1 Trade Liberalisation & Consumer Welfare in South Asia Project Review Meeting Dhaka, June 28, 2011 Cost of Economic Non Cooperation to Consumers in South.

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Trade Liberalisation & Consumer Welfare Trade Liberalisation & Consumer Welfare in South Asiain South Asia

Project Review MeetingProject Review Meeting

Dhaka, June 28, 2011Dhaka, June 28, 2011

Cost of Economic Non Cooperation to Cost of Economic Non Cooperation to

Consumers in South AsiaConsumers in South Asia

COENCOSACOENCOSA

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Overview of the Project Background and Objectives Activities and Expected Outcomes

Theoretical Basis of Consumer Welfare Main Inferences from Meta-Analysis

Assessment of Consumer Welfare under SAFTA Method Partial Estimates (Indo-Bangla Case)

Usefulness of the Estimates

ContentContent

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Background

Intra regional trade in South Asia is least as compared to other economic blocs in the world

Intra regional trade has stagnated at under 5% of total trade as against 27.06% for ASAEN

SAFTA, operational from January 2006, suffers from shortcomings such as:

Large Sensitive Lists retained by Members Minimal provisions on non tariff measures Strict value-addition requirements

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Background

Though positive effects of export promotion on economic growth is well acknowledged, trade policy regimes in South Asia are still highly influenced by the notion of import-substitution

Impact of trade liberalisation on producer welfare is given thrust, while positive effects on consumer welfare is ignored

Deeper economic cooperation among the South Asian countries could avoid high costs to consumers

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Objectives

To assess the potential consumer welfare gains from SAFTA through meta-analysis of existing literature and using secondary data

To study the reasons of and solutions for economic non-cooperation between South Asian countries in general and neglect of consumer welfare impacts of SAFTA in particular through a perception survey

To use the results thereof to garner support for enhanced trade integration in the SAARC region

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Activities

Meta-analysis of the literature on regional trade integration in South Asia

Peer review of meta-analysis

Perception survey of selected stakeholders in five South Asian countries

Publication and dissemination of research results (December,

2011)

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Expected Outcomes

Awareness generated amongst South Asian policy makers regarding loss of consumer welfare on account of regional economic non-cooperation

Policy actions leading to enhancement of intra-regional trade and investment relations in South Asia and resultant gains in consumer welfare in the region

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Theoretical Basis

Classical trade theory and its modern derivations treat consumer welfare effects of trade as inseparable from producer welfare. Empirical literature consider them differently because of distinct incidence on importing and exporting country respectively.

Given that reciprocity is a basic element for the functioning of trade treaties, demands for tariff concessions in sectors with maximum export induced producer welfare should be accompanied by offers of tariff concessions in sectors with maximum import induced consumer welfare.

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Inferences from Meta-Analysis

Low Levels of intra-regional trade implies possibility of trade diversion rather than trade creation – small shares in World GDP and trade flows indicates that the probability of finding the most efficient suppliers within the region is very less:

Beginning of import substitution and protectionism in the post independence era worked asymmetrically against regional trading partners for all SA countries

Empirical evidences exist for minimal impact of trade diversion The political economy of selection of sensitive lists indicates weak

possibility of trade diversion Argument of need for resistance to regionalism in other parts of the

world through SAFTA. It may quicken multilateral freeing of tariff barriers

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Inferences from Meta-Analysis

▪ Rejection of significance of SAFTA based on “natural trading block” hypothesis based on geographical proximity (trade intensity index), degree of complementarity (complementarity index – matching export profiles and import demands):

Post-liberalisation trade diversification effects are ignored Existence of huge informal trade in the region could not be

explained

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Inferences from Meta-Analysis

Quantitative assessments – general and partial equilibrium models, gravity models etc. predict that the impact of a South Asian FTA on trade flows will be small for India compared to its trading partners:

Wide variation in predictions on impacts depending on assumptions used

Reliance on past trends and ex-post analysis Ignores positive influence of RTAs in changing the

traditional rent-seeking behavior Ignores positive externalities of development of trade

infrastructure and related trade reforms for trade costs Excludes effects of changes in transaction costs due to

trade facilitation measures

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Inferences from Meta-Analysis

Omission of spillover effects of comprehensive economic integration including simplification of banking facilities for import financing, transit facilities for the landlocked countries, removal of barriers to intra-SAARC investments, policy consultations, rules for fair competition and promotion of venture capital, development of communication systems and transportation infrastructure, easing foreign exchange controls on repatriation of profits, simplification of procedures for business visas, etc

Dearth of studies on consumer welfare effects – only passing references to consumer welfare gains in general equilibrium modeling exercises

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Assessment of Consumer Welfare under SAFTA

Country wise assessment of potential consumer welfare gains due to subjecting items in the sensitive lists to Trade Liberalisation Programme of SAFTA

Calculates figures of minimum gains for product categories with maximum potential effects on consumer welfare

Country wise trade data for the analysis is accessed from

UNCOMTRADE database and data on import and export prices and quantity is accessed from Trade Maps, International Trade Centre

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Assessment of Consumer Welfare under SAFTA (Methodology)

STAGE 1- Selection of products from sensitive lists (HS07 6-Digitlevel) of each country by sequentially applying the following twocriteria:

Products in sensitive lists of a SAFTA member country (m) with high shares in the total exports of partner countries (p) to rest of the world (RoW), reflecting the export potential of partner countries in such products

A list thus selected is further filtered by selecting products in which exports of partner countries to the member country is minimal

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Assessment of Consumer Welfare under SAFTA (Methodology)

STAGE 2 – Consumer welfare gains for a member is calculated as:

∑CWmi = ∑ (pmiqmi – ppiqmi) where,

CWmi – Consumer Welfare due to change in import price of countryM in product i

pmi – Import price of member country M in product i from ROW

ppi – Export price of SAFTA partner country p in product i to ROW

qmi – Import Quantity of member country (m) in product i from ROW

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Partial Estimates: Indo – Bangla CaseIndia’s major export items in Sensitive List of Bangladesh

Sr No.

