

Trade policy reform:its contribution to global development : 

Trade policy reform: its contribution to global development Professor Kym Anderson University of Adelaide, Australia and Development Research Group, World Bank

Key questions: 

Key questions How can trade policy reform best contribute to economic growth and poverty alleviation in developing countries (DCs)? In particular, what role can the World Trade Organization’s Doha Development Agenda play? Does it help to reduce global poverty if rich countries provide free market access to least-developed countries (LDCs)?

Arguments for removing trade barriers: theory: 

Arguments for removing trade barriers: theory To allow each nation’s resources to be used to exploit its comparative advantage by producing what it does best That in turn can increase (especially in small economies): scope for exploiting economies of scale, competitiveness of domestic markets, the variety of goods and services available to producers and consumers, technological catch-up, and hence economic growth and thereby poverty alleviation

Arguments for removing trade barriers: empirical evidence: 

Arguments for removing trade barriers: empirical evidence There are many examples of reformed economies that have boomed South Korea from mid-1960s, Chile from mid-1970s, China from late 1970s, India from early 1990s There are no examples of closed economies that have enjoyed sustained economic growth Not to say openness is sufficient for sustained economic growth, but it is a necessary condition

So why do governments still retain protectionist policies?: 

So why do governments still retain protectionist policies? Because some workers, and owners of some productive resources, fear that they will lose from reform, and that social safety nets will not fully compensate them Losses in jobs, incomes and wealth would be concentrated in the hands of a few, who lobby Gains will be small per capita for the many benefiting firms or consumers, so they have less incentive to counter the protectionist lobbying  A political equilibrium can involve protection

Developing countries also are reluctant to reduce import protection: 

Developing countries also are reluctant to reduce import protection Support for infant industries? Increase food price stability? Contribute to food security/self sufficiency in the case of food-deficit countries? Offset the terms of trade deterioration In the case of those receiving tariff preferences, they worry that multilateral trade reform will erode their preferences

What can alter the political equilibrium level of protection?: 

What can alter the political equilibrium level of protection? Wider dissemination of information on the net gains from trade Technological innovations that lower trade costs (e.g. information revolution), or increased openness abroad, which increase the incentive for exporters to lobby for reduced protection Such globalization forces raise the rewards from good economic governance -- and raise the cost of poor economic governance  more countries are looking to open up

Why trade negotiations make reform politically easier: 

Why trade negotiations make reform politically easier They offer scope for exchange of market access and more so the larger the number of countries taking part, and the broader the product and issue coverage WTO’s multilateral negotiations offer the most scope bilateral and regional negotiations may allow faster and deeper integration, but at the risk of welfare-reducing trade and investment diversion

The big challenge: 

The big challenge Even though governments know their national income would be higher without wasteful subsidies and trade barriers, they fear cuts will redistribute jobs, income and wealth in ways that reduce their chances of staying in power; and Well-meaning civil society groups fear the costs of trade reform are too high in terms of harm to the environment, weaker labour standards, more social unrest, etc.

The challenge, therefore, is to show:: 

The challenge, therefore, is to show: The gains from reform far exceed the costs of adjustment; The related concerns about the environment, labour standards, etc. are misplaced or can be dealt with more effectively by other policy measures; and That there are politically expedient opportunities to facilitate such policy reform in both rich and poor countries

Static (one-off) economic gains from own-country trade reform: 

Static (one-off) economic gains from own-country trade reform Gains from greater production specialization, not just between sectors but also within sectors and even industries Gains to consumers (including firms) from less-distorted prices, greater product variety and greater competition among sellers And note that these gains are proportionately greater the smaller (not larger) an economy

Dynamic economic gains from own-country trade reform: 

Dynamic economic gains from own-country trade reform Capital grows faster with freer imports of intermediate and capital goods Redundant knowledge creation and new technology developments are avoided through openness Hence we observe open or reforming economies growing faster (and no examples of closed economies booming)

Necessary, even if not sufficient: 

