Managed exports and the recovery of world trade: The seventh Global Trade Alert report

Simon Evenett 16 September 2010

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While there remains considerable uncertainty about the pace of the recovery of the world economy, there is little doubt about the trajectory for world trade in 2010. Having fallen by 12.2% in 2009, according to the latest forecasts from the World Trade Organization, world trade is expected to grow 9.5% in 2010. Moreover recent World Bank forecasts, reported in Table 1 below, point to healthy growth of exports through 2012.

Table 1. Sustained export growth is expected through 2012

Group of countries
Forecasted total export growth rate (%) in
2010
2011
2012
Developing
9.4
8.3
8.1
High income
6.5
6.2
6.8

Source: World Bank, www.worldbank.org (accessed 10 September 2010)

No doubt a partial recovery of demand, inventory rebuilding, and the unfreezing of capital markets (which allows for greater working capital and trade finance) account for a large part of the recovery of world trade. Supply chains have regained some of their previous strength, and the associated movements of parts, components, and semi-finished goods across many borders quickly adds to recorded totals of international trade. In short, just as macroeconomic and financial factors probably accounted for much of the contraction of world trade in 2009, they bear the greatest responsibility for trade's recovery in 2010.

Some however have gone further, arguing that the recovery of world trade is inconsistent with rising protectionism. If protectionism is defined narrowly to include only import-reducing measures, such as tariff increases, then maybe there is something to this viewpoint. But, as this summary of the seventh report of the Global Trade Alert will show, such a narrow definition overlooks important beggar-thy-neighbour measures that have been taken during the past year, many of which were designed to stimulate exports. The fact that Brazil, China, and India have joined the US in taking measures to promote exports almost across the board, typically at the expense of other nations' exporters, prompts the following question: how much have "managed exports" contributed towards the recovery in world trade in 2010?

The seventh report also focuses on developments in Latin America. The variation across governments from that region in their resort to discrimination against foreign commercial interests is considerable. Taken together, the country analyses provided in section two of that report shed light on the various factors responsible. Extensive diagnostics for each Latin American country of the resort to protectionism and on the harm done by others' protectionism are presented in section three of the report.

Measures to promote exports gained ground during 2009 and 2010

Mercantilism is the belief that exports are good and imports are bad. The harm done by measures that reduce imports to foreign commercial interests, to competitive pressures at home, and ultimately to the allocation of national resources and to living standards are well known. It is not for nothing that tariff increases and other import-reducing measures generally have a bad name.

What may not be so well known is that measures to promote exports also harm foreign commercial interests, waste national resources, and therefore are a threat to living standards. Reductions in export taxes – or greater rebates from domestic taxes for exporters – enable own exporters to lower their prices in foreign markets, forcing exporters from other countries to lower their prices as well and accept lower revenues. Any state measure that shifts exports towards own firms at the expense of other nations' exporters is therefore a beggar-thy-neighbour policy. Managing trade, whether imports or exports, does not expand the pie, it merely redistributes it.

Worse, a government may retaliate to other nations' export promotion efforts, adding export incentive upon incentive. The state budget bears the brunt of such export management contests (often through direct or indirect outlays or forgone tax revenues). As will become clear in the data presented below, 2009 and 2010 has seen a ratcheting up in export promotion measures. Unlike many contemporary tariff increases and trade defence measures, these export promotion measures often target a wide range of sectors.

Export promotion is not just the preserve of industrialised countries with deep pockets. Nor are such measures always widely publicised. While it is true that President Obama made a public commitment this year to double US exports over a five year time frame, many developing countries have been willing to sacrifice tax revenues and to direct state banks to support national exporters. Indeed, some of the latter may be covert and under-reported in the GTA database. Sometimes export promotion measures are also part of a broader trade policy package (as is the case of Pakistan's pro-export measures) or as part of a broader financial package for a sector.

What evidence is available on contemporary export promotion measures?

Throughout the recent global economic crisis China's record on export management is hard to top. On eight occasions China has varied the rebates for domestically-charged value added tax (VAT) for its exporters1; six of those changes saw the rebates expanded, lowering Chinese exporters' costs, and the prices that Chinese firms can charge abroad. Taken together, these measures have applied almost across the board, affecting the incentives of many Chinese manufacturers.2

In fact, in the GTA's sixth report, Evenett and Fritz (2010) calculated the range of products affected by just one of these rebate-increasing Chinese measures. Exporters of goods from more than one in five product categories benefited from these Chinese rebates. Exports of those products totalled US$412 billion in 2008, equivalent to just under 30% of the total value of Chinese exports in that year. These products were exported to 155 countries, including 17 G20 members. Producers and exporters in those trading partners would have had to match lower prices from Chinese rivals, worsening the formers' competitive position and shifting pressures to adjust away from China. For example, the US Bureau of Labor Statistics recently reported that during the period July 2009-July 2010 only France and the ASEAN nations saw their export prices to the US rise less in percentage terms than China.

