Trade Policies for Development and Transition

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David G Tarr

• Publisher: WSPC
• Year: 2016
• ISBN:
  9789813108455
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

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The author has virtually incomparable experience in both providing trade policy advice to more than 25 countries on behalf of the World Bank and also publishing quality journal articles in most of those cases. In this volume, he focuses on his work on: (i) trade policies for countries making the transition from planned to market economies; (ii) his trade policy guideline papers for the World Bank on trade policies for poverty alleviation, uniform tariff policy, adjustment costs of trade liberalization, exchange rate overvaluation, globalization and technology transfer and rules of thumb on regional trade policies; (iii) multilateral, dynamic and environmental issues in trade policy using computable general equilibrium models; (iv) trade policy of the United States in the auto and steel industries; and (v) mathematical methods for modeling. The papers show an unusual combination of policy relevance, advice and impact, with rigor and international trade theory insights.

The papers in this volume have appeared in many of the economics profession's more prestigious journals, including Econometrica, Review of Economic Studies, Quarterly Journal of Economics, Economic Journal, the Journal of International Economics, International Economic Review, European Economic Review, Canadian Journal of Economics, Economic Inquiry, the Journal of Comparative Economic, Review of International Economics, World Economy, the Southern Economic Journal, the World Bank Economic Review, the Japanese Economic Review and the Latin American Journal of Economics. In this book, the author elaborates on the articles by discussing some of the policy contexts for the requests for the work from developing and transition countries to the World Bank, the key trade theory or policy insights, policy recommendations and conclusions and the policy impacts.

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Introduction and Overview

David G. Tarr

In this volume, we reprint my articles on the following subjects: (i) trade policy guidelines; (ii) trade policy in the transition from communist or planned economies to market economies; (iii) unilateral, dynamic and environmental issues in trade using CGE models; (iv) trade policy of the United States in autos and steel; and (v) papers in mathematical economics. The papers in the first section of this volume were designed to help establish the knowledge base for World Bank country economists and others trying to establish trade policies in developing and transition countries that contribute to development and poverty reduction. These are papers on the role of trade policy in poverty reduction, tariff policy, exchange rate overvaluation problems, adjustment costs of trade liberalization, trade and technology diffusion, and rules of thumb on regional economic policy. My co-authors and I have emphasized, however, that there is no “one size fits all” trade policy. Trade policy must be adapted to the conditions of individual countries. The key issue in trade policy is only occasionally simply tariffs, as might be emphasized in textbooks. Non-tariff barriers, the costs of trading across borders, exchange rate overvaluation, regional trade issues, costs of services in trade, adjustment costs and rent-seeking are all issues that I have addressed in my experience of working in more than 25 countries as a trade policy advisor. Determining the primary trade policy problem is one of the first challenges a trade policy advisor must address in diagnosing the country’s trade regime. Probably nowhere was that adaptation to local conditions more important than in the design of trade policies for countries making the transition from communist or planned economies to market economies. The efforts of the former Soviet bloc countries to make this transition to market economies was without historical precedent, and the opportunity to work with these governments on the transition was both extremely challenging and incredibly energizing. The papers in the third section of this volume are based on very innovative computable general equilibrium models that are among my most widely cited papers. In the fourth section of this volume, I reproduce some of my papers on the automobile and steel sectors; the section includes papers based on partial equilibrium, general equilibrium and econometric models. The final section of the volume contains papers in mathematical economics.

In this introductory chapter, I provide a brief introduction to each of the five research topics and then summarize the articles themselves. Since the articles themselves only briefly touch on the policy contexts of the work, I emphasize the policy background to the papers in this chapter and the behind the scene issues a trade economist might have to address in carrying out the work. I also discuss the requests for the work from developing and transition countries to the World Bank, the key trade theory or policy insights, policy recommendations, conclusions and the policy impacts.

The papers in this volume have appeared in many of the economics profession’s more prestigious peer reviewed journals, including Econometrica, Review of Economic Studies, Quarterly Journal of Economics, Economic Journal, Journal of International Economics, International Economic Review, European Economic Review, Canadian Journal of Economics, Economic Inquiry, Journal of Comparative Economics, Review of International Economics, World Economy, Southern Economic Journal, World Bank Economic Review, Japanese Economic Review and the Latin American Journal of Economics. Many of these papers were discussed with governments that requested early versions of the work and, as such, have passed the dual test of being academically rigorous and policy relevant.

Part 1. Trade Policy Guideline Papers

In 1991, World Bank Research Department economists Vinod Thomas, John Nash and others (Thomas, Nash and Associates, 1991) produced a volume on best practices in trade policy reform. During the 1990s, however, the World Bank substantially increased its focus on poverty reduction; and the role of globalization on global poverty came under increased scrutiny, partly reflected in annual large demonstrations during the Word Bank-IMF annual meetings. The international trade group in the World Bank saw the need for an update of Thomas, Nash and Associates (1991). In 2002, Bernard Hoekman, Aaditya Mattoo and Philip English produced Development, Trade and the WTO, A Handbook. This volume was a 55 chapter Handbook for the World Bank designed to be a guide for how international trade generally and the World Trade Organization in particular could contribute to economic development and poverty reduction.