Necessary, even if not sufficient While openness is necessary for sustained economic growth, its contribution will be less the fewer other key growth conditions are present, including: Macroeconomic and political stability Efficiently operating domestic factor and product markets, and good infrastructure Well-defined and enforced property rights

What can induce cuts to subsidies and trade barriers?: 

What can induce cuts to subsidies and trade barriers? Requires a shock to the current political market equilibrium, such as from: More information on the size and distribution of gains from freer trade, & of adjustment costs Technical changes such as the information and communications technology revolution Unilateral opening abroad, which also enhances exporters’ gains from lobbying for reform New opportunities for int’l trade agreements

How do new international trade negotiation opportunities help?: 

How do new international trade negotiation opportunities help? By exchanging market access, governments have new opportunities to trade off import-competing interests for exporter interests Gains will be larger the more countries participate and the broader the product and issue coverage in the negotiations Conversely, if only a subset of countries and products are included, global and even national gains cannot be guaranteed

Opportunities for addressing this challenge: 

Opportunities for addressing this challenge Ideal: What would be the gains from removing all welfare-reducing subsidies and trade barriers? Optimistic, non-discriminatory: how far could the WTO’s Doha Development Agenda take us? Limited, discriminatory: to what extent can regional free trade agreements provide a stepping stone to freer global trade? Even more limited, more discriminatory: does the provision of free access for exporters in least-developed countries to industrial-country markets reduce global poverty?

Economic benefits from full unilateral reform: 

Economic benefits from full unilateral reform What would be the potential welfare gains from full goods trade reform, by country/region, due to: developed relative to developing countries’ policies? agriculture relative to manufacturing policies? within agriculture, tariffs relative to export subsidies and domestic support?

Linkage model’s gain by 2015 from removing current protection policies: 

Linkage model’s gain by 2015 from removing current protection policies Global benefit from removing current tariffs on all goods plus agricultural subsidies would be $287 billion per year by 2015 2/3rds of those dollar would accrue to high-income countries But as a % of GDP, the benefit to developing countries as a group is twice that for developed countries

Full liberalization: global gain ($bn): 

Full liberalization: global gain ($bn)

Full lib’n: gains to developing countries: 

Full lib’n: gains to developing countries

Relative importance of 3 agric pillars : 

Relative importance of 3 agric pillars

Take-away messages from full lib’n: 

Take-away messages from full lib’n Potential gains from further trade reform are large must find the political will for Doha success DCs would gain disproportionately from reform, notwithstanding non-reciprocal tariff preferences But DCs would gain as much from South-South as South-North trade growth importance of DC reform too Agricultural reforms are the highest priority for goods, from global and developing country welfare viewpoints --even though the sector accounts for only 8% of global exports and 4% of global GDP

Take-away messages (continued): 

Take-away messages (continued) Half the potential gains to DCs could come from South-South trade growth Removing also tariffs on manufactures has the potential to raise the gains to DCs by >50% Removing barriers to services trade could more than double the gains from goods trade reform Temporary movements of labour from DCs to rich countries alone could, according to new World Bank research, be more important than all goods trade reform

Key elements of the Doha Agenda as shown in the July 2004 Framework agreement: 

Key elements of the Doha Agenda as shown in the July 2004 Framework agreement 3 agricultural pillars (including cotton) Non-agricultural market access Services Lesser tariff and subsidy cuts for developing countries (DCs) and zero cuts for least-developed countries (LDCs)

Our prospective Doha modelling scenarios: 

Our prospective Doha modelling scenarios We assume no services reform, but: phase out of agricultural export subsidies tiered cut to agricultural domestic support tiered cut to agric bound tariffs under various alternative market access packages, and cuts to non-agric bound tariffs

Results from Doha agric reform: 

Results from Doha agric reform Tiered formula even with sizeable cuts gives a $75 billion global gain, but only $9 billion goes to DCs BUT, if HICs exempt just 2% ‘sensitive’ products (DCs 4%), global gain shrinks to $18 billion, and DCs’ gain disappears

Adding non-agric market access: 

