Declining Protection in Developing
Countries: Fact or Fiction?
Chris Milner
GEP and School of Economics
University of Nottingham
The World Economy Asia Annual
Lecture
University of Nottingham Malaysia
February, 2012
Context
• There has been substantial ‘unilateral’ trade policy
reform across developing countries over the last two or
three decades
– dismantling of the old forms of non-tariff protection
(import licencing and foreign exchange controls)
– simplification of border taxation of imports and lowering
of average tariff levels
• There has also been greater discipline imposed on
trade policy setting in developing countries through
multilateral (e.g. WTO membership and binding of
MFN tariffs) and regional commitments
Average MFN Applied Tariffs (%)
1991
2001
2009
Developing
Countries
(134 countries)
27.7
13.5
9.9
Low Income
Developing
Countries
(42 countries)
44.4
14.4
11.8
Source: World Bank
Case Study: Malaysia (2009)
Dutyfree
0-10%
10-25%
25-50%
50-100%
100%+
MFN applied
tariff rates (%)
74.5
15.3
4.1
2.9
0.7
2.3
Imports share
(%)
75.9
8.7
3.6
7.2
0.9
3.8
MFN applied
tariff rate (%)
56.9
16.2
19.9
6.9
0.0
0
Imports share
(%)
77.3
9.2
7.3
6.2
0.0
0
Agricultural
products
Nonagricultural
Source: WTO Tariff Profiles
Developing Country Exports
(% of GDP)
40
35
30
25
low and middle income
20
low income
15
10
5
0
1990
1995
2000
2005
Initial Assessment of the Evidence
• A picture of import liberalisation and
increased openness in developing countries
• An associated reduction in protection for
domestic producers in domestic markets
• And an associated increased incentive to
orientate production towards unprotected
export markets
• But is this the reality and is the picture
painted of declining protectionism an illusion?
Tariff Peaks, Escalation and Protection
• Average applied tariffs hide the tariff peaks and
misrepresent the prohibitive and protective nature of
tariff protection
• There is much greater tariff escalation (between
input and output tariffs) in tariff structures than
implied by average tariffs, especially for local
production competing with imports in the domestic
market (see table below)
• Evidence below excludes the protective effects of
NTBs (traditional and new)
Further Details on MFN Applied NonAgricultural Tariffs in Malaysia (2009)
Average
Duty-free (%)
Maximum
Fish & products
1.1
87
20
Minerals etc.
11.2
49
60
Petroleum
0.7
87
5
Chemicals
2.9
82
50
Wood, paper etc.
10.1
46
40
Textiles
10.3
24
30
Clothing
15.9
17
20
Leather, footwear
13.9
40
40
Non-elect
machines
3.6
75
35
Elect. machinery
4.3
73
30
Transport equip.
11.6
41
50
Other
4.8
67
50
Source: WTO Tariff Profiles
Illustrative Effective Protection Effects
Uniform Input
and Output
Tariffs
(if based on
Malaysia’s
average applied
rates)
Uniform Input
and Output
Tariffs
(if based on
Malaysia’s
maximum
applied rates)
Escalating Tariffs
(if based on
Malaysia’s
maximum
output tariff
and duty free
inputs assumed
to account for
20% share of
value of output
of final good)
Escalating Tariffs
( if based on
Malaysia’s
maximum
output tariff
and duty free
inputs assumed
to account for
50% share of
value of output
of final good)
Tariff on Input
(Leather)
14%
40%
0%
0%
Tariff on Output
(Shoes)
14%
40%
40%
40%
Effective Rate of
Protection of
Shoe Production
14%
40%
50%
80%
Case Study: Effective Protection from
Tariffs in Mauritius (2009)
Estimated Effective
Protection from Tariffs
(using average applied
tariff) (%)
Estimated Effective
Protection from Tariffs
(using maximum applied
tariff) (%)
Chemical products
up to 1.2
up to 104.9
Wood, paper etc.
up to 8.3
up to 88.3
Textiles
2.7
500.8
Clothing
9.8
303.0
up to 12.8
up to 203.9
Non-electrical machinery
1.5
26.9
Electrical machinery
-0.8
112.1
Transport equipment
2.2
46.9
Other manufactures
up to 3.1
up to 110.3
Leather, footwear etc.
