Chris Milner GEP and School of Economics University of Nottingham The World Economy Asia Annual Lecture University of Nottingham M alaysia February 2012 Context There has been substantial unilateral trade policy reform across developing countries over the last two or three decades ID: 1027546
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1. Declining Protection in Developing Countries: Fact or Fiction?Chris MilnerGEP and School of EconomicsUniversity of NottinghamThe World Economy Asia Annual LectureUniversity of Nottingham MalaysiaFebruary, 2012
2. ContextThere has been substantial ‘unilateral’ trade policy reform across developing countries over the last two or three decadesdismantling of the old forms of non-tariff protection (import licencing and foreign exchange controls)simplification of border taxation of imports and lowering of average tariff levelsThere has also been greater discipline imposed on trade policy setting in developing countries through multilateral (e.g. WTO membership and binding of MFN tariffs) and regional commitments
3. Average MFN Applied Tariffs (%)199120012009Developing Countries (134 countries)27.713.59.9Low Income Developing Countries (42 countries)44.414.411.8Source: World Bank
4. Case Study: Malaysia (2009)Duty-free0-10%10-25%25-50%50-100%100%+Agricultural products MFN applied tariff rates (%)74.515.34.12.90.72.3 Imports share (%)75.98.73.67.20.93.8Non-agricultural MFN applied tariff rate (%)56.916.219.96.90.00 Imports share (%)77.39.27.36.20.00Source: WTO Tariff Profiles
5. Developing Country Exports (% of GDP)
6. Initial Assessment of the EvidenceA picture of import liberalisation and increased openness in developing countriesAn associated reduction in protection for domestic producers in domestic marketsAnd an associated increased incentive to orientate production towards unprotected export markets But is this the reality and is the picture painted of declining protectionism an illusion?
7. Tariff Peaks, Escalation and ProtectionAverage applied tariffs hide the tariff peaks and misrepresent the prohibitive and protective nature of tariff protectionThere is much greater tariff escalation (between input and output tariffs) in tariff structures than implied by average tariffs, especially for local production competing with imports in the domestic market (see table below)Evidence below excludes the protective effects of NTBs (traditional and new)
8. Further Details on MFN Applied Non- Agricultural Tariffs in Malaysia (2009)AverageDuty-free (%)MaximumFish & products1.18720Minerals etc.11.24960Petroleum0.7875Chemicals2.98250Wood, paper etc.10.14640Textiles10.32430Clothing15.91720Leather, footwear 13.94040Non-elect machines3.67535Elect. machinery4.37330Transport equip.11.64150Other4.86750Source: WTO Tariff Profiles
9. Illustrative Effective Protection EffectsUniform Input and Output Tariffs(if based on Malaysia’s average applied rates)Uniform Input and Output Tariffs(if based on Malaysia’s maximum applied rates)Escalating Tariffs(if based on Malaysia’s maximum output tariff and duty free inputs assumed to account for 20% share of value of output of final good)Escalating Tariffs( if based on Malaysia’s maximum output tariff and duty free inputs assumed to account for 50% share of value of output of final good)Tariff on Input (Leather)14%40%0%0%Tariff on Output(Shoes)14%40%40%40%Effective Rate of Protection of Shoe Production14%40%50%80%
10. Case Study: Effective Protection from Tariffs in Mauritius (2009)Estimated Effective Protection from Tariffs (using average applied tariff) (%)Estimated Effective Protection from Tariffs (using maximum applied tariff) (%)Chemical products up to 1.2up to 104.9Wood, paper etc.up to 8.3up to 88.3Textiles2.7500.8Clothing9.8303.0Leather, footwear etc.up to 12.8up to 203.9Non-electrical machinery1.526.9Electrical machinery-0.8 112.1Transport equipment2.246.9Other manufacturesup to 3.1up to 110.3Source: Own estimates
11. The Role of Non-Tariff BarriersContinuing tendency for instrument substitutionreplacing reduced tariff protection with non-tariff protectionreplacing old forms with new forms of NTB protectionDeveloping countries have learnt or are learning (from industrial countries) to use new forms of administrative protectiongreater use of standards and contingent protection (e.g. anti-dumping) measures (see table below)Difficult to accurately measure the extent of NTBs in comparable way to tariffsKee et al.(2008) estimate average tariff equivalent of NTBs on affected tariff lines to be 31.9% for Malaysia (for 2000)will tend to raise effective protection further, i.e. above generated by tariff protection
