Declining Protection in Developing Countries: Fact or Fiction? Chris Milner GEP and School of Economics University of Nottingham The World Economy Asia.

Declining Protection in Developing Countries: Fact or Fiction?

Chris MilnerGEP and School of Economics

University of Nottingham

The World Economy Asia Annual Lecture

University of Nottingham MalaysiaFebruary, 2012

Context

• There has been substantial ‘unilateral’ trade policy reform across developing countries over the last two or three decades– dismantling of the old forms of non-tariff protection (import

licencing and foreign exchange controls)– simplification of border taxation of imports and lowering of

average tariff levels• There has also been greater discipline imposed on

trade policy setting in developing countries through multilateral (e.g. WTO membership and binding of MFN tariffs) and regional commitments

Average MFN Applied Tariffs (%)

1991 2001 2009

Developing Countries (134 countries)

27.7 13.5 9.9

Low Income Developing Countries (42 countries)

44.4 14.4 11.8

Source: World Bank

Case Study: Malaysia (2009)Duty-free

0-10% 10-25% 25-50% 50-100% 100%+

Agricultural products MFN applied tariff rates (%)

74.5 15.3 4.1 2.9 0.7 2.3

Imports share (%)

75.9 8.7 3.6 7.2 0.9 3.8

Non-agricultural MFN applied tariff rate (%)

56.9 16.2 19.9 6.9 0.0 0

Imports share (%)

77.3 9.2 7.3 6.2 0.0 0

Source: WTO Tariff Profiles

Developing Country Exports (% of GDP)

1990 1995 2000 20050

5

10

15

20

25

30

35

40

low and middle incomelow income

Initial Assessment of the Evidence

• A picture of import liberalisation and increased openness in developing countries

• An associated reduction in protection for domestic producers in domestic markets

• And an associated increased incentive to orientate production towards unprotected export markets

• But is this the reality and is the picture painted of declining protectionism an illusion?

Tariff Peaks, Escalation and Protection

• Average applied tariffs hide the tariff peaks and misrepresent the prohibitive and protective nature of tariff protection

• There is much greater tariff escalation (between input and output tariffs) in tariff structures than implied by average tariffs, especially for local production competing with imports in the domestic market (see table below)

• Evidence below excludes the protective effects of NTBs (traditional and new)

Further Details on MFN Applied Non- Agricultural Tariffs in Malaysia (2009)

Average Duty-free (%) Maximum

Fish & products 1.1 87 20

Minerals etc. 11.2 49 60

Petroleum 0.7 87 5

Chemicals 2.9 82 50

Wood, paper etc. 10.1 46 40

Textiles 10.3 24 30

Clothing 15.9 17 20

Leather, footwear 13.9 40 40

Non-elect machines

3.6 75 35

Elect. machinery 4.3 73 30

Transport equip. 11.6 41 50

Other 4.8 67 50

Source: WTO Tariff Profiles

Illustrative Effective Protection EffectsUniform Input and Output Tariffs(if based on Malaysia’s average applied rates)

Uniform Input and Output Tariffs(if based on Malaysia’s maximum applied rates)

Escalating Tariffs(if based on Malaysia’s maximum output tariff and duty free inputs assumed to account for 20% share of value of output of final good)

Escalating Tariffs( if based on Malaysia’s maximum output tariff and duty free inputs assumed to account for 50% share of value of output of final good)

Tariff on Input (Leather)

14% 40% 0% 0%

Tariff on Output(Shoes)

14% 40% 40% 40%

Effective Rate of Protection of Shoe Production

14% 40% 50% 80%

Case Study: Effective Protection from Tariffs in Mauritius (2009)

Estimated Effective Protection from Tariffs (using average applied

tariff) (%)

Estimated Effective Protection from Tariffs

(using maximum applied tariff) (%)

Chemical products up to 1.2 up to 104.9

Wood, paper etc. up to 8.3 up to 88.3

Textiles 2.7 500.8

Clothing 9.8 303.0

Leather, footwear etc. up to 12.8 up to 203.9

Non-electrical machinery 1.5 26.9

Electrical machinery -0.8 112.1

Transport equipment 2.2 46.9

Other manufactures up to 3.1 up to 110.3

Source: Own estimates

The Role of Non-Tariff Barriers• Continuing tendency for instrument substitution

– replacing reduced tariff protection with non-tariff protection– replacing old forms with new forms of NTB protection

