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Tariff and non-tariff barriers benefit developing countries - new study

Geneva, 17 Sep (Chakravarthi Raghavan) - There is considerable evidence for the hypothesis that under certain conditions, restrictions on trade can promote growth, especially of developing countries, according to a study published in the Journal of Development Economics (No. 72/2003).

The study by Halit Yanikkaya, an academic at the College of Business and Administrative Services, Celal Bayar University (Turkey), has examined the growth effects on 108 economies of a large number of measures of trade openness, using the same yardsticks or measures of openness and over the same periods, and applying econometric models and regressions. The study has used two broad categories: measures of trade volumes and measures of trade restrictions and measures their effects on growth in the 108 economies.

The study and the results of the data analysed challenges what the author calls “the unconditional optimism in favour of trade openness among the economic profession and policy circles.”

It finds that on the basis of trade volumes, there is a positive and significant association between trade openness and growth.

According to the conventional view and studies on the growth and trade restrictions, trade restrictions have an “adverse association between trade barriers and growth.”

The study finds a contrary evidence and says: “our estimation results from most specifications (of tariff and trade barriers) show a positive and significant relationship between trade barriers and growth”.

“Equally important,” the study adds, “these results are essentially driven by developing countries, and thus consistent with the predictions of the theoretical growth literature that certain conditions, developing countries can actually benefit from trade restrictions.”

Several empirical studies of the ‘80s and ‘90s provided an affirmative answer for the view that “open economies” grew faster than closed ones, and that “outward-oriented” economies have consistently higher growth rates than “inward-oriented” ones. These led to a strong bias in favour of trade liberalisation and under-pinned the World Bank/IMF policy conditionalities and advice to developing countries and the Washington Consensus of the 1990s.

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the tragic failures of the import substitution strategies especially in the 1980s, and the overstated expectations from trade liberalization. The World Bank- sponsored studies, by Dollar and others, said they had found positive correlations between open economies and faster growth across countries.

The first major challenge from academia came from Dani Rodrik, and followed by a cross-country empirical analysis, using the same measures of ‘openness’ across a range of countries, which brought out that these studies had reached the conclusion of open economies growing faster because they used different yardsticks for countries and over different time-periods: But when the same yardsticks were used and over the same time-periods, the results showed that fast growth had taken place in some of the countries with higher trade restrictions (India and China), but which had adopted a measured approach to trade liberalization (after creating capacity domestically, and calibrating liberalization measures).

Since then a number of studies have come out challenging the view that liberalization of trade and investments is always a plus and there is growth in the long-run. These studies have brought out that openness to external trade and trade liberalization are two different concepts, and that the latter promoted growth (and brought in foreign direct investment and associated technology) only under certain conditions, and when the host-country State played an active role.

The Yanikkaya study notes that while there is a near consensus about the positive correlation between trade flows and growth, the theoretical growth literature (which studied growth effects of trade restrictions) came to the view that the effects were very complicated in the most general case, and mixed in how trade policies play a special role in economic growth.

This, the author attributes to the way ‘openness’ is described very differently in various studies, making classification of countries on basis of ‘openness’ a formidable task. Hence, using different measures of openness produces differing results.

The Yanikkaya study looks at the growth effects on a large number of measures of trade openness. Two broad measures of trade openness are used and studied: one is on effect of various measures on trade volumes, which indicate a positive and significant association between openness and growth, and is in line with conclusions of empirical and theoretical growth literature.

However, the estimation results for various measures for trade barriers, contradicts the conventional view on the growth effects of restrictions, and suggests “an adverse association between trade barriers and growth. The estimation results from most measures of trade restrictions show a positive relationship between trade barriers and growth, a result driven by developing countries.

These results are consistent with the predictions of theoretical growth literature, namely, that under certain conditions, developing countries can actually benefit from trade restrictions.

In a survey of the literature, the study finds that international trade theory (based on static trade gains) provides little guidance to the effects of international trade on growth and technical progress, the new trade theory argues that gains from trade can arise from several fundamental sources differences in comparative advantage and economy-wide increasing returns.

While there are many studies about the effects of trade policies on growth - during the failed import substitution strategies of the 1980s and the export-promotion policies - there is a lack of clear definition of ‘trade liberalization’ or ‘openness’.

The most difficult has been measuring ‘openness’. An ideal one would be an index that includes all trade barriers distorting international trade, such as average tariff rates and indices of non-trade barriers. Such an index, incorporating effects of both tariff and non-tariff measures has been developed by J.E.Anderson and J.P.Neary. But it is not available for a large number of economies. Other studies, like those by Dollar and, Sachs and Warner used available data.

If the growth engine is driven by innovation and introduction of new products, then developing countries should benefit more by trading with developed countries than with other developing countries. However, the Yanikkaya study results do not support this, both providing growth regressions positively and significantly.

The study finds that a developing country benefits through technology diffusion by trading with a developed country, and since the US is the leader in technology, developing countries benefit through this bilateral trade. Also, countries with higher population densities tend to grow faster than those with lower densities.

In using measures of trade restrictions - several of whom it acknowledges are not free from measurement errors - the study reaches some very different conclusions than conventional trade theory suggests.

Thus, it finds that trade barriers in the form of tariffs can actually be beneficial for economic growth.

In the current context (of the Doha Round and the drive of Europe and the US to tear down and harmonise developing country tariffs), this is a significant and telling result, providing support for the viewpoint of developing countries in these talks. The framework for modalities for tariff liberalisation in industrial products in the NAMA negotiations put forward by the chairman (and WTO secretariat) is misguided and needs to be opposed and jettisoned.

When export taxes and total taxes on international trade are used as a measure of trade restrictions, the study finds that save for fixed effect estimates, there is a “significant and positive association” between trade barriers and growth. This is similar to the results for average tariffs.

On non-tariff barriers, there are difficulties of estimation because of data limitations; hence these are excluded in most empirical studies. But studies by J.Edwards (cited in the Yanikkaya study) found such restrictions having an insignificant relationship with growth, and came to the view that NTBs are poor indicators of trade orientation, since a broad coverage of NTBs did not necessarily mean a higher distortion level.

Using several new measures of trade openness and restrictions now available, and applying them on a framework model explained in details (but needs econometric knowledge for the lay trade person to test and see), the Yanikkaya study, says that there is “considerable evidence for the hypothesis that trade restrictions can promote growth, especially in developing countries, under certain conditions.”

The study makes clear that it has no intention of establishing a simple and straightforward positive association between trade barriers and growth, but rather to show that “there is no such relationship between trade restrictions and growth.”

Such a relationship depends mostly on the characteristics of a country. Restrictions can benefit a country depending on whether it is developed or developing (a developed one seems to lose), whether it is a big or small country, and whether it has comparative advantage in sectors receiving protection. – SUNS5421

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