Three of the papers in this section are from the Handbook: (i) a shortened version of the key World Bank paper on trade strategies for poverty reduction; (ii) tariff policy, especially relating to uniform tariffs; and (iii) problems of exchange rate overvaluation. Despite substantial concerns about adjustment costs of trade liberalization, it is surprising that so little had been written on the evidence; a fourth paper summarizes the empirical studies on the adjustment costs of trade liberalization. A fifth paper summarizes the evidence on technology transfer through trade. The last paper develops rules of thumb in regional trade arrangements based on results my coauthors and I had found in several studies we had conducted.

Chapter 2: Rules of Thumb for Trade Policy for Poverty Reduction, Constantine Michalopoulos, Maurice Schiff and David G. Tarr, in Development, Trade and the WTO: A Handbook, B. Hoekman, A. Mattoo and P. English (eds.). The World Bank, 2002

Given the focus of the World Bank on poverty reduction, World Bank country teams were tasked with developing poverty reduction strategies in collaboration with their developing country client governments. In order to assist the country teams with the development of those strategies, the World Bank developed a two volume Sourcebook for Poverty Reduction Strategies (World Bank, 2002). The original version of this paper appeared as chapter 13 of that Sourcebook and as such, represented the World Bank’s view of how trade policy reform fits into a poverty reduction strategy, see Hoekman, Michalopoulos, Schiff and Tarr (2002). The paper that we reproduce here is the chapter in the “Handbook,” which is a shortened version of the “Sourcebook” chapter.

We outline the basic elements of good trade policy for growth and poverty reduction. We focus on policies that impact the poor. The title includes the expression “rules of thumb” in recognition of the fact that policies must be adapted to the specific conditions of particular countries. Further, the chapter emphasizes the need for a variety of complementary policies (including institutional development, macroeconomic stabilization, competition policies, and given their importance for the poor, policies that impact labor and agricultural markets) to accompany trade policy reform. The chapter emphasizes that while trade policy reform is a very important component of a development strategy, trade policy alone is not sufficient for growth and poverty reduction. I mention this latter point, since the World Bank is sometimes falsely accused of recommending trade policy reform alone as sufficient for a development strategy.¹

The chapter concludes by noting that trade policy reform should not wait until everything is in place to facilitate the reform, but some essential pre-conditions are specified. The poor are least able to bear risks, and in the short run trade liberalization may induce losses for some groups. Analysis of policies in the status quo that favor the poor prior to reform is important. General safety nets are first best, but may not exist or be inadequate in many low-income countries. In such situations reforms should not be postponed, but should be implemented gradually, following a pre-announced schedule, and complemented by actions to minimize adverse consequences to the poorest in society.

Chapter 3: On the Design of Tariff Policy: A Practical Guide to the Arguments for and Against Uniform Tariffs, David G. Tarr, in Development, Trade and the WTO: A Handbook, B. Hoekman, A. Mattoo and P. English (eds.). The World Bank, 2002

The original version of this paper was written at the request of the Minister of Trade of the Russian Federation in the late 1990s (Tarr, 1999). I revised and updated this version of the paper when the international trade group of the World Bank research department decided to produce a Handbook on international trade for development. This paper became the central paper on tariff policy in the Handbook.

An effective trade policy is central to the integration of developing countries into the international economic system and the growth that will generate. Tariff policy is the centerpiece of trade policy in a market system. Tariffs are, with very few exceptions, the only acceptable policy tool for protection under the GATT/WTO. They are superior to alternative instruments of protection, such as non-tariff barriers (NTBs) like quotas, licenses and technical barriers to trade (TBTs), because they are less likely to lead to rent seeking and corrupt practices, and because tariffs limit the exercise of domestic monopoly power where it exists whereas NTBs do not.

This chapter examines the arguments for and against a uniform tariff structure. Arguments against uniformity are: terms of trade; “strategic,” infant or restructuring industry considerations; revenue or balance of payments purposes; and tariffs as a negotiating tool at the WTO. Arguments in favor of uniformity are: political economy considerations; administrative convenience; and reduction of smuggling and corruption in customs. We maintain that tariff uniformity is the best choice in practice.

In many circumstances where tariffs are second best policy instruments, such as to raise public revenue or to cope with balance of payments problems, a uniform tariff rate is the most practical and efficient alternative. Where a country may be interested in using the tariff as a bargaining instrument in multilateral negotiations, it is immaterial whether the tariff is uniform or differentiated–the issues have to do with its capacity to use the tariff as a bargaining instrument and what it bargains for. Differentiated tariff protection in support of infant or restructuring industries is typically ineffective at addressing the alleged market failure problem; governments are not very good at picking winners and there are serious dangers that the policy would be overwhelmed by requests for protection from vested interests irrespective of its economic merits.

