MFN Tariffs Research Articles

Regional Route to Multilateralism: Proliferation of PTAs among Developing Countries and WTO Negotiations

Multilateralism and regionalism are seen as forces that pull the world apart in opposing directions. But, the incentive structure of the new generation PTAs, as they are mostly FTAs, is loaded in favour of freer trade. In FTAs members are free to enter into PTAs with third countries. They also have the freedom to reduce MFN tariffs. In the absence of strong rules of origin, FTA members might also end up competing among themselves to reduce tariffs to the level of the lowest tariff member lest all imports will get admitted through the lowest tariff country. Thus, what the FTA contagion does is to make the markets more contested. As developing nations enter into different networks of PTAs they would be exposed to international competition in a wide range of products. This for instance is what ASEAN-India FTA does in the case of trade in tropical commodities. The proliferation of FTAs, therefore, would render the developing world’s opposition to possible MFN cuts in bound tariffs with respect to many of the products redundant. The paper argues that the PTAs, especially the recently formed ones are likely to weaken the resistance against non-discriminatory, i.e., MFN liberalization of trade barriers.

Is Africa Integrating? Evidence from Product Markets

Integration into the global trading environment is viewed as a key factor underlying the success of the fastest growing economies. Yet many African countries remain isolated and appear to have failed to achieve the level integration of these fast growing economies. This paper presents a price-based assessment of product market integration in Africa using disaggregated retail prices for over 200 products and 13 African cities. Product market integration is first assessed using absolute and relative measures of price dispersion. This followed by an econometric analysis to identify some of the domestic, regional and global factors that have contributed towards product market integration in Africa. Overall, we find evidence of increased product market integration in Africa. The volatility of real exchange rates between African countries has fallen over the past two and a half decades. Product price dispersion at the retail level amongst the sample of African cities also fell, although much of the decline was concentrated in North Africa during the early 1990s. The econometric estimates reveal that trade costs, as proxied by distance and MFN tariffs, are the dominant determinant of price dispersion amongst the African cities. External forces also matter. Global trends in price dispersion contributed around 29 percent of the overall increase in integration.

Fruit and vegetable access to EU markets: Dissecting tariffs faced by Mediterranean countries

This paper analyzes the access of Eastern and Southern Mediterranean countries to the EU fruit and vegetables market and provides a measure of the level of preferences from which they benefit. To take into account the complexity of EU protection in the F&V sector, in particular the seasonality of protection and the Entry Price System, we conducted our analysis at a very disaggregated level (eight digits of the nomenclature, monthly data). We showed that, on average, Mediterranean countries do have significant preferences compared to other countries exporting to the EU. However, the magnitude of the preferences differs among countries; Morocco has the highest preference, while Syria and Israel have the lowest. We simulated a multilateral reduction in the MFN tariffs (as planned in the Doha Round) and showed that this would reduce the heterogeneity within the zone by more strongly eroding the preferences of the most advantaged countries. The classification of Entry Price products as sensitive products would either benefit or have no effect on most Mediterranean countries.

Are Trade Blocs Building or Stumbling Blocs?

The stumbling-bloc argument asserts that regionalism hinders MFN tariff cutting. If this was of first-order importance over previous decades, we should detect this in the levels of the tariffs. Using tariff line data for 23 large trading nations we find that MFN and PTA tariffs are complements, not substitutes since margins of preferences tend to be low or zero for products where nations apply high MFN tariffs. One interpretation is that regionalism is neither a building nor a stumbling bloc. Sectoral vested interests are a ‘third factor’ that generates the positive correlation between MFN and PTA tariff levels.

Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries

In the literature on the economics of international trade institutions, a key question is whether or not terms-of-trade effects drive international trade agreements. Recent empirical work addressing terms-of-trade effects has been restricted to non-WTO countries or accession countries, which differ markedly from existing WTO members and account for only a tiny fraction of world trade. This paper investigates whether MFN tariffs set by existing WTO members in the Uruguay round are consistent with the terms-of-trade hypothesis. We present a model of multilateral trade negotia-tions featuring free riding on MFN that leads the resulting tariff schedule to display terms-of-trade effects. Specifically, the model predicts that the level of the importer’s tariff resulting from negotia-tions should be negatively related to the product of exporter concentration, as measured by a Her-findahl-Hirschman index (sum of squared export shares), and the importer’s market power, as measured by the inverse elasticity of export supply, on a product-by-product basis. We test this hy-pothesis using data on tariffs, trade and production across more than 30 WTO countries and find strong support. We estimate that the internalization of terms of trade effects through WTO negotia-tions has lowered the average tariff of these countries by about 20% compared to its non-cooperative level.

