Evidence Based Trade policy Making: Using statistical tools for policy making

NATIONAL WORKSHOP ON TRADE POLICY CHOICES: ACCESSION TO WTO AND APTA 8-10 DECEMBER 2014, Bhutan Evidence Based Trade policy Making: Using statistical tools for policy making Witada Aunkoonwattaka (PhD) Trade and Investment Division, ESCAP anukoonwattaka@un.org

Outline Introduction to Evidence-based policy making (EBPM) EBPM Requirement conditions: Relevant Policy questions Understanding the tools Data availability Some online data sources

Policymaking approaches Opinion-based Policy Making Anecdote Experts Seniors Gut feeling Evidence-based Policy (EBP) Making Best available research evidence Evidence from collected data (empirical evidence) Theory Data Tools for data analysis Gains Transparency Accountability

Evidence-based policy making Tracking, monitoring and evaluation of the results of policies that have been put in place Ex-post analysis Making decisions in public area (including on issues recognition, policy choice and sequencing, or forecasting future developments) Ex-ante analysis 4

Components of EBPM Policy questions: Ex. What will be the potential effects of an FTA? Tools: 1. Making inferences from descriptive statistics and trade indicators 2. Partial equilibrium approaches to estimate the potential effects on an individual product 3. General equilibrium approaches to estimate the potential effects on the whole economy 4. Approaches to estimate distribution effects Data sources: - Cross-country data, National data - Secondary-data sources (online, published, unpublished), Primary-data surveys

EBPM requirement no. 1 POLICYMAKERS ASK RELEVANT POLICY QUESTIONS

Policy questions at different stages of policymaking Before negotiation of an FTA: An analysis of potential costs and benefits (ex-ante) What a country can supply to its FTA partners? What it can source from the partners? What are expected impacts on production and employment level and composition, welfare, fiscal balance, etc. What are the costs of necessary adjustment policies for the adversely affected sectors? After its implementation: An impact assessment (ex-post) Whether the impacts are within the expected range? Whether the expected benefits are fully materialized? Whether further adjustment policies are necessary? 7

EBPM requirement no. 2 RESEARCHERS UNDERSTAND THE TOOL(S) AND THEIR LIMITATIONS

What will be the potential effects of an FTA? 1. Making inferences from trade indicators 2. Estimating the potential effects on an individual product 3. Estimating the potential effects on the whole economy

Available methodologies Simple indicators (descriptive statistics) (Sophisticated) econometric models (including gravity models, etc. Simulation techniques A partial equilibrium model: sectoral analysis A general equilibrium model: economy-wide analysis They are complementary with different strength/weakness and different (explicit and/or implicit)assumptions 10

Context of the questions and availability of resources dictate the choice of methodology Whether the focus is the impacts at macroeconomic level or industry level? Whether ex-post questions or ex-ante questions are being asked? Whether the required data are available? How much time and resources (technology, human capital, and money) are available? 11

What will be the potential effects of an FTA? 1. Making inferences from descriptive statistics / trade indicators 2. Estimating the potential effects on an individual product 3. Estimating the potential effects on the whole economy

What can be looking at? How much of trade is intraregional? Will the proposed FTA promote trade between trading partners? Are they then natural trading partners? What is the comparative advantage of each member? Which sectors are likely to have export (import) potential? Is export of a particular good regionally oriented? How strong is a regional bias (if there is one)? How complementary is trade between a given pair of FTA members? To what extent the export pattern of a country matches the import pattern of a region? What is a degree of similarity between partners exports? To what extent a country s export profile overlaps with other FTA members? 13

Descriptive statistics Growth and value of trade Product shares Market shares Note: The list is not exhaustive. 14

Source: ITC trademap

Complementary of Bhutan exports with APTA members (2013) Index (0 to 100) 45 40 35 Bangladesh Rep. of Korea APTA China India Sri Lanka Lao PDR Importing countries Calculation using data from WITS

Ex. trade indicators Note: The list is not exhaustive. 18

Advantages Relatively easy to implement Data requirements are minimal Computation is straightforward Some of trade indicators may be found already computed. For example, WITS International Trade Centre World Bank UNCTAD APTIR TRADESIFT 20

Limitations They cannot provide precise numbers that quantify the effect of an FTA on trade, production, consumption, or welfare They can be meaningless or misleading if data are unsuitably classified Trade classifications do not match a country s production structure Data are too aggregated 21

Potential impacts on an individual product How an FTA will affect production, consumption, and trade flows in the domestic market for a single commodity? What will be an import increase? What will be an export increase of FTA partners? What will be an export decrease of non-member countries? What will be a fall in tariff revenue? 23

Potential impacts on an individual product How an FTA will affect production, consumption, and trade flows in the domestic market for a single commodity? Reasons for focusing on an individual product: Its trade is significant in the country s trade balance It generates substantial tariff revenue, It employs a large share of the country s workforce Its output contributes significantly to GDP Firms in the sector may be important political players It may be located in an important region of a country The in-depth analysis at the level of individual industry or product makes partial equilibrium (PE) approach more appropriate 24

How does PE work? An example from an analysis on tariff Input: A change in trade policy (tariff) Parameters Output: Effect on prices and quantities (volumes) traded Trade diversion effect Trade creation effect Most PE software gives you only change in import and exports, but these come from change in prices and quantities.

