How preferential is preferential trade?

In a paper on “How preferential is preferential trade?” we assess a central aspect of these preferential trade agreements: tariff preferences, using a new dataset on preferential and non-preferential applied tariffs, constructed by the International Trade Center and the World Bank. The dataset covers a total of 5,203 products at the HS6-digit level, 199 reporters and 239 partners, representing approximately 97 percent of world imports in 2016.

 Three main findings arise from this analysis.

1.     PTAs have significantly widened the scope of tariff-free trade. Whereas 42 percent of the total value of trade traded free under MFN rates in 2016, PTAs have fully liberalized an additional 28 percent of global trade (table 1).

Table 1: Trade-Weighted National Most-Favored Nation (MFN) and Applied Tariff Rates

 Source: Espitia et al. 2018.

Notes: Tariff information is not available for 4 percent of 2016 global trade from or to unspecified countries.

2.     The extent of preferential liberalization varies significantly across countries and sectors. Around 70 percent of countries have reduced trade-weighted average preferential tariffs to less than 5 percent (see figure 1), but PTAs have not been able to eliminate the high levels of protection in some low-income countries and in agricultural products, textiles, and footwear (see figure 2).

Figure 1: Preferential liberalization has reduced trade-weighted average tariffs rates to less than 5 percent for more than two-thirds of countries

Source: Espitia et al. 2018.

Figure 2: Although preferential liberalization has targeted highly protected sectors (MFN tariffs greater than 15%), agricultural products, textiles and footwear remain pockets of protection

Source: Espitia et al. 2018.

3.     While the average preferential margin for trade covered by PTAs is low because one-fifth of world trade under preferential agreements is already duty free, more than a quarter of world trade is subject to an average preference margin of 7.4 percent. Considering competition from preferential and non-preferential sources, however, only 5.2 percent of global exports benefited from a preferential advantage of over 5 percent and only 3.3 percent of global exports suffered from a preferential disadvantage higher than 5 percent.

These findings are based on potentially applied tariffs. In practice, preferential duties are not granted automatically to all potentially eligible products. An assessment of the scope of preference utilization for the sub-sample of EU imports from its trading partners suggests that not all eligible imports take advantage of preferences, because of impediments such as restrictive rules of origin, and therefore actual preference margins are generally lower than potential margins.

The full paper can be downloaded here

Food Prices and the Multiplier Effect of Export Policy (with Paolo E. Giordani and Michele Ruta)

This paper studies the relationship between export policy and food prices. We show that, when individuals are loss averse, food exporters may use trade policy to shield the domestic economy from large price shocks. This creates a complementarity between the price of food in international markets and export policy. Specifically, unilateral actions by exporting countries give rise to a “multiplier effect”: when a shock in the international food market drives up (down) its price, governments respond by imposing export restrictions (subsidies), thus exacerbating the initial shock and soliciting further export activism. We test this theory with a new dataset that comprises monthly information on trade measures across 125 countries and 29 food products for the period 2008-10, finding evidence of a multiplier e¤ect. Global restrictions in a product (i.e. the share of international trade covered by export restrictions) are positively correlated with the probability of imposing a new export restriction on that product, especially for staple foods. Large exporters are found to be more reactive to restrictive measures, suggesting that the multiplier effect is mostly driven by this group. Finally, we estimate that a 1 per cent surge in global restrictions increased international food prices by 1.1 per cent on average during 2008-10. These findings contribute to inform the broader debate on the proper regulation of export policy within the multilateral trading system.

The full paper can be downloaded here

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Deep integration and production networks: an empirical analysis (with Gianluca Orefice)

In this paper, the two way relationship between deep integration and production networks trade is investigated. Deep integration is captured by a set of indices constructed in terms of policy areas covered in preferential trade agreements. An augmented gravity equation is estimated to investigate the impact of deep integration on production networks. The results show that on average, signing deeper agreements increases production networks trade between member countries by almost 35 percentage points. In addition, the impact of deep integration is higher for trade in automobile parts and information and technology products compared with textiles products. To analyse whether higher levels of network trade increase the likelihood of signing deeper agreements the literature on the determinants of preferential trade agreements is followed. The estimation results show that, after taking into account other PTAs determinants, a ten per cent increase in the share of production network trade over total trade increases the depth of an agreement by approximately 6 percentage points. In addition, the probability of signing deeper agreements is higher for country pairs involved in North-South production sharing and for countries belonging to the Asia region.

