Preferential Market Access to EU and Japan:
Implications for Bangladesh
[Methodological Notes presented to the CDG-GDN Research Workshop on
“Quantifying the Rich Countries Policies on Poor Countries”,
Washington D.C., October 23-24, 2003]
Debapriya Bhattacharya
Executive Director, CPD
Mustafizur Rahman
Research Director, CPD
Ananya Raihan
Research Fellow, CPD
October 5, 2003
(Revised draft)
CENTRE FOR POLICY DIALOGUE (CPD)
B
a
A
N
c i v i l
G
L
A
s o c i e t y
D
E
t h i n k
S
H
- t a n k
House 40C, Road 11, Dhanmondi R/A, Dhaka-1209, Bangladesh
Tel: 880 2 9145090, 880 8124770; Fax: 880 2 8130951
E-mail: cpd@bdonline.com; Website: www.cpd-bangladesh.org
CPD Study on Preferential Market Access to EU and
Japan: Implications for Bangladesh
Estimating Impact of Preferential Market Access Offered by
EU and Japan to Bangladesh – A Methodological Note
1. Objectives
i.
Assessment of impact of enhanced preferential treatment by EU under EBA and
by Japan
ii.
Identification of products which have potential in EU and Japan due to the new
facilities
iii.
Policy implications arising out of the EU-EBA and Japan’s offer
2. Source of Information
i.
ii.
GTAP Database: First introduced in 1994, Bangladesh was included in GTAP 5.0
in 2000, the base period of the GTAP 5.0 was 1997.
Trade Map Database, ITC-UNCTAD-WTO (World price, import price, export
volume from beneficiary countries, import volume form the world etc.)
3. Assumptions
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
Non-convexities in preferences and technologies are kept out of the framework
The model is based on assumption of perfect competition, absence of market
failures and non-convexities in production
Factors are immobile across the national boundaries
No dynamic considerations related to capital accumulation and technical change
over time
Ex-ante analysis
The elasticity of substitution between any pair of domestic and imported goods is
constant within each sector and the elasticity of substitution between each pair of
imported goods originating from different countries is twice higher than that
between domestic and foreign goods [Armington Differentiation].
The production side of the model assumes fixed production coefficients between
primary and intermediate inputs [Leontief Aggregation]
Production factors are fully employed
Primary production factors [agricultural land, skilled and unskilled labour and
capital] are mobile across the sector, captured by constant elasticity of
transformation (CET).
4. Variables
i.
Endogenous: trade flows ( export and import), consumption through expenditure
(household expenditure, public expenditure, private expenditure, investment),
production ( sectoral)
ii.
Exogenous: policy variables like tariff, tariff equivalent of quota, tariff equivalent
of Rules of Origin restriction.
5. Advantages of General Equilibrium Framework (GEF) and CGE Modelling
i.
A general equilibrium setting is preferable when the policy experiment to be
modelled affects simultaneously many countries and many sectors.
CPD: EU & Japan Market Access from Bangladesh
1
ii.
iii.
iv.
The GEF allows considering consumption of all goods by the rest of the world
thus allows to estimate income effect of non-reciprocal preferential treatment,
which is not possible by partial equilibrium analysis.
General equilibrium model can capture inter-sectoral linkage effects.
Partial equilibrium models neglect offsetting effects following liberalisation and
working through inter-sectoral shifts, factor price adjustment and exchange rate
changes. The GEF addresses these issues reasonably.
6. Disadvantages
i.
ii.
iii.
iv.
v.
Results are sensitive to elasticities used, which are fixed for a particular situation
[Constant elasticity of substitution among exports of different origin], which have
strong implication for the estimate of trade creation or trade diversion.
The Armington assumption states that commodities imported and exported are
imperfect substitutes of domestically produced and used commodities. This
assumption is necessary to take into account two-way trade, while an
unrealistically high degree of specialisation is avoided. The imported (exported)
and domestically produced (demanded) commodity are aggregated into a new
composite commodity using constant returns to scale CES (Constant Elasticity of
Transformation; CET) functions. This may lead to over-estimation of terms of
trade effects.
The model is based on assumption of perfect competition, absence of market
failures and non-convexities in production. However, the perfect competition is
not characteristic for majority of products traded in the world market. It is to be
mentioned that this drawback is representative of all methodologies.
