Trade Policies for Development and Transition

The following sections are included:

• Dedication
• Contents
• Acknowledgments

In this volume, we reprint my articles on the following subjects: (i) trade policy guidelines; (ii) trade policy in the transition from communist or planned economies to market economies; (iii) unilateral, dynamic and environmental issues in trade using CGE models; (iv) trade policy of the United States in autos and steel; and (v) papers in mathematical economics. The papers in the first section of this volume were designed to help establish the knowledge base for World Bank country economists and others trying to establish trade policies in developing and transition countries that contribute to development and poverty reduction. These are papers on the role of trade policy in poverty reduction, tariff policy, exchange rate overvaluation problems, adjustment costs of trade liberalization, trade and technology diffusion, and rules of thumb on regional economic policy. My co-authors and I have emphasized, however, that there is no “one size fits all” trade policy. Trade policy must be adapted to the conditions of individual countries. The key issue in trade policy is only occasionally simply tariffs, as might be emphasized in textbooks. Non-tariff barriers, the costs of trading across borders, exchange rate overvaluation, regional trade issues, costs of services in trade, adjustment costs and rent-seeking are all issues that I have addressed in my experience of working in more than 25 countries as a trade policy advisor. Determining the primary trade policy problem is one of the first challenges a trade policy advisor must address in diagnosing the country’s trade regime. Probably nowhere was that adaptation to local conditions more important than in the design of trade policies for countries making the transition from communist or planned economies to market economies. The efforts of the former Soviet bloc countries to make this transition to market economies was without historical precedent, and the opportunity to work with these governments on the transition was both extremely challenging and incredibly energizing. The papers in the third section of this volume are based on very innovative computable general equilibrium models that are among my most widely cited papers. In the fourth section of this volume, I reproduce some of my papers on the automobile and steel sectors; the section includes papers based on partial equilibrium, general equilibrium and econometric models. The final section of the volume contains papers in mathematical economics…

The effect of trade reform on growth will depend on a variety of complementary policies and institutions. In low income countries, the key complementary policies/institutions that need to be analyzed fall into the following major areas: (a) macro-economic, and especially exchange rate policy; (b) the operation of the market for labor, since the poor are often concentrated in the informal sector; (c) the operation of the markets for agriculture—which is both a major source of income and accounts for a large portion of the household expenditures of the poor; (d) access of the poor to trade related services—for example, credit, marketing, transportation; and (e) access to safety nets. There are of course other issues, such as governance, which are important here as well as in other reform efforts. What follows provides a “checklist” of questions and issues that can be considered in the design and pursuit of trade reform…

The following sections are included:

• Introduction—The value of an Open Trade Regime and the Role of Tarffis
• Arguments for Tariffs and for Non-Uniform Tariffs
• Arguments in Favor of a Uniform Tariff
• International Experience with Tariff Uniformity
• Conclusion—and Practical Steps
• References

We would like to thank Milan Brahmbhatt, Uri Dadush, Anne Krueger, Costas Michalopoulos, Martin Rama, Julie Schaffner, L. Alan Winters, and seminar participants at the conference on Economic Policy Reform at Stanford for thoughtful comments on earlier versions of this paper, and Maria Kasilag for logistical support. The views expressed in this paper are our own and do not necessarily reflect those of the World Bank.

The following sections are included:

• Introduction
• The Problems of an Overvalued Exchange Rate—Theory and Cross-Country Econometric Evidence
• Case Studies of the Effects of Overvaluation
• Conclusion
• References

An empirical analysis of the microeconomic links between trade and knowledge diffusion is useful for singling out some of the key predictions of the theory of endogenous growth in open economies. This literature postulates that total factor productivity is higher when trade gives countries access to a wider or more sophisticated range of technologies. The articles reviewed here find considerable evidence that imported technologies raise total factor productivity in importing countries, particularly developing countries and particularly when technologies are acquired by way of imports of intermediate goods. They also provide some support for the argument that exports and foreign direct investment are channels for learning. Although access to foreign technologies has a positive impact on developing countries’ total factor productivity, overall these countries are shown to purchase older and simpler machines than industrial countries. Relative factor and machinery costs and skill and technology endowments affect the choice of imported technologies. However, government attempts to limit or guide the selection of technologies are likely to have a negative effect on growth because they discourage producers from purchasing the most appropriate and efficient machines. Rather, policies aimed at promoting technological development should strengthen the absorptive capacity of importing countries and address the complementarity between human and physical capital in a broader context.