Major Items exported by India to the ROW HS07 4 Digit Level) Product Description

No. of items present in Bangladesh's Sensitive List

Percentage of total exports

1 8703 Cars (incl. station wagon) 5 3.46

2 3004 Medicament mixtures (not 3002, 3005, 3006), put in dosage 2 2.42

3 8517 Electric app for line telephony,incl curr line system 7 2.28

4 8708 Parts & access of motor vehicles 14 1.71

5 8528 Television receivers (incl video monitors & video projectors) 6 0.83

6 2701 Coal; briquettes, ovoids & similar solid fuels manufactured from coal 2 0.77

7 9018 Electro-medical apparatus (electro-cardiographs, infra-red ray app, sy 3 0.61

Total 39 12.08

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Partial Estimates: Indo – Bangla CaseBangladesh’s major export items in Sensitive List of India

Sr. No

Major Items exported by Bangladesh to the ROW HS CODE(4 DIGIT LEVEL)

Product Description No. of items present under India’s Sensitive List

Percentage of Total Exports

1 6109 T-shirts, singlets and other vests, knitted or crocheted

2 16.63

2 6110 Jerseys, pullovers, cardigans, etc, knitted or crocheted

3 15.64

3 6203 Men's suits, jackets, trousers etc & shorts

8 14.46

4 6204 Women's suits, jackets, dresses skirts etc&shorts

17 8.21

5 6205 Men's shirts 3 6.49 6 6104 Women's suits, dresses, skirt etc &

short, knit/croch 12 3.19

7 6105 Men's shirts, knitted or crocheted 3 3.13 8 0306 Crustaceans 0 2.25 9 6302 Bed, table, toilet and kitchen linens 0 2.4 10 6206 Women's blouses & shirts 4 1.79 11 6108 Women's slips, panties, pyjamas,

bathrobes etc, knitted/crocheted 10 1.76

12 5307 Yarn of jute or of other textile bast fibres of hd no 53.03

0 1.64

Total 62 77.86

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Partial Estimates: Indo – Bangla Case Filtered Sensitive List of India – items of minimal exports from Bangladesh

Sr. No

Major Items exported by Bangladesh to the ROW HS CODE(4 DIGIT LEVEL)

Product Description Number of items with 0 trade between India and Bangladesh

Total Value of Imports from the Rest of the World (in US$)

Total Consumer Welfare (in US$)

Percentage share of consumer welfare in imports from ROW

1 6203 Men's suits, jackets, trousers etc & shorts

5 2579000 877123 34.01

2 6204 Women's suits, jackets, dresses skirts etc&shorts

12 3471000 2090777 60.23

3 6104 Women's suits, dresses, skirt etc & short, knit/croch

8 806000 367938 45.64

4 6206 Bed, table, toilet and kitchen linens

2 940000 613190 65.23

5 6108 Women's slips, panties, pyjamas, bathrobes etc, knitted/crocheted

9 1657000 466869 28.17

TOTAL 36 9453000 4614753 48.82

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Partial Estimates: Indo – Bangla CaseFiltered Sensitive List of Bangladesh– items of minimal exports from India

Sr No.

Major Items exported by India to the ROW HS CODE (4 Digit Level) Product Description

No. of items present in

Bangladesh's Sensitive List

Total Value of Imports from ROW

(in US$)

Consumer Welfare (in US$)

Percentage of

Consumer Welfare in Imports

1 3004 Medicament mixtures (not 3002, 3005, 3006), put in dosage 2 33262000

25668520

77

2 8517 Electric app for line telephony,incl curr line system 7 362173000

94494668

26

3 8528 Television receivers (incl video monitors & video projectors) 6 21555000

1762036

8

4 8443 Printing machinery; machines for uses ancillary to printing 1 17341000

5 9018

Electro-medical apparatus (electro-cardiographs, infra-red ray app, sy 3 14794000

12663610

86

Total 19 449125000

134588834

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Partial Estimates: Indo – Bangla Case

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Partial Estimates: Indo – Bangla Case

Distribution of Gains - Bangladeshi Consumers

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From Minimum to Maximum Estimates of Consumer Welfare Gains

These estimates only show the effects of change in import price with fixed quantity of imports. The following three effects will be taken into account to arrive at revised figures:

Effects of domestic price reduction due to import competition by using data for total quantity consumed in the importing country, instead of import quantity

Effects of trade creation due to increase in import demand by using estimates of potential trade creation

Effects of reduction in trade costs within the SAARC region

following trade facilitation measures

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Usefulness of the Estimates

The estimation method helps to identify products with maximum potential consumer welfare gains for each country and therefore, qualifies for removal from their respective sensitive list

The estimates form the basis for more detailed studies on the effects of reduction in transportation costs and other trade facilitation measures on consumer welfare

The estimates will facilitate comparison with other trade costs

and relative merits of tariff liberalisation in each product category can be assessed

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Thank You

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