___________________________________________________________________________

2017/SOM1/CTI/TPD/003

The Cost of APEC Non-Tariff - Initial Estimates and Ideas for Further Research

Submitted by: New Zealand Institute of Economic Research (NZIER)

Trade Policy Dialogue to Advance Understanding on Non-Tariff Measures in the Food Sector

Nha Trang, Viet Nam 24 February 2017

The cost of APEC non-tariff measures

John Ballingall, Deputy Chief Executive, NZIER APEC Trade Policy Dialogue Nha Trang 24 February 2017

Initial estimates and ideas for further research

For the romantics out there….

For V-Day, my love I sent you my finest treasure It got blocked at the border For a non-tariff measure

2

#TradeValentines

You're far away I might need a freight carrier But the fact you don't like me's The biggest non-tariff barrier

For V-Day, my loveI sent you my finest treasure It got blocked at the border For a non-tariff measure

You're far away I might need a freight carrier But the fact you don't like me'sThe biggest non-tariff barrier

3

http://nzier.org.nz/static/media/filer_public/ac/2d/ac2d99f1-ac0f-4f53-86d3-e1d3d65e096a/wp2016-4_non-tariff_measures_in_apec.pdf

4

WHY DO NTMS MATTER?

Modern trade is dominated by Global Value Chains • Global Value Chains (GVCs) “have become a dominant

feature of the global economy and offer new prospects for growth, competitiveness and job creation for APEC economies at all levels of development” (APEC Leaders’ statement, 2014)

• Over 70% of global trade is in intermediate goods and services and in capital goods (OECD, 2014)

• The average services content of exports for G20 economies is 42% in 2009, and was above 50% for countries such as the US, the UK, India, France and the EU (OECD, 2014)

5

6

Higher transaction costs decrease competitiveness & purchasing power

Environmental standards Import licensing

Quotas Port costs

•TBT •Certification

Tariffs Safeguards

Raw materials

Initial processing

Refining & packaging

To end consumer

Costs along GVC

This increases the importance of removing ‘grit from the engine’

7

ABAC recently recommended that APEC: • Provide opportunities involving the private sector to discuss ways

in which the impact of NTBs can be mitigated as far as possible while still allowing economies to achieve legitimate domestic objectives, taking note of a principled approach to NTBs.

• Provide leadership and support for high quality multilateral, bilateral and regional trade agreements that seek to minimize the range of potential barriers at and behind the border, increase the level of utilization of those agreements by businesses, and ensure coherence and complementarity of multilateral and regional initiatives.

Source: https://www2.abaconline.org/assets/2016/ABAC_Report_2016.pdf

Asia-Pacific tariffs have dropped steadily over time…

8

Source: http://www.statistics.apec.org/index.php/key_indicator/economy_list

…which is shifting business and policy focus towards NTMs

9

WHAT DO WE KNOW ABOUT THE USE OF NTMS IN APEC?

Not all NTMs are ‘bad’: they become NTBs when more trade restrictive than necessary to achieve their goals

10

Source: Adapted from Marshall School (2008)

Quadrant 1: Necessary and intentional NTMs – put in place to protect against known risks. Accepted as legitimate by trading partners. Quadrant 2: Necessary and unintentional NTMs – initially to protect against known risks, now applied differently by each economy. Become unintentional NTBs creating unnecessary transaction costs. Quadrant 3: Unnecessary and unintentional NTMs – designed to address risks, but applied inconsistently between trading partners. Also includes obsolete NTMs that remain in place due to bureaucratic inertia. Quadrant 4: Intentional but unnecessary – protectionist non-trade barriers. Their public policy legitimacy is debated by trading partners.

The use of NTMs in APEC is on the rise

11

Source: WTO I-TIP database

74%

Increase in APEC NTMs 2004-2015

So what’s behind this trend?

Challenges dealing with new goods & services,

new health, environmental &

safety risks

Lack of regional/global

harmonised standards

Complex issues that cut across

regulatory agencies, leading to inconsistencies in application of

policies

Old-fashioned protectionism;

desire to maintain ‘policy space’

12

TPP contains useful provisions on NTMs Chapter Content Implications Customs Requires each Party to ensure

its customs procedures are applied in a way that is predictable, consistent and transparent; judicial review processes

Lower cost of trade, simplified customs procedures for traders, and the expeditious clearance of goods.

