1. Trade Reform

2. Trade Reform Background and Experiences
Elements and Formulation of Trade Liberalization
Speed and Sequence

3. The end of the Golden Years Experiences of 60’s and 70’s
Background
The end of the Golden Years
Experiences of 60’s and 70’s

4. The End of Golden Years
By 1960, easy substitution had already taken place.
New problems: inflation, debt crisis, agricultural sector, unequal distribution, unemployment
IS was expanded from the country sphere to the regional level, and a number of attempts to create regional trading agreements were undertaken.
Some governments made attempts to liberalize trade.

5. Late 60’s and 70’s Programs to expand exports
Brazil’s aggressive industrial policy: export subsidies + tax allowances, subsidized credit to selected industries + crawling peg exchange rate system
Some success, not very much
Export didn’t relax the required foreign exchange constraint
Heavy borrowing
1982 crisis
Why different with East Asia?
East Asian countries rewarded export in general
Macroeconomic instability, real exchange rate

6. Other examples
Chile : Eliminate QRs, tariff reduction. Trade policies suffered from some adjustment between 1962 to 1988, but the rules established after 1974, in essence, have not been altered.
Uruguay: reform 1978, reversal 1983, resume 1986
Argentina: : a frustrated move

7. Elements Formulation Conditions for a successful reform
Trade Liberalization
Elements
Formulation
Conditions for a successful reform

8. Trade Liberalization Unilateral liberalization Regional integration
Multilateral negotiation

9. Result of the early efforts
During 1970s, there were only few successful cases.
In the mid 1980s, liberalization through the three approaches.

10. Elements of trade liberalization
Reduction of NTBs
Reduction of the average level of tariffs
Reduction of the degree of dispersion of the tariff structure
Reduction of export taxes

11. Formulation
Substitution of quantitative restrictions for tariffs. Why is this a liberalization?
Tariffs protects less than quantitative restrictions, more transparent
Tariffs affects price, not quantity. International price change is reflected more quickly
In many cases, this substitution have been a fundamental element in the first stage of trade reform, sometimes the unique element.
It was observed that with this small change only, the production grew due to a more transparent and less restrictive regime.

12. Tariff reform Two dimensions Ways to reduce the average and dispersion
Reduction in the average tariff
Reduction in the dispersion or variance
Ways to reduce the average and dispersion
Reduction equiproportional to all tariffs
Reduction equiproportional to the excess of each tariff to the targeted level prefixed
Higher reductions in proportion for the higher tariffs
“De Concertina”

13. Incentives to export If import tariff is not zero  anti-export bias
Export subsidy can neutralize this effect
But, fiscal burden
Conflict with WTO

14. Trade Liberalization in Latin America

15. Average Tariff in Latin America
Country
Mid 80s
Late 80s
Mid 90s
Argentina
28.0
43.7
14.0
12.2
Bolivia
20.0
18.6
9.7
9.3
Brazil
80.0
50.6
12.6
12.3
Chile
36.0
15.1
11.0
7.0
Colombia
83.0
47.6
11.4
11.7
Costa Rica
53.0 -
6.0
Ecuador
50.0
39.9
11.2
11.3
El Salvador
23.0
9.2
7.3
Guatemala
10.8
6.9
Honduras
41.9
17.9
6.1
Mexico
34.0
10.6
13.7
16.4
Nicaragua
54.0
17.4
5.1
Panama
33.0
8.9
Paraguay
71.7
19.3
9.4
10.7
Peru
64.0
67.8
16.3
13.5
Uruguay
32.0
27.0
9.6
Venezuela
30.0
33.8
11.8 LA
49.98
33.99
12.35
10.43

16. Exports/GDP in Latin America

17. Conditions for successful reform
Export expands.
Productivity grows.
Trade balance does not exhibit unreasonable deficits.
Low unemployment is maintained.
Real wage increases.

18. Speed and Sequence Speed Stabilization and Trade Reform
Trade Liberalization and Capital Market Opening

19. Speed of trade liberalization
Gradual liberalization
This would give firms time for restructuring their productive processes and, thus, would result in low dislocation costs in the form of unemployment and bankruptcies.
Low adjustment cost  provide the needed political support for reform.
Some authors contend that adjustment cost can be reduced by relying on foreign capital during the transition
Slower reform tend to lack credibility, inhibiting firms from actually engaging in serious restructuring

20. Faster reforms More credible
Empirical work shows that even in the short-run, the cost of reform can be small.
Expanding sectors tend to create a large number of employment positions and absorb workers from contracting sectors.

21. Consequences of lack of credibility
Reduce adjustment incentive
Make it more difficult for the reform to be sustained
Consumer expect that the reform will be reversed sometime
Perceives that important goods are temporarily cheaper
Leads to intertemporal substitution in consumption to the present (lower saving rate and lower investment)
Increase in current account deficit
reversal

22. Low investment in export sectora
Import
competing
export b rm rx
Discount rate d, initially rm = rx
Trade reform increases rx  rm + s
Is s enough for the capitalist to switch from import competing to export sector?
Capital relocation take place if rm+ s – d*a > rm
But if investors attach probability of p that the reform will be aborted?

23. The investor will have to pay an additional relocation cost of p(a+b) to move back to import competing sector.
rm+ s – d*a – p(a+b) > rm
s > d*a + p(a+b) must be satisfied
p(a+b) can be viewed as a tax on investment in export sector imposed by incomplete credibility.

24. Multiple equilibria
Eq1. High credibilityhigh investmenthigh probability of successhigh credibility
Eq2. Low credibilitylow investmentlow probability of successlow credibility
Investment and current account
political alliances

25. How to enhance the credibility
Consistency of the policy package
Ex. Fiscal spending, exchange rate…
In case of time inconsistency problem
Build reputation and mechanism of commitment
In case of asymmetric information
With World Bank assistance, the redistributer may choose to mimic the liberalizer for a while to have access to World Bank resources.
Signaling

26. Stabilization and trade liberalization
Resolving the fiscal imbalance is a priority in implementing trade liberalization
Uncertainty associated with very high inflation, including high relative price variability, would reduce the effectiveness of market oriented structural reforms
Low investment, investment in the wrong sector
More relevant to the small countries that relies heavily on import tariffs

27. Fiscal imbalance tends to result in the appreciation of the RER, even if depreciation is required.
In countries with moderate rates of inflation, trade liberalization and macro stabilization will tend to reinforce themselves
Price discipline, productivity increase offset RER appreciation
But most countries embarked on trade reform first or simultaneous stabilization and reform

28. Many countries failed to maintain depreciated RER
A large devaluation constitutes the first step in a trade reform process, in order to maintain a depreciated and competitive RER.
Reduction in protection may generate a rapid and immediate surge in imports. On the other hand, the expansion of exports usually takes some time.
Trade balance disequilibrium
Many countries failed to maintain depreciated RER

29. Capital Market opening and trade liberalization
Trade liberalization first
Prevent large capital inflows that may result in real appreciation
Chile’s superior performance was due to having maintained the capital account closed while tariffs were reduced.
Instantaneous adjustment of capital market and slow adjustment of the goods market
Simultaneous liberalization
Use foreign capital to reduce the adjustment cost.