The GTA database contains many sectoral export management initiatives as well as many that cut across sectors.3 Table 2 provides a selection of these measures taken by developing countries in 2009 and 2010. The largest emerging markets are well represented in that table. Moreover some developing countries, such as Brazil and India, have implemented multiple schemes, many of whose coverage equals or exceeds a fifth of all exported products. The last column of Table 2 reports the number of trading partners that have exporters which compete in foreign markets with the country implementing the export management measure in question.

With the exception of the Pakistan and Nigeria, such is the wide range of goods being favoured that most of these export management schemes will affect to the conditions of competition in overseas markets to the detriment of over 100 trading partners. Therefore, the fallout from contemporary export management measures is unlikely to be confined to pockets of the world economy. This can be said even before the export management schemes of industrialised countries are taken into account.

The impact on the recovery of world trade, the implied diversion of exports away from one source to another, and the cost effectiveness of these export management measures are matters for further analysis. Export promotion measures have probably offset to some degree the impact of import-reducing trade policies during the recent rebound of world exports, just as the many non-financial sector bailouts probably cushioned the fall in world trade in the first place. The opposing effects on trade flows of different forms of discriminatory state policy makes observed changes in world trade a poor proxy for the total level of contemporary protectionism.

Here, as in other GTA reports, the key to understanding contemporary protectionism is to recognise its diverse composition and not to focus exclusively on its overall level or on a narrow range of import-reducing measures.4 Governments discriminate against foreign commercial interests in many different ways. Trade diplomats have long recognised this. Our analyses of contemporary protectionism need to take this fundamental point on board.

Managed Exports and the Recovery of World Trade: The 7th GTA Report is available to download free of charge from the Global Trade Alert website.

References

Evenett, Simon J and Johannes Fritz (2010), “Jumbo’ discriminatory measures and the trade coverage of crisis-era protectionism”, in: Evenett, SJ (ed). Unequal compliance: The 6th GTA report,CEPR.

Table 2. Selected state measures to favour own exporters taken by developing countries in 2009 and 2010

Implementing jurisdiction: Title of measure in GTA database
Year
Percentage of total number of product categories exported that benefit from this measure.
Number of nations whose exporters directly compete with the beneficiary exporters from the implementing jurisdiction
India: Incentives for leather and textile sector exports
2009
13.83%
110
Brazil: Interest rate reduction on public financing for the export of capital goods
2009
19.38%
122
India: Union Budget's implications for tariffs and other trade policies.
2009
21.57%
119
China: Export tax rebates.
2009
22.17%
155
Pakistan: Strategic Trade Policy Framework 2009-12
2009
38.81%
41
Nigeria: Loans for textile and cotton manufacturers.
2009
41.54%
24
Brazil: Public financing for the production of goods for exports by small and medium companies (pre-shipment phase)
2009
na
na
Brazil: Extension of the Drawback System
2010
10.63%
157
Brazil: new credit line for exports of consumer goods
2010
21.71%
130
India: Incentives for critical export sectors
2010
22.53%
127
India: Incentives to exporters through Market Linked Focus Programme
2010
32.18%
130
Argentina: Subsidized export credits for capital goods and related services
2010
37.31%
135

 


1 China is not alone in offering VAT rebates to exporters. EU nations offer full VAT rebates to their exporters. Where Chinese experience does stand out is that, to the best of our knowledge, no other country has amended its VAT rebates so many times during the global economic crisis. Eight changes in these rebates smacks of export management and not a one-off transition to a new tax regime for exporters. For a summary list of the eight Chinese VAT rebate changes from July 2007 to July 2010, see "Export Tax Rebate Changes in Recent Years," Beijing Review, 21 July 2010.
2 The most recent occasion when changed VAT rebates came into effect for Chinese exporters was 15 July 2010. On this occasion the rebates for certain commodities were abolished, thereby providing less incentive to export after that date. News reports at the time suggested that exports of some goods surged before the implementation date.
3 One search of the GTA database, prepared for this Report, revealed 45 state measures of different types had as part of their goal, at least, to promote exports.
4 The Global Overview, found in chapter 2 of the seventh GTA report, contains many useful statistics on the composition of contemporary protectionism, which jurisdictions are responsible for the implementation of the most protectionist measures, and how frequently each jurisdiction's commercial interests are harmed by foreign protectionism. Interestingly, one finding is that, despite the recovery of world trade, discriminatory measures are being implemented by governments at approximately the same pace in 2010 as they were in 2009, once due account is made of reporting lags. Remarkably, each quarter's reported total number of implemented protectionist measures soon converges to 125, the level witnessed in the first quarter of 2009 when protectionist fears were at their peak. Few protectionist measures have been removed during 2009 and 2010. Therefore, the number of discriminatory measures has risen quarter-by-quarter during the slump in world trade in 2009 and then during the recovery of world trade in 2010.

 

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Topics:  International trade

Tags:  international trade, exports, protectionism, Global Trade Alert

Professor of International Trade, University of St. Gallen; Research Fellow, CEPR

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