PE - various effects Due to tariff liberalization of country A with a partner country B

Advantages of using PE Analysis PE models can be used to compute trade impacts of trade policy at a very disaggregated level of statistical product classification. This detailed level is very often the level at which trade liberalization and rule of origin in trade agreements are negotiated. Easier to implement than general equilibrium Less of a black box than general equilibrium Less intensive on data requirements Easy to change parameters and check for robustness to different assumptions

Limitations It ignores the inter-industry effects and the feedback effects of a trade policy change One way to look at it is the short-run impacts of a policy change on a particular industry 28

Potential economy-wide impacts What are the macro-level impacts of an FTA (when interactions between all markets are accounted for)? real GDP trade balance terms of trade import and export prices in a particular sector output and trade in different sectors within the country national welfare (and where will these welfare effects come from?) The multi-sectoral trade liberalization makes CGE (Computable General Equilibrium) approach may be more appropriate The direct effects of tariff reductions in individual markets The indirect changes in related markets 30

What is CGE? CGE models are based on the fact that the different markets in a given economy are linked, and changes that take place in one market affects other markets; these changes must be accounted for as they can have back and forth impacts CGE models use Social Accounting Matrix (SAM) to capture these various linkages SAM is built upon the circular flow conception of the economic system where each expenditure must be matched by a corresponding receipt or income. They take into account cross-sectoral reallocation of factors of production

EBPM requirement no. 3 EVIDENCE (DATA) EXISTS

Data on trade flows EBPM Basic Requirements bilateral trade data at different levels of aggregation, for example, UN Commodity trade (so called Comtrade) statistics database (access through WITS : World Integrated Trade Solution, International Trade Centre: (TRADEMAP) IMF Direction of Trade Statistics (DOTs) Data on trade policy - Tariff data WTO integrated database (IDB) and Consolidated Tariff Schedules database (CTS): MFN applied tariffs and imports of WTO Members at the tariff-line level which often means 8 digits, sometimes even 10 digits, starting in 1996 WTO Tariff Analysis Online (TAO) CEPII and IFPRI's MAcMap database: a set of files at the tariff line level of the bilateral measurement of applied tariff duties, taking regional agreements and trade preferences exhaustively into account. AMAD (Agricultural Market Access Database) WITS and ITC provides integrated platform to access to databases on trade and trade-policy measures 33

EBPM Basic Requirements - NTM data World Bank Temporary Trade Barriers Database AMAD (also data on tariff-quotas) TPP database World Bank TBT database Data on ad-valorem equivalents of NTMs from Kee at al. (2009) WTO databases SPS TBT (and also this database on Specific Trade Concerns) Subsidies (Not publicly available) WITS and ITC provides integrated platform to access to databases on trade and trade-policy measures 34

Data availability

SOME ONLINE DATA SOURCES

ITC An integrated platform to access trade and trade policy databases

WITS An integrated platform to access trade and trade policy databases

What does WITS offer? WITS gives access to trade and tariff related statistical information WITS calculates some trade indices at for a country WITS includes a partial equilibrium simulation tool and data analysis tools

WITS Functionality

Data Retrieval and Analysis (3) Data Retrieval and Analysis

I-TIP The integrated platform to access WTO database on trade policy measures in goods (and services)

Integrated Trade Intelligence Portal (I-TIP) I-TIP provides a single entry point for information compiled by the WTO on trade policy measures. Containing information on over 25,000 measures, I- TIP covers both tariff and non-tariff measures affecting trade in goods as well as information on trade in services, regional trade agreements and the accession commitments of WTO members.

Conclusions Keys for EBPM: Policy questions Data availability Technical capability of research institutes Time and resources There is more than one approach to answer to a policy question. They are actually complementary. Understanding underlying assumptions the tools is the key to properly interpret the research results To get the research-based evidence relevant to policy decisions, policymakers could play important roles: Communication between researchers and policymakers to make research more relevant to policymakers needs Improve data accessibility Building technical capacity of local research institutes

Useful readings Andriamananjara, Cadot, and Grether (2013). Tools for Applied Goods Trade Policy Analysis: An Introduction, in Arvid Lukauskas, Robert M. Stern, and Gianni Zanini (eds), Handbook of Trade Policy for Development. Oxford University Press. ESCAP (2009). Trade Statistics in Policymaking - A Handbook of Commonly Used Trade Indices and Indicators. Plummer, Cheong, and Hamanaka (2010). Methodology for Impact Assessment of Free Trade Agreements. Manila, ADB. World Bank (2011). User s Manual-WITS. World Bank (2013). Online Trade Outcome Indicators- User s Manual. World Integrated Trade Solution (WITS). WTO-UNCTAD (2012), A Practical Guide to Trade Policy Analysis.

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