Tariff Preferences
Related terms:
Free Trade, World Trade Organization, Customs Union, Trade Effect,
Terms of Trade, Foreign Economic Policy, Most Favoured Nation,
Tariffs, Foreign Investment
Legal Aspects of Commercial Policy Rules
A.O. Sykes, in Handbook of Commercial Policy, 2016
3.3.2 Special and Differential Treatment
From the outset of GATT, developing countries have sought and
received certain special allowances. It is well known that developing
countries have not been asked to make tariff concessions to the same
degree as developed nations, an unsurprising fact given the smaller
size of developing country markets. Additional flexibilities were
provided in GATT Article XVIII. It affords somewhat relaxed rules for
tariff renegotiations for the purpose of promoting a “particular
industry,” for balance of payments measures (already noted in
connection with the case against India), and for measures that violate
other GATT provisions after notification and consultation with other
members. Part IV of GATT, which was added in response to
developments in the 1950s and early 1960s, contains mostly
hortatory language urging GATT members to take account of the
interests of developing countries in their commercial policies. Two
provisions in Article XXVII are arguably binding, however, concerning
an obligation on the part of developed members to refrain from
raising tariffs and nontariff barriers on goods of export interest to
less-developed members, and to refrain from new fiscal measures
that would hamper the exports of primary products from less-
developed members. There has not been any enforcement litigation
under these provisions, however, despite numerous occasions on
which developed members have taken measures that affect exports
from less-developed members.
In addition to these provisions of GATT, many other WTO treaties
afford some form of special and differential treatment. Examples
include longer phase-in and transition periods for developing
country members under the Agriculture Agreement, the SPS and TBT
Agreements, the Subsidies Agreement, and TRIPs, as well as
exemptions from certain obligations for least-developed countries
under several agreements.
One the most significant instances of special and differential
treatment in practice has been the development of the Generalized
System of Preferences (GSP), pursuant to which (mostly developed)
members afford duty exemptions and other preferences to
developing country exports. GSP was authorized by a 10-year waiver
under GATT in 1971, and made permanent by the 1979 “Enabling
Clause,” which refers back to the 1971 waiver and its “generalized,
nonreciprocal, and nondiscriminatory preferences beneficial to the
developing countries” (footnote 6). Developed countries are not
obligated to extend GSP benefits, but are authorized to do so subject
to certain constraints. Major GSP schemes include those of the EU,
the United States, Japan, and Australia.
In practice, GSP schemes are quite selective in their coverage, often
excluding politically sensitive imports, excluding imports of particular
goods from countries that are deemed to be already competitive, and
“graduating” certain countries altogether from the scheme based on
their level of development. GSP benefits may also be conditioned on
the willingness of beneficiary countries to afford adequate intellectual
property protections, to afford internationally recognized worker
rights, and to assist in efforts to combat international terrorism,
among other things. Thus, GSP benefits have been used to
encourage beneficiaries to cooperate in a variety of economic and
political initiatives.
It is questionable, therefore, whether existing GSP schemes meet the
standards of “generalized, nonreciprocal, and nondiscriminatory
preferences” set forth in the Enabling Clause. India brought a case
against the EU's GSP scheme on this basis, challenging in particular
some special preferences given to 12 nations, ostensibly granted
because of the special needs of those countries to combat drug
production and trafficking. These special preferences, which did not
apply to India, did apply to Pakistan. The Appellate Body ultimately
held that the EU scheme was discriminatory and inconsistent with
the Enabling Clause because the EU had not justified in any careful
way the selection of the 12 beneficiaries. Ultimately, the EU
rejiggered its criteria for granting special preferences in a manner
that excluded Pakistan, and the issue has been quiescent since then.
There is little doubt that other features of various national schemes
involving limitations on coverage, implicit reciprocity, and
discrimination among countries could be challenged under the
Enabling Clause, but such challenges have not been brought to date,
probably because the respondent might respond by abolishing its
GSP scheme altogether.
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u
v
Special and Differential Treatment for
Developing Countries
E. Ornelas, in Handbook of Commercial Policy, 2016
2.1.1 The American Nonreciprocal Arrangements
The GSP of the United States took effect on January 1976. It currently
offers duty-free access on around 3500 tariff lines to 122 countries.
Another 1500 tariff lines are included for 43 LDCs. Its statute
specifies various criteria under which a developing country may not
qualify—being “communist,” expropriating US citizens, not
recognizing worker rights, not recognizing intellectual property
rights, allowing child labor, etc. Countries in those categories may be
taken out, permanently or provisionally, fully or partially, from the
recipients’ list. The American GSP also excludes several sensitive
items. Some statutory exclusions are explicit (eg, “watches”) whereas
others allow for more discretion (import-sensitive electronic articles).
The program needs periodical renewal by Congress. Historically,
there have been several periods during which it was temporarily
suspended due to lack of authorization by Congress, although it has
always been renewed retroactively, with duties paid during expiration
periods been reimbursed to exporters after reauthorization.
Remarkably, such retroactive payments have always taken place
despite the lack of a statutory requirement imposing them.
In addition to GSP, the United States currently has two other major
non-GSP schemes of nonreciprocal preferences: the African Growth
and Opportunity Act (AGOA, in force since 2001) and the Caribbean
Basin Initiative (CBI, launched under a different name in 1983 and
expanded in 2000). The beneficiaries of the non-GSP programs are
usually GSP beneficiaries. A key difference is that they receive broader
preferences than they would under standard GSP. AGOA also
provides more flexibility (to some members) in terms of compliance
with rules of origin.