• Developing countries have learnt or are learning (from industrial countries) to use new forms of administrative protection– greater use of standards and contingent protection (e.g. anti-

dumping) measures (see table below)• Difficult to accurately measure the extent of NTBs in

comparable way to tariffs– Kee et al.(2008) estimate average tariff equivalent of NTBs on

affected tariff lines to be 31.9% for Malaysia (for 2000)– will tend to raise effective protection further, i.e. above generated

by tariff protection

Use of Anti-DumpingCountry 1985-1994 1995-2004

Investigations Investigations Measures Imposed

New Developing Country Users (a)

16% 40% 45%

Traditional Developed Country Users (b)

73% 36% 33%

Other WTO members 11% 24% 22%

Total Number 2065 2646 1656

(a) Argentina, Brazil, Colombia, India, Indonesia, Mexico, Peru, Turkey, Venezuela

(b) Australia, Canada, European Union, USA

Source: Bown (2006)

Trade Costs and Implicit Protection• Considerable amount of evidence now that trade

policy is a relatively small component of trade costs• Transport and distributions costs affected by aspects of

geography, but also by the scale of trade, the quality of infrastructure and institutions

• These costs are absorbed by ‘small countries’ and serve also to have implicit taxing and subsidising effects (akin to those of trade policy measures)– even if these other trade costs uniformly apply to imports of

intermediate and final goods they will raise effective protection for import-competing production substantially

– likely to be some resistance domestically to reducing avoidable, ‘unnatural’ sources of these trade costs

Estimated Average Bilateral Trade Costs: Malaysia (2009)

Trade Partner Average Tax Equivalent of International Relative to Domestic Trade Costs (% rate)

Regional:

China 52.2

Indonesia 54.7

Japan 61.3

India 75.3

Extra-regional:

USA 75.3

Germany 81.1

UK 102.7

France 106.9

Source: McGowan and Milner (2011)

Implicit Subsidy (+) and Taxation (-) Effects of Trade Costs

Sector:Impact on Stage:

Import- competing production

Export production

Final good

- tariffs and NTBs + 0 (?)- other trade costs + -Intermediate inputs

- tariffs and NTBs - (or 0) - (or 0)

- other trade costs - -Overall Effective Protection Positive Negative or Zero

Protected Exporting

• Tend to think of exporting being un-protected and not being implicitly or explicitly subsidised, but a growing proportion of the exports of developing countries is under some form preferential arrangement– preference scheme offered by industrial countries to

developing countries– intra-regional trade behind a common external tariff– not such a feature of intra-Asian trade, but not

unimportant from some Asian countries too

Share (%) of Intra-Regional Exports in Total Exports: Africa

1990 2009

Agricultural products 12 21

Fuels & mining products 3 6

Manufactures 12 25

Source: World Trade Report, 2011

Share (%) of Intra-ASEAN Exports in Total Exports (Manufactures)

Member country 1992 2009

Cambodia 38 34

Indonesia 6 25

Malaysia 7 23

Singapore 19 23

Thailand 9 19

Vietnam 17 19

Total ASEAN 21 24

Source: World Trade Report, 2011

Preference Margins on Asian Exports to European Union : (2009)

Weighted Preference Margin on Exports of Agricultural

Products(%)

Weighted Preference Margin on Exports of Non-

Agricultural Products(%)

Exports to EU by:

Cambodia 20.3 11.8

India 4.0 2.0

Indonesia 2.3 1.8

Malaysia 1.1 0.9

Sri Lanka 3.4 9.2

Thailand 1.8 1.8Source: WTO Tariff Profiles

Preference Margins on Exports to Major Markets: Mauritius (2008)

Major market Exports (mill. US $) Preference margin (weighted) (%)

Agricultural products

EU 628 10.4

USA 28 0.4

Madagascar 21 19.4

Kenya 4 26.6

Non-agricultural products

EU 810 9.7

USA 144 13.5

Madagascar 69 14.8

South Africa 62 32.9

Source: WTO Tariff Profiles

Revised Assessment and Conclusions• Trade reform and import liberalisation do not necessarily reduce or

reduce significantly the levels of protection for domestic producers• The degree of protection for domestic producers in developing

countries is much understated by examination of average applied tariffs– much greater escalation and effective protection from peak

tariffs– focus on tariffs misses protective effects of NTBs and non-trade

policy sources of trade costs• The increased outward or export orientation of many developing

countries may well also over-state the shift from protected to unprotected production– growing share of preferentially treated exports, including in

intra-regional and intra-developing country trade

An After-thought!• As a much younger economist, I co-authored a

Hobart Paper (Greenaway & Milner, 1979) entitled ‘Protectionism Again…?’

• I now wonder whether I should not have used the title ‘Protectionism Again and Again and Again!’ for this lecture– some decline in protection may be a fact for some

developing countries, but it is and is likely to remain a fiction for many others!