THE NEXT WTO ROUND: North-South stakes in new market access negotiations

Transcription

1 THE NEXT WTO ROUND: North-South stakes in new market access negotiations

2 The Centre for International Economic Studies (CIES) was established at the University of Adelaide by its School of Economics in Its purpose is to strengthen teaching and research in the field of international economics and closely related disciplines. Both theoretical and empirical, policy-related studies are undertaken, with particular focus on developments within, or of relevance to, Asia and the Pacific. The Tinbergen Institute is the institute of economic research of the Erasmus Universiteit Rotterdam (EUR), the Universiteit van Amsterdam (UvA), and the Vrije Universiteit Amsterdam (VU). The Institute was founded in 1987 and named after Professor Jan Tinbergen, Dutch Nobel Prize laureate in economics in It is located in both Amsterdam and Rotterdam.

3 THE NEXT WTO ROUND: North-South stakes in new market access negotiations Joseph Francois Centre for International Economic Studies, Adelaide Tinbergen Institute, Amsterdam and Rotterdam

4 First Published by the Centre for International Economic Studies, Adelaide and the Tinbergen Insitute in September Centre for International Economic Studies University of Adelaide SA 5005 Australia Tinbergen Institute Tinbergen Institute Amsterdam (TIA) Rotterdam (TIR) Keizersgracht 482 Burg. Oudlaan EG Amsterdam 3062 PA Rotterdam The Netherlands The Netherlands Joseph Francois All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopy, recording or information storage and retrieval) without permission in writing form the publisher. Cover design by Inprint Design, Adelaide Cover printed by Eureka Corporate Group, Adelaide. Text printed and bound by Image and Copy Centre, University of Adelaide. Typeset by Carola Sanders ISBN paperback.

5 Contents Page List of boxes, figures and tables vi Foreword, by Kym Anderson ix Executive summary xi 1 Introduction 1 2 The market access landscape 3 3 The model and data 17 4 Policy experiments and results 23 Appendix A: An overview of the computational model 49 Appendix B: Mark up data 65 Appendix C: Tariff equivalents of trading costs for business and construction services trade 69 Appendix D: Additional model results and aggregation comparisons 73 References 75

6 List of boxes, figures and tables Boxes Box 4.1. Bound and applied tariff rates...25 Figures Figure 2.1. Peaks in tariff protection in the EU, US and Japan...9 Figure 2.2. Tariff equivalents in services...14 Figure 4.1. Comparison of income effects with bound rates experiments..32 Figure 4.2. Comparison between income gains and resource flows for developing countries...33 Tables Table 2.1. Industrial applied and bound tariff rates...5 Table 2.2. Unbound tariff lines...6, 7 Table 2.3. Pre- and post-uruguay round import protection...13 Table 3.1. Sectors and regions...19 Table 4.1. Model experiments under Chamberlinian monopolistic competition...26 Table 4.1. Model experiments under Cournot oligopoly...27 Table 4.2. National income effects under monopolistic competition in US dollars...28 Table 4.3. National income effects under oligopoly in US dollars...29 Table 4.4. National income effects under monopolistic competition, percent change...30

7 Table 4.5. National income effects under oligopoly, percentage change Table 4.6. Capital stock effects under monopolistic competition...35 Table 4.7. Capital stock effects under oligopoly...36 Table 4.8. Terms of trade effects under monopolistic competition.37 Table 4.9. Terms of trade effects under oligopoly...38 Table Effects on exports under monopolistic competition...39 Table Effects on exports under oligopoly...40 Table Relative wage effects under monopolistic competition...41 Table Relative wage effects under oligopoly...42 Table Real unskilled wage effects under monopolistic competition...43 Table Real unskilled wage effects under oligopoly...44 Table Competition policy experiment...46 Appendix Figures Figure A.1. Armington aggregation nest Figure A.2. Trading costs in the service sector Figure A.3. Basic features of the simulation model Appendix Tables Table A.1. Table A.2. Table B.1. Model parameters...51 Symbols used in the technical appendix...63 Estimated markups from OECD mark up data...66