The top portion of Table 4 details the breadth and depth of the main
American nonreciprocal programs. Over a third of the tariff lines are
already zero on an MFN basis. Relative to the tariff lines with strictly
positive MFN duties, regular GSP beneficiaries can export duty-free
in just over half of them. LDCs have duty-free access in an additional
21.5% of dutiable tariff lines. AGOA and CBI beneficiaries have even
broader access, being able to export around 40% more products
duty-free to the American market than regular GSP beneficiaries
countries are allowed to. Table 4 also distinguishes between
agriculture (where several developing countries have comparative
advantage) and nonagricultural products. It is worth noting that only
in about 21% of agricultural products there is duty-free MFN access
to the American market. Moreover, regular GSP beneficiaries have
preferences in just about 40% of the dutiable agricultural goods.
Countries included in the broader programs, on the other hand, are
j
k
eligible to export duty-free a larger fraction of agricultural than of
nonagricultural dutiable products.
Table 4
. Tariff lines covered by the American and the European
programs of nonreciprocal preferences, 2014
United
States
Tariff
schedule
Total
number of
tariff lines
10713
1897
Number of
MFN duty-
free tariff
lines
3871
395
Number of
MFN
dutiable
tariff lines
6842
1502
GSP
Number of
duty-free
lines
3507 51.3%
598
39.8%
29
GSP-LDCs
Number of
duty-free
lines
4980 72.8%
1230 81.9%
37
AGOA
Number of
duty-free
lines
5247 76.7%
1259 83.8%
39
CBI/CBERA Number of
duty-free
lines
5499 80.4%
1269 84.5%
42
CBI/CBTPA Number of
duty-free
lines
5756 84.1%
1269 84.5%
44
EU
Tariff
schedule
Total
number of
tariff lines
9379
2076
Number of
MFN duty-
free tariff
lines
2356
400
All products
Agricultural
goods
a
N
# of
tariff
lines
As % of
dutiable
tariff
lines
# of
tariff
lines
As % of
dutiable
tariff
lines
#
ta
lin
Obs.: For the United States, all preferential tariffs are duty-free.
a
WTO standard definition of agricultural and nonagricultural
goods.
WTO database on Preferential Trade Arrangements.
The breadth of the American GSP program has been relatively stable
over the last two decades, as Fig. 1 shows. After a drop in the late
1990s, the number of GSP-eligible tariff lines has fluctuated just
around 50–51% of the total nonzero MFN tariff lines.
Number of
MFN
dutiable
tariff lines
7023
1676
GSP
Number of
preferential
tariff lines
6137 87.4%
867
51.7%
52
of which:
Number of
duty-free
lines
2994 42.6%
124
7.4%
28
GSP+
Number of
preferential
tariff lines
6197 88.2%
917
54.7%
52
of which:
Number of
duty-free
lines
6004 85.5%
731
43.6%
52
EBA
Number of
preferential
tariff lines
6932 98.7%
1603 95.6%
5
of which:
Number of
duty-free
lines
6932 98.7%
1603 95.6%
5
All products
Agricultural
goods
a
N
# of
tariff
lines
As % of
dutiable
tariff
lines
# of
tariff
lines
As % of
dutiable
tariff
lines
#
ta
lin
Fig. 1. Proportion of GSP-eligible tariff lines relative to dutiable MFN
tariff lines, United States.
The top portion of Table 5 shows instead the importance, in terms of
trade value, of the imports entering the United States under its
nonreciprocal arrangements. It makes clear that, from the
perspective of the United States, the preferences do not have a major
impact: the imports that are eligible for preferences under all of its
nonreciprocal programs combined amount to less than 3% of the
value of the American imports (or about 5% of the American imports
of dutiable products). Observe also that these are the figures for
eligible imports; if one considers only the imports that actually claim
preferences, the proportion would be significantly smaller, as I
discuss in Section 4.2.3. The corresponding values for agricultural
products are only slightly higher.
Table 5
. Imports into the United States and the EU from beneficiaries
of programs of nonreciprocal preferences, as a percent of their total
imports
United
States
(2014)
All partners
Imports
entering
MFN
duty-
free
47.6%
41.1%
48%
GSP
beneficiaries
Total
imports
11.9%
15.7%
11.7%
Imports from nonreciprocal
programs beneficiaries (% of
total imports)
All
products
Agricultural
goods
a
Nonagricult
goods
a
Imports
entering
MFN
duty-
free
5.5%
9.5%
5.2%
Imports
eligible
for GSP
benefits
1.6%
3%
1.5%
LDC GSP
Beneficiaries
Total
imports
0.8%
0.4%
0.8%
Imports
entering
MFN
duty-
free
0.1%
0.3%
0.1%
Imports
eligible
for GSP
benefits
0.3%
0.1%
0.3%
AGOA
beneficiaries
Total
imports
1.1%
1.8%
1.1%
Imports
entering
MFN
duty-
free
0.4%
1.3%
0.3%
Imports
eligible
for
AGOA
benefits
0.6%
0.3%
0.6%
CBI/CBERA
beneficiaries
Total
imports
0.3%
0.2%
0.4%
Imports
entering
MFN
duty-
free
0.2%
0.1%
0.2%
Imports
eligible
for
CBERA
benefits
0.1%
0.1%
0.1%
Imports from nonreciprocal
programs beneficiaries (% of
total imports)
All
products
Agricultural
goods
a
Nonagricult
goods
a
CBI/CBTPA
beneficiaries
Total
imports
0.3%
0.02%
0.3%
Imports
entering
MFN
duty-
free
0.2%
0.1%
0.2%
Imports
eligible
for
CBTPA
benefits
0.04%
–
0.05%
EU
(2012)
All partners
Imports
entering
MFN
duty-
free
59.3%
42.9%
60.4%
GSP
beneficiaries
Total
imports
60.6%
65.3%
60.3%
Imports
entering
MFN
duty-
free
38.4%
31.7%
38.8%
Imports
eligible
for GSP
benefits
21%
19.3%
21.1%
GSP+
beneficiaries
Total
imports
2.6%
8.9%
2.2%
Imports
entering
MFN
duty-
free
2.1%
3.6%
2%
Imports
eligible
for
GSP+
benefits
0.3%
2.9%
0.2%
EBA
beneficiaries
Total
imports
1.9%
2.6%
1.9%
Imports from nonreciprocal
programs beneficiaries (% of
total imports)
All
products
Agricultural
goods
a
Nonagricult
goods
a
a
WTO standard definition of agricultural and nonagricultural
goods.
