Using data on the preference and utilization rates of NAFTA for Mexican exports to the United States in 2001, this chapter proposes a method to estimate the likely costs of different Rules of Origin (ROO) for final and intermediate goods, and compares these results with those obtained using the synthetic index proposed by Estevadeordal (2000). Econometric results indicate that changes in tariff classification are more costly for final goods than for intermediate ones, and that technical requirements are the most constraining. For activities subject to regional value content minima, illustrative simulations are carried out to indicate what tariff preference margin would be necessary to compensate for the import content minima. Cost estimates suggest that, at least in the case of NAFTA, preferential market access is quite small, leading to speculations that these conclusions may carry over to other North-South preferential schemes.
This paper reports panel gravity estimates of aggregate bilateral trade for 130 countries over the period 1962-96 in which the coefficient of distance is allowed to change over time. In a standard specification in which transport costs are proxied by distance only, it is found paradoxically that the absolute value of the elasticity of bilateral trade to distance has been significantly increasing.The result is attributed to a relatively larger decline in costs independent of distance (such as handling) than in distance-related costs (e.g. oil price). An extended version of the model that controls for these two factors eliminates this positive trend without reversing it. However, when the sample is split into two groups ("rich-rich" and "poor-poor"), the paradox is maintained for the "poor-poor" group. While not conclusive, these results are consistent with the view that poor countries may have been marginalized by the current wave of globalization.
It has been widely argued that, with the decline in trade costs, the importance of distance has declined over time. On the other hand, most gravity models find that the importance of distance on bilateral trade has increased over time. This puzzle is examined here. The paper develops a new measure of the distance of trade (dot) and shows that the dot falls over the period 1962-2000 for the average country in the world, with the number of countries with declining dot about double those with increasing dot. This implies an increased importance of distance over time. The paper argues that this result can be compatible with declining trade costs. Actually, we show that the decision about what proportion to trade at different distances does not depend on the level of trade costs but on the relative importance of its components. The paper also analyzes the impact on the dot of other determinants such as regional integration, changes in the geography of growth or in real exchange rates. Finally, the paper provides an empirical analysis of the evolution of the dot and explains most of its negative trend.
Building on earlier work by Estevadeordal (2000), we construct a synthetic index (R-index) intending to capture the restrictiveness of rules of origin in preferential trading agreements. The R-index is applied to NAFTA and the Single List of the EU's PANEURO system covering all of the EU's preferential trade agreements. The R-index highlights how a common set of rules of origin can affect countries differently depending on their export structures, and how their complexity varies across sectors. Having controlled for the extent of tariff preference at the tariff-line level, the R-index contributes to explain differences in the rate at which preferences are used. Finally, we compute estimates of the compliance costs associated with rules of origin under NAFTA and under PANEURO and find them to be between 6.8% of good value (NAFTA) and 8% (PANEURO).
This paper surveys the empirical literature on export and import diversification and its linkages with growth. We review widely used measures of diversification and the evidence about their evolution focusing on how export diversification relates to trade liberalization and economic development. We also discuss the linkages between trade diversification and productivity at the firm and industry level, highlighting new advances on the linkages between import diversification and productivity.
The ‘distance effect' measuring the elasticity of trade flows to distance has been found to be rising since the early 1970s in a host of studies based on the gravity model, leading observers to call it the ‘distance puzzle'. However, this puzzle is regularly challenged by new developments in the specification of the gravity equation or in its estimations. We propose an original survey on the existing methods used to quantify the distance puzzle – basically the computation of an average distance of trade, a meta-analysis on existing gravity papers and the implementation of recent econometric developments, all on a well-specified gravity equation both in cross-section and panel data. We apply all these methods to a unique large database (124 countries from 1970 to 2006). It appears that if all these new developments can change the amplitude of the increase in the trade elasticity to distance, none solve the distance puzzle. We confirm the existence of this puzzle and identify that it only applies to low-income countries which exhibit a significant rising distance effect on their trade of around 18% between 1970 and 2006 while the distance ‘puzzle' for trade within richer countries disappears.
Least developed countries (LDCs) hoped that the DOHA round would bring them greater market access in the Organization for Economic Cooperation and Development countries than for non-LDCs. Using HS-6 tariff level data for the United States and the EU for 2004, this paper estimates that, once the erosion from preferential access into the EU to non-LDCs is taken into account, LDCs have about a 3% preferential margin in the EU market. In the US market, in spite of preferences under the African Growth and Opportunity Act(AGOA), on a trade-weighted basis, LDCs are discriminated against. Under various ‘Swiss formulas’ for tariff cuts, effective market access for LDCs in the EU will be negligible and still negative in the United States. If the United States were to apply a 97% rule (i.e, duty-free quota-free access for all but 3% of the tariff lines), LDCs could increase exports by 10% or about USD 1 billion annually. Effective market access is further reduced by complicated Rules of Origin (RoO) applied by the EU and the United States. Furthermore, generally, the most restrictive RoO fall on products in which LDCs have the greatest preferential market access.
Using an “event analysis”, this paper complements the cross-country approach to the study of fiscal correlates of growth. Data on fiscal expenditures and growth for a database of 140 countries (118 developing countries) over 1972–2005 are reorganized around turning points providing a summary but encompassing description of “what is in the data”. For this sample, the probability of occurrence of a fiscal event is about 10%, and, the probability of a growth event once a fiscal event had occurred is around 26%. For developing countries, fiscal events followed by growth events occur under situations of (i) significantly lesser deficit, (ii) fewer resources devoted to non-interest general public services and (iii) shift in primary expenditures toward transport & communication. After controlling for the growth-inducing effects of positive terms-of-trade shocks and of trade liberalization reform, probit estimates indicate that a growth event is more likely to occur in a developing country when surrounded by a fiscal event. Moreover, the probability of occurrence of a growth event in the years following a fiscal event is greater the lower is the associated fiscal deficit, confirming that success of a growth-oriented fiscal expenditure reform is associate with a stabilized macroeconomic environment (through limited primary fiscal deficit).
We study the response of regional employment and nominal wages to trade liberalization, exploiting the natural experiment provided by the opening of Central and Eastern European markets after the fall of the Iron Curtain in 1990. Using data for Austrian municipalities, we examine differential pre- and post-1990 wage and employment growth rates between regions bordering the formerly communist economies and interior regions. If the «border regions» are de fined narrowly, within a band of less than 50 km, we can identify statistically significant liberalization effects on both employment and wages. While wages responded earlier than employment, the employment effect over the entire adjustment period is estimated to be around three times as large as the wage effect. The implied slope of the regional labor supply curve can be replicated in an economic geography model that features obstacles to labor migration due to immobile housing and to heterogeneous locational preferences.
