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Assessment of economic benefits generated by the EU Trade Regimes towards developing countries Volume I Directorate-General for International Cooperation and Development, EU Development Policy and International
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Assessment of economic benefits generated by the EU Trade Regimes towards developing countries Volume I Directorate-General for International Cooperation and Development, EU Development Policy and International Cooperation, Policy and Coherence, Economic Analysis Team. June 2015 Disclaimer The content of this report does not reflect the official opinion of the European Union or of its Member States. Responsibility for the information and views expressed in the report lies entirely with the authors. Author(s): Martin Hvidt Thelle (project director) Dr. Tine Jeppesen Dr. Christian Gjødesen-Lund Professor Johannes Van Biesebroeck More information on the European Union is available on the Internet (http://europa.eu). Cataloguing data can be found at the end of this publication. ISBN: DOI: /23108 Cover design: Global Concept Consulting Infographic design: Global Concept Consulting Conception/pre-press: Global Concept Consulting Additional illustrations: Istock European Union, 2015 Reproduction is authorised provided the source is acknowledged. Printed in Belgium 2015 3 Acknowledgements This study, entitled Assessment of economic benefits generated by the EU Trade Regimes towards developing countries, was prepared for the European Commission, Directorate-General for International Cooperation and Development (DEVCO) by Copenhagen Economics A/S and Professor Johannes Van Biesebroeck of KU Leuven. We would like to thank Renato Lazzaroni, Irina Vlaskina and Nathalie Genin, from the European Commission Directorate-General for Taxation and Customs Union, for their support in the preparation of the database, which was compiled for the purpose of this study. We also would like to thank Lars Nilsson, deputy-chief economist at the Directorate-General for TRADE, for his high-quality comments which have significantly contributed to the soundness of the report and Giorgio Cocchi, Deputy Head of the Trade and Regional Integration Policies Unit at DEVCO who also provided valuable comments. Finally, we would like to thank Gaspar Frontini, Head of the Policy and Coherence Unit (DEVCO) and his Economic Analysis Team - Antonio Carlos Teixeira, Dorota Panczyk-Piqueray and Olga Tschekassin - for their supervision, comments and suggestions. This report was commissioned and financed by the European Commission. The views expressed are those of the consultants and do not represent the official view of the Commission. Acknowledgements 3 Executive summary Mapping trade and FDI flows between the EU and developing countries Introduction Background on EU trade regimes towards developing countries Rules of Origin EU imports from developing countries in General trends in EU imports from developing countries Regional Trends in EU imports from developing countries Regional trends in EU imports from Non-LDCs Regional trends in EU imports from LDCs Trend in sector composition of EU imports from developing countries Developments over time for Non-LDCs Developments over time for LDCs FDI Conclusion 59 5 Table of contents 2. changes in the EU trade policy regimes and developing countries export performance Introduction The impact of EU trade regimes on the growth of exports from developing countries Conclusion EU trade regimes and economic diversification Economic development and export diversification Empirical analysis Conclusion 98 References 101 Appendix A 102 Appendix B 134 Appendix C 144 Table 1 EU preferential schemes towards developing countries 23 Table 2 ACP Membership by Trade Agreement 24 Table 3 EU imports of goods from developing countries, Table 4 EU imports (bill. Euro) from developing countries by region, Table 5 Top 10 origins for EU27 imports from Non-LDCs, Table 6 EU imports (bill. Euro) from LDCs by region, Table 7 Sector composition of imports from DCs, Table 8 Median sector share in total decade imports by region (non-ldcs) 48 Table 9 Median sector shares in total decade imports by region (LDCs) 50 Table 10 Summary statistics: Preference margins 68 Table 11 Preference margins by sectors 68 Table 12 Preference margins over time by LDC status 69 Table 13 Baseline Results 70 Table 14 Results by GSP preference scheme 73 7 List of tables Table 15 Results by LDCs Status 74 Table 16 Results by income classification 76 Table 17 Results by product groups 77 Table 18 Results by initial level of protection 80 Table 19 Results by timing 81 Table 20 Export propensities across country groups and years 88 Table 21 Export propensities across sectors 89 Table 22 Baseline Results 90 Table 23 Results by GSP scheme 91 Table 24 Results by LDC Status 92 Table 25 Results by income classification 93 Table 26 Results by product groups 94 Table 27 Results by initial level of protection 96 Table 28 Results by timing 97 Figure 1 TRIAD