WTO database on Preferential Trade Arrangements.
Interestingly, although the number of GSP-eligible tariff lines has
remained roughly constant since 2000 (Fig. 1), their relative
importance has changed more significantly. This is especially true for
agricultural products, as Fig. 2 illustrates. Reaching over 12% of the
value of all dutiable agricultural imports in 1997, and remaining
above 10% until 2006, that figure has declined to just 5% in 2014.
Fig. 2. Proportion of GSP-eligible imports relative to total dutiable
imports, United States.
In addition to the requirements in nontrade areas mentioned above,
countries “graduate” if they reach a certain level of income, in which
case they lose the right to preferential access. Furthermore, a
product-country pair may be excluded as well if there is no longer a
“competitive need,” where the competitive need limit (CNL) is
defined by a monetary threshold or as a percentage of American
Imports
entering
MFN
duty-
free
1%
1.3%
1%
Imports
eligible
for EBA
benefits
0.9%
1.3%
0.9%
Imports from nonreciprocal
programs beneficiaries (% of
total imports)
All
products
Agricultural
goods
a
Nonagricult
goods
a
imports of that product in a year. By construction, exclusions under
this criterion target precisely the most successful exporters.
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l
m
Preferential Trade Agreements
N. Limão, in Handbook of Commercial Policy, 2016
6.2.2.4 Bilateral Interdependence
What effect do cooperative preferential tariffs between two countries
have on other policies between them not covered in the agreement?
Understanding this type of interdependence can help explain the
policy scope of agreements, eg, if tariffs and certain NTBs are highly
substitutable then an agreement that only includes the former would
be unraveled by the use of NTBs and thus have little value, which
may explain why almost all the agreements in Table 1 include both. It
would be interesting to explore that detailed database to determine
the extent of substitution between policies included and those
excluded from agreements. It would also be interesting to test if such
substitution increases the probability of subsequent cooperation in
those NTBs.
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The Empirical Landscape of Trade Policy
C.P. Bown, M.A. Crowley, in Handbook of Commercial Policy, 2016
2.3.3 Tariff Preferences Offered by the United States
Here, we extend the analysis to provide a more detailed assessment
of the variation in the United States’ preferential tariff offerings
under its various PTAs. Fig. 9 breaks out bilaterally the United States’
share of these preference possible products for which it actually
granted a lower-than-MFN tariff in 2014. As previously observed in
Table 3, the United States offers some bilateral tariff preferences to
countries via free trade agreements including NAFTA (with Canada
and Mexico), and bilateral FTAs with Australia, Colombia and Korea.
The United States offered a lower-than-MFN tariff in 2014 for close
to 100% of preference possible products to each of these countries.
In the few instances in which a product was not offered a bilateral
tariff preference, it is typically associated with the more recent
agreements (Colombia, Korea) that were not yet fully phased in.
Fig. 9. United States's bilateral tariff preferences toward major
economies, 2014.
Constructed by the authors with bilateral tariff data at the HS06 level from UN
International Trade Center. “Preference possible” products, defined as HS06
products with nonzero applied MFN tariffs in 2014 (58.0% of US imported
products), not including products with tariffs applied as specific duties. For
country acronyms, see Table A.2.
US trading partners also receive lower-than-MFN applied tariffs
under unilateral preference offerings. In 2014, the United States
offered tariff preferences to trading partners under a number of
different unilateral programs; for the trading partners in our sample,
this includes the African Growth and Opportunity Act (AGOA) and
the Generalized System of Preferences (GSP). Fig. 9 indicates
differences in the comprehensiveness (product coverage) across the
different US programs. For example, the US offered tariff preferences
for more than 80% of possible products for African countries such as
Kenya or Tanzania (which are eligible for AGOA) and only 65% of
possible products for Bangladesh or Pakistan (which are eligible for
GSP), despite these countries all having comparable levels of income
per capita. Furthermore, because the United States exercises
discretion by excluding certain products from certain countries (that
are both otherwise part of the program) from being GSP eligible, the
United States offers Brazil, India, Indonesia, Thailand, Turkey, and
Ukraine slightly fewer tariff preferences than other GSP-eligible
countries.
Importantly, there are also major trading partners to which the
United States offered no special tariffs in 2014. These include three of
the top five sources for its imports—China, the EU, and Japan.
Collectively, these three economies alone accounted for over 43% of
total US goods imports; by itself, this explains why such a large share
of US trade continues to arrive under MFN tariffs. This may partially
explain why countries were seeking comprehensive new free trade
agreements with the United States in 2014 via the Trans-Pacific
Partnership (TPP) negotiations (which includes Japan, as well as
Vietnam) and the Transatlantic Trade and Investment Partnership
(TTIP) negotiations with the European Union. Other major countries
to which the United States did not offer preferences in 2014 include
Argentina, Russia and Saudi Arabia. Argentina and Russia had
previously been part of the US GSP program for a number of years;
both were recently removed from eligibility. Finally, the United States
not only did not offer Burma and Iran any bilateral tariff preferences
in 2014, they were not even granted the US's applied MFN tariff rate
(despite Burma being a WTO member); the United States had an
import ban from both countries in effect in 2014.
