Trade and industrial policy
Table of Contents
1 General principles 2
1.1 The evolution of the multilateral trading system 2
1.2 Most-favored nation and national treatment principles 2
Non discrimination 2
Minimisation of distorsions (disciplines on specific instruments) 3
2. The instruments of trade policy 4
2.1 Tariffs and non-tariff measures 4
2.2 Why are quantitative restrictions (QR) bad? 4
2.3 Trade-defense instruments and anti-dumping regulations 6
2.4 Measuring the restrictiveness of trade policy 7
Tarifs moyens 7
Le TTRI et l’OTRI 8
Mesurer la restrictivité des mesures non tarifaires 9
3. La politique industrielle 13
4. Le régionalisme 18
4.1 Les déterminants du commerce bilatéral 18
4.2 Les accords régionaux 21
4.3 Création et détournement de commerce 22
4.4 Gains non traditionnels 26
Références 26
1 General principles
1.1 The evolution of the multilateral trading system
The WTO is the guardian of the treaties that form the basis of the multilateral trading system (MTS). Its growing importance relates to its capacity to settle disputes between sovereign states and to its sanction system. A few things to remember:
o From Bretton Woods to the WTO
o Negotiation «rounds»
o «Mission creep»: from tariffs to NTBs and regulations
o Dispute settlement: From the first panels to the Appellate body
1.2 Most-favored nation and national treatment principles
The MTS’s overarching principles are non discrimination and the minimization of policy-induced distortions.
Non discrimination
Article I of the GATT (most-favored nation principle) states that all partners should be treated alike:
PART I
Article I
General Most-Favoured-Nation Treatment
1. With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III,* any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.
Article III (national treatment) states that “like products” should be treated alike (whether imported or produced domestically)
PART II
Article III*
National Treatment on Internal Taxation and Regulation
1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.
2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph1.
However there are exceptions. The architecture of WTO agreements with respect to national treatment and acceptable exceptions is shown in Figure 1:
Figure 1: The architecture of WTO agreements on national treatment
Minimisation of distorsions (disciplines on specific instruments)
Regulations that can affect international trade are covered by the disciplines of the TBT (Technical Barriers to Trade) and SPS (Sanitary and Phyto-Sanitary measures) agreements. The SPS agreement imposes that measures be based on science:
5.2. In the assessment of risks, Members shall take into account available scientific evidence; relevant processes and production methods; relevant inspection, sampling and testing methods; prevalence of specific diseases or pests; existence of pest — or disease — free areas; relevant ecological and environmental conditions; and quarantine or other treatment.
5.4. Members should, when determining the appropriate level of sanitary or phytosanitary protection, take into account the objective of minimizing negative trade effects.
5.7. In cases where relevant scientific evidence is insufficient, a Member may provisionally adopt sanitary or phytosanitary measures on the basis of available pertinent information, including that from the relevant international organizations as well as from sanitary or phytosanitary measures applied by other Members. In such circumstances, Members shall seek to obtain the additional information necessary for a more objective assessment of risk and review the sanitary or phytosanitary measure accordingly within a reasonable period of time.
2. The instruments of trade policy
2.1 Tariffs and non-tariff measures
The rise in importance of NTMs reflects partly the proliferation of regulation and partly the fact that tariffs (the other major trade-policy instrument) have come down substantially over the last thirty years, as shown in Figure 2.
Figure 2: Average tariffs at the country level against GDP/capita, 1980-2010
Source: World Bank, 2011
The term «Non-tariff measures» (NTMs) covers all regulations other than tariffs that can affect international trade:
o Taxes
o Quantitative restrictions (prohibitions, quotas)
o Technical and SPS regulations
o Anti-dumping regulations
o Restrictive commercial practices
2.2 Why are quantitative restrictions (QR) bad?
Article XI of the GATT specifically prohibits QRs:
Article XI*
General Elimination of Quantitative Restrictions
1.No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.
Why is this? Under perfect competition at home, there is a basic tariff-quota equivalence theorem: For every tariff, one can find a quota that has exactly the same effect on welfare.
Figure 3: Tariff-quota equivalence under perfect competition
(a) Tarif / (b) QuotaHowever, when the assumption of perfect competition on the home market is relaxed, a quota is much worse than a tariff. To see this, let us consider the case of a monopoly on the home (importing) market. The way we will proceed is in four steps
- Monopoly in a closed economy
- Monopoly under free trade
- Monopoly with a tariff
- Monopoly with a quota.
The argument is essentially this: In the closed economy, the home firm in a monopoly situation holds back output in order to raise price (standard story). Free trade strips the home firm of its monopoly power. Imposing a tariff allows the home firm to raise its price somehow, but not all the way back to its closed-economy level. That is, a tariff does not hand back monopoly power to the home firm. By contrast, a quota hands it back monopoly power on a silver plate. As a result, the home firm again holds back output (that is, does not create jobs) and jacks up prices, the worst of both worlds (high prices but no jobs!)
