Session 2 Trade indicators for evaluating the potential impacts of an FTA

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1 ARTNeT- GIZ Capacty Buldng Worshop Practcal tools for Impact Assessment of Free Trade Agreements January 2017, Bango Sesson 2 Trade ndcators for evaluatng the potental mpacts of an FTA Dr. Wtada Anuoonwattaa Trade, Investment and Innovaton Dvson (TIID), ESCAP anuoonwattaa@un.org

2 Indcators to evaluate the potental economc effects of an FTA They can be used at the ntal stage of any trade polcy decson-mang process, ncludng the decson on whether or not to jon an FTA. These ndces are ndcatve, but they do not control for factors that affect blateral trade (whch s done n the gravty model).

3 Useful Indcators Whch are the sectors most lely to have export potental? Revealed comparatve advantage (RCA) Export specalzaton (ES) Are trade profles of the potental FTA partners complement wth ours? Trade complementarty ndex (TCI)

4 Comparatve advantage a. Revealed comparatve advantage The current resurgence of nterest for ndustral polcy sometmes confronts trade economsts wth demands to dentfy sectors of comparatve advantage The tradtonal measure s the Revealed Comparatve Advantage (RCA) ndex (Balassa, 1965) RCA X X RCA s the rato of product s share n country s exports to ts share n world trade Interpretaton: A value of the RCA > 1 n sector means that has a revealed comparatve advantage n that sector A value of the RCA < 1 n sector means that has a revealed comparatve dsadvantage n that sector Countres (regons) wth smlar RCA profles are unlely to have hgh blateral trade ntenstes unless ntra-ndustry trade s nvolved. / / X X 4

5 a. Revealed comparatve advantage (ct d) A dsadvantage of the RCA ndex s that t s asymmetrc,.e. unbounded for those sectors wth a revealed comparatve advantage, but t has a zero lower bound for those sectors wth a comparatve dsadvantage A soluton s to rely on a smple normalzaton proposed by Laursen (2000). The normalzed RCA ndex, NRCA becomes: NRCA RCA RCA 1 1 By constructon, NRCA s between -1 and 1 RCA avalable at WITS In next slde, we present an llustraton usng the Trade, Producton and Protecton (TTP) database 5

6 a. Revealed comparatve advantage (ct d) Change n NRCA between 1980s and 2000s, Chna and Thaland (Stata) NRCA for CHN NRCA NRCA for THA NRCA NRCA Sectors above the man dagonal experenced an ncrease n NRCA Sectors above the man dagonal whose NRCA was < 0 n and > 0 n (second quadrant) moved from revealed comparatve dsadvantage to revealed comparatve advantage 6

7 b. Export specalzaton ndex The export specalzaton ndex s a modfed RCA ndex ES X M j / / X M j The denomnator s the share of mports of product n country j s total mports ES provdes product nformaton on revealed specalzaton n the export sector of a country not vs-à-vs the world, le RCA, but rather vs-à-vs specfc marets or partners Interpretaton: The value of the ndex < 1 ndcates a comparatve dsadvantage and a value > 1 represents specalzaton n ths maret. 7

8 b. Trade complementarty Trade Complementarty Index (TCI) measures the extent to whch two countres are "natural tradng partners", n the sense that what a country exports overlaps wth what the other country mports TC j j m x 2 Where m s sector s share n s total mports from the world and x j s sector s share n j s total exports to the world Interpretaton: The ndex s zero when no goods are exported by one country or mported by the other and 100 when the export and mport shares exactly match 8

9 EMPIRICAL EXERCISES

10 To start 1) Runnng the drectory defnton global nput "D:\wtada\ARTNeT\worshops\capacty buldng\ GIZ\Jan 17\materals\Practcal gude to TPA" cd "$nput 2) Open a new do fle clear all capture log close set more off, perm 3) loadng data cd "$nput/chapter1/datasets"

11 Exercse 1: Computng NRCA ndex Q1. Use data from TTP.dta to calculate the normalzed RCA (NRCA) ndex for every year between 1983 and 1985 (ncluded) and calculate the average for those three years. Do the same for Q2. Comparng Mongola and Japan NRCA for

12 STATA Exercse 2: Computng Trade Complementarty Index (TCI) Q1. Use data from BlateralTrade.dta to Trade Complementarty Index (TCI) for all countres n the dataset. Q2. Compare the opportunty of Mongola (MNG) to export to Chna (CHN), Inda (IND), Japan (JPN), and Thaland (THA) by constructng lne plot and nterpret the results. Q3. Dd exports from Mongola actually go to the countres wth hgh trade complementarty? Why or why not? cd "$nput/chapter1/datasets" use BlateralTrade.dta, clear

13 Exercse 3: Downloadng data from WITS to calculate Export Specalzaton Index (ES) of Mongola all products at (HS 2-dgt) n ASEAN marets and nterpret the result Bonus: you wll earn extra ponts f you mplement the calculaton n STATA.

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>1 indicates country i has a comparative advantage in production of j; the greater the index, the stronger the advantage. RCA 1 ij

>1 indicates country i has a comparative advantage in production of j; the greater the index, the stronger the advantage. RCA 1 ij 69 APPENDIX 1 RCA Indces In the followng we present some maor RCA ndces reported n the lterature. For addtonal varants and other RCA ndces, Memedovc (1994) and Vollrath (1991) provde more thorough revews.

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