Before concluding our discussion of preferential tariffs, we make two
additional points regarding US tariff preferences that we are not able
to capture in the data utilized here.
First, our description of US tariff preferences has focused exclusively
on the supply (offerings) side. Even our data on bilateral tariff
offerings are incomplete as they exclude reference to the fact that the
United States also imposes upper limits (quantitative restrictions) on
how much can be imported under some of these unilateral
preferences. The focus on bilateral tariff offerings also does not
assess the equilibrium take-up of preferences, as it does not consider
demand-side factors. For example, preference utilization rates
describe the equilibrium outcome whereby exporters actually claim
the preferential tariff rate on the customs declaration form, in lieu of
simply continuing to pay the (potentially higher) applied MFN tariff.
Finally, like other areas of trade policy, there is additional variation to
US tariff preference offerings over time as well as across trading
partners and products, especially associated with the preferences that
arise under the discretionary unilateral programs. The list of products
for which the US offers preferences can change from year to year;
furthermore, as we have seen from Fig. 9, certain GSP-eligible
exporting countries may have their particular export products
excluded from GSP in a given year that are otherwise GSP eligible.
Trading partners can also “graduate” from a given GSP scheme over
time, especially after exceeding certain income-per-capita thresholds.
For example, the US graduated Bulgaria and Romania from its GSP
program in 2007 (upon their accession to the European Union) and
Russia in 2014. Finally, countries can also be kicked out of GSP for
political reasons. For example, the United States removed Argentina
from its GSP program beginning in 2012 due to Argentina's failure to
pay roughly $300 million in damages since 2005–06 that it owed US
investors arising under a foreign direct investment dispute (USTR,
2012). Overall, there should appear to be much more trade policy
uncertainty associated with a US tariff preference arising under GSP
than a US tariff preference arising under one of its free trade
agreements.
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as
Dumping and Antidumping Duties
B.A. Blonigen, T.J. Prusa, in Handbook of Commercial Policy, 2016
5.4.1 Do PTAs Affect the Patterns of AD Use?
It is well known that preferential tariffs discriminate against
nonmembers it is not clear whether other PTA policies accentuate or
attenuate this discrimination. Prusa and Teh (2010) focus on the
extent to which PTAs alter the pattern of AD. AD is a particularly apt
policy to study because there is considerable variation in AD rules
across PTAs. Some PTAs contain no AD provisions, some prohibit it,
and others contain special rules for its use. They find PTAs have had
large effect on the pattern of AD use: decreasing the incidence
against PTA members and increasing the number of AD actions
against non-PTA members. The results are particularly strong for
PTAs that have additional AD rules. Taking the two effects together,
they find net effect of PTA rules on total AD filings is small. Bown
(2014b) finds a similar effect looking just at PTAs involving Turkey.
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The Escape Clause in Trade Agreements
M. Beshkar, E.W. Bond, in Handbook of Commercial Policy, 2016
2.3 Other Escape Clauses
Escape clauses have also been included in some preferential trade
agreements as well as in other agreements that are part of the WTO.
A safeguard clause within a preferential trade agreement (PTA) is
intended to provide an avenue for temporary escape from injury due
to preferential tariff reductions with a PTA partner. These safeguard
actions differ from the “global” safeguards of the WTO agreement in
that they only apply to the preferential cuts made to PTA partners.
The degree to which safeguard protection is provided varies across
PTAs. The European Union, which has the deepest degree of
integration among partners, does not allow safeguard or
antidumping actions against member countries. The Treaty of
Asunciòn that established MERCOSUR, which aspired to a deep
integration among members, allowed safeguard measures against
member countries during the transitional period but not thereafter.
In practice, however, antidumping measures have continued to be
pursued against member countries.
In contrast, Article 801 of the North American Free Trade Agreement
(NAFTA) identifies conditions under which a safeguard action may be
applied that are virtually identical to those in Article XIX of the GATT,
and allows safeguard measures to be applied against member
countries if the imports from the members contribute to the injury to
the domestic industry. The lack of use of escape mechanisms in the
EU may indicate that when there is a very high level of integration
among countries, so that other mechanisms for compensating
domestic industries for injury are available.
The existence of PTAs also raises a question of whether a country
imposing a global safeguard is allowed to exclude PTA members
from the application of the safeguard. In the Argentina Footwear
case, the WTO Appellate Body ruled that if a country includes the
trade from PTA members in calculating the increased imports of a
product, then it must also include those countries in its safeguard
measure. This parallelism principle has been supported in
subsequent rulings on safeguards.
Discriminatory safeguard clauses have also been allowed during
transitions as part of WTO agreements on specific topics. For
example, the WTO Agreement on Textiles and Clothing allowed
countries to impose temporary restrictions on specific countries
during the phase out of quotas that had been in place under the
Multi-Fibre Arrangement. Similarly, the Chinese Accession protocol
included a transitional safeguard measure that was in effect for 12
years after China's entry into the WTO. Bown (2010) points out that
there has been a substantial weakening of the WTO safeguard
principles in the case of China safeguards. In addition to their
discriminatory nature, the injury test has been weakened and
countries are allowed to impose safeguards merely with the threat of
deflection of imports from other countries.