Trade remedies

Reaffirms WTO obligations; permits temporary use of special safeguards if increased imports cause “serious injury” to domestic sector; identifies practices to improve transparency and due process

Parties retain a degree of policy space but encouraged to be transparent and use remedies that are not overly trade-distorting

SPS Reinforces and builds upon WTO SPS Agreement; ensures that SPS measures do not create unjustified obstacles to Trade; dispute resolution process

SPS measures more likely to be based on sound science; improved exporter understanding of SPS measures; greater certainty for firms (dispute resolution)

TBT Builds on WTO TBT Agreement; seeks to remove unnecessary TBT, enhance transparency and promote regulatory good practice and cooperation

Sector-specific annexes add clarity; TBT Committee established to promote consistency and avoid trade-distortion

GVCs Promotes the development and strengthening of supply chains in order to integrate production, facilitate trade and reduce the costs of doing business within TPP

Greater outreach by officials to businesses in GVCs about how to take the opportunities presented by TPP

13

But it’s not clear how much these will ‘bite’ to actually reduce NTMs costs

14

What’s the size of the prize? Our modelling approach • We use ad-valorem equivalents (AVEs) from

Adler et al (2009) and Kee et al (2009) - Non-automatic licenses, quotas, prohibitions,

administrative pricing, voluntary export price restraints, variable charges, monopolistic measures, technical regulations, and domestic support subsidies

- Caveat: AVEs used are from 2000 and will likely have changed in nature and severity

• We apply these to 2011 import data from GTAP version 9 database - Caveat: trade-weighting approach may underestimate

the trade-chilling impacts of NTMs

15

NTMs raise transaction costs three times as much as tariffs in APEC…

16

Source: NZIER

The trade-weighted average AVE of NTMs in APEC is 9.7%, compared to just 2.9% for tariffs

… and cost the APEC region US$790 billion

17

Source: NZIER

Small reductions in NTMs will enhance Asia-Pacific firms’ competitiveness • We have not modelled the effects of removing a

portion of these NTMs • Hoekman and Nicita (2011) suggest halving

AVEs of NTMs would increase global trade by 2 percent to 3 percent

• Bradford (2005) suggests gains from NTM removal in OECD would be > double the gains from tariff elimination

18

And businesses are clear that they want to see more coherence in RTAs

“Trade agreements often handle value chains incoherently, and crucial provisions appear in many chapters of an agreement.

For example, a value chain business process may require streamlined customs and border formalities, unrestricted data flows, common standards and certification requirements, strong intellectual property rights, investments that enable a company to locate some operations abroad, and the mobility of some personnel.

Each of these issues is typically addressed in a different chapter of a trade agreement”

19

20

WHAT NEXT?

Finding the sweet spot for durable trade policy solutions

21

Politicallyfeasible

Administrativelyfeasible

Durablesolution

Technically feasible,and possible withininstitutional constraints,but non-responsive todomestic andinternational politicalconcerns

Politically achievableand institutionallypossible, but ineffectivein achieving ultimateobjectives

Politically desirable andtheoreticallyachievable, butimpossible to sustaininstitutionally

Effectivepolicy

Source: Nixon, C. (2016). ‘Durable policy approaches: Framework development and literature review’. NZIER Public Discussion paper 2016/2. http://nzier.org.nz/static/media/filer_public/b3/19/b3191379-4adf-4686-989f-1dd9eb973410/wp2016-2_final_durable_policy_bargains.pdf

There is political support “The importance of addressing NTMs to reduce costs to businesses operating in the APEC region has been acknowledged through their inclusion in the Boracay Action Agenda and APEC Individual Action Plans. We encourage officials to explore further work on NTMs, including through workshops”

22

How might this happen in the Asia-Pacific region? • Via WTO (perhaps…) • Continued attention in RTAs

• Ongoing efforts via APEC - Research to quantify impacts of NTMs, linking with

World Bank/OECD/UNCTAD efforts - Assistance to economies to categorise their NTMs and

consider the use of ABAC’s NTMs principles - Encouraging business engagement to help prioritise - Capability-building assistance to help economies

understand the impact of NTMs on GVC participation 23

Takeaways NTMs are becoming more commonly used

Some are for valid policy reasons; others less so

NTMs impose costs along GVCs in APEC; three times those from tariffs

APEC-wide cost of NTMs is ~US$790 billion

Even a small decrease in the use of the more trade-distorting NTMs would deliver significant trade and living standard gains in APEC

And even the most appropriate NTMs could be delivered more efficiently

But more concerted effort is required to achieve this, both in negotiations and in research

24