General Equilibrium Analysis of Albania's Integration with the EU and South Eastern Europe

The aim of this paper is to provide a framework for the analysis of implications of various trade policy options for Albania. We study the impact of implementation of the Stablization and Association Agreement, free trade agreements with South-East European neighbors and reduction of the MFN tariffs. We employ a computable general equilibrium (CGE) model, which allows for evaluation of the likely impact of trade agreements on trade, output, factor rewards, tariff revenue and welfare. Our simulations indicate that Albania has a lot to gain from further integration with its neighbors and the EU. However, the benefits from regional integration can only be realized as long as Albania gains better access for its exports on regional markets. Liberalization of trade with all trading partners allows for a permanent increase of Albanian GDP by 1% on a recurring annual basis and an increase of wages by 3.4% relative to their 2000 level.

Competitive Pressure in Transition: A Role for Trade and Competition Policies?

This paper investigates the effects of trade reforms and antitrust enforcement on the pricing behavior of firms, shedding light on the respective contributions of these policy instruments to the shaping of competitive markets. To this end, we use a rich panel data set of more than 25,000 manufacturing firms from Bulgaria, the Czech Republic, Estonia, Hungary, Poland, the Slovak Republic and Slovenia, spanning a 5-year period. We find a positive and statistically significant relationship between domestic firms’ mark-ups and industry protection, as reflected in MFN and trade-weighted import tariffs. The toughness of competition policy enforcement, captured by the number of final instance decisions delivered by national antitrust authorities and an index developed by the EBRD, has a negative impact of greater magnitude than import penetration. We also test for the significance of enacting major legislative amendments with regard to competition policy in the studied countries, as well as for differential effects in export-oriented and import-competing industries.

The ASEAN Free Trade Agreement: Impact on Trade Flows and External Trade Barriers

Using detailed data on trade and tariffs from 1992-2007, the authors examine how the ASEAN Free Trade Agreement has affected trade with nonmembers and external tariffs facing nonmembers. First, the paper examines the effect of preferential and external tariff reduction on import growth from ASEAN insiders and outsiders across HS 6-digit industries. The analysis finds no evidence that preferential liberalization has led to lower import growth from nonmembers. Second, it examines the relationship between preferential tariff reduction and MFN tariff reduction. The analysis finds that preferential liberalization tends to precede external tariff liberalization. To examine whether this tariff complementarity is a result of simultaneous decision making, the authors use the scheduled future preferential tariff reductions (agreed to in 1992) as instruments for actual preferential tariff changes after the Asia crisis. The results remain unchanged, suggesting that there is a causal relationship between preferential and MFN tariff reduction. The findings also indicate that external liberalization was relatively sharper in the products where preferences are likely to be most damaging, proving further support for a causal effect. Overall, the results imply that the ASEAN agreement has been a force for broader liberalization.

Clothes without an Emperor: Analysis of the preferential tariffs in ASEAN

This paper examines the current state of intra-ASEAN trade under the preferential regime of the AFTA. It partly addresses some data problems and employs a gravity model to arrive at alternative ways of gauging the importance of preferences in the absence of data on the actual utilisation of AFTA preferential tariffs. Our results show that although the range of products where AFTA might have an influence is limited, preferences seem to matter when the differential margin between the MFN and preferential tariff rates reaches a critical amount, allowing regional exporters to cover the costs of requesting preferences. However, at very high differential margins, the significance of AFTA preferences seems to wane. This indicates either the presence of non-tariff measures which prevent traders from exploiting the huge tariff discounts offered by the AFTA, and or, the propensity of ASEAN to extend high preferences on products where little or no intra-ASEAN trade takes place.

The Impact of Trade Barriers on Exports: The Case of Peru, 1992-2002

Using a straightforward methodology, this paper assesses and estimates the trade barriers impact on exports from the Peruvian economy. The results of the analysis indicate that MFN and/or GSP tariffs rates imposed by developed countries to Peruvian exports are relatively low and, conversely, the number of NTBs and the average number of NTBs per export tariff line are relatively high. This difference produces a higher estimation of the export impact of the NTBs. An implication of these results is that the new wave of regional preferential trade agreements among developed and developing countries (which face similar trade barriers structure as the Peruvian case) may not have meaningful effects on trade flows unless it is accompanied by substantial reductions in the number of NTBs per export tariff line.

The MFN clause, welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.

Clothes Without an Emperor: Analysis of the Preferential Tariffs in ASEAN

This paper examines the current state of intra-ASEAN trade under the preferential regime of the AFTA. It partly addresses some data problems and employs a gravity model to arrive at alternative ways of gauging the importance of preferences in the absence of data on the actual utilisation of AFTA preferential tariffs. Our results confirm the wide-spread notion that the AFTA preferential scheme is of very little consequence to intra-regional trade. However, in that limited range of products where AFTA might have an influence, preferences seem to matter only when the differential margin between the MFN and preferential tariff rates reaches a critical amount, allowing regional exporters to cover the costs of requesting preferences.