One case of particular interest is the Special Safeguard Mechanism in
the WTO Agreement on Agriculture. The agreement on agriculture
was intended to reduce trade barriers and support in agriculture,
while also converting quantitative restrictions to tariffs. A special
safeguard mechanism was put in the agreement that applied to
products that had been “tariffied” under the WTO agreement. The
agreement sets rules on the tariffs that can be imposed if imports
exceed a trigger level or price falls below a trigger price (based on
1986–88 prices). These safeguards differ from those in Article XIX
because they can be triggered automatically without an investigation,
and as a result there is no injury criterion to be met in order for the
safeguard to be put in place. This agreement was limited in that it
applied only to the subset of agricultural goods that had been
tariffied and it required notification to the WTO of what lines would
be eligible for this mechanism.
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Business Networks in Thailand
N. Wailerdsak, S. Siengthai, in Business Networks in East Asian
Capitalisms, 2017
10.3.3.1.1 New Normal
The economic growth of Thailand (GDP) was on average, 9% in 1990
and lowered to 5% per year in 2000. Followed by the political
turbulence in the country during 2010–14, the economic growth
became 3% per year. The export growth rate was also negative
consecutively from 2012. Under the new normal of the economic
conditions and growth, it is expected that the growth rate will be
about 3% per year and the export growth rate will not be higher than
4% per year. This is due to the fact that many environmental factors
are changing. Many of the main staple products such as rice, rubber,
and palm oil have experienced a continuous decline in price. In
addition, the EU has stopped the Generalized System of Preferences
(GSP) privileges for Thailand as it has reached the expiration within
the set time frame. In addition, Thai manufacturers or exporters have
not ventured to other countries to make use of the GSP privileges
that those countries could have offered. So, the problems must be
solved by other means and mechanisms available in the country
(Thailand Future Foundation Institute of Education, 2015; World
Bank, 2015).
Thailand is currently faced with some significant problems, which
contribute to the slow economic growth. The main problem is that
the world trade has slowed down and its export growth rate is
negative. From the expansion rate around 10% per year during
1998–2008, the growth rate of the export sector has gone down to
0.9% per year during 2011–13. Needless to say, part of this outcome
was due to the world economic recession. But more importantly,
Thailand’s manufacturing sector, which is the foundation of the
export sector and the source of wealth for the country, has been
trapped and could not make a breakthrough from such a trap. It lacks
technological advancement to compete in the international upper
markets. At the same time, it could not come down to compete with
China and Vietnam in the lower markets which utilizing cheap
labour. This trap reflects the law of diminishing returns which is
experienced when the economic opportunities and gains based on
the utilization of local labour resources and foreign technology start
to diminish (Siengthai et al., 2009). This necessitates the country
increase its technological capacity with respect to production and
labour productivity to build its production capacity and hence,
competitiveness (Jestin, 2009; Suehiro, 2009). The second problem is
the fierce competitive environment within the region itself. For
example, the value of electronics products from Vietnam is much
higher than that of Thailand (ie, about 40%). In spite of the fact that
not many years ago (ie, in 2010), the value of electronics product
export from Vietnam was only one in four times Thailand’s export
(IMD, 2014). In mid-2015, Samsung shut down its TV production
base in Thailand and moved to set up a new manufacturing plant in
Vietnam with about 90,000 mil. baht registered capital. The third
problem issue for Thailand is that it is evident that Thailand is
becoming an ageing society and the wage rates are increasing. The
Thai population is rapidly ageing, while the active labour force is
hardly increasing. The wage rates are increasing rapidly after the
minimum wage policy was implemented in around 2010 which was
above the labour productivity rate. This has decreased Thailand’s
competitiveness significantly when compared to its competitors in
the global markets (IMD, 2014; Suehiro, 2009; World Economic
Forum, 2014). In 2011, there was a great flood in Thailand, which led
to the retrenched export sector, as many manufacturing plants had to
close down and companies needed significant budgets to recover
and renovate.
Under the 11th National Economic and Social Development Plan, the
Thai economy, which earlier had depended on the manufacturing
sector, is experiencing the saturation point. The export sector is
declining. More and more emerging economies have entered into
the manufacturing of basic needs products in competition directly
with Thailand. Meanwhile, the upgrading to the production of high-
technology products also demands time in development. The
existing competitors are firmly controlling their market share. Thus,
Thailand has come to a critical junction in its transition from a
middle-level income to a high-level income and developed economy.
The National Economic and Social Development Board (NESDB) has
therefore established a strategy for the country that Thailand now is
entering into the era in which the country growth will be based on
innovation and creativity. Thailand has to transform from low-cost
advantage manufacturing to the service sector which emphasizes
‘Thainess’. In the 11th Plan, there is a clear indication about the
development of industries which are knowledge-based. In the new
BOI Investment Promotion Policy issued in January 2015, it is clearly
stated that the government wants to create a competitive advantage
in a Thai way by emphasizing the ‘Thainess’ as its strengths.
Read full chapter
URL: https://www.sciencedirect.com/science/article/pii/B9780081006399000104
Handbook of International Economics
Giovanni Maggi, in Handbook of International Economics, 2014
4.2 Impacts of RTAs
In this section I will focus on two related themes: the impact of RTAs
on member countries’ trade barriers against outsiders (“external”
trade barriers) and the impact of RTAs on multilateral trade
liberalization.
The impact of RTA formation on external trade barriers has been the
subject of a sizable theoretical literature. One point that emerges
clearly from this literature is that the qualitative impact of RTAs on
external tariffs depends crucially on whether the agreement takes the
form of an FTA or of a CU. I will focus first on FTAs.
