Environment and trade

Environmental and Energy Products: The Benefits of Liberalising Trade



Published: 23/05/06
ISBN: 9264025588
256 pages

Trading Up: Economic Perspectives on Development Issues in the Multilateral Trading System


The prospect of further trade liberalisation sometimes attracts a noisy public discourse, particularly with respect to the possible implications for developing countries. This volume considers trade and development from an economic perspective, aiming to examine these emotive issues using empirical approaches and dispassionate analysis.


What are the potential welfare impacts on developing countries from further liberalisation? What economic adjustments would such liberalisation entail? What policy options exist for developing cuntries seeking to seize on new market opportunities while responding to the associated structural challenges?


Table of Contents




Chapter 1 - The Doha Development Agenda: Welfare gains from further multilateral tariff liberalisation


This paper considers the welfare gains form trade liberalisation with particular emphasis on reduction of tariff protection. The first part of the paper examines the present structure of tariffs, outlines the DDA work in the area of tariffs, briefly discusses the various approaches to tariff reduction used in past rounds of multilateral trade negotiations and considers a sample of the existing literature on the effects of various trade liberalisation scenarios involving tariff reductions.


The second part presents a quantitative assessment of the potential welfare gains from trade liberalisation involving tariff reduction and trade facilitation. This assessment takes into accountcertain negotiating realities in the WTO including the fact that negotiations focus on bound tariffswhile the main focus for many actors in the economy is on the applied tariffs. A number of generic tariff reduction scenarios are examined to reflect elements of some proposals now under consideration in the WTO. The results point to the importance of market access for all regions,particularly developing countries.


While improved market access for agricultural products is found to yield substantial potential benefits, the results highlight that potential gains from further liberalisation with respect to industrial goods may be even larger. The findings also indicate the potential welfare benefits from progress in trade facilitation, which can exceed the gains from tariff reduction for some regions under some scenarios. Overall the study underscores the importance to developing countries of both greater access to developed countries’ markets as well as their own engagement in making substantive commitments under the DDA.


Chapter 2 - Global merchandise trade reform: disaggregating the welfare impacts


The welfare impacts of global trade policy reforms are typically compared to two reference situations, a current baseline and one following full merchandise trade reform. The first purpose of this chapter is to illustrate the gains that can be achieved in the latter situation and to highlight the sources of these gains, i.e. what proportion comes from different regions (e.g. high-income versus developing), what proportion comes from different sectors (e.g. agriculture versus manufacturing) and what proportion can be attributed to the so-called three pillars (market access, domestic support and export subsidies).


In addition, the paper disaggregates the terms of trade impacts for each region by export versus import channels and across broad sectors. The latter breakdown highlights the role of the Armington trade elasticities and the balance of payments constraint. The second purpose of the chapter is to illustrate the roles of key model assumptions and how the choices made here compare with those of other global trade modelling studies, especially the GTAP model-based results. Among the key assumptions are flexibility of land (i.e. gricultural supply response), trade elasticities, and labour market flexibility.


Chapter 3 - Trade preference erosion: potential economic impacts


Several recent OECD Trade Directorate studies have considered the potential impact of preference erosion on developing countries, particularly where preference erosion might arise as aconsequence of multilateral tariff liberalisation. Drawing on these studies, the present chapter presents key findings as well as some updates. The chapter underscores that although most developing regions would benefit if major preference- ranting countries reduced their tariffs, a few – particularly in Sub-Saharan Africa – could face comparatively modest net welfare losses due to reduced preference margins in some sectors.


It suggests that in most cases the best policy response may be to promote an environment where economic actors can capitalise on new opportunities from liberalisation, while facilitating adjustment for sectors on the negative side of the equation and developing an appropriate social safety net. Some countries, however, face particular economic challenges in view of their geography (e.g. being landlocked or small island economies) or their reliance on a narrow range of exports (such as sugar, bananas or textiles). In such cases, development assistance and transitional arrangements may play a role in supporting reforms needed to promote growth.


Chapter 4 - Impact on government revenue of changes in tariffs in developing countries


This chapter addresses tariff revenue concerns that some countries have been expressing in the context of the current multilateral trade negotiations under the Doha Development Agenda. It presents empirical stimates and analysis of the nature and scope of revenue reduction that might be associated with tariff reductions negotiated under the DDA. First, it provides a discussion of the global pattern of tariff protection devoting special attention to developing countries’ tariff profiles as they affect both their level of protection and their fiscal situation. Second, the paper provides a discussion of tax reform policies that could accompany tariff reform and lessen potential revenue losses follows.