8 Table B.2. Table B.3. Regression results...67 Mark-ups by model sector and region...68 Table C.1. Gravity equations for services tariff equivalents...71 Table C.2. Estimated tariff equivalents...72 Table D.1. Comparison of welfare effects with alternate aggregations...73 Table D.2. Output effects for European Union 74

9 Foreword Reaching a consensus on the next round of multilateral trade negotiations has been a trying experience for members of the World Trade Organization (WTO). The failure to launch a new round at the WTO Trade Ministerial in Seattle in late 1999 was not just because of the disruptive efforts of 50,000 anti-globalization protestors. Also reluctant to see a new round launched were numerous developing country members of WTO. Some of those countries feel their economies have not benefitted sufficiently from implementation of commitments made at the previous Uruguay Round of negotiations. Why should the next round be any different in that respect, they ask? This study explores that question using state-of-the-art modelling of the global economy. It examines the distributional consequences within (e.g. between unskilled and skilled workers) and between countries of a 20% and a 50% cut in the tariffs that will remain after the Uruguay Round is fully implemented by It takes explicit account of the fact that many (especially developing) countries have bound their tariffs on imports at well above the actual rates currently applied, so that a commitment to cut bound rates leads to less trade liberalization than previous studies have suggested. But this study also factors in the realities of imperfect competition in many markets (which generates procompetitive gains from trade that are omitted from studies that simply assume perfect competition in all markets), and the potential for gains from reforms in the services sectors. Among the results to emerge is the finding that developing countries could expect to gain more from the next round than they gain from all the official development assistance they currently receive a gain comparable in value to their current inflows of foreign direct investment. Joseph Francois is a Professor of Economics at Erasmus University in Rotterdam, where he holds a chair in Political Economy and International Development. He is also an Adjunct Professor in the School of Economics and Centre for International Economic Studies at the University of Adelaide, as well as a Research Fellow

10 in Europe s Centre for Economic Policy Research (based in London). He has previously served in the Economic Research and Analysis Division of the World Trade Organization in Geneva and in the International Trade Commission of the United States Government in Washington, D.C. He has authored and edited several books and published numerous journal articles on trade theory and policy over the past decade. The present study was completed in August 2001 while the author was visiting the Centre for International Economic Studies and teaching a graduate class at the University of Adelaide. An earlier version of the study was prepared for the Trade Directorate of the European Commission. The views expressed are the authors alone, and are not meant to reflect the official position of the European Commission or any other organization with which the author is or has been affiliated. Professor Kym Anderson Executive Director, CIES University of Adelaide September 2001

11 Executive summary Overview This study examines the impact of a prospective new set of multilateral trade negotiations. The objective is to shed some light on the implications of future trade negotiations not only for the developed WTO Members, but also for developing countries. Along with globalization opponents in industrial countries, the developing countries have also been vocal about their opposition to further trade-liberalization efforts. In addition, the international anti-globalization camp has clearly weighed in against such a move. Without the broad support of developing countries, a very real possibility is limited negotiations -- limited in terms of being limited to the OECD, and also in terms of being focused on sectors (like industry or agriculture) without a comprehensive linkage across sectors. Therefore, this study also tries to shed some light on the implications of sectoral approaches, by assessing the individual impact of a separate initiative for agriculture, industry, or services. The market access landscape Industrial tariff binding overhang: An important feature of the policy landscape left by the Uruguay Round Agreements is tariff bindings on industrial goods. It is useful to remember that tariff negotiations in the WTO are not actually about applied tariff rates, but rather tariff "bindings." Tariff bindings are commitments not to raise tariffs above a certain level. Many developing country tariffs remain either unbound or else bound well above applied rates. What is important for future industrial tariff negotiations is the current level of tariff bindings vis-à-vis applied rates in developing countries, and the limited scope of