Various papers have pointed out a strong tendency of FTAs to lead to
lower external trade barriers. This is generally known as the “tariff
complementarity” effect, but it is important to point out that such
effect can arise from two distinct mechanisms. The first one,
highlighted by Richardson (1993), occurs when the FTA leads
member countries to compete for tariff revenue, thus inducing them
to reduce external tariffs. Interestingly, this mechanism can occur
even for small countries that use tariffs only for political-economy
reasons and have no TOT power. A second mechanism was pointed
out by Bagwell and Staiger (1999b): an FTA leads member countries
to import less from non-member countries, and if member countries
have TOT power this reduces their incentives to manipulate TOT vis-
à-vis non-members, in turn leading to lower external tariffs.
The tariff complementarity effect however is not the only possible
effect at play in determining the impact of FTAs on external tariffs,
and other effects may arise that mitigate or overturn it. Limão (2007)
for example shows that an FTA can lead to higher external tariffs if
the FTA serves also non-trade objectives (such as enhancing
cooperation on labor standards or security issues). Several real-world
FTAs appear to have this feature, with one country (typically the US or
the EU) granting tariff preferences, and the other (typically a less
developed country) making non-trade concessions. In this type of
situation, the country that grants tariff preferences may be better off
increasing its external tariffs, because this enhances the value of the
preferences and hence allows it to extract larger non-trade
concessions.
In the case of CUs, tariff-complementarity effects may still be
present, but two new forces arise that push in the opposite direction.
The first one is known as the “market power” effect: if two member
countries import the same good from outsiders, once the CU is
formed they jointly have more power over TOT, and thus have a
stronger incentive to raise tariffs against outsiders. The second effect
is known as the “coordination” effect: if country A increases the tariff
on imports of a certain good from country B, this has a positive
externality on all other countries (both importers and exporters of
that good), and a CU allows member countries to internalize this
externality, thus leading to higher external tariffs. The first paper in
the literature to highight these two effects was Kennan and Riezman
(1990). Note that the coordination effect can arise even in the
absence of the market power effect: this is crystal-clear in a setting of
“competing exporters,” where each country is the sole importer of a
given good. Once all the effects are taken into account, a CU can still
lead to lower external tariffs, but this is less likely than in the case of
an FTA (as shown by Bagwell and Staiger, 1999b).
In a series of papers, Emanuel Ornelas has established a link between
the literature on the impacts of RTAs and that on the determinants of
RTAs, by showing that taking into account the impact of RTAs on
external tariffs has important implications for the likelihood of RTA
formation in the first place.
84
85
86
Ornelas (2005a) considers a model similar to Grossman and
Helpman (1995b), but in which external tariffs are determined
endogenously. Ornelas identifies a “rent destruction” effect of the
FTA, which arises from the fact that the rents from external tariff
protection spill over to partner countries under the FTA. The rent-
destruction effect lowers the incentives of special interest groups to
lobby for protection, and this creates a tendency of FTAs to induce
reductions in external tariffs. Interestingly, when political-economy
motivations are stronger, the drop in external tariffs is larger, thus
FTAs are more conducive to multilateral trade liberalization.
The second point made by Ornelas (2005a) is that, since an FTA
lowers the total amount of rents that trade protection can generate,
this has important implications for the political viability of the FTA.
Ornelas starts by considering a situation where there is no ex-ante
lobbying (that is, no lobbying to influence directly the decision to join
the FTA), and shows that in this case only FTAs that are sufficiently
welfare-enhancing can be politically viable: intuitively, a welfare-
reducing FTA cannot be attractive to the government, because it
reduces both the level of welfare and the available amount of rents.
Ornelas then allows for ex-ante lobbying, and finds that in this case a
welfare-reducing FTA may in some cases be politically viable, but this
is made less likely by the rent-destruction effect of the FTA: in
particular, a welfare-reducing FTA can be viable only if the
governments’ valuation of welfare relative to contributions is neither
too small nor too large. The bottom line of this paper then is that the
rent-destruction effect reduces the political viability of welfare-
reducing FTAs.
The impact of RTAs on external trade barriers has also been the
subject of recent empirical work. Estevadeordal et al. (2008) focus on
the effect of preferential trade liberalization on external tariffs in Latin
America from 1990 to 2001. An appealing feature of this dataset is
the wide variation in trade preferences across sectors and over time.
Employing a rich set of fixed effects, these authors find that
preferential tariff reduction induces faster decline in external tariffs.
Furthermore, they find that this effect is present only for FTAs, not
for CUs, and is stronger in sectors where the potential for trade
diversion is larger.
Interestingly, Limão (2006) and Karacaovali and Limão (2008) find
results that seemingly diverge from those of Estevadeordal et al.
(2008). These two papers examine the impact of preferential trade
liberalization by the US and the EU on multilateral trade
liberalization, and find that the US and the EU liberalized less during
the Uruguay Round in sectors where they had granted tariff
preferences, suggesting that preferential liberalization might hinder
the cause of global free trade. What can explain the difference in
findings between these papers and Estevadeordal et al. (2008)?
Theory can help us answer this question. A key difference between
the two approaches is that Limão (2006) and Karacaovali and Limão
(2008) focus on the US and the EU, whereas Estevadeordal et al.
(2008) focus on developing countries. Tariffs are considerably higher
87
88
in developing countries, so the potential for trade diversion is larger
for these countries, and as theory suggests, this implies a stronger
tariff complementarity effect. Furthermore, Limão’s (2007) theoretical
analysis suggests that preferential liberalization may hinder global
free trade if RTAs are formed also for non-trade reasons, and this is
more often the case for North–South RTAs than for South–South
RTAs.
Thus far I have focused on how the formation of an RTA affects its
member countries’ unilateral choices of external tariffs. Next I focus
on the impact of RTAs on the political viability of multilateral trade
agreements.
