Why Do We Need a New Approach to Trade Policy? Iwan J Azis (iazis@adb.org) New Issues in Trade Policy: Challenges and Responses from Asia 22-26 August 2011, ADB-Manila, Philippines • Fact 1: Asian countries have relatively liberal trade policies and are reasonably well integrated into the global economy; tariff barriers have been reduced over the last four decades • Fact 2: Many Asian economies are highly dependent on trade with and inward investment from the rest of the world • Fact 3: Pattern of trade shifts to intraindustry, e.g., growing Production Network (PN) From Tariffs to Regulatory or Nonpolicy Barriers Major Economies Average Applied Manufacturing Tariffs (%) 1988-2009 Regulatory Barriers & Nonpolicy Trade Costs (“New” Trade Policy) • Shift to regulatory barriers (e.g., customs procedures, through product authorization or export licensing requirements). Costs imposed on importers can be greater than import tariffs. • Technology & economic transformation led to fragmentation of production and the timeliness of trade, e.g., Production Network (PN) in Asia. Implications: (1) Increased competitiveness (future Asia’s trade pattern); (2) Bulk of trade is in intermediate goods, often traded between different arms of the same company. Barriers can be more complex than simple tariffs • Importance of “nonpolicy” trade costs, which traditionally have been left out of the main thrust of trade policy (e.g., transportation costs) particularly critical for countries which have traditionally underinvested in its infrastructure • Facilitating technological and infrastructural upgradation of all the sectors , e.g., through imports and thereby increasing productivity • Upgradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade chain • Services: Important role in productivity and efficiency, yet slow progress of openness services liberalization needs to be combined with effective competition policy and effective regulation. PRC ASEAN ROW PRC Korea & Japan ROW Net Exports of Intermediate Goods Net exports of Final Goods PRC EEA incl Japan ROW Trade With Other Emerging Markets • During the first three months, China's imports from the other BRICS countries reached 33.05 billion US dollars, up 57.2% year on year. Exports to those countries hit 26.85 billion USD up 33.8%. • China's Q1 trade deficit with the other four nations reached 6.2 billion US dollars, up more than five times the amount from the same period last year. • India strives to catch up with China in what has been dubbed "the new scramble for Africa". Dependence on FDI Significant Role of FDI in Asia, esp In PRC Portfolio Inflows FDI Inflows Other Inlows Capital Flows: ASEAN-4 Capital Flows: India Capital Flows: China Determinants of Capital Flows Intra-Industry & Production Network Intraindustry vs. Interindustry Trade Home (capital abundant) Foreign (labor abundant) Machinery Toys } Interindustry trade } Intraindustry trade Exports & imports of manufactures Relationship between intra-industry trade and the correlation of export/import movements over the 1990s Intra-Industry Vs Inter-Industry Trade • Intra-industry trade is more beneficial than interindustry trade because it (1) stimulates innovation and (2) exploits economies of scale. Moreover, since productive factors do not switch from one industry to another, but only within industries, intra-industry trade is less disruptive than interindustry trade (e.g., on income distribution). • About 60% of U.S. trade or European trade is intra-industry. About 80% of U.S. trade with Mexico is intra-industry, and thus concern that trade with Mexico will harm unskilled workers is based on an erroneous view of the nature of that trade. New Trade Theory • Early international economics ignored returns to scale. The idea that trade might reflect an overlay of increasing-returns specialization on comparative advantage was not there at all: instead, the ruling idea was that increasing returns would simply alter the pattern of comparative advantage. • Using of the “network effect,” the formation of important industries was path-dependent (leading to monopolistic competition) in a way which industrial policy and judicious tariffs might control— ”protection”?--predicting the possibilities of national specialization-by-industry (movies in Hollywood, watches in Switzerland, etc). # External economies refer to economies of scale at the level of industry, not firm, e.g., location concentration reduces industry’s cost A. Marshall: specialized suppliers, labor pooling, knowledge spillover Trade Makes Worse Off P2 # Pattern of specialization due to external economies e.g., Swiss watch may persist even when new producers e.g., Thailand could potentially have lower costs. Being first in the industry, Switzerland can sell watches at P1, which is below the cost that Thai firm would face if it began production on its own. # If Thailand were to block all trade in watches, it would be able to supply its domestic market at lower price P2. Yet, due to Switzerland’s external economies Swiss watches are sold at P1 which is low enough to block entry by Thai producers, so consumers import them. So trade makes Thailand “worse off.” . ”New” Economic Geography • Why do economic