Source: Own estimates
The Role of Non-Tariff Barriers
• Continuing tendency for instrument substitution
– replacing reduced tariff protection with non-tariff
protection
– replacing old forms with new forms of NTB protection
• Developing countries have learnt or are learning (from
industrial countries) to use new forms of administrative
protection
– greater use of standards and contingent protection (e.g.
anti-dumping) measures (see table below)
• Difficult to accurately measure the extent of NTBs in
comparable way to tariffs
– Kee et al.(2008) estimate average tariff equivalent of NTBs
on affected tariff lines to be 31.9% for Malaysia (for 2000)
– will tend to raise effective protection further, i.e. above
generated by tariff protection
Use of Anti-Dumping
Country
1985-1994
1995-2004
Investigations
Investigations
Measures Imposed
New Developing
Country Users (a)
16%
40%
45%
Traditional
Developed Country
Users (b)
73%
36%
33%
Other WTO members
11%
24%
22%
Total Number
2065
2646
1656
(a) Argentina, Brazil, Colombia, India, Indonesia, Mexico, Peru, Turkey, Venezuela
(b) Australia, Canada, European Union, USA
Source: Bown (2006)
Trade Costs and Implicit Protection
• Considerable amount of evidence now that trade
policy is a relatively small component of trade costs
• Transport and distributions costs affected by aspects
of geography, but also by the scale of trade, the
quality of infrastructure and institutions
• These costs are absorbed by ‘small countries’ and
serve also to have implicit taxing and subsidising
effects (akin to those of trade policy measures)
– even if these other trade costs uniformly apply to imports
of intermediate and final goods they will raise effective
protection for import-competing production substantially
– likely to be some resistance domestically to reducing
avoidable, ‘unnatural’ sources of these trade costs
Estimated Average Bilateral Trade
Costs: Malaysia (2009)
Trade Partner
Average Tax Equivalent of International
Relative to Domestic Trade Costs (% rate)
Regional:
China
52.2
Indonesia
54.7
Japan
61.3
India
75.3
Extra-regional:
USA
75.3
Germany
81.1
UK
102.7
France
106.9
Source: McGowan and Milner (2011)
Implicit Subsidy (+) and Taxation (-)
Effects of Trade Costs
Sector:
Import- competing
production
Export production
+
+
0 (?)
-
- tariffs and NTBs
- (or 0)
- (or 0)
- other trade costs
-
-
Positive
Negative or Zero
Impact on Stage:
Final good
- tariffs and NTBs
- other trade costs
Intermediate inputs
Overall Effective Protection
Protected Exporting
• Tend to think of exporting being un-protected
and not being implicitly or explicitly subsidised,
but a growing proportion of the exports of
developing countries is under some form
preferential arrangement
– preference scheme offered by industrial countries to
developing countries
– intra-regional trade behind a common external tariff
– not such a feature of intra-Asian trade, but not
unimportant from some Asian countries too
Share (%) of Intra-Regional Exports in
Total Exports: Africa
1990
2009
Agricultural products
12
21
Fuels & mining products
3
6
Manufactures
12
25
Source: World Trade Report, 2011
Share (%) of Intra-ASEAN Exports in
Total Exports (Manufactures)
Member country
1992
2009
Cambodia
38
34
Indonesia
6
25
Malaysia
7
23
Singapore
19
23
Thailand
9
19
Vietnam
17
19
Total ASEAN
21
24
Source: World Trade Report,
2011
Preference Margins on Asian Exports
to European Union : (2009)
Weighted Preference Margin
on Exports of Agricultural
Products
(%)
Weighted Preference Margin
on Exports of NonAgricultural Products
(%)
Cambodia
20.3
11.8
India
4.0
2.0
Indonesia
2.3
1.8
Malaysia
1.1
0.9
Sri Lanka
3.4
9.2
Thailand
1.8
1.8
Exports to EU by:
Source: WTO Tariff Profiles
Preference Margins on Exports to
Major Markets: Mauritius (2008)
Major market
Exports (mill. US $)
Preference margin
(weighted) (%)
EU
628
10.4
USA
28
0.4
Madagascar
21
19.4
Kenya
4
26.6
EU
810
9.7
USA
144
13.5
Madagascar
69
14.8
South Africa
62
32.9
Agricultural products
Non-agricultural products
Source: WTO Tariff Profiles
Revised Assessment and Conclusions
• Trade reform and import liberalisation do not necessarily reduce or
reduce significantly the levels of protection for domestic producers
• The degree of protection for domestic producers in developing
countries is much understated by examination of average applied
tariffs
– much greater escalation and effective protection from peak
tariffs
– focus on tariffs misses protective effects of NTBs and non-trade
policy sources of trade costs
• The increased outward or export orientation of many developing
countries may well also over-state the shift from protected to
unprotected production
– growing share of preferentially treated exports, including in
intra-regional and intra-developing country trade
An After-thought!
• As a much younger economist, I co-authored a
Hobart Paper (Greenaway & Milner, 1979)
entitled ‘Protectionism Again…?’
• I now wonder whether I should not have used
the title ‘Protectionism Again and Again and
Again!’ for this lecture
– some decline in protection may be a fact for some
developing countries, but it is and is likely to
remain a fiction for many others!