Levy (1997) considers a model where gains from trade can arise from
differences in relative factor endowments and/or from increased
product variety, and takes a median-voter approach to the choice of
trade policies. He shows that, if the FTA provides a country’s median
voter with disproportionately large gains, it may raise his or her
reservation utility above the level offered by a multilateral agreement,
thus undermining political support for the latter. This undermining
is more likely to occur in FTAs that involve countries with similar
relative factor endowments. For example, suppose Germany joins the
EU. Assuming that EU countries have similar relative factor
endowments, this will benefit the median voter in Germany mostly
through variety gains. In the next stage, Germany considers signing
a multilateral agreement. If Germany is relatively rich in capital and
its median voter is an unskilled worker, the multilateral agreement is
likely to damage the median voter through Stolper-Samuelson
effects, without providing much additional variety gains, so he/she
will block the multilateral agreement. On the other hand, if the same
median voter were asked if he/she supports a multilateral agreement
before joining the EU, then the answer may be yes, because in this
case the variety gains may outweigh the adverse Stolper-Samuelson
effects.
The model by Krishna (1998), already mentioned in Section 4.1, leads
to a similar result, in spite of the very different structure. Recall that
Krishna focuses on a Grossman-Helpman type model with
oligopolistic competition. After establishing that politically viable
FTAs are more likely to be trade-diverting, Krishna examines how an
FTA affects the political viability of a multilateral agreement. The key
finding is that the formation of an FTA may increase producers’
opposition to a subsequent multilateral agreement, because the
latter may reduce or eliminate the rents created by the FTA, and it
can even reverse the preferences of producers, from supporting a
multilateral agreement to opposing it. Thus, taken together, the
papers by Levy (1997) and Krishna (1998) deliver a pessimistic
message about the impact of RTAs on the political viability of
multilateral agreements.
Finally, Bagwell and Staiger’s (1999a) model (already discussed in
Sections 2.1 and 3.1.4) also delivers pessimistic implications for the
impact of RTAs on multilateral trade agreements, but for a very
different reason than the models discussed above. A simple corollary
89
of Bagwell and Staiger’s analysis is that the presence of RTAs, by
breaking the ability of the MFN rule to channel all international
policy externalities into a single world-price externality, undermines
the effectiveness of the MFN and reciprocity rules in guiding
countries toward an efficient policy outcome.
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90
An analysis of the role of vertical specialization
in the development of China’s trade surplus:
evidence from 2000–2007
Wang Wei, in Vertical Specialization and Trade Surplus in China,
2013
Introduction
Globalization has altered world production and consumption
networks. As a result, the traditional flow of goods from primary
production through to manufacturing and consumption has
expanded across international borders. VS in processing and
manufacturing in China has driven export growth. In particular,
intra-industry and intra-product trade between China, the US and
East Asia has increased China’s trade surplus over the long term.
Its trade surplus has continued to be a major component of China’s
rapid economic growth and increase in employment and income.
China’s outstanding performance in trade can be traced back to 1978,
with the adoption of reform and openness policies and increased
integration into VS and preferential tariff treatment for the
processing trade. Following concerns raised by developed countries
over China’s huge trade surplus and growing external debt, China
appreciated the RMB by 8 percent in the first half of 2008 in an
attempt to curb further growth.
Since China implemented the “Promoting Trade through Science
and Technology” strategy in 1999, China’s manufacturing goods
exports have grown rapidly and have become an important driver of
China’s trade surplus. However, there are still some problems with
the export competitiveness of China’s high-tech products: less
independent innovation and high VS, for example. While creating
more labor-intensive jobs for China, the growth of the Sino-US
bilateral VS trade and the transfer of production and export platforms
of transnational corporations to China have also brought China into
“the trap of comparative advantage.” As a result of the high VS, the
import of intermediate products better promotes the export of final
products and has a large impact on the export of low-to-medium
technology-intensive final products; the increasing liberalization of
intermediate products promotes the export of final product exports
while decreasing the trade benefit; and improved methods in the
processing trade, different manufacturing goods trade structures and
types of specialized division of labor influence the welfare effect of
bilateral trade liberalization.
Despite the promise of long-term economic prosperity for China,
globalization has also led to trade conflicts within China due to an
increased reliance on external demand and industrial safety issues.
Furthermore, the transfer of manufacturing, processing and
assembly works to China has led to a “hollowing out” of the
manufacturing industry in countries such as the US and Japan.
The concept of VS has been used by many economists to study the
case of China (Ping, 2005; Dean et al., 2007; Koopman et al., 2008;
CCER Research Team, 2006; Wendongwei et al., 2009). As mentioned
in the Appendix, Hummel et al. (2001) define VS as the sequential
production of a good, divided between a number of countries. In this
process, a country may outsource one or more parts of the
manufacturing process to other countries which are more specialized
in that particular area.
Specialization has changed from intra-industry and interindustry to
intra-product, which has accelerated globalization and brought more
countries into the global production system. The processing trade is
China’s main pattern for participating in the international division of
labor. This type of processing trade carried out by FIEs has accounted
for a large part of China’s trade growth. Though China takes part in
the global production network based on its comparative labor
advantage, has a comparatively low status and gains less than its
trading partners in the developed countries, it has been able to
increase its trade surplus due to its experience of 30 years’ reform
and “opening-up.”
The international trade in intermediate inputs and the outsourcing of
production processes has required a change in the way exports are
measured. The “standard” measure of exports is determined by the
market value of goods sold internationally. However, the market
value of goods can be very high when compared to the domestic
value added (not including the value of imported components). This
has led to an overestimation of the value of exports, an inflated value
added and inaccurate representation of net trade.
Alternatively, exports can be measured by “value-added trade” which
determines exports net of VS trade and reallocates value-added
during production to each country which participated in the
manufacturing process. This measure avoids the overestimation of
exports and moderates the value of net trade. This chapter utilizes
the value-added trade measure to determine the level of VS in the
Chinese manufacturing industry and provide an estimation of the
trade surplus which is net of intermediate inputs.
