Transcript Slides Session 6, Escaith

Global Value Chains and Tariff
Policy:
Effective Protection in an
Inter-Connected World Economy
Antonia Diakantoni
Hubert Escaith
WTO
WIOD CONSORTIUM MEETING, 25-26 MAY 2011
Sevilla, Spain.
Effective Protection Theory
• Nominal tariffs affect the domestic price of traded
goods
• The higher the tariff, the higher the:
• Benefits for domestic firms producing the good
• Costs for domestic firms using the good as input
• Effective Protection for any given industry:
• Weights additional production costs against the additional
benefits determined by nominal tariffs Effective Protection
Rate (EPR)
• Tariff Escalation:
• Nominal tariffs increase with the degree of processing
• Effective Protection is low for producers of intermediate
goods and high for producer of final goods
Global Value Chains, Tariff
Escalation and Trade in Tasks
• Steep Tariff Escalation was a key feature of import
substitution industrialization policies
• Low nominal tariffs on intermediate inputs or capital goods
• High tariffs on manufactured final (consumer) goods
• But since the end-1980s, industrialization of developing
countries is increasingly export-led
• Processing imported inputs as part of international supply
chains
• Trade in final goods displaced by trade in processed
intermediates embedding the domestic value added (trade
in tasks)
Trade in Tasks and Effective
Protection Rate
• From an input-output perspective, high sectorial EPR protects primary
factors in this industry and increases the “price” of the value added
(compared to a “free market” situation)
• It is an incentive for moving productive factors (labour and investment) to
the protected sector
• But reduces international price competitiveness as GVCs blur the
dichotomy between tradables vs. non-tradables
(trade in tasks=trade in value added)
• Expectations :
• The smaller the domestic economy, the lower the incentive for high EPRs
• Because trade within GVCs is very responsive to transaction costs, we
expect a reduction in EPRs peaks during the 1990s for manufactured goods
• The higher the incidence of GVCs and the length of supply chains, the
flatter the nominal protection ditribution (lower EPR)
Research Proposal
• Analyse the evolution of sectorial EPRs
• From 1995 to 2005
• For a selection of developed and developing countries: USA and 9 Asian
economies
• Using IDE-JETRO Asian Input-Output data base
• To disentangle the role of changes in tariff policy from the changes in
production structure and technology
• Explore specific patterns related to the specificity of industries
or the length of international supply chains (in particular, vulnerability to a
supply shock affecting prices)
• Relate stylised facts with the recent literature/
discussion on GVCs
Research Proposal (2)
• Descriptive and Exploratory Data Analysis
… to establish stylized facts
• Counterfactuals to separate the role of tariffs from the
changes in production structure:
1. Controlling for technical coefficients and changing
tariffs
2. Controlling for tariffs and changing technical
coefficients
• Relating observation with the incidence of price shocks
in a “trade in tasks” framework (production networks)
 Approximating the length of international
supply chains through Average Propagation Length
Some preliminary results: EPR 1995-2005
Simple average of countries and sectors
Comparison of China's nominal
and EPR rates (2005)
Average propagation length of a supply shock
index 100 = highest sectoral value, 2008
Length weighted by size of shock (Ghosh) from industrial and electronic
products, non-domestic effects only.
Caveats (besides numerous data issues):
EPR is a descriptive more than a normative tool
• Positive theory: tariffs affect the allocation of resources (the
«raison d’être» of protectionism)
… But they also eventually affect consumption and (potentially
at least) terms of trade
EPR is a partial equilibrium tool, but
Indirect effects (e.g. substitution) would need to be modelled
through General Equilibrium Models.
• Comparative statics (e.g. 2005 vs. 1995) controlling separately
for changes in tariffs and changes in production structure:
• Will shed some light on substitution effects
• But cannot isolate them from other changes in the
institutional and economic environments.
Global Value Chains and Tariff Policy:
Effective Protection in an
Inter-Connected World Economy
Antonia Diakantoni
Hubert Escaith
WTO
The “Made in the World” initiative has been launched by the WTO to support
the exchange of projects, experiences and practical approaches in measuring
and analysing trade in value added.