Potential Gains from Trade Liberalisation in the Baltic Sea Region

Transcription

1 Potential Gains from Trade Liberalisation in the Baltic Sea Region Executive Summary

2

3 Executive Summary Potential Gains from Trade Liberalisation in the Baltic Sea Region A Simulation of the Effects on Trade Flows, Production, and National Income of Lower Tariffs Lower Export Subsidies and Taxes Improved Trade Procedures Liberalised Services Trade and a Separate Look at Reduction of Non Tariff Measures

4 Introduction and background In this study the potential effects from unilateral trade liberalisation, in the countries of the Council of Baltic Sea States (CBSS) 1 is analysed. In other words, what would a Global Baltic Sea region, liberalised to the rest of the world, mean for national income and the trade and production patterns of the region? The results in this study are based on an economic simulation, using a computable general equilibrium model called the GTAP-model. 2 Economic data has been used together with certain assumptions on the functioning of the economy. Reforms have been simulated in order to analyse their impact on certain key variables, such as trade and national income. The simulation outcomes shows that trade liberalisation could have positive effects for all countries in the region, measured in national income. 3 There are several limitations with this type of study that should be kept in mind when interpreting the results. Firstly, a model is always by definition a highly simplified illustration of reality, and can as such not consider all aspects of the real world. In the model used in this study, dynamic effects, that tend to have amplifying effects on the results, are not considered in the model. Nor is there an explicit consideration of foreign direct investment in the model. As a result of these (as well as other) limitations, the effects and potential gains from trade liberalisation seen in this study are most likely underestimated. Also, data collection as well as modelling of tariff equivalents for trade in services, border procedures and, in particular, non-tariff measures (NTMs), is still in a very early stage of development. Even though there are several restrictions with this type of simulation model, it is still a useful tool to analyse the mechanisms that are initiated by a trade policy change. The main data set used is the GTAP database, in which a snapshot of the world economy in year 2001 is provided. Given that several changes have taken place since this year, a presimulation is first carried out to account for some important policy changes that have taken place, or can be expected take place within the next-coming 10 years. 4 In the study the CBSS countries are divided into three aggregate country groups/countries in order to facilitate the analysis: Russia, the emerging market economies (including the Baltic States and Poland) and the mature market economies (comprising the Nordic countries and Germany). Two main liberalisation scenarios are simulated: one full unilateral liberalisation scenario and one partial liberalisation scenario (with a 50 per cent reduction of trade barriers). In both scenarios the following reforms are included: 1 CBSS includes the following countries: Russia, Poland, Estonia, Latvia, Lithuania, Denmark, Finland, Norway, Iceland, Sweden and Germany. Due to database restrictions Norway and Iceland are treated as one entity. 2 The Global Trade Analysis Project (GTAP) includes a model and a database and origins at Purdue University, USA. 3 National income effects include changes in factor returns as well as in net government transfers. Technically, national income gains are changes in economic welfare, which in turn is measured as equivalent variation (EV). The EV is the hypothetical change in income which would have produced the same effect on the welfare of representative consumers in the countries, at constant (base scenario) prices. 4 This includes: the EU-enlargement; reforms of the EU Common Agricultural Policy; Norway-EC agreement on agricultural products; implementation of plurilateral agreements; implementation of EBA; the ATC; and Russia s accession to the WTO. The representation of the policy changes are by necessity highly stylized (based on simplified assumptions). This is due to restrictions in the model as well as incomplete information about future policy changes. 2