Using traditional economic measures, trade surpluses can be
overestimated due to VS and the inclusion of foreign inputs in
China’s exports. What, then, can account for the Chinese trade
surplus? We believe that the answer lies in VS. Let us look at China’s
trade surplus from a VS trade perspective. This chapter aims to
measure the level of VS in the Chinese manufacturing industry to
provide a more accurate representation of China’s trade surplus.
Read full chapter
URL: https://www.sciencedirect.com/science/article/pii/B9780857094469500034
East Asia
Kui-Wai Li, in Redefining Capitalism in Global Economic
Development, 2017
I Introduction
The success of all East Asian economies can best be explained by
neoclassical economic analysis, the application of market economy
and capitalism. Having been considered as the “newly industrializing
economies” since the early 1970s, the growth of the East Asian
economies, typically South Korea, Taiwan, Singapore, and Hong
Kong, have gone through a process of industrialization, though the
type of export-oriented industries differed among these economies.
Beginning from light manufacturing and labor-intensive industries,
South Korea and Taiwan have ventured into heavy industries, such as
shipping. The strong exports of the four East Asian economies have
earned them a new status since 1979, namely graduation from the
Generalized System of Preference (GSP) which specified that exports
from developing countries were allowed to enter the United States
and European markets without import tariffs (Kwok and Li, 1992).
Effectively, this graduation changed the status of the four East Asian
economies to “developed economies,” and their exports would no
longer be tariff-free.
The development experience of East Asia has shown distinct
transition stages. The early stage of industrialization was financed
mainly from foreign direct investment dominated by labor-intensive
manufacturing. Industrial flexibility is another advantage. Other than
the light manufacturing in the early stages of industrialization in the
1960s, industries that have flourished since late 1970s were
electronics. Electronics should not be regarded as a land-intensive
industry, and its development would best be in small and effective
economies. However, their concentration on electronics became a
constraint when new competitors emerged.
Due to their small market size, much of the industrial output from
East Asia was exported, supplementing the supply bottleneck in
consumer goods in the western economies. As income grew and
economies became more mature in the 1980s, these economies were
transformed to become suppliers of capital to neighboring
economies by investing in industrial plants in other Southeast Asian
countries, typically, Indonesia, Malaysia, Thailand, and the
Philippines, and later Vietnam and southern China. Singapore soon
served as the regional headquarters among the countries in the
Association of Southeast Asian Nations (ASEAN), while Hong Kong
served as headquarters to foreign investors to China. Singapore
tends to have a slight advantage over Hong Kong in Southeast Asia,
since Singapore is a leading member in ASEAN, while Hong Kong
has a slight advantage over Singapore in the economic relationship
with China, due to geographical proximity. Nonetheless, their
economic compositions are close to each other.
There has been a lack of regional protection among Asian economies.
The establishment of the ASEAN in 1967 with the five initial
members (Singapore, Malaysia, Thailand, Indonesia, and the
Philippines) was more a political cooperation against the spread of
communism from Vietnam than an economic cooperation body.
Unlike the European Union, all Asian economies compete among
themselves, especially given the similarities in their economic
background. Hence, maintaining competitiveness meant economies
would do their best to remain stable. Indeed, if any Asian economy
falls, the economic benefits, such as outflow of capital and loss of
foreign investment, would go immediately to neighboring
economies. For example, when there was trouble in Indonesia or the
Philippines, Singapore and Hong Kong would become the natural
“shelter” of capital. Asian economies do not enjoy the kind of rescue
from neighboring economies as in the European Union where
stronger members could come to the rescue. This cannot be true
among Asian countries. Hence, the “look after oneself ” mentality in
the “intraregional” competition became a force of growth in itself.
However, by the 1990s, rising domestic costs in the four East Asian
countries have eroded their competitive advantage considerably. The
emergence of China has diverted much foreign investments away
from all East Asian economies, and at the same time, East Asian
economies also increased their investment in China. In the “push
and pull” analysis, the Chinese economy since the 1990s produced a
combination of both complement and substitution effects on the
East Asia economies. The low cost of production in China worked as
a complement, as China “pulled” investment from East Asia.
However, foreign investments that could have come to East Asia
would have diverted to China, and such a loss of foreign investment,
and exports subsequently, produced the substitution effect that
constrained growth among East Asia economies.
Another major event was the Asian financial crisis in 1997−98,
though it was short-lived, the crisis reflected the economic and
industrial narrowness among key East Asian economies. Political
realities in some East Asian economies have somewhat derailed their
growth path, as political uncertainties generated risk and
disincentives, thereby hastening their fall in economic
competitiveness. While industrial diversity and economic
restructuring takes time, there is a need to explore new “comparative
advantage” for future development.
The human behavior of “give and take” is elaborated in the next
section to enlighten the economic performance of successful East
Asian economies, especially when compared to those “fragile states”
with extremely low levels of development, or countries that have
always remained in an unstable situation, with no potential to grow
and survival based on a daily basis. East Asian economies have
“taken” a lot from the international community over the years, but
their development has been complemented by domestic
improvements that enabled these economies to also “give” and
develop neighboring economies. This chapter summarizes, renews,
and extends the neoclassical debate on the causes of growth among
East Asian economies. Discussions will be made in relation to their
development in the period after the Asian financial crisis, as each of
the East Asian economies are faced with new challenges and
situations and their next stage of growth can provide useful lessons
for other emerging countries.
Read full chapter
URL: https://www.sciencedirect.com/science/article/pii/B9780128041819000124
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