Figure 4: Non-equivalence in the presence of a monopoly on the importer market
(a) Tariff / (b) QuotaUpshot of the discussion: When there is market power in the importing country (not necessarily a pure monopoly, but anything that deviates from competition), a quota is the worst way of protecting the home producer from foreign competition.
2.3 Trade-defense instruments and anti-dumping regulations
Anti-dumping (AD) regulations allow a country’s producers to complaint to their government about unfair pricing practices by their foreign competitors. The WTO AD agreement allows the importing government to conduct an investigation in order to determine
- Whether there was dumping in the form of either pricing below cost or pricing exports below the domestic price (see below)
- Whether there was injury in the importing country (for its domestic producers)
- Whether the dumping caused the injury.
If the answer is yes to all three questions, the government is entitled to impose AD duties on all firms in the exporting country (not just those that actually dumped). After five years, the duties must be re-examined and can be extended only upon justification
In reality, AD regulations are a mess. Dumping is defined by the AD agreement as follows:
Article2
Determination of Dumping
2.1 For the purpose of this Agreement, a product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.
2.2 When there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the margin of dumping shall be determined by comparison with a comparable price of the like product when exported to an appropriate third country, provided that this price is representative, or with the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits.
Thus, standard business practices, like introducing new products on export markets at a discount, can easily qualify as dumping. Moreover, the calculation of dumping margins is fraught with weird practices. For instance, «zeroing» is a cute way of biasing the result. Here is an example:
In this case, under zeroing the firm is dumping even though it charges the exact same prices on its domestic and export markets.
2.4 Measuring the restrictiveness of trade policy
Measuring the overall restrictiveness of a trade-policy stance involves two challenges:
o Combining the effects of several types of measures
o Aggregating their effects on all goods.
This is however very important, because assessments of how restrictive is a country’s policy enter scoring systems used by donors to determine their aid commitments.
Average tariffs
Overall tariff restrictiveness can be measured by either simple or import-weighted average tariffs. Unfortunately both are biased:
o The simple average over-weighs small items
o The weighted average under-weighs items with the most restrictive tariffs
In addition, neither takes into account the effect of tariff variability, which is a factor of inefficiency in itself from a welfare perspective. To see this, consider the following approximation of the deadweight loss:
The TTRI and OTRI
The tarif trade restrictiveness index(TTRI) is the rate of a (fictitious) uniform tariff that would give the same welfare level (i.e. that would generate the same deadweight loss) as the current array of tariffs at different rates. It is calculated as follows:
TheOverall Trade Restrictiveness Index (OTRI) is the rate of a (fictitious) uniform tariff that would give the same aggregate import level (all goods together) as the current array of tariffs at different rates:
The MA-OTRI is an export-weighted average of the OTRIs a country faces on its destination markets:
It is an inverse measure of a country’s market access; i.e. the higher it is, the more protection a country faces on its export markets.
Figure 5 shows that both OTRI and MA-OTRI correlate negatively with income levels; thus
o Poor countries are more protectionist
o They face higher barriers on their export markets.
Figure 5: Correlation of OTRI and MA-OTRI with income level
Source: Kee, Nicita and Olarreaga 2009
However, this is partly a statistical illusion created by the way the OTRI and MA-OTRI are constructed. A country can have a high OTRI and yet grant deep tariff preferences to LDCs. For instance, most industrial countries grant tariff-free, quota-free access to products from sub-Saharan Africa. Thus, E.U. and U.S. MFN tariffs do not concern Africa, even though they enter in the calculation of the E.U. and U.S. OTRI. When calculating the MA-OTRI of an African country, the use of E.U. and U.S. OTRIs is thus misleading.
Measuring the restrictiveness of non-tariff measures
One can measure the restrictiveness of non-tariff measures (NTMs) in an «artisanal» way by calculating the price gap, i.e. the difference of a given good’s price in an NTM-ridden market vs. a market where no NTM is imposed. For instance, Table 1 shows a price gap calculation for goods affected by import prohibitions in Nigeria. The market affected by the NTM (the import prohibition) is Lagos, Nigeria’s port city, and the comparator market is Nairobi. Cotonou, Benin’s capital, would have been a much better comparator, but there is no price data for Cotonou.
Table 1: Price gap calculation for Nigerian import bans
On average, goods not affected by import prohibitions are 15% more expensive in Lagos than Nairobi (second line of the table). However, goods affected by prohibitions are 92% more expensive. Thus, the price gap is 92% - 15% = 77%. That is, import prohibitions raise the price of affected products by 77%.
This price increase can be fed into household survey data in order to assess the effect on the cost of living at each level of income. Formally, let k be a good and the estimated price gap:
1)