Specialization and Diverging Manufacturing Structures: The Aftermath of Trade Policy Reforms in Developing Countries

Trade barriers have been declining around the world over the last five decades. Countries reduced their tariffs unilaterally as well as concertedly in the framework of regional integration agreements. As a consequence, trade flows among economies have substantially intensified. According to economic theory, this should have had a significant impact on the countries' specialization patterns. However, to our knowledge, there is no direct robust econometric evidence on the effect of trade policy on the overall degree of countries' specialization. This paper aims at filling this gap in the literature. We focus on ten Latin American countries members of the LAIA (Latin American Integration Association) over the period 1985-1998. These countries are natural case studies because in the last two decades they implemented broad and comprehensive trade liberalization programs, both generally and preferentially, starting from relatively high tariff protection levels. Our econometric results suggest that reducing own MFN tariffs is associated with increasing manufacturing production specialization. Furthermore, we find that preferential trade liberalization and differences in the degree of unilateral openness have resulted in increased dissimilarities in manufacturing production structures across countries. These results are robust to the specialization measure being used, the correction for group-wise heteroscedasticity, cross-sectional correlation, serial correlation and endogeneity biases, and the inclusion of indicators to account for the real exchange misalignment prevailing in the region during the period under examination.

A New Compensation Mechanism for Preference Erosion in the Doha Round

The Doha Round is intended to advance the interests of developing countries but it has run into problems because additional liberalization in sectors of interest to some developing countries could erode the preferences of others. None of the current proposals to deal with the issue, either through delaying liberalization or providing compensation have found widespread support. In this paper we explore a proposal to backload the phase-in of MFN tariff reductions in sensitive sectors and use the revenues generated to provide compensation for preference erosion. We argue that the approach would be both equitable and effective.

NAMA Negotiations in the WTO and Preference Erosion

The on-going negotiations on non-agricultural market access (NAMA) in the World Trade Organization (WTO) are expected to lead to substantive reductions in MFN tariff rates on industrial goods in both the developed and developing countries. Although the LDCs are not required to undertake any tariff reduction commitment under the Doha Round, they are likely to suffer substantive tariff preference erosion as a consequence of these negotiations since any reduction of MFN tariffs by the developed countries will result in a reduction in the preferential margins currently enjoyed by LDCs under the various GSP schemes operated by those developed countries. In this context this article undertakes the following: (a) reviews relevant literature dealing with the issue, (b) examines the importance of preference erosion for LDCs, and particularly for Bangladesh, (c) makes an attempt to estimate, under various scenarios, the range of preference erosion which Bangladesh is likely to suffer given her current trade pattern and the preferential treatment she currently enjoys as a beneficiary of the EU and US GSP schemes, and (d) presents a number of possible solutions to address the issue of preference erosion. In this context the article also reviews the WTO Ministerial Decision in Hong Kong as regards the duty free, quota free market access as articulated in Annex F of the Decision on S&D treatment for LDCs, and also subsequent developments with respect to NAMA negotiations in Geneva and examines their possible implications in terms of preference erosion for LDCs.

Non-Reciprocal Preference Erosion Arising From MFN Liberalitzation in Agriculture: What are the Risks?

This paper estimates the risk of preference erosion for non-reciprocal preference recipients in the agricultural sector as a consequence of MFN tariff cuts. It is based on a simulation of a single tariff-cutting scenario. The measure of preference erosion risk is the difference in preference margins enjoyed by individual suppliers to the QUAD (Canada, EU, Japan, United States) markets before and after a MFN tariff reduction, multiplied by the associated trade flow. The paper does not attempt to determine how losses in preference margins translate into trade outcomes, but it does highlight which products and which non-reciprocal preference beneficiaries are the most vulnerable to erosion effects in the major developed country markets. Overall, the paper finds that the risk of preference erosion is small, but some countries are strongly affected in particular product lines (notably sugar and bananas).

Binding Overhang and Tariff-Cutting Formulas

Trade negotiations deal with cuts in bound duties, which differ substantially from applied preferential duties, and from MFN applied duties. Based on WTO’s Consolidated Tariff Schedules (CTS) database and on national sources, this paper proposes a systematic assessment of ad valorem-equivalent bound duties at the detailed product level, for almost all WTO members. Fully consistent with the assessment of applied protection provided in the MAcMap-HS6 database, this work allows the full structure of protection—bound, MFN applied, preferential applied duties—to be accurately assessed. We thus provide the first worldwide assessment of the binding overhang, i.e. the gap between bound and applied MFN tariffs. We also assess the likely applied-protection impact of an agreement in the Doha Round.