imports from developing countries, Figure 2 TRIAD agricultural imports from developing countries, Figure 3 TRIAD manufacturing imports from developing countries, Figure 4 Trends for EU9 imports from DC by eligibility to trade regimes, Figure 5 Trends for EU9 imports from ACP countries by eligibility to trade regime, Figure 6 Trends for EU9 imports (excl. Fuel) from ACP countries by eligibility to trade regime, Figure 7 Trends for EU15 imports by eligibility to GSP regime 35 Figure 8 Trends for EU15 imports (excluding fuel) by eligibility to GSP regime (1995 = 100) 36 Figure 9 Growth in the value of EU9 imports by region 37 Figure 10 EU27 imports from Non-LDCs by region, Figure 11 Geographic origin of EU9 imports from Non-LDCs, 9 List of figures Figure 12 Geographic origin of EU9 imports (excl. fuel) from Non-LDCs, Figure 13 EU27 imports from LDCs by region, Figure 14 Figure 15 Figure 16 Figure 17 Geographic origin of EU9 imports from LDCs over the period Geographic origin of EU9 imports (excl. fuel) from LDCs over the period Growth in the value of EU imports from LDCs by geographical region 45 Growth in the value of EU imports from East Asian and Pacific LDCs 45 Figure 18 Sector composition in EU27 imports by LDCs status, Figure 19 Trend in EU15 imports of agriculture from LDCs, Figure 20 Trend in EU15 imports of agriculture from EAP 51 Figure 21 FDI Flows to Developing Countries 52 Figure 22 FDI Flows to the Least Developed Countries 53 Figure 23 FDI flows to Developing countries with China shown 53 Figure 24 Stock of inward FDI in selected countries Figure 25 Stock of EU and US FDI in Vietnam, Figure 26 Stock of EU and US FDI in selected countries, Figure 27 Stock of EU relative to US FDI in four Asian countries, Figure 28 Stock of EU FDI in Africa and African ACP, Figure 29 Stock of EU FDI in selected FTA partners, Figure 30 Difference-in-difference 63 11 List of boxes Box 1 The Generalised System of Preferences: Box 2 Tariff modulation 26 Box 3 Everything But Arms 27 Box 4 The GSP General Arrangement 28 Box 5 The GSP+ 28 12 Executive summary The European Union (EU) has a long tradition of granting preferential access to exports from developing countries to its market. The rationale of this policy is to encourage exports from these countries through a competitive advantage vis-à-vis the exports from other countries. Ultimately, an increase in the exports of developing countries results in a stimulus to their global economic activity and development. 13 14 Non-reciprocal preferential access has been granted by the EU to most developing countries via the General System of Preferences (GSP) since Today, the GSP includes the GSP General Arrangement, the GSP+ (i.e., a special incentive scheme for sustainable development and good governance designed for vulnerable countries) and the Everything But Arms (EBA) scheme - under which all exports, except arms and ammunition, from the Least Developed Countries (LDCs) are given a completely duty free access to the EU market. In addition, especially generous non-reciprocal schemes have, historically, been available to certain African, Caribbean and Pacific (ACP) countries. The EU has also Free Trade Agreements with a number of individual developing countries in place, under which exports are granted duty free access in return for preferential access for EU exports to their own market. While preferential access regimes provide eligible exporters with a competitive advantage vis-à-vis other exporters, and thereby provides scope for an enhanced export performance by beneficiaries, the extent to which this will actually occur depends on the size of the preferential tariff margins granted and the ability of the intended beneficiaries to take advantage of the preferences offered. The size of the preferential tariff margin is determined by how generous a preferential tariff is relative to the tariff applicable for non-beneficiaries of the scheme. As EU trade barriers are progressively lowered via both the multilateral system and other regional or bilateral Free Trade Agreements, the value of preferences may thus diminish, giving rise to the term preference erosion. As to the ability of beneficiaries to take advantage of preferential access schemes, it depends on a number of factors including supply side constraints within developing countries themselves as well as the cost of complying with the Rules of Origin, which specify the conditions which must be met for a product to be considered as originating in the beneficiary country and thus to be eligible for preferential access. In sum, the real economic impact of the preferential regimes is therefore an empirical question. The aim of this report is precisely to assess empirically the economic benefits generated by the EU Trade Regimes towards developing countries. The main focus in terms of trade regimes is on non-reciprocal preferences and, especially, on the GSP and the individual schemes thereunder. The new and advanced micro-econometric technique applied to an extremely large dataset of more than 12 million