Most interesting results on the welfare effects of regional arrangements are ambiguous at a theoretical level. Many questions only have quantitative answers that are specific to the particular model and policy considered. Thus, to determine the impact of prospective regional arrangements governments often rely on a quantitative evaluation. Usually at the request of a government involved, we have implemented a number of computable general equilibrium (CGE) models to inform policy-makers. We summarize the main conclusions we draw from these studies, focusing on applications in the Americas…

The following sections are included:

• Introduction
• The Situation Today
• Transitional Arrangements
• Conclusions and Policy Implications for the World Bank
• Notes
• References

The following sections are included:

• Summary
• Trends in trade
• Trade with the rest of the world: the bias against exports
• Interstate trade
• Three countries—three experiences
• Quantifying the link between reform, exports, and GDP
• A strategy for reform
• Notes
• References

We develop and empirically implement a model to examine a market in a centrally planned economy characterized by a complicated maze of interrelated and offsetting distortions: the butter market in Poland. Eliminating all distortions in the butter market results in substantial structural changes and benefits to Poland. However, we find one case in which removing a distortion while others distortions remain in place results in substantial welfare losses, in classic second best fashion. Moreover, piecemeal reduction of some of the distortions results in much smaller benefits due to the offsetting effects.

The welfare costs of price controls can vary enormously, depending on the method of allocating the good in shortage and the possible rent-seeking costs that may result. With full rent dissipation, the welfare loss from price controls on Polish color televisions in 1989 was about ten times the standard estimates of distortion costs, which ignore rent-seeking, and was more than 100 percent of the value of domestic producers’ sales. The methods of allocating cars, however, did not result in rent-seeking costs. The domestic price controls were an unintended implicit subsidy to imports. Subsidies for cars were estimated at 43 percent and for color televisions at 22 percent.

In this paper we provide the first documented estimates of the terms-of-trade impact on all 15 countries of the former Soviet Union of shifting to international prices in their trade. We decompose the total impact of a change in the terms-of-trade into a change in the interrepublic and extrarepublic terms-of-trade. The broad pattern is that raw material and energy exporters, notably Russia, Turkmenistan, and Kazakhstan, are estimated to gain, whereas countries that concentrate on food and machinery exports, notably the Baltic states. Belarus, and especially Moldova, are estimated to be the biggest losers.

Given the demise of the CMEA as of January 1, 1991, it is estimated that the terms of trade will move adversely against Hungary by about 30% and impose an income loss on Hungary of about $1.7 billion. The estimates are based on an extensive series of interviews with firms involved in the trade. Compared with traditional methods, this is at least as reliable a method for adjusting for product quality. We assess the estimates and the methodology of others who have provided estimates and evaluate the consequences of a possibly unredeemable surplus in transferable rubles on the terms-of-trade estimates…

The following sections are included:

• INTRODUCTION
• WTO LEGAL ISSUES – IS THE DEMAND WTO-PLUS?
• THE ECONOMICS OF DUAL PRICING OF NATURAL GAS
• CONCLUSION
• APPENDIX A
• APPENDIX B
• REFERENCES

This paper summarizes the estimates of what Russia will get from WTO accession and why. A key finding is the estimate that Russia will gain about $53 billion per year in the medium term from WTO accession and $177 billion per year in the long term, due largely to its own commitments to reform its own business services sectors. The paper summarizes the principal reform commitments that Russia has undertaken as part of its World Trade Organization (WTO) accession negotiations, compares them with those of other countries that have acceded to the WTO. It finds that the Russian commitments represent a liberal offer to the members of the WTO for admission, but they are typical of other Transition countries that have acceded to the WTO. The authors discuss why Russian WTO accession will result in the elimination of the Jackson- Vanik Amendment against Russia. The authors discuss Russian policies to attract foreign direct investment, including an assessment of the impact of the 2008 law on strategic sectors and the increased role of the state in the economy. Finally, the authors assess strategies for most efficiently meeting the Government’s objective of diversifying the Russian economy.