12. Use of Anti-DumpingCountry1985-19941995-2004InvestigationsInvestigationsMeasures ImposedNew Developing Country Users (a)16%40%45%Traditional Developed Country Users (b)73%36%33%Other WTO members11%24%22%Total Number206526461656(a) Argentina, Brazil, Colombia, India, Indonesia, Mexico, Peru, Turkey, Venezuela(b) Australia, Canada, European Union, USASource: Bown (2006)
13. Trade Costs and Implicit ProtectionConsiderable amount of evidence now that trade policy is a relatively small component of trade costsTransport and distributions costs affected by aspects of geography, but also by the scale of trade, the quality of infrastructure and institutionsThese costs are absorbed by ‘small countries’ and serve also to have implicit taxing and subsidising effects (akin to those of trade policy measures)even if these other trade costs uniformly apply to imports of intermediate and final goods they will raise effective protection for import-competing production substantiallylikely to be some resistance domestically to reducing avoidable, ‘unnatural’ sources of these trade costs
14. Estimated Average Bilateral Trade Costs: Malaysia (2009)Trade PartnerAverage Tax Equivalent of International Relative to Domestic Trade Costs (% rate)Regional:China52.2Indonesia54.7Japan61.3India75.3Extra-regional:USA75.3Germany81.1UK102.7France106.9Source: McGowan and Milner (2011)
15. Implicit Subsidy (+) and Taxation (-) Effects of Trade Costs Sector:Impact on Stage:Import- competing productionExport productionFinal good- tariffs and NTBs+0 (?)- other trade costs+-Intermediate inputs- tariffs and NTBs- (or 0)- (or 0)- other trade costs--Overall Effective ProtectionPositiveNegative or Zero
16. Protected Exporting Tend to think of exporting being un-protected and not being implicitly or explicitly subsidised, but a growing proportion of the exports of developing countries is under some form preferential arrangementpreference scheme offered by industrial countries to developing countriesintra-regional trade behind a common external tariffnot such a feature of intra-Asian trade, but not unimportant from some Asian countries too
17. Share (%) of Intra-Regional Exports in Total Exports: Africa19902009Agricultural products1221Fuels & mining products36Manufactures1225Source: World Trade Report, 2011
18. Share (%) of Intra-ASEAN Exports in Total Exports (Manufactures)Member country19922009Cambodia3834Indonesia625Malaysia723Singapore1923Thailand919Vietnam1719Total ASEAN2124Source: World Trade Report, 2011
19. Preference Margins on Asian Exports to European Union : (2009)Weighted Preference Margin on Exports of Agricultural Products(%)Weighted Preference Margin on Exports of Non-Agricultural Products(%)Exports to EU by:Cambodia20.311.8India4.02.0Indonesia2.31.8Malaysia1.10.9Sri Lanka3.49.2Thailand1.81.8Source: WTO Tariff Profiles
20. Preference Margins on Exports to Major Markets: Mauritius (2008)Major marketExports (mill. US $)Preference margin (weighted) (%)Agricultural products EU62810.4 USA280.4 Madagascar2119.4 Kenya426.6Non-agricultural products EU8109.7 USA14413.5 Madagascar6914.8 South Africa6232.9Source: WTO Tariff Profiles
21. Revised Assessment and ConclusionsTrade reform and import liberalisation do not necessarily reduce or reduce significantly the levels of protection for domestic producersThe degree of protection for domestic producers in developing countries is much understated by examination of average applied tariffsmuch greater escalation and effective protection from peak tariffsfocus on tariffs misses protective effects of NTBs and non-trade policy sources of trade costsThe increased outward or export orientation of many developing countries may well also over-state the shift from protected to unprotected productiongrowing share of preferentially treated exports, including in intra-regional and intra-developing country trade
22. An After-thought!As a much younger economist, I co-authored a Hobart Paper (Greenaway & Milner, 1979) entitled ‘Protectionism Again…?’I now wonder whether I should not have used the title ‘Protectionism Again and Again and Again!’ for this lecturesome decline in protection may be a fact for some developing countries, but it is and is likely to remain a fiction for many others!