observations, containing detailed tariff information at product-level, allows us to isolate the causal impact of GSP preferences on exports from developing countries to the EU. In addition, we examine empirically the linkages between increased exports and poverty reduction in developing countries. To the best of our knowledge, this is the first time that this type of analysis has been done in an EU context. The report consists of four distinct parts, which provide a description and a quantitative assessment of the impact of preferential access schemes on the growth and diversification of exports from developing countries to the EU over time. Each part of the report can be read individually. The report is organised as follows: Part I: Mapping of trade and FDI flows between the EU and developing countries. This part consists of descriptive analysis of the evolution of exports from developing countries to the EU over the last 40 years across trade regimes, regions and sectors as well as a descriptive analysis of FDI flows. Part II: Changes in EU trade policy regimes and developing countries export performance. This part contains a causal econometric analysis of the effect of GSP preferences on the growth of exports from developing countries to the EU. Part III: EU trade regimes and economic diversification. This part comprises a causal econometric analysis of the effect of GSP preferences on the number of products exported from developing countries to the EU. Part IV: Export performance and poverty reduction. This part contains an assessment of the impacts of exporting on poverty reduction in developing countries, based on a literature review and an econometric cross-country analysis. Assessment of economic benefits generated by the EU Trade Regimes towards the developing countries / executive summery 15 Parts I-III are contained in this first volume of the report and Part IV is presented in volume two. The key features and findings from Part I-III of the report are summarised below. Part I: Mapping of trade and FDI flows between the EU and developing countries In the first part of the report, we introduce the various EU trade regimes put in place with developing countries since the formation of the European Economic Community. In order to gain a general understanding of how exports from developing countries to the EU have evolved over time and to provide a first indication of the impact of trade preferences, this part of the report also provides a mapping of exports from 137 developing countries to the EU since 1973, across trade regimes, geographical regions and sectors. Compared to the US and Japan, which also receive large inflows of exports from developing countries, the EU is a rather important market for developing countries, in particular for Least Developed Countries. In total, the EU27, the US and Japan, jointly referred to as the TRIAD, imported goods worth over billion from developing countries in 2012, of which 60 billion originated in the Least Developed Countries. While the EU27 accounted for 42% of the total TRIAD imports from all developing countries, its share of imports from the Least Developed Countries was close to 60%, thus the EU is the largest market for Least Developed Countries exports in the TRIAD. Linking the trends in the EU s imports from developing countries to the trade regimes in place does not reveal any sudden changes in the trend of aggregate imports around the time in which preferences were introduced. However, a closer analysis indicates that imports from a number of ACP countries benefitting from special commodity protocols for sugar, meat and bananas, have been focused around these products. Furthermore, the liberalisation of sugar under the EBA is found to coincide with increased imports of sugar, especially from Cambodia. Across regions and sectors, the analysis points to a relatively larger growth in EU imports from East Asia and the Pacific and from South Asia than from other regions over time. Finally, we see a clear overall trend in diversification of the export base in developing countries. The share of manufacturing products in imports from both the Least Developed Countries and from the Non-Least Developed Countries has steadily increased over the last four decades across all geographical regions, while agricultural products have become less dominant. Key findings from Part I The EU is an important market for exports from developing countries. In 2012, the EU27 imported goods worth 860 billion from developing countries equivalent to 44% of all goods imported into the EU, from countries outside the union. Compared to the US and Japan, the EU is the largest market for imports from the Least Developed Countries (59% of the LDCs total exports to the TRIAD). Compared to the US and Japan, the EU is the largest market for agricultural imports from all developing countries. Of the 860 billion worth of imports from developing countries into the EU27 in 2012, 37% originated in China (49% if excluding fuel). Countries in the Middle East and North Africa were the origin of further 127 billion worth of imports, equal to 15% of the total (6% if excluding fuel). Latin America was the third largest originator of imports, followed by Sub-Saharan Africa, East Asia and the Pacific and finally South Asia and Eastern Europe and Central Asia. While no sudden changes in the trend of aggregate imports were found around the time when preferences were introduced, imports from a number of ACP countries benefitting from special commodity protocols for sugar, meat and bananas, were found to be focused around these products. 