1. Trade Reform

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

3. Trade Liberalization Unilateral liberalization Regional integration
Multilateral negotiation

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

5. 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

6. 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.

7. Tariff Escalation in developing countries
Tariffs: raw materials < intermediate goods < final goods
The tariff schedules of many countries on which information is available showed substantial escalation.
Tariff escalation in a large number of developing countries is quite extensive and involves higher degree of effective protection than escalation in developed countries.

8. Tariff escalation in industrial countries
Tariff escalation in industrial countries often works against efforts to increase domestic processing in developing countries.
Twists the worldwide distribution of value added along processing chains in favor of the industrial countries.
Tariff escalation, as well as tariff peaks, in certain products, continues to be an area of concern related to market access for developing country exports.

9. 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” - reducing tariffs on those goods with the highest tariffs first

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

11. Average Tariff

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

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

14. 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

15. 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.

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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.

23. Reform in Latin America 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

24. 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

25. Reform in Latin America: 1980s

26. 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

27. Exports/GDP in Latin America

28. Trade Reform in Africa Trade policies in 1960~1980s
import-substitution industrialization
with significant trade restriction
NTMs: quantitative import restrictions, import licenses
high and complex tariff
excessive export taxes and strict regulations, especially on agricultural exports
highly overvalued exchange rates
continued deterioration of economic performance
Structural adjustment program in early 1980s
market-oriented policy package
wide trade liberalization
by the mid-1990s, most African countries had undertaken these programs designed by/with IMF/WB

29. Effects of Trade Reform?
Expected positive effects of trade liberalization
greater production in tradable sector and improved export performances by shifting the incentive structure
greater investment
greater specialization and “learning by doing”
improved total factor productivity with more efficient technology
also leading trade diversification
However, not all of these effects were realized.

30. Tariff and NTM Reform As to NTMs, Africa is one of the world’s lowest.
Tariffs, on average, were reduced by 40 % ( ) but still remain comparatively high, with considerable heterogeneity among countries.
By mid- to late-1990s, most African countries had liberalized their trade policies.

31. After Trade Liberalization
Trade liberalization tends to stimulate imports as well as export, with the former effects dominating, thereby worsening the balance of trade.
In Africa, the limited export response was responsible for the increased trade deficit.

32. After Trade Liberalization
Africa’s disappointing export performance
not because trade liberalization has no effects
but because of weak export momentum and domestic policies

33. After Trade Liberalization: Export Structure
Composition of merchandise exports in developing regions, 1995–2006
Sub-Saharan Africa is the region with the highest dependence on primary product exports, especially fuel
African countries’ export structure, 1995–2006 averages
However, a large majority of African countries are not fuel exporters. The big exporters are fuel exporters.

34. After Trade Liberalization: Export Structure
African exports by type (% of GDP, 1995–2006)
Little changes in manufacturing or primary product exports when fuels are excluded.

35. After Trade Liberalization: Export Structure
Export concentration index, 2006
African countries have become increasingly dependent on a limited number of commodities.