Silviase/jgov_v1.4_full_ann huggingface dataset:
# European perspectives on NTM and tariff liberalization

Joseph Francois

Johannes Kepler University (Linz) and CEPR (London)

Miriam Manchin

University College London

Hanna Norberg

University of Lund

Abstract: The individual Members of the European Union trade inside a web of preferential trade agreements. At the core of these agreements is the EU itself. More recently, the EU has been engaged in negotiations with countries as far ranging as Central America, South East Asia, East Asia, and North America. The ambition and scope of the more recent set of preferential negotiations is not limited to tariffs. The stated goal of the EU is to ease access for investment, reduce tariffs, reduce trade costs linked to regulations, and reduce policy uncertainty. In other words, while tariffs are part of the mix, the interests of the EU also include investment regulation (which impacts market access for services), regulatory barriers to trade, and commitments to policy stability as it impacts on EU firms. The existence of these agreements, and especially the multipronged effort of the EU to negotiate more agreements, means that the impact of the agreements is a collective affair. In particular, with the prospective combination of recent and possible new agreements with a range of middle-and high-income G20 Members, the impact of these agreements collectively may be different from impact of comparable individual agreements. This paper compares and contrasts the impact of a range of new preferential trade agreements (PTAs) when viewed individually or collectively. This is done with a computable general equilibrium model of the world economy. The collective impact is far greater than the sum of the parts. This follows from induced investment effects. The investment impacts lead to positive gains for third countries. The comparison of NTMs and tariffs also highlights the potential importance of regulatory and administrative barriers to trade. Overall, estimated impact from reduction in NTMs is much larger than reduction in tariffs. This may explain the shift in emphasis in recent agreements from tariffs to deeper modes of integration, as these are more likely to address the impact of non-tariff measures on European exporters.
### 1. Introduction

The individual Members of the European Union trade inside a web of preferential trade agreements. At the core of these agreements is the EU itself. The EU offers duty free access for goods, progressive efforts to integrate factor and services markets, and ongoing efforts to harmonize and reduce regulatory barriers to trade within the EU. Linked to the EU itself are the members of the European Economic Area, who also share in the regulatory convergence process. Beyond this lies a set of preferential agreements with a range of trading partners – such as Mexico, South Africa, and various Mediterranean countries. More recently, the EU has been engaged in negotiations with countries as far ranging as Central America, South East Asia, East Asia, and North America.

The ambition and scope of the more recent set of preferential negotiations is not limited to tariffs. The stated goal of the EU is to ease access for investment, reduce tariffs, reduce trade costs linked to regulations, and reduce policy uncertainty. In other words, while tariffs are part of the mix, the interests of the EU also include investment regulation (which impacts market access for services), regulatory barriers to trade, and commitments to policy stability as it impacts on EU firms. These are broadly consistent with the EU goals with respect to new and prospective members of the EEA and EU itself through extension of the acquis communautaire.

The existence of these agreements, and especially the multi-pronged effort of the EU to negotiate more agreements, means that the impact of the agreements is a collective affair. In particular, with the prospective combination of recent and possible new agreements with a range of middle-and high-income G20 Members, the impact of these agreements collectively may be different from impact of comparable individual agreements. This paper compares and contrasts the impact of a range of new preferential trade agreements (PTAs) when viewed individually or collectively. This is done with a computable general equilibrium model of the world economy. Notably, while the individual agreements generally have a positive impact of prospective partners, the aggregate impact is actually greater, with all prospective PTA partners benefitting from the collective impact.
of the full set of agreements, more than would follow from any one agreement on its own. This follows from the long-run investment effects of the agreements.

The paper is organized as follows. Section 2 provides a discussion of the direction of trade and protection affecting EU exporters, as well as a discussion of non-tariff barriers, a focus of recent PTAs. This is followed by a brief discussion of the structure of the model in Section 3, as well as an outline of the policy experiments. Section 4 discusses the numerical modelling results, with a decomposition based both on the impact of the PTAs in terms of allocative efficiency, precompetitive effects, and dynamic effects, as well as a break down of the impact of individual agreements, relative to the collective impact. Conclusions are offered in Section 5. Additional summary tables of results are provided in the Annex.