The full paper can be downloaded here

Offshoring and migration in a world with policy spillovers (with Cosimo Beverelli and Gianluca Orefice)

Using a trade in task model that extends the one of Ottaviano, Peri, and Wright (2010) to three countries, we study the effects of immigration and offshoring costs on employment. Tasks can be performed by migrants, offshore workers or natives, with sorting along a continuum of task determined by cost minimization. For two alternative specifications of the model – one in which the ordering of low-end and intermediate tasks is pinned down by worker characteristic and one in which it is pinned down by country characteristics – we derive testable predictions on `direct’, `domestic spillover’ and `international spillover’ effects of migration and offshoring costs on the number of migrants and the number of offshore workers. Direct effects refer to the impact of own migration (offshoring) costs on number of migrant (offshore) workers. Domestic spillovers capture the effect of own migration (offshoring) costs on the number of offshore (migrant) workers. International spillovers refer to the direct effect of country j’s migration (offshoring) costs on country i’s migration (offhoring), and to the indirect effect of country j’s migration (offshoring) costs on country i’s offshoring (migration). Overall, we find strong support of negative direct effects, mild support for domestic spillover effects and very limited support for international spillover effect, leading to conclude that the second model specification is a better fit of the data. Two broad policy implications follow. First, host countries can affect the number of migrants by acting both on bilateral migration policies and on bilateral offshoring policies. Second, de jure discriminatory policies on migration or offshoring need not be de facto so.

The full paper can be downloaded here

What constrains Africa’s exports ? (with Caroline Freund)

This paper examines the effects of transit, documentation, and ports and customs delays on Africa’s exports. The authors find that transit delays have the most economically and statically significant effect on exports. A one-day reduction in inland travel times leads to a 7 percent increase in exports. Put another way, a one-day reduction in inland travel times translates to a 1.5 percentage point decrease in all importing-country tariffs. By contrast, longer delays in the other areas have a far smaller impact on trade. The analysis controls for the possibility that greater trade leads to shorter delays in three ways. First, it examines the effect of trade times on exports of new products. Second, it evaluates the effect of delays in a transit country on the exports of landlocked countries. Third, it examines whether delays affect time-sensitive goods relatively more. The authors show that large transit delays are relatively more harmful because of high within-country variation.

The full paper can be downloaded here

Determinants of Firm Location: Empirical Evidence for France

This paper analyzes the effects of local externalities on the probability of starting a new economic activity. We use firm-level data and geographic information on French zip-codes for 1993-2002. Poisson and Negative Binomial panel data models are estimated as they naturally allow for large sets of location choices with frequent zero outcomes and control for unobserved zip-code heterogeneity. To measure the geographic extent of location externalities we compute localization, urbanization and congestion variables for neighboring regions. We separately analyze the scale effects stemming from exporting and non-exporting firms. Our results show that agglomeration economies at zip-code level strongly effect the location decision of industrial establishments and find the presence of agglomeration shadows, one of the core predictions of the standard New Economic Geography formulations.

The full paper can be downloaded here

Trade Liberalization and New Exporters’ Size: A Test of Heterogeneous Firm Models (with Rosen Marinov and Virginia Di Nino)

This paper tests an empirical implication of heterogeneous firm models along the lines of Melitz (2003) in the context of falling trade costs. Using the EU’s intensive liberalization phase (1993-2002) as a natural experiment, we investigate freer trade’s impact on the frequency of market reorientation across the productivity distribution of active firms to shed light on the presence of a minimum productivity (size) threshold for profitable sales abroad. Contrary to the models’ predictions, firms that switch from non-exporting to exporting over the studied period are not concentrated in a particular size range. Our findings, based on a rich data set of French manufacturing enterprises, suggest a scope for fine-tuning of the theoretical framework.

The full paper can be downloaded here