1. Standards Harmonization as Export Promotion Marion Dovis University of Aix-Marseille Mlise Jaud The World Bank Policy Seminar on Firm-level and export diversification in the ERF Region March 21, 2014 Cairo, Egypt

2. Motivation I Increasing role of non-tariff measures (NTMs) as tariffs continue to fall Increasing number of Regional Integration Agreements involve NTM harmonization, e.g. Morocco Effect of NTM harmonization on trade is complex Unlike tariff: not necessarily welfare-reducing or discriminatory Affects access to both foreign and domestic markets Limited evidence on the impact of NTMs harmonization on firms export performance => We examine the effect of NTM harmonization on developing countries domestic firms export performance. 3. Motivation II What are we talking about? NTMs are requirements on product characteristics labeling, price control and quantity, and conformity assessment, that define conditions for access to a given market NTMs harmonization btw 2 countries adopt a common standard which may be one of theirs or a third one (regional, i.e. new, or existing international) Morocco: vigorous effort to modernize and harmonize with international standards - largely mandated under the Association Agreement with the EU and WTO agreements 4. This Paper I Q: How do NTM harmonizations affect firms export performance? Whats new? 1. Data : unique merged NTM-customs dataset for Morocco (2002-2010) Measure of import competition at HS6 digit: NTM harmonization 1. Estimation strategy: DiD approach: we relate a change in non-tariff protection associated with NTM harmonization with change in domestic firms exports Exploit waves of NTM harmonization - with dates that vary across products and estimate the within firm-product effect of harmonization Focus on incumbent firms isolate import competition channel Identification issues: reverse causality, omitted variable bias 5. This Paper II Underlying assumptions: 1. Change in non-tariff measures have important impact on the competitive pressure faced by domestic firms Harmonization translated into implementation of stricter standard relative the one previously in place Exporters sell on the domestic market: over 60% of exporting manufacturing firms are active on the domestic market (census data), drop MNC, ZF 1. Incumbent firms are already compliant. Firm that export a given product to harmonized destination markets throughout the sample period: 75% of incumbent transactions are with HIC Not affected by compliance cost of stricter domestic standard Export cost unaffected => Change in the non-tariff protection may affects incumbent firms export performance through changes in level of competition they face on the domestic market and/or through the reaction of foreign demand. 6. At aggregate level: Positive effect of standard harmonization on trade flows lack of harmonization of standards and technical regulations is detrimental to trade (Otsuki, Wilson and Sewadeh, 2001; Gebrehiwet, Ngqangweni and Kirsten, 2007; Fontagn et al., 2005) Harmonization of domestic food standards on international ones had a positive and significant impact on exports (Mangelsdorf, Portugal-Perez and Wilson, 2012) Harmonization and market structure Chen and Mattoo (2004) harmonization on regional standards improves market access for out-of-bloc exporters from industrial countries, while reducing it if they were from developing countries. Harmonization of developing countries on developed countries standards as part of regional agreements reinforce hub-and-spoke trade structures at the expense of South-South trade (Disdier et al., 2012). At the firm-level Reyes (2012) impact of EU harmonization on US firms export performance: positive impact on firms ability to enter the EU market crowding out of developing countries producers. Augier, Cadot and Dovis (2013) harmonization of Moroccan domestic standards with international ones: positive impact of firms profitability and productivity. 6 Existing Literature 7. 