### 2. The Policy Landscape

### 2.1 Direction of Trade

The interests of individual EU Member States in regional trade agreements reflects the different interests these countries have, in terms of trade flows and barriers faced by their exporters. The collective interest of the EU as a whole reflects these underlying interests at Member State level. Table 1 below presents the direction of exports from various Member States. The pattern of exports reflects both geography and history. In the case of the United Kingdom, geography, history, and language contribute to an orientation to North America far greater than the EU average. Together, the US and Canada account for almost 18 percent of UK exports. Japan is also far more important for the UK than the EU average, at 3.2 percent of exports (compared to 2 percent for the EU as a whole). For Spain, Latin America is more important, again reflecting language and history. However, the EU itself is also more important for Spain than for the average EU country.
Table 1

Direction of exports, shares
exporters ==>
other € zone	other non €	France	Germany	Italy	United Kingdom	Netherlands	Spain	Total EU
EU trade	67.36	66.65	63.80	60.86	59.11	53.45	72.15	71.47	63.54
EEA Trade	4.00	6.36	4.32	6.06	5.60	3.46	3.05	3.47	4.81
Other FTAs	3.78	3.14	6.30	4.22	6.22	5.21	3.15	6.10	4.60
Korea	0.71	0.61	0.74	0.96	0.74	0.94	0.54	0.39	0.76
Japan	1.70	1.89	2.02	2.22	1.97	3.19	1.42	1.00	2.01
Latin America	1.55	1.51	1.68	1.71	2.32	1.89	1.79	3.43	1.84
India	0.99	0.55	0.62	0.56	0.55	1.37	0.53	0.46	0.73
ASEAN	2.44	2.08	2.78	2.74	2.54	3.89	3.24	1.95	2.69
USA	8.56	7.10	7.89	9.95	9.13	15.96	6.62	4.50	9.13
Canada	0.64	0.82	0.96	0.83	0.98	1.91	0.58	0.48	0.90
China	1.91	1.66	2.04	3.49	2.25	1.92	1.54	1.54	2.25
ROW	6.35	7.64	6.85	6.39	8.59	6.82	5.38	5.22	6.73
basis: exports of goods and services

It is interesting to note that the combination of the EEA and existing regional agreements means that, already the individual EU Member States have trade agreements with partners accounting for roughly 73% of exports. In addition, the focus of recent, prospective, and ongoing negotiations reflects (Latin America, India, ASEAN, Canada) bring another 6 percent under the PTA umbrella. If the EU were also to proceed with the US and Japan, and all of these processes led to successful agreements, then 90% of Member State trade would be under preferential trade agreements.

It is important to recall that, for the EU Member States, trade interests include a mix of EU Members, EEA partners, and other trading partners. When you look at individual Members, and not at the EU as a block, the existence of the EU itself means that already a substantial share of Member trade is duty free and subject to preferential treatment on other aspects of rules and regulations. If as seems reasonable, the EC in Brussels responds to the interests of its Members, than at some point the interest in pursuing further agreements is diminishing as more and more trade is covered by existing agreements. Even without an agreement with the US or Japan, the EU is engaged in negotiations with a potential to bring the share of individual Member State exports under such agreements (including the EU itself) to almost 80%. With the US and Japan, this would cross the 90% threshold.
### 2.2 Tariff barriers facing EU exports

While the direction of trade helps to explain the focus of EU negotiations, another indicator is the tariff barriers faced by exporters. To illustrate this point, Table 2 below presents an estimate of the duties that would be collected against EU exports if MFN rates were applied. In the table, EEA trade is assumed to be structurally duty free. Based on these calculations, the table shows the share of duties collected against exports, in value terms, across different destination markets. Viewed together with Table 1, these figures help to pinpoint areas where the EU could save the most money for exporters by negotiating a reduction in applied tariffs.

