Session 1: Things to know before doing impact assessment ... · Session 1: Things to know before...
Transcript of Session 1: Things to know before doing impact assessment ... · Session 1: Things to know before...
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Susan F. Stone
Director, Trade, Investment and Innovation Division
ARTNeT- GIZ Capacity Building Workshop 23-27 January 2017, Bangkok
Session 1: Things to know before doing impact assessment of FTAs
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Outline
• Why do countries liberalize trade?
• Approaches to trade liberalization
• Potential costs and benefits of joining an FTA
• Rules of origin
• Factors affecting utilization of FTAs
• An overview of impact assessment methods
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Why do countries liberalize trade?
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What is trade liberalization all about?
• Reduced barriers to trade
• Extension of trade liberalization to markets other than goods:
-Services
-Financial
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Primary (static) gains from free trade • Efficient structural adjustment: the country uses its
resources in the most productive way when it specializes in the areas in which it has comparative advantages
• Firms are able to source the most cost-effective inputs
• Consumers are able to purchase imports at the lowest price
→ NOTE: “free trade” and “free trade area” are not the same thing.
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and dynamic gains
• Dynamic effects: more important but difficult to quantify
• Economies of scale: the average cost -The “average” cost reduction effect
- More competitive not only at home but also in foreign markets
• Technology transfer and FDI - Long-term, risk-sharing investment flows
- MNCs provide a channel to reach the global market
- Technology transfer from MNCs
• Stimulating competition
• Structural policy change and reform - Pressure to embrace “best practices”, to reform law and regulations, policy harmonization.
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Approaches to trade liberalization
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Policy options
- UNILATERAL (non-negotiated, non-reciprocal)
- MULTILATERAL (WTO)
- PLURILATERAL
- REGIONAL (sub-regional blocs e.g. SAFTA)
- BILATERAL
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Why FTAs? Many reasons
• Economic motives:
• Minimizing beggar-thy-neighbour
• Gaining credibility
• Market access
• Other reasons:
– increasing policy predictability
– signalling openness to investors
– foreign policy
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Why do WTO members still need FTAs?
• It is easier to address deeper integration in a shorter period of time than via WTO
• A requirement of “substantially all trade” in GATT/WTO
• A group of like-minded countries
• Training ground for all – negotiators, legislators, producers, consumers
• Increased bargaining power in WTO, though trade interests of all members may not be the same
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Is discrimination allowed in the multilateral trading system?
• GATT (1947) WTO (1995)
• Both based on MOST-FAVOURED NATION (MFN) principle: non-discrimination — treating virtually everyone equally
• The mutual exchange of trade concessions through instrument of “preferential trade agreements (PTAs)” is allowed: – Article XXIV of GA TT 1994 provides the rules governing free trade in
goods.
– Article V of the General Agreement on Trade in Services (GATS) gives the corresponding rules for free trade in services.
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The WTO and FTAs: Requirements
• Trade barriers against non-members “must not be raised”
• The FTA must be formed “within a reasonable length of time”
• The FTA must eliminate trade barriers on “substantially all the trade” among the members
• With regard to services, the General Agreement on Trade in Services (GATS) requires that the FTA or CU involve “substantial sectoral coverage”
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Potential costs and benefits of joining an FTA
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Viner Theorem
• Exports from FTA-partner countries will replace inefficient domestic production – It is called “trade creation”
• Exports from FTA-partner countries will displace exports from efficient non-partner countries – It is called “trade diversion”
• The keys issues for policy discussions are about – What would happen to efficiency?
– What would happen to tariff revenue?
– Is there any better option than joining an FTA?
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Tariff revenue
Illustration
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Tariff revenue
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[transfer to
partner]
Trade Diversion
Summary: the net trade effect depends on whether the loss of efficiency due to diversion
(green rectangle) is greater or less than the gains in efficiency (grey triangles).
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Stylized dynamics
Re-allocation
Specialisation & scale economies
Learning (adapting, exporting)
Greater productivity
Increased investment
Innovation, productivity
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Effects when there are overlapping FTAs
There will be more than trade creation and trade diversion effects.
Trade creation: Import from partner what was previously produced at home.
Trade diversion: Import from partner what was previously imported from 3rd country.
Preference erosion: Loss of a preference when a previous partner forms FTA with a 3rd country.
Trade reversion: Import from new partner what had been diverted to a partner in prior FTA (Deardorff, 2014).
Noodle (or spaghetti ) bowl effects: problems of crisscrossing FTAs which arise from the application of different rules of origin (Bhagwati, 1995).
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Rules of origin (RoO)
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Different concepts for Rules of Origin
Change in Tariff Classification Regional Value Content
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Why do we need the Rules of Origin in an FTA?
• FTAs extend preferential tariffs ONLY on products originating from the country/area.
• Rules of Origin (RoO) will determine which products are considered originating.
• Goods that satisfy the RoO under an FTA will be allowed to pay lower or no import tariffs when imported into a Party under the FTA.
• Unfortunately, RoO varying from FTAs to FTAs can be problematic to exporters.
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Burden of the noodle bowls
• Overlapping and uncoordinated rules
• The complex rules and variable tariffs increase transaction costs
• Deter the use of FTA preference , particularly by small- and medium-sized enterprises (SMEs)
• One way to solve the problem is having an over-arching set of free-trade principles
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Factors affecting utilization of FTAs
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Evidence generally shows that FTAs are underutilized
• Examples of utilization rates of ASEAN countries
25
Country FTA AFTA
Indonesia 42% 51%
Malaysia 16% 39%
Singapore 21% 43%
Viet Nam 37% 65%
Average 26% 50%
Source: “FTAs in South-east Asia: Towards the next generation.” Economist Intelligence Unit,2014.
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Factors for the success of PTAs
• Natural trading partners
• High margin of preference – High MFN rates
– No other programme providing alternative incentives (EPZ, ITA, etc.)
• No replacement of protection (NTBs)
• Low cost of utilization (learning about FTA provisions,
tailoring business plans to comply with the RoO and to obtain
the C/O, Cost of compliance (with the rules of origin, etc.)
• Information availability (especially to SMEs)
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Impact assessment of FTAs: an overview
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Why is impact assessment so important?
• Joining an FTA is a costly way of trade liberalization
• Facilitate better trade negotiations
• Objective (unbiased) and transparent policymaking – Less susceptible to lobbying
• Identify ‘winners’ and ‘losers’ – Targeted trade-adjustment assistance program
• Compare ex-ante predictions with ex-post actual impacts – Feed into future trade policymaking
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Menu of choices
Purpose Methods
Ex-ante overview of potential impacts
Use trade and trade-policy indicators
Ex-ante assessment of impacts on a specific sector/product
Partial-equilibrium models (SMART, GSM, TRIST)
Ex-ante economy-wide impacts Computable general-equilibrium (CGE) models
Ex-post overview Preference utilization indicators
Ex-post assessment of impacts Gravity (econometric) models
Ex-post impacts on households and firms
Use survey data to run econometric models
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Keep in mind that..
• Results are conditional upon the assumptions. – Some of the assumptions employed by the models, such as perfect
competition and full employment, may not be realistic.
• The data limitations affect the feasibility of using different evaluation methods. For example, – sophisticated econometric models demand a lot of data, while simple
trade indicators do not.
– Even if sufficient data exists to make a method feasible, poor data quality may make the results of a study unreliable.
• FTAs may be designed to serve these unquantifiable economic or strategic purposes, such as structural reform and foreign relation.
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Thank you