7 What should we expect Possible impacts: 1. Competition effect on the domestic market Limit competition from low income producers the standard is tougher to meet for foreign producers than for domestic ones. Exit of firms from export. Increase competition from High-income producers the trade cost of foreign exporters remains unchanged. Entry of firms from exports. 2. Return to scale effect Enable incumbent firms to exploit economies of scales through the introduction of their product on the domestic market 3. Reputation effect Selling harmonized product will give the opportunity for firms to benefit from a reputation effect on high-income markets 8. 8 Data 1. Moroccan customs: All annual export transaction flows between 2002-2010 HS 10-digits level, in a four-dimensions panel: firm-year-product-partner (No data on firms characteristics) 2. NTM data: New database from World Bank National inventories of all trade regulations For each HS6 products whether a NTM is in place codes and whether it is harmonized with international regulations => Merged customs and NTM data at the product HS 6- digit level 9. 9 NTM Data I Harmonization took place in waves NTM harmonized with an international standard represent for 14% of NTMs adopted in the Moroccan economy over the period Year # NTM domestic # NTM harmonized Type NTM A B D E F P 2002 1024 31 537 506 12 2003 154 91 60 91 94 2004 313 0 313 2005 164 25 189 2006 250 147 91 161 69 76 2007 67 5 72 2008 11 15 11 15 2009 38 32 11 30 29 2010 17 2 4 12 3 2011 1024 31 817 241 1 80 2012 154 91 30 14 10 3 10. 10 In aggregate and at the firm level : harmonized products represent a growing share in the number of product exported and the share of exports. Customs-NTM Data, 2002-2010 Year N products Total export N firms Average firm N products Export Count Harmonize d product (%) Value (million USD) Harmonize d product (%) Count Harmoniz ed product (%) N destination s Count Harmonized product (%) Value (thousan d USD) Harmonized product (%) 2002 2246 1% 6994 0% 4562 2% 2.3 5.1 1% 1534 1% 2003 2145 3% 7924 2% 4566 6% 2.4 4.9 5% 1737 3% 2004 2174 3% 8754 3% 4797 6% 2.3 4.6 6% 1826 3% 2005 2235 3% 9265 4% 4839 9% 2.3 4.5 7% 1916 4% 2006 2379 8% 10373 6% 4761 19% 2.4 4.9 17% 2180 8% 2007 2462 8% 12129 7% 4749 20% 2.5 5.2 18% 2556 7% 2008 2520 9% 15343 6% 4789 21% 2.5 5.1 18% 3206 8% 2009 2479 9% 11018 9% 4617 22% 2.4 4.8 21% 2388 9% 2010 2509 9% 13714 8% 4563 22% 2.5 4.7 22% 3007 9% Note: Harmonized products are products that underwent harmonization. Firms exporting harmonized products are defined as firms exporting at least one products affected by harmonization. 11. Estimate effect of product-specific treatment on firms export performance across destinations, with firm-product and time effects Investigate import-competition channel : focus on incumbent firms export a given product to harmonized destination markets throughout the sample period Not affected by compliance cost of stricter domestic standard Change in the non-tariff protection affects incumbent firms export performance through changes in level of competition they face on the domestic market. Yfdpt = log export quantity in kg or log export UV or a dummy variable coding alternately (i) firm-product entry taking value 1 if firm f enters the export market with product p in year t, and (ii) product creation taking value 1 if firm f exports a new product p in year t 11 Empirical Strategy Yfdpt =+1NTM pt1 harm +2NTM pt mor +X fdpt +fp +d +t +fdpt (1) or Yfdpt =+1NTM pt1 harm * Incumbentfp +2NTM pt1 harm * NonIncumbentfp +3NTM pt mor +X fdpt +fp +d +t +fdpt (2) 12. 12 Export quantity Unit Value (1) (2) (3) (4) NTMharm t-1 0.0713* -0.0268 (0.0377) (0.0190) NTMharm t-1*Incumbent 0.1700*** -0.0538* (0.0606) (0.0311) NTMharm t-1*NonIncumbent -0.0102 -0.0045 (0.0563) (0.0204) NTMmor -0.0440 -0.0453 -0.0033 -0.0029 (0.0395) (0.0394) (0.0216) (0.0216) Nbexporters 0.4107*** 0.4105*** -0.0154*** -0.0153*** (0.0105) (0.0105) (0.0031) (0.0031) Tarifft-1 -0.0273*** -0.0274*** -0.0132*** -0.0131*** (0.0099) (0.0099) (0.0039) (0.0039) Import 0.2380*** 0.2387*** 0.0005 0.0004 (0.0183) (0.0183) (0.0072) (0.0072) Constant 7.1944*** 7.1970*** 2.9615*** 2.9608*** (0.1739) (0.1738) (0.1129) (0.1129) Fixed Effects product-firm year destination Observations 289.496 289.496 289.496 289.496 R-squared 0.819 0.819 0.925 0.925 Robust standard errors in parentheses clustered by product-year. * significant at 10%; ** significant at 5%; ***significant at 1%. Main Result: Standards Harmonization, Import Protection and Firm Exports 13. 