5 Industrial liberalisation - including elimination/reduction of import tariffs, elimination of export taxes, and improved procedures at the border for industrial goods (trade facilitation). 5 Agricultural liberalisation, including elimination/reduction of import tariffs, elimination/reduction of export subsidies, and improved border procedures for trade with agricultural goods (trade facilitation); and Services liberalisation: reducing the tariff equivalents for barriers to trade in services. 6 It should be noted that in this study only the countries of the Baltic Sea region are assumed to liberalise. This means that only some of the countries belonging to the EU will take part in liberalisation while others will not. Hence, the scenarios are therefore merely theoretical illustrations with the aim of analysing the potential of a more open region. In addition, a separate scenario for non tariff measures (NTMs) is simulated. That it is separate means the simulation has been carried out in isolation from the main liberalisation scenario. The objective of this additional scenario is to take into account other barriers than those included in the main liberalisation scenario, such as: price control measures (e.g minimum import prices); quotas in various forms; monopolistic measures (e.g. state trading administration); and technical rules (e.g. packing or testing requirements). However, even though most of these NTMs do not cover the barriers in the main liberalisation scenario, there may be some overlapping elements. Outcome from the main liberalisation scenario Effects on national income As a whole, the simulation results from the main liberalisation scenario indicate that the CBSS countries could gain about 30 billion USD from the full liberalisation scenario, which is equivalent to 1.0 per cent of the region s initial GDP. The results from the partial liberalisation scenario approximately halve these effects. Looking at the results for the three country groups, it can be noted that Russia and the group of emerging economies have relatively more to gain from the liberalisation, 1.9 and 1.2 per cent of GDP, respectively. The mature economies group has an average overall national income gain of 0.8 per cent. Table 1 Effects on national income mn USD % of GDP Denmark Finland Germany Sweden Estonia Latvia Lithuania Poland Norway/Iceland Russia Mature economies Emerging economies Total CBSS Estimates of tariff equivalents for cumbersome border procedures (based on data from the World Bank and OECD) converge fully (or partially) towards best practice, meaning the country with the most efficient border procedures. Only indirect costs at the border, i.e. delays in customs, are modelled here. 6 Barriers converge fully or partially towards best practice, here defined as the country (or group of countries) in this study with the lowest barriers in a specific services sector. 3

6 On a country level, the largest relative gains are observed for Lithuania, with a 4 per cent increase, followed by Estonia, with an increase of 2.5 per cent. The changes in national income, as a consequence of liberalisation, can have different explanations, such as: changes in terms of trade; better use of resources; less costly import and scale effects. In order to better understand the underlying mechanisms for these changes, it can be useful to look at the contribution of different factors, see Table 2 below. 7 Table 2 Explanatory factors to the national income effects (% of total) Import efficency Resource allocation Scale effects Terms of trade TOTAL Russia Mature Emerging All CBSS The largest gains by far, for all country groups, derive from an increased efficiency in the imports of goods and services, as a consequence of reducing indirect trade barriers (90 per cent). In other words, this represents the cost-reducing effects from removing barriers to trade in services and implementing better border procedures for trade in goods. The reforms make imports available to consumers and producers at lower prices, leading to national income gains. Moreover, in contrast to tariff reductions these reforms do not lead to reduced government revenues. This factor seems especially important for Russia. The second largest contributor to the CBSS-countries total gains is a more efficient allocation of resources, i.e. resources are moved to sectors where they are more productive. This effect accounts for 23 per cent of the region s total gains. Moving on to the scale effects 8, it seems to have a positive effect for the group of emerging economies, but a negative impact both on the group of mature economies as well as on Russia. This effect is the result of the modelling of monopolistic competition in some sectors. The contribution of the scale economies effect in the overall national income gains is related to which sectors are expanding: if the expansion takes place in sectors modelled with no (or low) economies of scale at the cost of production in sectors with higher economies of scale, the effect will be negative. This can be observed for Germany, Sweden and Denmark as specialisation in some sectors has the negative effect of drawing resources from other sectors with high economies of scale. A fourth factor that may influence the impact on national income is changes in the terms of trade. A positive terms-of-trade effect implies that prices of a region s export increases in relation to the prices of that region s import. Overall, the region as a whole seems to have positive effects from the changes in terms of trade, but among and within the groups of countries there are large differences. Changes in terms-of-trade have a negative effect on the group of emerging economies, and especially Poland, whereas it has a positive effect on especially Russia, and the group of mature economies. 7 All rows in Table 2 do not sum up due to the omission of small financial balance effects. 8 The use of the term scale economy in this context differs somewhat from the common definition of the term. Here, it implies effects from changes in the number of available products varieties, which, in effect, mimics (external) scale economy effects. The modelling approach is based on the assumption that consumers benefit from more product varieties whereas producers benefit from more varieties in intermediate goods. 4