It is assumed that factors are immobile across the national boundaries. However,
the mobility of capital is one of the fundamental factors accelerating globalisation.
Thus, ignoring the movement of capital across the border (particularly when it
happens in response to incremental market opportunities) is a major weakness of
the method.
The constant elasticity of substitution undermines efficiency gain and productivity
factor in international competition.
7. Model Structure
i.
ii.
iii.
The world has been divided into 10 regions
a. Preference Donor Countries (4): EU, US, Japan, QUAD
b. Beneficiary Countries (3): Bangladesh, ACP-LDC region, other ACP region
c. Third Countries (4): India, Mexico, China, Rest of the World
The productive sectors have been aggregated in to 10 sectors: Apparel, Textiles,
Leather, Fish, Vegetables, Sugar, Other Food, Other Primary, Other
Manufacturing
Equation Blocks
a. Price Equations
b. Supply Equations
c. Factor Demand and Export Supply Equations
d. Trade and Final Demand Equations
e. Income and Savings Equations
f. General Equilibrium Conditions
g. Welfare Measure: Hicksian equivalent variation (EV), with changes in
government consumption and investment spending valued according to private
household's preference
CPD: EU & Japan Market Access from Bangladesh
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iv. Parameters
a. Share parameters estimated from SAM of each countries
b. Elasticity parameters describing curvature of various structural functions
c. Institutional parameters (e.g. quotas)
8. Key mechanics
1. Substitute relationships in consumption and production between close substitute of
goods
2. Parameters like supply elasticities and own cross-price elasticities of demand are in
use
9. Results
The results of the exercise are presented in the Annex.
10. Future Use of Method
Given the Trade Map data are accessible for all products, countries and with a time series,
analysis for identification of products, which have potential in the preference donor countries
will be possible to perform at more disaggregate layer, which are more useful at the
entrepreneur level.
Despite the legitimate criticism of the CGE modelling, it will continue to be used by the
policy researchers across the world, as there is no credible alternative to it. Furthermore, the
methodology for dynamic CGE modelling is being improved continuously. The problem is
availability of reliable detailed social accounting matrix and time series data for all countries.
Incorporation of Migration in the Trade Model: In the current GTAP structure, the
incorporation of migration into the trade model directly is not possible, as the international
factor mobility is not allowed. However, a proxy may be worked out through the remittance
earning, which is a part of balance of payments component of the model. As we know, the
proportion of remittance is different for various skill groups - less the skill, the higher is the
proportion of income remitted to the country of worker’s origin. Thus far, in developing the
proxy variable the differential of remittance by skilled category may be incorporated.
11. Further Areas of Research
General
Extrapolation of results of CGE Modelling for estimating current benefit or loss from
preferential treatment
Methodological aspects for CGE Modelling of service sector liberalisation
For Bangladesh
Ex-post analysis of impact of preferential treatment (dataset)
Analysis of impact of AGOA on Bangladesh
CGE Modelling of SAPTA and analysis of benefit and losses of Regional Agreement to
Member Countries
CPD: EU & Japan Market Access from Bangladesh
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Annex I. MATRIX ON METHODOLOGY: EU-EBA
Simulation
I. Elimination of all tariff
and non-tariff barriers
(except sugar and service
sectors) against LDCs in
the EU
II.
Elimination of all
tariff and nontariff
(quota)
barriers (except
service sector) in
EU
elimination of all
tariff and nontariff
barriers
against
ACP
countries
III.