12 xii The next WTO round bindings coverage. Taken together, the combination of bound and applied rates means that developing countries will, collectively, be able to reduce bound rates (or introduce them for the first time) while having to make only modest (and in many cases no) changes to applied rates. Average tariff rates: With the implementation of Uruguay Round commitments, average tariffs in the industrial countries generally are around 3 percent or less. However, there are important exceptions. One of these is textiles and clothing, where the average rate is roughly three hundred percent of the average rate of industrial protection. In developing countries, averages industrial tariffs range from a low of 3 to 4 percent to a high of more than 20 percent. Agriculture: As in the case of industrial tariffs, the stage for any future agriculture negotiations was set by the UR -- this time by the Uruguay Round Agreement on Agriculture (URAA). The next round of agricultural negotiations was scheduled in the URAA, while the negotiating parameters (tariffs, quota levels, subsidy commitments, etc.) must also be viewed in the context of the schedules of URAA commitments. The system that is emerging is complex and similar to the multifibre arrangement, featuring a mix of bilateral quotas (and associated quota rents) and tariffs. Viewed in conjunction with industrial protection, the basic pattern is that the industrial countries protect agriculture and processed food, while protection in developing countries is more balanced (though also higher overall) in its focus on food and non-food manufactured goods. Services: This study also offers estimates of protection for intermediate services (finance, business services, and the like) and also for construction services. The pattern that emerges is consistent with that for industrial tariffs. Barriers to services trade are higher (often much higher) in developing countries than in the OECD. Hence, as in the case of industrial tariffs, the effects of further GATS negotiations will hinge critically on developing country participation or non-participation, and the extent to which they commit to actual liberalization rather than standstills (the qualitative equivalent of ceiling bindings).

13 Executive summary xiii Estimated effects The possible economic effects of trade negotiations have been assessed with the help of a computable general equilibrium (CGE) model. The model is characterized by an input-output structure (based on regional and national input-output tables) that explicitly links industries in a value added chain from primary goods, over continuously higher stages of intermediate processing, to the final assembling of goods and services for consumption. Inter-sectoral linkages are direct, like the input of steel in the production of transport equipment, and indirect, via intermediate use in other sectors. The model captures these linkages by modeling firms' use of factors and intermediate inputs. Experiments: The policy experiments involve hypothetical 20 percent and 50 percent reductions in import protection for agricultural and industrial goods and for services, as well as a reduction in trading costs due to trade facilitation measures. Regional income effects: In terms of regional effects from the total set of liberalization experiments, the greatest gains consistently accrue to the European Union (between roughly $20 and $45 billion for the 20% experiment and between $40 and $80 billion under the 50% experiment) and to the composite rest-of-world region (between roughly $35 and $50 billion for the 20% experiment and between $55 and $70 billion under the 50% experiment.) For the entire package of goods, services, and agriculture, regional losses under some components (like agriculture) are outweighed by gains under others (like tariff liberalization), so that on net the regional effects are consistently positive, though they are also uneven. Global income effects: Globally, income effects under the 20 % liberalization scenario range from $ 100 billion to $ 200 billion. Under the 50% scenario, they range from $175 billion to $385 billion annually. These are, approximately, evenly split between developed and developing countries.

14 Executive summary xiii Binding overhang: Because tariff bindings are well above applied rates across developing countries, they will be under minimal pressure to actually reduce tariffs if they agree to reduce bound rates. This flexibility has a cost. Simulation results suggest that because of this overhang, estimated global income effects are reduced by between $25 and $70 billion annually. The developing country take of these foregone gains ranges from $20 to $45 billion. In a sense, this is the price tag for letting developing countries opt out of effective liberalization. (For many lower income countries, of course, there is little choice given that tariff revenue can be a substantial share of government revenue. Nonetheless, this option carries a price.) The latter figure of $45 billion is comparable to total foreign aid to developing countries. Developing country gains in perspective: To those familiar with the acrimonious debate surrounding the Uruguay Round gains and the failed attempt to start a new round in Seattle in 1999, the consistently positive regional effects may appear suspicious. This is not because the experiment are constructed as such, but rather because the traditional approach to liberalization under the GATT and WTO is broad based and multilateral. Multilateral, broadbased liberalization offers the opportunity for terms-of trade losses and gains to cancel, so that efficiency and pro-competitive gains (which tend to be positive) can dominate the net effects. To put the estimated national income effects into perspective, the projected annual income real gains for developing countries would well outweigh recent annual flows of official development aid from the industrial countries. They would also be comparable to aggregate FDI inflows. In other words, the potential income gains for developing countries are greater than flows of official assistance and are roughly comparable to total FDI inflows.