7 Effects on trade flows When import and export barriers are removed, trade flows between different countries and regions will be altered. On a global level the simulation of a full unilateral liberalisation in the CBSS region increases total trade by 2 per cent, as seen in Table 1. If only considering the trade effects on the countries within the CBSS region, both their total exports and imports increase with about 8 per cent. The trade within the CBSS region increases with 10 per cent. The simulation results from the partial liberalisation scenario approximately halves the overall effects, as global trade increases by 1 per cent and trade within the CBSS region with about 4 per cent. Table 3 Volume changes in trade flows (in %) From To Mature Emerging Russia All CBSS Total Mature Emerging Russia All CBSS Total A general observation is an increase in trade between most countries/regions. Focusing on changes in trade flows between the three country groups of the CBSS region, there is a minor decline in the total export from the group of mature economies to the group of emerging economies. On the contrary, trade between the two country groups and Russia increases substantially. The total export from both groups to Russia increase with about 32 per cent, and exports from Russia to the mature economies and the emerging economies increase with 28 and 13 per cent, respectively. In fact, Russia increases its trade with all the countries and country groups of this analysis. Sectoral effects on trade and production Trade and production effects on the agricultural sector 9 The agricultural sector was prior to the simulated liberalisation, highly protected by import tariffs as well as export subsidies. Also, the cost for cumbersome border procedures for agricultural goods was high in comparison to industrial goods. Removal of these barriers could therefore be expected to have substantial effects on the sector, both when it comes to production and trade. As a consequence of the simulated full liberalisation scenario, the import of agricultural goods to the CBSS countries increases with about 20 per cent, while total export falls with approximately 5 per cent. The reforms also have an impact on the total agricultural production of the CBSS countries, as it declines with some 6 per cent. However, though these relative increases are large, it is important to remember that the agricultural sector, both when it comes to production and trade, for most countries constitutes a small share of the total value. 9 Volume changes measured in millions of US dollars at base period prices 5

8 Table 4.1 Effects on the agricultural sector, volume changes in % Mature Emerging Russia All CBSS Denmark Finland Germany Sweden Norway/ Estonia Iceland Latvia Lithuania Poland Imports Exports Production Not surprisingly, the increase of agricultural import is especially high in the CBSS countries with the highest weighted import tariffs, this is seen for Norway/Iceland as well as Russia, and in particular in those sectors that were most protected. The group of mature economies increases import in all of the agricultural sectors, but especially in the dairy sector. This import sector also exhibits the largest relative increase in the group of emerging economies. Almost all CBSS-countries decrease their total agricultural export, though on a less aggregate sector level there are diverging effects. In fact, the overall decline of the CBSS-countries agricultural exports is mainly due to the contraction of the dairy export sector in the group of emerging economies and the group of mature economies. This is a sector which prior to the simulated liberalisation was highly subsidised. The only two countries that experience an increase in the export of this sector initially had low (Norway/Iceland) or no (Russia) export subsidies on dairy products prior to the liberalisation. Because of the availability of less costly import and the increased competition on the world market, the agricultural production decreases in all of the CBSS countries, but especially in Russia and Latvia. Of all agricultural sectors, the dairy sector goes through the largest changes. Effects on the industrial sector The industrial sector was before the simulated liberalisation fairly open with relatively low import tariffs in most countries. The most protected industrial market was found in Russia, which had comparatively high levels for import tariffs and high costs for cumbersome border procedures. Furthermore, Russia was the only country using export taxes, which contributed to keep the export volume down and domestic consumer prices on a low level. Since most trade takes place in the industrial sector, this is where the largest absolute value difference is observed both on the import and the export side. Also in the industrial sector the imports to the CBSS-countries increase, in total with approximately 5 per cent. Equally, there is a general increase in the industrial export in all the CBSS-countries, in total 9 per cent. 10 The total production of the CBSS -countries increases with 2.5 per cent. Table 4.2 Effects on the Industrial sector, volume changes in % Mature Emerging Russia All CBSS Denmark Finland Germany Sweden Norway/ Estonia Iceland Latvia Lithuania Poland Imports Exports Production In the partial liberalisation scenario imports increase with 2 per cent, and exports with 4 per cent. 6

9 All three country groups increase import of industrial goods, but the largest increase by far takes place in Russia. As mentioned above, the industrial sector was in Russia highly protected from foreign competition, and when barriers are removed in the simulation, domestically produced goods become more expensive in relation to import prices. (Table A.3), causing a surge in imports. In the group of emerging countries, the change in total imports of industrial goods is only marginal. Also on the export side, Russia is the group that experiences the largest changes in the industrial sector, with an increase with approximately 20 per cent. The increase in both exports and imports in Russia is not surprising considering that this is the only CBSS-country that was not part of the European Economic Area and had the high initial barriers. On a country level the largest export increase is observed for Lithuania as all industrial export sectors increase in size. In contrast to the agricultural sector, the production of industrial goods increases in all countries of the Baltic Sea region. However, the results vary more between the different industrial sub-sectors and between countries. Effects on the services sector The services sector is highly regulated and subject to several restricting barriers to trade. As a consequence of the elimination of the trade barriers, the import of services becomes less expensive relative to domestic price. The services sector represents the largest sector in all of the CBSS countries but since most services are consumed within a country removed barriers may not lead to great changes in the overall production level. It should once again be acknowledged that only three of the four modes of services supply are represented in the simulation (as categorised in the WTO General Agreement on Trade in Services, GATS), and effects of foreign establishment, that represents about 60 per cent of all trade in services, is not explicitly considered. The CBSS-countries trade in services is largely affected by the simulated liberalisation scenario, as the total import increases with 13 per cent and total exports with 4 per cent. 11 Looking at the effects on services production the relative changes are in general less drastic than in the goods sectors, as only marginal changes can be observed. Table 4.3 Effects on the services sector, volume changes in % Mature Emerging Russia All CBSS Denmark Finland Germany Sweden Norway/ Estonia Iceland Latvia Lithuania Poland Imports Exports Production As a consequence of lower prices, all the CBSS countries increase the overall imports of services. Most of the CBSS countries experience a substantial increase in the import of construction services. This is due to the removal of the high import barriers in this sector, 11 In the partial liberalisation scenario the imports increase by 6 per cent and exports by 1 per cent. 7

