Cost of Economic Non Cooperation to
Consumers in South Asia
COENCOSA
Trade Liberalisation & Consumer Welfare
in South Asia
Project Review Meeting
Dhaka, June 28, 2011
11
Content

Overview of the Project
 Background and Objectives
 Activities and Expected Outcomes


Theoretical Basis of Consumer Welfare
Main Inferences from Meta-Analysis

Assessment of Consumer Welfare under SAFTA
 Method
 Partial Estimates (Indo-Bangla Case)

Usefulness of the Estimates
2
Background
 Intra regional trade in South Asia is least as compared to other
economic blocs in the world
 Intra regional trade has stagnated at under 5% of total trade as
against 27.06% for ASAEN
 SAFTA, operational from January 2006, suffers from shortcomings
such as:
 Large Sensitive Lists retained by Members
 Minimal provisions on non tariff measures
 Strict value-addition requirements
3
Background
 Though positive effects of export promotion on economic
growth is well acknowledged, trade policy regimes in South
Asia are still highly influenced by the notion of importsubstitution
 Impact of trade liberalisation on producer welfare is given
thrust, while positive effects on consumer welfare is ignored
 Deeper economic cooperation among the South Asian
countries could avoid high costs to consumers
4
Objectives

To assess the potential consumer welfare gains from SAFTA
through meta-analysis of existing literature and using
secondary data

To study the reasons of and solutions for economic noncooperation between South Asian countries in general and
neglect of consumer welfare impacts of SAFTA in particular
through a perception survey

To use the results thereof to garner support for enhanced trade
integration in the SAARC region
5
Activities
 Meta-analysis of the literature on regional trade integration in
South Asia
 Peer review of meta-analysis
 Perception survey of selected stakeholders in five South Asian
countries
 Publication and dissemination of research results (December,
2011)
6
Expected Outcomes

Awareness generated amongst South Asian policy makers
regarding loss of consumer welfare on account of regional
economic non-cooperation

Policy actions leading to enhancement of intra-regional
trade and investment relations in South Asia and resultant
gains in consumer welfare in the region
7
Theoretical Basis

Classical trade theory and its modern derivations treat consumer
welfare effects of trade as inseparable from producer welfare.
Empirical literature consider them differently because of distinct
incidence on importing and exporting country respectively.

Given that reciprocity is a basic element for the functioning of
trade treaties, demands for tariff concessions in sectors with
maximum export induced producer welfare should be
accompanied by offers of tariff concessions in sectors with
maximum import induced consumer welfare.
8
Inferences from Meta-Analysis

Low Levels of intra-regional trade implies possibility of trade diversion
rather than trade creation – small shares in World GDP and trade flows
indicates that the probability of finding the most efficient suppliers
within the region is very less:




Beginning of import substitution and protectionism in the post
independence era worked asymmetrically against regional trading
partners for all SA countries
Empirical evidences exist for minimal impact of trade diversion
The political economy of selection of sensitive lists indicates weak
possibility of trade diversion
Argument of need for resistance to regionalism in other parts of the
world through SAFTA. It may quicken multilateral freeing of tariff
barriers
9
Inferences from Meta-Analysis
▪
Rejection of significance of SAFTA based on “natural trading
block” hypothesis based on geographical proximity (trade
intensity index), degree of complementarity (complementarity
index – matching export profiles and import demands):


Post-liberalisation trade diversification effects are ignored
Existence of huge informal trade in the region could not be
explained
10
Inferences from Meta-Analysis

Quantitative assessments – general and partial equilibrium
models, gravity models etc. predict that the impact of a South
Asian FTA on trade flows will be small for India compared to its
trading partners:





Wide variation in predictions on impacts depending on
assumptions used
Reliance on past trends and ex-post analysis
Ignores positive influence of RTAs in changing the
traditional rent-seeking behavior
Ignores positive externalities of development of trade
infrastructure and related trade reforms for trade costs
Excludes effects of changes in transaction costs due to
trade facilitation measures
11
Inferences from Meta-Analysis

Omission of spillover effects of comprehensive economic
integration including simplification of banking facilities for
import financing, transit facilities for the landlocked countries,
removal of barriers to intra-SAARC investments, policy
consultations, rules for fair competition and promotion of
venture capital, development of communication systems and
transportation infrastructure, easing foreign exchange controls
on repatriation of profits, simplification of procedures for
business visas, etc

Dearth of studies on consumer welfare effects – only passing
references to consumer welfare gains in general equilibrium
modeling exercises
12
Assessment of Consumer Welfare under
SAFTA

Country wise assessment of potential consumer welfare gains due
to subjecting items in the sensitive lists to Trade Liberalisation
Programme of SAFTA

Calculates figures of minimum gains for product categories with
maximum potential effects on consumer welfare

Country wise trade data for the analysis is accessed from
UNCOMTRADE database and data on import and export prices
and quantity is accessed from Trade Maps, International Trade
Centre
13
Assessment of Consumer Welfare under
SAFTA (Methodology)
STAGE 1- Selection of products from sensitive lists (HS07 6-Digit
level) of each country by sequentially applying the following two
criteria:

Products in sensitive lists of a SAFTA member country (m) with
high shares in the total exports of partner countries (p) to rest
of the world (RoW), reflecting the export potential of partner
countries in such products