Adding non-agric market access Adding 50%/33%/0% cuts to non-agric bound tariffs boosts global gain from agric tiered formula cut from $75 to $96 billion pa That $96 billion gets the world 1/3rd of the way to the potential gains from complete free trade in merchandise If DCs and LDCs fully participate in market access opening, global gain goes up to $119 billion per year

Lessons from Doha analysis : 

Lessons from Doha analysis Even large cuts in agric tariffs do little if ‘sensitive’ and ‘special’ products are subjected to lesser cuts Adding non-agric market access to Doha package could nearly double the welfare gains to other DCs even with their lesser cuts and it helps balance the North-South exchange of ‘concessions’

Implications for Doha negotiating strategy of agric exporters: 

Implications for Doha negotiating strategy of agric exporters Need to seek ambitious outcome on agric market access, not just on cuts to subsidies Need to encourage developing countries, not just developed, to provide more market access Otherwise this won’t be much of a development round (or may even be abandoned by developed countries)

What about economic gains from regional FTAs?: 

What about economic gains from regional FTAs? Involve diversion not only of trade and investment but also of trade negotiators’ time and energy But are faster and so have political appeal

What about economic gains from free market access for LDCs?: 

What about economic gains from free market access for LDCs? Non-reciprocal duty-free access for exports from LDCs to rich countries sounds generous, but: It does not include services (especially labour) Access is typically subject to safeguards Half the gain in trade will be at the expense of other poor (but not “least-developed”) countries such as China, India, Indonesia, Pakistan, Vietnam

Other worries with such non-reciprocal trade agreements: 

Other worries with such non-reciprocal trade agreements They encourage production in LDCs that is not internationally competitive They provide no incentive for LDCs to liberalize their own trade regimes They cause LDCs to become advocates for instead of against the continuation of high MFN tariff peaks for farm and textile goods in the EU and elsewhere

Economic costs of trade reform?: 

Economic costs of trade reform? Structural adjustment costs (temporary unemployment, retraining, asset losses) may arise But evidence suggests these are much lower than typically asserted especially if reforms are gradual (e.g. over ten years), in which case their impact is small compared with the normal on-going structural adjustments associated with economic growth

What about effects of trade reform on:: 

What about effects of trade reform on: Poverty? The environment? Conflicts/wars? Corruption? Hunger?

What about effects of trade reform on poverty?: 

What about effects of trade reform on poverty? The growth effect of trade reform helps alleviate poverty So too may the change in the international terms of trade, because the poor in DCs are producers of farm and textile products, whose relative prices in most DCs would rise most from across-the-board reform

What about effects of trade reform on the environment?: 

What about effects of trade reform on the environment? Net effect on environment of cuts in subsidies is almost certainly positive, while it is less certain for cuts in import tariffs But much environmental damage in DCs is due to poverty, hence is reduced to the extent trade reform reduces poverty Even if trade reform did harm the environment, economic welfare would fall only if optimal environmental policies were not in place So it’s better to advocate improved environmental governance than avoidance of trade reform

What about effects of trade reform on conflicts?: 

What about effects of trade reform on conflicts? Openness breaks down prejudices that accompany insularity, and broadens mutual understanding It also expands economic interdependence, which raises the opportunity cost of going to war

What about effects of trade reform on corruption?: 

What about effects of trade reform on corruption? A tolerance for subsidies and trade barriers encourages rent-seeking by special interests seeking assistance for their industries The costs of such lobbying thereby add to the welfare costs of protectionism If those policies include import licences, that encourages the bureaucrats issuing them, and the customs officers policing them, to accept bribes

What about effects of trade reform on hunger?: 

What about effects of trade reform on hunger? Farm trade reform will raise international food prices, which will help the vast majority of poor households because they are food producers. Poor food-deficit households also may gain if their wages rise to offset any food price hike which is more likely if textile barriers also are cut Trade in technologies also can reduce hunger e.g. 1960s Green Revolution’s dwarf cereal varieties, and current biotechnology revolution could too if the EU were to tolerate GMOs as much as North America