EU Trade Policies: Benchmarking Protection in a General Equilibrium Framework

This paper deals with the EU's trade policy with two objectives: on the one hand, we study the performance of EU's preferential agreements in granting their partners improved market access; on the other hand, we assess the extent to which domestic sectors are effectively protected. As far as the first objective is concerned, we construct bilateral indicators of protection based on the applied tariffs faced by each exporter. In order to do this, an index of trade policy restrictiveness is computed, using the Mercantilistic Trade Restrictiveness Index as the tariff aggregator. We also analyze the protection granted to each sector by the existing tariff structure. In this respect, we compute effective rates of protection that overcome the well-known theoretical shortcomings of the traditional definition (Output Effective Rate of Protection). The analysis is based on a comparative static applied general equilibrium model (Global Trade Analysis Project) and on the most recent version (release 6) of the related database. Results are obtained with reference to the situation existing in 2001, but the assessment of protection is carried out for the enlarged EU. Overall, it appears that notwithstanding the rhetoric about preferential access, several developing countries are the ones facing the highest hurdles in getting into the EU markets. Both bilateral protection and effective protection rates are broadly consistent with the evolution of the WTO negotiations: the strongest demands from developing countries in terms of market access in the EU have less to do with the overall applied MFN tariffs on industrial products than the reduction of distortions affecting trade in agriculture.

Binding Overhang and Tariff-Cutting Formulas

Trade negotiations deal with possible cuts in bound duties, which differ substantially from applied preferential duties, and even from MFN applied duties. Based on WTO's Consolidated Tariff Schedules (CTS) database and on national sources, this paper proposes a systematic assessment of ad valorem-equivalent bound duties at the detailed product level, for almost all WTO members. Fully consistent with the assessment of applied protection provided in the MAcMap-HS6 database (Bouet et al., 2004), this work allows the full structure of protection-bound, MFN applied, preferential applied duties - to be accurately assessed. We are thus able to provide with the first ever worldwide assessment of the binding overhang, i.e. the gap between bound and applied MFN tariffs. We also assess the likely applied-protection impact of an agreement in the Doha Round, based on the Harbinson Proposal for agricultural products, and on the Girard Proposal for nonagricultural products. In all cases, we show the difference between bound and applied protection to be key in understanding both the structure of protection worldwide, and the possible impact of liberalisation scenario cutting bound duties, as uses to be the case in multilateral liberalisations.

Modeling tariff rate quotas in the South African livestock industry

The Uruguay Round of trade negotiations resulted in three main areas of trade liberalization in agriculture, namely market access, domestic support, and export subsidies. In terms of market access, the introduction of tariff rate quotas (TRQs) was one of the main tools to facilitate greater market access. After the liberalization of the agricultural sector and phasing out of past protection mechanisms South Africa introduced a process of tariff reform in compliance with WTO regulations. Furthermore, a system of TRQs was introduced in compliance with WTO regulations. Literature on South African agricultural trade shows that very little research has been conducted on the impacts of TRQs. In this study the impacts of further TRQ liberalization on the South African livestock industry were investigated using four TRQ liberalization scenarios, namely: 33 per cent expansion of import quotas, 33 per cent reduction in ad valorem MFN tariffs, a combination of the first two scenarios and a complete removal of tariffs. The approach followed in this study is spatial partial equilibrium in nature and consists of the primary (beef cattle, broilers, pigs, and sheep) and secondary (beef, poultry, pork and sheep meat) sub-sectors. The model delineates South Africa into its nine provinces, as well as neighbouring important meat producers - Namibia and Botswana. For the four secondary products (beef, poultry, pork and sheep meat) the border prices declined by between 0.89 and 2.39 per cent for scenario one, 2.35 and 7.96 per cent for scenario two, 2.96 and 9.97 per cent for scenario three and 8.25 and 25.19 per cent for scenario four. The largest decline in beef and sheep meat prices due to liberalization was recorded in the Eastern Cape and KwaZulu-Natal Provinces. Cattle and sheep numbers owned by emerging producers are more than those of the established commercial farmers in these two provinces. The implication is that the development efforts by government aimed at commercializing emerging commercial stock farming in order to address equity and poverty may be slowed down considerably with further trade liberalization. The study used the consumer and producers surplus concepts, as well as the equivalent variation concept to measure the impact on welfare of potential trade policy changes mentioned. Welfare as measured by consumer surplus increases by R230.8 million in scenario 1 to R1 880.8 million in scenario 4. Producer surplus decreases by R77.6 million in scenario 1 to R656.89 million in scenario 4. Welfare as measured by equivalent variation increased by R60.6 million in scenario 1 to R468.2 million in scenario 4. The equivalent variation concept revealed much more moderate changes to consumer well being. The reason for this is that consumer and producer surplus estimations assume linearity of the demand and supply curves, whereas the model used in this study accounts for the non-linearity of demand and supply curves. Consumer and producers surplus estimates nevertheless provide useful insight into the relative impact of trade policy changes.