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Declining Protection in Developing Countries: Fact or Fiction? Chris Milner GEP and School of Economics University of Nottingham The World Economy Asia.

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Presentation on theme: "Declining Protection in Developing Countries: Fact or Fiction? Chris Milner GEP and School of Economics University of Nottingham The World Economy Asia."— Presentation transcript:

1 Declining Protection in Developing Countries: Fact or Fiction? Chris Milner GEP and School of Economics University of Nottingham The World Economy Asia Annual Lecture University of Nottingham Malaysia February, 2012

2 Context There has been substantial unilateral trade policy reform across developing countries over the last two or three decades – dismantling 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 levels There 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 (%) Developing Countries (134 countries) Low Income Developing Countries (42 countries) Source: World Bank

4 Case Study: Malaysia (2009) Duty- free 0-10%10-25%25-50%50-100%100%+ Agricultural products MFN applied tariff rates (%) Imports share (%) Non- agricultural MFN applied tariff rate (%) Imports share (%) Source: WTO Tariff Profiles

5 Developing Country Exports (% of GDP)

6 Initial Assessment of the Evidence A picture of import liberalisation and increased openness in developing countries An associated reduction in protection for domestic producers in domestic markets And 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 Protection Average applied tariffs hide the tariff peaks and misrepresent the prohibitive and protective nature of tariff protection There 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 (%)Maximum Fish & products Minerals etc Petroleum Chemicals Wood, paper etc Textiles Clothing Leather, footwear Non-elect machines Elect. machinery Transport equip Other Source: WTO Tariff Profiles

9 Illustrative Effective Protection Effects Uniform Input and Output Tariffs (if based on Malaysias average applied rates) Uniform Input and Output Tariffs (if based on Malaysias maximum applied rates) Escalating Tariffs (if based on Malaysias 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 Malaysias 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% Tariff on Output (Shoes) 14%40% Effective Rate of Protection of Shoe Production 14%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 Wood, paper etc.up to 8.3up to 88.3 Textiles Clothing Leather, footwear etc.up to 12.8up to Non-electrical machinery Electrical machinery Transport equipment Other manufacturesup to 3.1up to Source: Own estimates

11 The Role of Non-Tariff Barriers Continuing tendency for instrument substitution – replacing reduced tariff protection with non-tariff protection – replacing old forms with new forms of NTB protection Developing countries have learnt or are learning (from industrial countries) to use new forms of administrative protection – greater 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 tariffs – Kee 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-Dumping Country Investigations Measures Imposed New Developing Country Users (a) 16%40%45% Traditional Developed Country Users (b) 73%36%33% Other WTO members11%24%22% Total Number (a) Argentina, Brazil, Colombia, India, Indonesia, Mexico, Peru, Turkey, Venezuela (b) Australia, Canada, European Union, USA Source: Bown (2006)

13 Trade Costs and Implicit Protection Considerable amount of evidence now that trade policy is a relatively small component of trade costs Transport and distributions costs affected by aspects of geography, but also by the scale of trade, the quality of infrastructure and institutions These 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 substantially – likely 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: China52.2 Indonesia54.7 Japan61.3 India75.3 Extra-regional: USA75.3 Germany81.1 UK102.7 France106.9 Source: McGowan and Milner (2011)

15 Implicit Subsidy (+) and Taxation (-) Effects of Trade Costs Sector: Impact on Stage: Import- competing production Export production Final good - tariffs and NTBs +0 (?) - other trade costs +- Intermediate inputs - tariffs and NTBs - (or 0) - other trade costs -- Overall Effective Protection PositiveNegative 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 arrangement – preference scheme offered by industrial countries to developing countries – intra-regional trade behind a common external tariff – not such a feature of intra-Asian trade, but not unimportant from some Asian countries too

17 Share (%) of Intra-Regional Exports in Total Exports: Africa Agricultural products1221 Fuels & mining products36 Manufactures1225 Source: World Trade Report, 2011

18 Share (%) of Intra-ASEAN Exports in Total Exports (Manufactures) Member country Cambodia3834 Indonesia625 Malaysia723 Singapore1923 Thailand919 Vietnam1719 Total ASEAN2124 Source: 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: Cambodia India Indonesia Malaysia Sri Lanka Thailand1.8 Source: WTO Tariff Profiles

20 Preference Margins on Exports to Major Markets: Mauritius (2008) Major marketExports (mill. US $)Preference margin (weighted) (%) Agricultural products EU USA280.4 Madagascar Kenya426.6 Non-agricultural products EU USA Madagascar South Africa Source: WTO Tariff Profiles

21 Revised Assessment and Conclusions Trade reform and import liberalisation do not necessarily reduce or reduce significantly the levels of protection for domestic producers The degree of protection for domestic producers in developing countries is much understated by examination of average applied tariffs – much greater escalation and effective protection from peak tariffs – focus on tariffs misses protective effects of NTBs and non-trade policy sources of trade costs The increased outward or export orientation of many developing countries may well also over-state the shift from protected to unprotected production – growing 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 lecture – some decline in protection may be a fact for some developing countries, but it is and is likely to remain a fiction for many others!


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