A list thus selected is further filtered by selecting products in
which exports of partner countries to the member country is
minimal
14
Assessment of Consumer Welfare under
SAFTA (Methodology)
STAGE 2 – Consumer welfare gains for a member is calculated as:
∑CWmi = ∑ (pmiqmi – ppiqmi) where,
CWmi – Consumer Welfare due to change in import price of country
M in product i
pmi – Import price of member country M in product i from ROW
ppi – Export price of SAFTA partner country p in product i to ROW
qmi – Import Quantity of member country (m) in product i from
ROW
15
Partial Estimates: Indo – Bangla Case
India’s major export items in Sensitive List
of Bangladesh
Sr
No.
Major Items exported
by India to the ROW
HS07 4 Digit Level)
Product Description
No. of items
present in
Bangladesh's
Sensitive List
Percentage of
total exports
1
8703
Cars (incl. station wagon)
5
3.46
2
3004
Medicament mixtures (not 3002,
3005, 3006), put in dosage
2
2.42
3
4
8517
8708
Electric app for line telephony,incl
curr line system
Parts & access of motor vehicles
7
14
2.28
1.71
5
8528
Television receivers (incl video
monitors & video projectors)
6
0.83
6
2701
Coal; briquettes, ovoids & similar
solid fuels manufactured from coal
2
0.77
7
9018
Electro-medical apparatus (electrocardiographs, infra-red ray app, sy
Total
3
39
0.61
12.08
16
Partial Estimates: Indo – Bangla Case
Bangladesh’s major export items in Sensitive
List of India
Sr.
No
1
Major Items exported
by Bangladesh to the
ROW
HS CODE(4 DIGIT
LEVEL)
6109
2
6110
3
6203
4
6204
5
6
6205
6104
7
8
9
10
11
6105
0306
6302
6206
6108
12
5307
Total
Product Description
No. of items
present under
India’s
Sensitive List
Percentage of
Total Exports
T-shirts, singlets and other vests,
knitted or crocheted
Jerseys, pullovers, cardigans, etc,
knitted or crocheted
Men's suits, jackets, trousers etc &
shorts
Women's suits, jackets, dresses
skirts etc&shorts
Men's shirts
Women's suits, dresses, skirt etc &
short, knit/croch
Men's shirts, knitted or crocheted
Crustaceans
Bed, table, toilet and kitchen linens
Women's blouses & shirts
Women's slips, panties, pyjamas,
bathrobes etc, knitted/crocheted
Yarn of jute or of other textile bast
fibres of hd no 53.03
2
16.63
3
15.64
8
14.46
17
8.21
3
12
6.49
3.19
3
0
0
4
10
3.13
2.25
2.4
1.79
1.76
0
1.64
62
77.86
17
Partial Estimates: Indo – Bangla Case
Filtered Sensitive List of India – items of
minimal exports from Bangladesh
Sr.
No
1
Major Items
exported by
Bangladesh to
the ROW
HS CODE(4
DIGIT LEVEL)
6203
2
6204
3
6104
4
6206
5
6108
TOTAL
Product Description
Men's suits, jackets, trousers etc
& shorts
Women's suits, jackets, dresses
skirts etc&shorts
Women's suits, dresses, skirt etc
& short, knit/croch
Bed, table, toilet and kitchen
linens
Women's slips, panties, pyjamas,
bathrobes etc, knitted/crocheted
Number of
items with 0
trade
between India
and
Bangladesh
5
Total Value
of Imports
from the
Rest of the
World
(in US$)
2579000
Total
Consumer
Welfare
(in US$)
877123
Percentage
share of
consumer
welfare in
imports
from ROW
34.01
12
3471000
2090777
60.23
8
806000
367938
45.64
2
940000
613190
65.23
9
1657000
466869
28.17
36
9453000
4614753
48.82
18
Partial Estimates: Indo – Bangla Case
Filtered Sensitive List of Bangladesh– items
of minimal exports from India
Sr
No.
Major Items
exported by India
to the ROW HS
CODE (4 Digit
Level)
Product Description
No. of items
present in
Bangladesh's
Sensitive List
Total Value
of Imports
from ROW
(in US$)
Consumer
Welfare
(in US$)
Percentage
of
Consumer
Welfare in
Imports
1
3004
Medicament mixtures (not 3002,
3005, 3006), put in dosage
2
33262000
25668520
77
2
8517
Electric app for line telephony,incl
curr line system
7
362173000
94494668
26
3
8528
Television receivers (incl video
monitors & video projectors)
6
21555000
1762036
8
4
8443
Printing machinery; machines for
uses ancillary to printing
1
17341000
9018
Electro-medical apparatus
(electro-cardiographs, infra-red ray
app, sy
3
14794000
12663610
86
Total
19
449125000
134588834
30
5
19
Partial Estimates: Indo – Bangla Case
20
Partial Estimates: Indo – Bangla Case
Distribution of Gains - Bangladeshi Consumers
Electric app for line
telephony,incl curr line
system
43%
Others
32%
Television receivers
(incl video monitors &
video projectors)
1%
Electro-medical
apparatus (electrocardiographs, infrared ray app, sy
5%
Medicament mixtures
(not 3002, 3005,
3006), put in dosage
19%
21
From Minimum to Maximum Estimates of
Consumer Welfare Gains
 These estimates only show the effects of change in import price
with fixed quantity of imports. The following three effects will be
taken into account to arrive at revised figures:
 Effects of domestic price reduction due to import competition
by using data for total quantity consumed in the importing
country, instead of import quantity
 Effects of trade creation due to increase in import demand by
using estimates of potential trade creation
 Effects of reduction in trade costs within the SAARC region
following trade facilitation measures
22
Usefulness of the Estimates
 The estimation method helps to identify products with maximum
potential consumer welfare gains for each country and therefore,
qualifies for removal from their respective sensitive list
 The estimates form the basis for more detailed studies on the
effects of reduction in transportation costs and other trade
facilitation measures on consumer welfare
 The estimates will facilitate comparison with other trade costs
and relative merits of tariff liberalisation in each product
category can be assessed
23
Thank You
24