The effects of the Uruguay Round are quantified using a numerical general equilibrium model which incorporates increasing returns to scale, 24 regions, 22 commodities, and steady state growth effects. We conclude that the aggregate welfare gains from the Round are in the order of $96 billion per year in the short run, but could be as high as $171 billion per year in the long run after capital stocks have optimally adjusted. Despite these global gains, we identify some developing countries that lose from the Round in the short run. In the long run, almost all gain, and the Round will allow developing countries to gain further through their own unilateral liberalisation.

We develop a numerical growth model that quantifies the welfare effects of trade liberalization. Additional intermediate input varieties provide the engine of growth and dramatically magnify the welfare gains from trade liberalization. In our central model, a 10% tariff cut leads to a 10.6% estimated gain in Hicksian EV. Systematic sensitivity analysis shows that there is virtually no chance of a welfare increase less than 3%, but a 6.6% chance of a welfare gain greater than 18%. We show that complementary reforms are crucial to fully realize the potential gains from the trade reform.

Starting from our earlier multi-region trade model, we develop two new 24 sector small open economy (SOE) computable general equilibrium models (CGE) of Chile. One is comparative static and the other is dynamic. We evaluate the impact of Chile forming free trade agreements with either NAFTA or MERCOSUR. Our principal result is that the dynamic SOE model does not produce welfare estimates significantly different from the comparative static SOE model. Our second result is that, although the difference is small, it is possible for a fully dynamic model to produce welfare estimates for a preferential trade area that are welfare inferior than those from a comparative static model. Finally, we develop two classes of comparative steady-state models and show that it is necessary to properly calibrate these models to the dynamic steady-state equilibrium path in order to produce estimates that are not significantly biased relative to the true dynamic estimates.

Foreign producer services can provide substantial benefits for domestic firms. We build on earlier monopolistic-competition models of intermediate producer services in this paper. Results show that: (1) while foreign services are partial-equilibrium substitutes for domestic skilled labour, they may he general-equilibrium complements, (2) service trade can provide crucial missing inputs that reverse comparative advantage in final goods, (3) the ‘optimal’ tax on imported services may be a subsidy, and (4) in our dynamic formulation, there may be earnings losses for immobile workers along a transition path that suggest potentially important equity consequences of reform.

We investigate the environmental impacts of Russia’s World Trade Organization (WTO) accession with a computable general equilibrium model incorporating imperfectly competitive firms, foreign direct investment and endogenous productivity. WTO accession increases CO₂ emissions through technique (−), composition (+) and scale (+) effects. We consider three complementary policies to limit CO₂ emissions: cap and trade, emission intensity standards and energy efficiency standards. With imperfectly competitive firms, gains from WTO accession result with any of these policies. If we assume perfectly competitive market structures, the negative environmental impacts of WTO accession are smaller and no net gains arise when environmental regulation involves energy intensity or efficiency standards.

Rationing is pervasive in transition economies and in many developing countries. This paper contrasts the welfare costs of two forms of rationing: with and without license transferability among license holders. In the latter case, for a given level of rationing, welfare costs will be higher if users of rationed products have different elasticities of demand. Illustrative general-equilibrium-based numerical calculations are carried out to derive orders of magnitude of the costs of rationing for an economy that trades 40 percent of its GDP with half of its imports concentrated in manufactures. In this setting, rationing of manufactures to 70 percent of their free-trade desired level reduces free-trade income by 6 percent when licenses are transferable. Nontransferability of licenses adds approximately 20 percent to the costs of rationing.