A uniform tariff conveys a number of advantages, the most important of which is that if the tariff is uniform, the gains to industry lobbying are much smaller (and may be negative), creating a kind of free-rider problem for the lobbying industry that dramatically reduces the incentive to lobby for protection. Then: (1) the level of protection is likely to be lower (the experience of Chile is a dramatic case in point); (2) there is a direct saving of resources from the reduced lobbying; (3) the reduction to the gains from lobbying for protection provides a vastly improved signal to valuable entrepreneurial talent which will thus be encouraged to create better and cheaper products; and (4) the reduction in resources devoted to lobbying will result in less corruption in government, which may have positive spillover effects into other dimensions of government activity.

Chapter 4: Adjusting to Trade Policy Reform, Steven J. Matusz and David G. Tarr, in Economic Policy Reform: The Second Stage, Anne O. Krueger (ed.). The University of Chicago Press, 2000

Notwithstanding the skeptical comments of Rodiguez and Rodrik (2001) and Rodrik, Subramanian and Trebbi (2004), I judge there to be strong evidence of improved incomes and poverty reduction from trade reform when trade reform is part of a comprehensive development strategy. Evidence comes from many studies including Frankel and Romer (1999), Dollar and Kraay (2003; 2004) and Freund and Bolaky (2008). Nonetheless, some policy makers are reluctant to implement trade reform due to fear of excessive adjustment costs. Policy makers may fear they will incur the anger of the owners of displaced resources while the benefits may accrue in later years; but their fears may also be based in part on the fact that there is much less written and known on the subject of the nature, magnitude, and duration of adjustment costs, leading to exaggerated fears of adjustment costs. In this paper, Matusz and I attempted to fill the void in the literature by surveying the evidence on the adjustment costs of trade liberalization, and placing those estimates of adjustment costs in perspective relative to the gains from trade liberalization. An earlier version of this paper appeared as a chapter in the Global Economic Prospects (World Bank, 1997).²

Our key results are as follows: while we find that it is necessary to apply caveats to most of the more than 50 studies we survey, virtually all the studies find that adjustment costs are very small in relation to the benefits of trade liberalization. And those studies that focused on manufacturing employment in developing countries found that employment had typically increased within one year after liberalization. Collectively, the weight of so many studies of various types, all pointing in more or less the same direction, makes it difficult to avoid the conclusion that adjustment costs are relatively very small relative to the benefits of trade liberalization.

The explanation for the low adjustment costs in relation to the benefits is as follows: (1) most importantly, adjustment costs are typically short term and terminate when workers find a job, while the benefits of trade reform can be expected to grow with the economy; (2) estimates of the duration of unemployment for workers in most industries are not high, especially where workers were not earning substantial rents in the original job; (3) in many industries normal labor turnover exceeds dislocation from trade liberalization, so that downsizing where necessary could be accomplished without much forced unemployment; and (4) it has been observed that a significant portion of the resource reallocation after trade liberalization was accomplished through intra-industry shifts, which minimized the dislocation of factors of production. In addition, developing countries would be expected to have comparative advantage in labor intensive industries, so trade liberalization should favor labor.

Chapter 5: Exchange Rate Overvaluation and Trade Protection: Lessons from Experience, Howard J. Shatz and David G. Tarr, in Development, Trade and the WTO: A Handbook, B. Hoekman, A. Mattoo and P. English (eds.). The World Bank, 2002

The key conclusions are the following. Experience shows that protection to defend an overvalued exchange rate will significantly retard the medium to long run growth prospects of the country. In fact, an overvalued exchange rate is often the root cause of protection, and the country will be unable to return to the more liberal trade policies that allow growth without exchange rate adjustment. Worldwide experience has shown that defending the exchange rate has no medium-run benefits, since falling reserves will force devaluation eventually. It is better that the devaluation be accomplished without further debilitating losses in reserves and lost productivity due to import controls.

Howard Shatz and I wrote the first version of this paper as the basis of my one-person World Bank mission to Kazakhstan in March 1999. The Kazakhstan tenge had become significantly overvalued during early 1999. Kazakhstan defended the tenge with bans on imports from Russia of many categories of foodstuffs, prohibitively high tariffs on imports of several categories of products from Kyrgyzstan and Uzbekistan, and threatened “antidumping” actions. The International Monetary Fund (IMF) team had not been able to convince the authorities to adequately devalue the tenge, the protectionist trade actions of Kazakhstan were having a negative impact on growth and these action threatened to incite a trade war.

IMF staff responsible for Kazakhstan agreed that it would be useful for me and Howard Shatz to write a concise survey on the worl...

Table of contents

• Cover
• Halftitle
• Series Editors
• Title
• Copyright
• Dedication
• Contents
• Acknowledgments
• 1. Introduction and Overview
• Part 1: Trade Policy Guidelines Papers
• Part 2: Trade Policy in the Transition from Planned to Market Economies
• Part 3: Multilateral, Dynamic and Environmental Issues in International Trade Using Computable General Equilibrium Models
• Part 4: U.S. Trade Policy in Autos and Steel
• Part 5: Mathematical Economic Models
• Author Index
• Subject Index