activities tend to agglomerate to locations that do not seem to have any special advantage over other regions? What puts limits to the agglomeration? How does globalisation affect agglomeration? Weightless economy? • Basic idea: Monopolistic competition with mobility of firms and/or factors of production. • Agglomeration can take place even without labour mobility due to: (1) Vertical structures and variety of inputs (Adam Smith; Venables; Fujita-KrugmanVenables, Fujita-Thisse); and (2) Backward and forward linkages: self-sustained development, vicious and virtuous cycles. Trade Facilitation Trade Facilitation • Simplification & harmonization of trade procedures through: – Reduced transport costs – Improved ports facilities – Efficient and modern customs regimes – Transparent and harmonized regulations – Improved information technology infrastructure • Define trade facilitation as: Port efficiency, Customs environment, regulatory environment and services infrastructure Supply Chain for Emerging Market • In low-growth developed economies, companies must defend or steal market share by providing better, faster innovation and exceptional service without sacrificing profit margins. • In high-growth emerging economies, the main challenge is delivering rapidly increasing volumes of low-cost and sometimes low-margin products profitably -- even in the face of poor infrastructure and convoluted distribution channels. A very low-cost, streamlined supply chain is needed. If we deliver a truckload of cookies that we sell at 10 cents a pack, it better cost us less than it does to deliver a truckload of cookies that sell for $3 a pack. It is essential to wring as many costs out of the system as possible. Thus, emerging markets need lowest possible delivery cost because consumers can't pay premium for a product Time Required for Customs Clearance (Average days for customs clearance for sea cargo, by region) Developed (7) 2.1 East Asia and Pacific (9) 4.8 Latin America and Caribbean (4) 9 Africa (5) 10.1 South Asia (1) 10.5 0 2 4 6 8 10 12 How Important Is Trade Facilitation? • Logistics account for 33 % of shipment costs (Subramanian and Arnold, 2001) • Higher inventory raises costs of production by 20% (Gausch and Kogan, 2001) • Administrative and customs costs add 20 % (World Bank study of Brazilian ports, 1997) • Gains from reducing cost. – One less day equals 0.5 reduction in tariffs Freund and Weinhold: E-commerce – 10 % increase web-hosts increase trade 1% Fink, Mattoo, Neagu: Communications costs – 10 % fall in telecom costs increase trade 8% • Security Raising Capacity Half-way to Global Average $377 billion increase in 75 countries Sources of Trade Expansion Port Efficiency 28% Services 41% Regulatory Harmnization 10% Customs Environment 9% Trade Gain from Reform by Region 18 16 14 % Change 12 Ports 10 Customs Regulations 8 Services 6 4 2 0 OECD East Asia ECA LAC Source: Wilson, Mann and Otsuki (2003) South Asia Sub-Sah. Africa etc Something to Contemplate……. • FINAL REPORT OF THE HIGH-LEVEL TRADE EXPERTS GROUP (May 2011) Co-chairs: Jagdish Bhagwati , Peter Sutherland KCMG • Successive G20 Summits have repeated conventional mantras about the value of the open trading system and the need to bring the Doha negotiation to a successful conclusion. The follow through from these statements has been incomplete or nonexistent. Politicians have talked up the value of multilateral trade while focusing their political energy on bilateral agreements. • Doha captures many of the basic political problems the wider multilateral trading system faces: a changing political economy among the largest and most influential members, driven above all by the rise of the growing economies of Asia and Latin America; a political tension between the multilateral agenda and regional and bilateral trade agreements; and above all, a deficit in political leadership at the level of the states that actually make Aid For Trade • Greatest barrier to trade for many developing countries is their capacity to shift goods to market or absorb them effectively into their economy. No rules-based system of trade can be adequate without concerted action to remove these asymmetries, especially as trade rules begin to move into complex areas such as intellectual property. • Aid for Trade initiative launched at the Hong Kong ministerial in 2005 institutionalized approach to trade related development assistance 1. Trade policy and regulation, which includes training trade officials, helping governments implement trade agreements and strengthening institutions to comply with rules and standards. 2. Trade development, including trade and investment promotion, business facilitation, and trade finance. 3. Trade-related infrastructure, such as building or strengthening of roads, ports, transport and storage, communications, and energy facilities. 4. Building productive capacity, which includes all activities aimed at improving a country‘s capacity to produce goods and services. 5. Trade-related adjustment, defined as accompanying measures that mitigate the economic costs of trade liberalization, including financial assistance to losers and fiscal and balance-of-payments support. 6. Other trade-related needs.