16 Over time, EU imports from East Asia and the Pacific and from South Asia have grown relatively more than from other regions. The share of manufacturing products in EU imports from both Least Developed and Non-Least developed Countries has been increasing steadily over the last decades across all regions, while agricultural products have become less dominant. Clothing is especially important for the Least Developed Countries, accounting for 37% of the EU total imports from this group in Preferences may also make a beneficiary country a more attractive location for Foreign Direct Investment (FDI). Based on a descriptive analysis using available FDI data sources, we do not find any strong evidence indicating that EU preferences have led to a surge in inward FDI in developing countries. However, FDI data is much less comprehensive than trade data, and part of the reason why we do not find any clear patterns may simply be down to the low quality of FDI data. Part II: Changes in EU trade policy regimes and developing countries export performance While the descriptive analysis in Part I did not find any sudden changes in the trend of aggregate imports around the time in which preferences were introduced, the analysis did find suggestive evidence of a positive impact for individual countries and product groups. In Part II of the study, we look further into the effects of preferences on the growth of exports and we undertake an econometric analysis to determine the causal effect of GSP preferences on the growth of exports from developing countries to the EU. To do so, we estimated a triple-difference model, which allows us to isolate the impact of preferences from other factors, which may lead to increased exports and coincide with the granting of preferences. The methodology has previously been used to estimate the effects of the U.S import liberalisation on African countries export performance under the African Growth and Opportunity Act (Frazer and Van Biesebroeck, 2010), but has, to the best of our knowledge, not been applied before in an EU context. The analysis is performed using a highly detailed dataset, which contains detailed tariff information for imports into the EU15 of close to 4000 different 6-digit products under the various GSP schemes and under the MFN regime. This data was collected for 176 countries over the period , resulting in a total dataset of close to 12 million observations. These data were obtained from the EU TARIC database via extracts obtained from the European Commission s Directorate General for Taxation and Customs Union. The estimation methodology combined with the richness of data allows us to clearly identify the causal impact of EU GSP preferences on the growth of exports from beneficiary countries and to assess how this varies with the size of preferential tariff margins. Compared to more standard approaches to the analysis of various trade regimes, where a so-called dummy variable is often used to capture the coverage of individual schemes, either at the country or product level, the use of detailed tariff information gives us the opportunity to examine the impacts of preferences in a much more detailed manner than has been done previously. We have data not only on whether or not a preference is in place for a given product originating in a given country in a given year, but we also know the magnitude of the preferential tariff allowing us to calculate the preference margin. The results obtained are highly robust and indicate a positive impact of GSP preferences. On average we find that GSP preferences have increased the exports of the products covered by up to 5%. This average impact, however, masks very large differences across different country groups, GSP schemes and individual product groups. The impacts are especially large for LDCs and low-income countries, for which preferences are found to have increased Assessment of economic benefits generated by the EU Trade Regimes towards the developing countries / executive summery 17 exports by up to 10% and 7.6% respectively. In line with the high impact found for LDCs, we find an above average impact of EBA preferences close to 7%. Across product groups wood and paper products and basic manufactured products show above average impacts. Finally, we find that the full effects have usually occurred within two years after preferences have been granted. Key findings from Part II We apply a new advanced micro-econometric techn
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