13 Destination Income Effect: Proxy for Demand for Harmonized Products 14. 14 Standards Harmonization Promotes Existing Firms Entry into Harmonized Products Export 15. 15 Standards Harmonization : by sectors 16. 16 Standards Harmonization and Spillover Effects Promotes Existing Firms Entry into non-harmonized Products Export Within Same Sector 17. 17 Standards Harmonization Effects Persist Over Time 18. 18 Export quantity Unit value All High income No high income All High income No high income (1) (2) (3) (4) (5) (6) Excluding firms in top & bottom 1% (total export) NTMharm t-1*Incumbentfp 0.1283** 0.1476** 0.0450 -0.0513 -0.0692* 0.0171 (0.0583) (0.0706) (0.0983) (0.0315) (0.0358) (0.0414) NTMharm t-1*No Incumbentfp -0.0079 -0.0301 0.0195 -0.0038 -0.0118 0.0547 (0.0555) (0.0647) (0.0957) (0.0205) (0.0233) (0.0416) Observations 286.475 246.128 40.347 286.475 246.128 40.347 R-squared 0.815 0.812 0.880 0.924 0.925 0.937 Robust standard errors in parentheses clustered by product-year. * significant at 10%; ** significant at 5%; ***significant at 1%. Robustness Checks I : Intensive Margin Excluding top and bottom 1% of firms in our sample 19. 19 Entry firm-product Product creation All High income Non- high income All High income Non- high income (1) (2) (3) (4) (5) (6) All sectors NTMharm t-1 0.0131 0.0061 0.0028 0.0364*** 0.0384*** -0.0017 (0.0185) (0.0209) (0.0288) (0.0113) (0.0131) (0.0151) Observations 286.475 246.128 40.347 286.475 246.128 40.347 R-squared 0.737 0.733 0.812 0.758 0.753 0.849 Observations 286.475 246.128 40.347 286.475 246.128 40.347 R-squared 0.204 0.198 0.344 0.181 0.181 0.295 Robust standard errors in parentheses clustered by product-year. * significant at 10%; ** significant at 5%; ***significant at 1%. Robustness Checks I : Extensive Margin Excluding top and bottom 1% of firms in our sample 20. 20 Robustness Checks II : Import tariffs 21. 21 Robustness Checks III : Cumulated number 22. 22 Mean coefficient Mean S.E Mean t- stat Replication number Dependent Variable (1) (2) (3) (4) Export quantity Baseline 0.025 0.078 0.321 1000 Incumbent 0.082 0.137 0.599 1000 Incumbent and high income sample 0.224 0.182 1.231 1000 Export growth of quantity Baseline 0.052 0.154 0.338 1 000 Incumbent 0.206 0.171 1.205 1000 Incumbent and high income sample 0.164 0.194 0.845 1000 Unit value Baseline 0.043 0.088 0.489 1000 Incumbent 0.021 0.136 0.154 1000 Incumbent and high income sample 0.035 0.149 0.235 1000 Product creation Baseline -0.013 0.020 -0.650 1000 high income sample -0.050 0.052 -0.961 1000 No high income sample 0.003 0.059 0.051 1000 Robustness Checks III : Placebo 23. Estimate the within firm-product effect of standard harmonization on firms exports 1. Harmonization of domestic NTM affect the export performance of domestic firms through changes in the level of competition they face and increasing return to scale. Increased exports of incumbent firms and reduced their marginal production cost At the extensive margin expansion of portfolio towards harmonized products 1. Effect vary with destination demand for harmonized product suggesting a reputation effect: Standard harmonization only confers exporters with a competitive edge in high income destination markets where demand for harmonized products is high Similarly at the extensive margin. 1. Effect is sustained over time Harmonization of developing countries domestic standards with stricter international regulations may serve as a policy instrument to promote domestic firms exports. Concluding Remarks 24. 24 Disentangle more precisely effects : distinguishing competition effect versus return to scale effect versus reputation effect Next Steps 25. 25 Thank You