In the empirical part, we present selected results of simulations of tariff revenue and welfare effects using the Swiss tariff reduction formulas for a sample of 24 developing countries. We discuss cross-country differences in revenue impact and sensitivity with respect to three different coefficients in the Swiss formula. Finally, the paper offers an estimation of the welfare effects of reducing tariffs and simultaneously replacing lost tariff revenue with revenues from consumption tax. It concludes with some policy implications and caveats.


Chapter 5 - South-south goods and services trade


This chapter contributes to the debate on the development potential of South-South trade in goods and services. It uses descriptive statistics and gravity methodology to help understand past trends in world goods and services trade. The analysis of goods trade indicates that South-South trade barriers are still much higher than those for other types of trade and that South-South trade is severely constrained by distance-related trade costs. Econometric modelling also suggests that reducing South-South tariff barriers can have a major impact on trade flows whereas an equivalent reduction in North-North or North-South tariff barriers would have less impact.


The analysis of services is a first attempt to identify key features governing the South-South dimension of services. Services trade between developing countries is predominantly regional and may reflect an increasing tendency to incorporate disciplines to liberalise services trade in regional trade agreements. It is estimated that cross-border South-South exports represent around 10% of world exports. While developing countries’ exports to developed countries seem to be more important for most non-OECD regions, the opposite is true for developing Asian countries. The results suggest that there is further scope for increasing developing country services exports in general and for services trade between developing countries in particular.


Chapter 6 - Services as outputs and intermediate inputs: the impact of liberalisation


The aim of this chapter is to (1) determine the magnitude of services barriers and (2) examine the flow-on effects of such barriers to the economy as a whole by (i) highlighting the costs imposed by inefficient services inputs to both services and non-services sectors and (ii) analysing whether and how the benefits of services trade reform are passed on to other sectors in the economy. The analysis covers telecommunication, banking, distribution, electricity, professional services, and air and maritime transport in selected developing and transition economies.


Given that tax equivalents for services barriers are stimated by statistical means, and are therefore inherently uncertain, care has to be taken to ensure that policy conclusions are relatively general. Notwithstanding these limitations, the exercise could be important from a practical point of view as it shows that in a number of agricultural and manufacturing sectors the sign of protection is reversed (i.e. it goes from positive protection into effective taxation) if existing services barriers are taken into account.


The chapter shows that removing the restrictions on services trade would tend to improve the productivity of the services sector and deepen the services intensity of an economy. The economywide gains from services trade reform would come almost entirely from unilateral action.


Chapter 7 - Agricultural policy reform, factor returns and household welfare


Governments of most developed and many developing countries impose tariffs on imports in order to boost domestic market prices of agricultural commodities. In some OECD countries governments may top up the financial benefits of this market price support through other means, e.g. direct budgetary payments, favourable tax treatment, and subsidised credit. These interventions typically lead to lower world market prices and farm incomes in countries in which governments offer farmers little in the way of agricultural trade protection and support.


Widespread agricultural policy reform would undoubtedly improve global economic welfare but would also produce a complex pattern of economic winners and losers. Using a combination of global, national and household level analysis this chapter examines such distributional implications, focusing especially on differences in policy effects among countries and between different sectoral and household constituencies within countries.


Chapter 8 - Assessing special and differential treatment and aid for trade as complements to multilateral trade liberalisation


This chapter assesses the role of Special and Differential Treatment and Aid-for-Trade in increasing the benefits to developing countries from trade reform and WTO Agreements. First, the paper provides an overview of the specific challenges faced by developing countries in adjusting to and in capturing the gains from trade liberalisation. Special and Differential Treatment enables developing countries to modulate the speed and depth of WTO commitments, and can be instrumental in helping developing countries to meet some of the adjustment challenges brought by own trade reform.


However, it does not offer easy solutions to address preference erosion or domestic supply-side constraints. Aid-for-trade, on the other hand, is specifically aimed at helping developing countries to increase their trade capacity. In the last decade, between a fifth and a fourth of official development assistance has beendedicated for use in improving developing countries' productive and export capacity. The projected scaling up of aid provides ample room to increase development assistance further, but it is essential that aid effectiveness be improved if additional resources are to deliver the desired results.


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