The following sections are included:

• INTRODUCTION AND SUMMARY OF RESULTS
• MODEL AND ASSUMPTIONS
• THE GAINS AND LOSSES FROM REMOVING THE VRA
• CONCLUSIONS
• REFERENCES FOR CHAPTER THREE

In this chapter the findings of the study are summarized, and their implications for international trade policy for steel are presented. The study has attempted to explain the pattern of U.S. steel trade flows over the past 20 years. During that time, imports as a percentage of U.S. apparent steel consumption rose gradually to a peak of 17.9 percent in 1971; since then the long-term trend has been arrested and slightly reversed…

This paper examines the welfare effects of protection in two high wage premia sectors—autos and steel—to determine if protection is justified to correct for the labor misallocation due to the wage premia. If wage premia are exogenous, under most product market structures, labor misallocation is too small to justify protection. More importantly, due to union influence in autos and steel, the wage premium is endogenous. Then wage premia may even exacerbate the welfare costs of protection. With increasing returns to scale and firm entry optimal policies may be reversed, so further caution must be exercised.

In this article a model is developed to evaluate the impact on an exporting country of a restraint imposed on its export by an importing economy in the context of a three-region model of world trade in a single product. The welfare changes in any of the three regions in the model and in the global economy can be evaluated.

The model is applied to the restraints imposed on steel exports from the Republic of Korea to the United States and the European Economic Community (EEC). The United States and the EEC are found to have incurred significant losses as a result of the restraints. The largest part of these losses are quota rents transferred to Korea and the rest of the world. Under reasonable parameter assumptions, Korea and the rest of the world obtain net gains from the quotas, because the resource misallocation costs are smaller than the quota rents.

The model is modified to analyze a tariff barrier rather than a quantitative restraint. It is found that an “equivalent” tariff on steel transforms Korea and the rest of the world from net gainers to net losers as a result of a restraint.

Recently a number of studies have argued that foreign steel manufacturers use their export prices in relation to their domestic prices to smooth out fluctuations in home market demand. This phenomenon is called cyclical dumping. It is shown that the price discriminating monopolist model explains dumping, but its predictions with respect to cyclical dumping are ambiguous. Tests are performed for the United States, Japan and the European Community for each of three representative steel products. At conventional significance levels, the cyclical dumping hypothesis is rejected in all cases.

The following sections are included:

• INTRODUCTION
• STABILITY OF DISTRIBUTED LAG MODELS IN THE MORISHIMA CASE
• CONCLUSIONS AND EXTENSIONS
• REFERENCES

Arrow and Nerlove (1958) have found that when all commodities, both present and future, in a continuous time general equilibrium model of a competitive economy, are gross substitutes, then stability with “static” expectations is equivalent to stability with “adaptive” expectations. It is found here that we may extend the Arrow-Nerlove result that the stability behaviour of the system is unaffected by the selection of the more sophisticated adaptive expectations over static expectations, provided the substitute-complement relationship of commodities, both present and future, fits into the Morishima (1952) matrix pattern. In addition, a counterexample is exhibited which establishes that the Arrow-Nerlove result does not hold in general and the choice of adaptive versus static expectations can affect stability…

The following sections are included:

• INTRODUCTION
• THE MODEL
• THE EFFECT OF LAGS IN CONSUMPTION AND INVESTMENT

This paper seeks to analyze the stability of an oligopolistic market characterized by uncertainty where each firm uses all the information available in assessing probabilities. It is convenient to define some notation…

In recent years a number of authors have considered a variety of expectations assumptions in analyzing the stability of oligopoly. In this paper it is assumed that an oligopolist has a probability distribution for its competitors’ outputs. This « nondogmatic conjectures » approach enables us to determine: (1) which of the stability results are not dependent on the expectation assumption made and (2) how the expectation assumptions themselves affect the stability results.

The following sections are included:

• INTRODUCTION
• THE MODEL
• CONCLUSIONS
• APPENDIX
• REFERENCES

The following sections are included:

• Introduction
• Definitions and Theorem
• Conclusions
• REFERENCES

The following sections are included:

• Author Index
• Subject Index