Elimination of all tariff
and non-tariff (quota)
barriers (except sugar and
service sectors)
for
Bangladesh and ACP
countries in EU, countries
under USTDA in US and
Mexico in US and Canada
Variables under control
Rationale of such
control
Expected Outcome of
Simulation
Rules
of
Origin
Restrictions
for
Bangladesh in the
apparel and textile
sector
Isolating all other
dynamics
Isolating all other
dynamics
To measure only the
impact
of
EU-EBA
initiative
Little
benefit
for
Bangladesh due to RoO
restrictions
As EU also offers duty
free quota free access to
ACP countries, The
simulation will allow to
understand
combined
effect
Due to the production
structure
of
ACP
countries benefit for the
ACP countries from the
ACP initiative is much
higher than the benefit
from EU-EBA for
Bangladesh
Rules
of
Origin
Restrictions against
Bangladesh and ACP
in EU in the apparel
and textile sector
Rules
of
Origin
Restrictions against
countries
under
USTDA Act 2000 in
US and Mexico in the
US and Canada
Isolating all other
dynamics
The said preferential
treatments
are
of
simultaneous
concurrence, a combined
impact is essential is to
identify
the
true
incremental benefit of
these initiatives
Bangladesh has little to
gain from this initiative
as the Room restriction
is there
CPD: EU & Japan Market Access from Bangladesh
Result of Simulation
Change (%) in
Aggregate Export,
[Mln US$]
BD: 0.97%,
[52.6 mln US$]
ACP-LDC: 0.4%
[213.22 mln US$]
Other ACP: 0.01%
[11.81 mln US$]
Change (%)
in Terms of
Trade
BD: 1.66%
ACP-LDC:
1.27%
Other ACP
0.02%
BD: 0.097%
ACP-LDC:
0.085%
Other ACP
0.002%
Change (%)
in Regional
HH Income
BD: 2.31%
ACP-LDC:
1.69%
Other ACP
0.03%
BD: 1.89%,
[102.29 mln US$]
ACP-LDC: 0.59%
[312.05 mln US$]
Other ACP: 0.54%
[457.68 mln US$]
BD: 2.81%
ACP-LDC:
1.73%
Other ACP
1.26%
BD: 0.18%
ACP-LDC:
0.12%
Other ACP
0.14%
BD: 3.93%
ACP-LDC:
2.32%
Other ACP
1.95%
BD: 0.96%,
[52.2 mln US$]
ACP-LDC: 0.41%
[217.3 mln US$]
Other ACP: 0.91%
[772.01 mln US$]
BD: 1.63%
ACP-LDC:
1.27%
Other ACP
1.8%
BD: 0.09%
ACP-LDC:
0.08%
Other ACP
0.21
BD: 2.27%
ACP-LDC:
1.74%
Other ACP
2.83%
Change (%)
in GDP
4
Simulation
IV. Elimination of all tariff
and non-tariff (quota)
Variables under control
Rationale of such
control
Expected Outcome of
Simulation
Isolating all other
dynamics
To understand the extent
of impact of Japan’s
initiative
Due to low base level
trade the impact will be
insignificant, however,
it does not provide for
conclusion on the lack
of impact
Result of Simulation
Change (%) in
Aggregate Export,
[Mln US$]
BD: 0.18%,
[9.95 mln US$]
ACP-LDC: 0.09%
[49.64 mln US$]
Other ACP: 0.004%
[3.66 mln US$]
Rules of Origin
Restrictions against
Bangladesh and ACP
in EU in the apparel
and textile sector
Rules of Origin
Restrictions against
countries under
USTDA Act 2000 in
US and Mexico in the
US and Canada
Room against LDC in
Japan
Isolating all other
dynamics
This simulation is an
improved version of
simulation III inclusive
of Japan’s initiative.
The benefit for
Bangladesh will be
more than only EU
scenario. However, the
extent is not high due to
the RoO restriction
BD: 1.14%,
[61.83 mln US$]
ACP-LDC: 0.41%
[217.37 mln US$]
Other ACP: 0.91%
[772.14 mln US$]
barriers (except sugar and
service sectors) against
Change (%)
in Terms of
Trade
BD: 0.36%
ACP-LDC:
0.32%
Other ACP
0.01%
BD: 0.02%
ACP-LDC:
0.021%
Other ACP
0.0008%
Change (%)
in Regional
HH Income
BD: 0.51%
ACP-LDC:
0.43%
Other ACP
0.01%
BD: 1.99%
ACP-LDC:
1.27%
Other ACP
1.80%
BD: 0.114%
ACP-LDC:
0.084%
Other ACP
0.213%
BD: 2.78%
ACP-LDC:
1.74%
Other ACP
2.83%
Change (%)
in GDP
LDC in Japan
V. Elimination of all tariff
and non-tariff (quota)
barriers (except sugar and
service sectors) for
Bangladesh and ACP
countries in the EU,
against LDC countries in
Japan, against countries
under USTDA 2000 Act in
the US and against Mexico
in the US and Canada.
CPD: EU & Japan Market Access from Bangladesh
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