10 observed in most CBSS countries prior to liberalisation. The group of emerging economies has the highest relative increase in the overall import of services. Also, since the demand for imports increase in the CBSS countries, because of better border procedures on the export side as well as on the import side of the partner country, the export of services increases in almost all CBSS countries. As was the case on the import side, the construction sector is also the fastest growing services export sector in the CBSS region. Looking at the three country groups, the largest relative increase in service export takes place in Russia, followed by the group of emerging economies and finally the group of mature economies. Of all the CBSS countries, the largest increase in overall export of services can be noted for Norway/Iceland followed by Lithuania. As most services are consumed within the domestic market, the total change in the services sector is not greatly affected by the changes in trade flows. All the three country groups experience marginal declines in the production of services. On a country level, the largest production changes can be observed for Denmark, with a decrease of 1.4 per cent, and Lithuania, with an increase of 1.8 per cent. National income effects of reforms in different sectors A closer look at the simulated effects on national income from reforms in different areas, shows that industrial liberalisation accounts for the largest share of the overall gains in the region,( 42 per cent), followed by services (32 per cent) and finally agricultural liberalisation (26 per cent). This may seem surprising considering that the industrial sector was comparatively open prior to liberalisation. However, since this is the sector in which most trade takes place, even smaller reforms will lead to great gains in absolute terms. Table 5.1 The different sector's contribution to national income effects (in %) Industrial liberalisation Agricultural liberalisation Services liberalisation TOTAL Denmark Finland Germany Sweden Estonia Latvia Lithuania Poland Norway/Iceland Rest of EU DCs Rest of the World Russia Emerging economies Mature economies All CBSS As a group, the emerging economies acquire the largest gains from agricultural liberalisation, as over half of their total gains come from this area. The country that benefits the most from agricultural liberalisation (in relative terms) is Lithuania (87 per cent), but also Poland and the other two Baltic countries have a lot to gain from liberalisation in the agricultural sector. The largest gains from agricultural liberalisation in the CBSS region come from trade facilitation, followed by removal of export subsidies and finally the elimination of import 8

11 tariffs. The large gains from improved border procedures are mainly due to the positive effects in Russia, whereas the group of emerging countries and Lithuania in particular, has most to gain from the removal of export subsidies. The country Norway/Iceland, which had the highest initial agricultural tariffs, has the most to gain from the removal of import tariffs. 5.2 The different elements' contribution to gains from industrial and agricultural liberalisation (in %) Industrial liberalisaton Agricultural liberalisation Import Trade Export taxes tariffs facilitation TOTAL Import tariffs Export Trade subsidies facilitation TOTAL Russia Emerging economies Mature economies All CBSS As seen previously, the largest gains from liberalisation could be expected from the reforms in the industrial sector. As seen in the table, these gains mainly derive from trade facilitation for industrial goods for all the country groups. In contrast, removing tariffs and export taxes have a negative effect on the group of CBSS countries as a whole. This is due to an expansion in sectors modelled with no (or low) economies of scale at the cost of production in sectors with high economies of scale. On a country level, Germany, Finland and Russia gain relatively the most from industrial liberalisation. Germany obtains more than half of its gains from this area, and most of these gains come from trade facilitation. As was seen in Table 5.1 approximately 30 per cent of each of the three country groups national income gains derives from services liberalisation. The Nordic countries, and especially Sweden and Denmark, acquire over half of their gains from the liberalisation of trade in services, 62 and 56 per cent, respectively. This is because the lowered trade barriers lead to services being available at a lower cost. Studies have often shown that the largest gains from liberalisation comes from trade reforms in the own country. This is also seen in this study, as more than 90 per cent of the total gains of the CBSS-countries come from country s gains from own reforms. It was in the simulation outcome also noted that consumer prices seem to decrease as a consequence of the scenario. A final observation from the main scenario is that there is no evidence of the common concern that wages would be negatively affected from liberalisation. On the contrary, the results indicate an upward pressure on wages both for skilled and unskilled labour. Outcome from the separate NTM-scenario Effects on national income In brief, the simulation results from the separate scenario on Non-Tariff Measures (NTMs) indicate a potential for substantial gains for the CBSS region, approximately 26 bnusd, which is the equivalent of some 0.9 per cent increase in initial GDP, see table below. Russia could receive remarkable gains, almost 3 per cent. However, the results of the individual emerging economies diverge, with Estonia and Latvia experiencing much higher income rises and Lithuania a net loss (Table A6.1). Still, Lithuania has a lot to gain from own liberalisation, as well as from most other countries liberalisation the overall net loss is almost entirely due to effects from Russia s liberalisation. A country s own reduction of NTMs represents the largest source for gains of that country. This is true for the groups of 9

12 mature and emerging economies as well as for Russia. Decomposition of the results with respect to removal of NTM-barriers to agricultural and industrial goods shows that industrial liberalisation contributes far more to the overall gains than agricultural liberalisation, 60 versus 40 per cent (table below). However, for Russia, agricultural liberalisation is approximately as important as industrial liberalisation to its national income gains. Table 6.1 National income gains and contributions by elements Income gains Contributions by elements (%) (% of initial GDP) Agriculture Industry Total Russia Emerging economies Mature economies CBSS Source: Own GTAP-simulation results from NTM-scenario Reducing the NTM-barriers to trade to best practice improves resource allocation significantly in the CBSS region (Table A6.3). Better access to foreign products also facilitates efficiency in imports of goods, as expected. For most countries these two elements dominate the income gains. On the negative side is a minor worsening of terms of trade and a relatively small negative scale economies effect. The latter is the result of changes in production towards expansion in sectors with less potential for scale economies and/or (partial) withdrawal from sectors where higher degree of scale economies are modelled, such as medicines and chemicals and especially in services sectors. This is especially important for Lithuania, whose production of dairy products increases, while production in other sectors decrease. On the contrary, Poland gains from expansion of production in sectors with important scale economies. Russia benefits from positive effects across the board (resource allocation, efficiency in imports, terms of trade and scale effects). Effects on trade The reduction of Non-Tariff-Measures (NTM) to imports of the CBSS countries boosts exports as well as imports with some 4 per cent, see table below. Russia s trade increases more than twice that much. Notably, services net-import declines and contributes positively to trade balances. At a more detailed level, changes in the emerging economies agriculture and services trade develops positively, with strong growth in net-exports. Table 6.2: Overall trade volume changes (%) Exports Imports Mature economies Emerging economies Russia CBSS Source: Own GTAP-simulation results from NTM-scenario Poland, Lithuania and Estonia all experience an increase in the agricultural exports relatively to imports. It can also be noted that the net-imports of the highly protected dairy sector, augments into Russia but also Sweden, while the net-export from many other CBSS countries increases, in particular that of Lithuania. Overall, the CBSS s net-export of industrial goods decreases. 10

13 Final comments In this study liberalisation of different types of trade barriers has been simulated using an economic model. In a world where tariff barriers are becoming less important, the more complex trade structures with non-tariff-measures will play a more important role. In order to better understand the effects and mechanisms of these barriers, this is an area where further analysis is needed. Even though the results from the main scenarios cannot simply be added to the results from separate NTM-scenario, looking at the results jointly could at least give an indication of the additional effects when addressing both these areas. Some of the general conclusions from this study, seen in both liberalisation scenarios, are that the reforms lead to increased trade both within the region as well as with other countries, and to overall income gains. However, on a country level, the results showed that different reforms create different incentives for production, and the net-effect on a country s national income will to a large extent be related to which sectors are expanding / contracting. Finally, an important conclusion from the scenarios was that the largest gains come from a country s own liberalisation. Contact Information For more information on this study, contact the authors Susanna Kinnman and Magnus Lodefalk, analysts at the National Board of Trade. Contact details: susanna.kinnman@kommers.se or The National Board of Trade is the governmental agency in Sweden dealing with foreign trade and trade policy. The Board provides the Swedish government with analyses and input on trade policy matters. The overall objective is to promote open and free trade with transparent rules. 11