## Table 2

Potential Duties Collected Against Exports, share
exporters ==>
other € zone	other non €	France	Germany	Italy	United Kingdom	Netherlands	Spain	Total EU
EU trade	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
EEA Trade	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Other FTAs	15.49	10.85	28.20	15.50	20.63	18.80	12.20	34.42	18.82
Korea	2.22	2.01	2.26	3.79	2.15	3.33	3.84	1.22	2.70
Japan	2.56	11.00	5.08	1.17	4.61	1.85	3.52	1.81	3.82
Latin America	6.18	5.86	5.89	7.28	8.15	7.67	7.61	14.54	7.35
India	8.95	3.02	2.60	3.77	2.64	10.06	3.30	2.02	4.54
ASEAN	2.90	3.09	2.95	6.16	2.23	5.47	4.34	1.93	3.90
USA	8.52	5.65	4.97	8.59	11.44	9.57	5.60	5.86	7.89
Canada	1.59	1.33	1.59	1.39	2.04	2.03	1.28	0.84	1.55
China	7.21	5.89	5.83	17.54	6.04	6.54	5.48	4.66	9.01
ROW	44.38	51.31	40.61	34.82	40.06	34.67	52.83	32.70	40.42
basis: exports of goods and services

basis: exports of goods and services

From Table 2, the PTAs already negotiated by the EU already cover roughly 20% of potential duties collected against EU exports. For Spain, these agreements (which include Mexico) have been even more important, eliminating a full third of extra-EEA tariffs. In addition, the current process of ongoing and recently completed negotiations (Korea, Latin America, ASEAN, Canada, India) accounts for another 21% of extra-EEA tariff barriers faced by EU exporters. The US and Japan would add another 12.5%. The total of existing, potential, and EU/Japan duties add up to around 50% of extra-EEA tariffs faced by EU exporters.

It is important to note where remaining tariffs barriers are, outside this core of existing and prospective agreements. Most are in the ROW (non-G20 middle and low income countries) and China. These are not obvious candidates for deep
preferential trade agreements. As such, after the current round of negotiations (perhaps with the addition of Japan and the US), the EU is likes to see remaining benefits rest with multilateral initiatives, rather than yet more bilateral agreements.

### 2.3 Non-Tariff Barriers

While the discussion in Section 2.2 emphasized tariff barriers, it is important to keep in mind non-tariff barriers as well. These are a key component of more recent trade agreements, and are likely to be increasingly important and we move forward. The reasons for this are as follows. First, with the multilateral, bilateral, and unilateral moves to reduce tariffs, what remains is by definition non-tariff barriers. At the same time, a second reason is that political processes that generate tariff protection of specific industries may turn to lobbying for non-tariff barriers as the scope for tariff protection is reduced. Finally, while not contributing to the rising importance of NTMs per se, significant progress in research in this area means we have a better understanding of NTMs. This has contributed to a heightened awareness of barriers to trade. (For a survey on previous studies on NTMs in goods, see Anderson and van Wincoop 2004. For services, see Francois and Hoekman 2010.)

How do we quantify these barriers? The recent literature can be divided into two broad groups. The first involves overviews and assessments of available NTB measures and surveys of existing literature. This includes the OECD (2000) study on technical standards and conformity, OECD (2001) study on sanitary, phytosanitary and technical barriers to trade, the OECD (2005) study on Customs fees and charges on imports, the OECD (2006) study on the review of different methods for assessing NTMs and the OECD (2009) study on NTMs affecting trade in agricultural and processed food products.

A second strand of this literature focuses on econometric estimates of non-tariff barriers. In this study we will utilize the survey results from recent EU-sponsored research on NTMs, building on a G20 assessment by the OECD (2011) that maps EU survey results to broad industrial sectors. The EC NTM project led by ECORYS (2009) had the stated goal of trying to "shed light on the existence of
nontariff measures (NTMs) and regulatory divergence at the sector level of EU-US trade"- Furthermore, the study aimed to estimate the magnitude of this divergence and to the calculate the potential economic impact of a reduction or harmonisation of these measures. The basis for the estimation in the study comes from an extensive business survey incorporating firms originating in the EU, US and third countries, operating in the EU and/or US. (The survey is further described below). The results from the survey were incorporated in a set of econometric models, using the Anderson et al methodology (outlined in the report) to estimate current levels of NTBs impacting US-EU trade The use of a gravity model allowed for calculation of ad valorem equivalents of NTBs. These were then used as basis for further analysis using a Computable General Equilibrium (CGE) model aiming to estimate potential effects of lowering current levels on NTBs.

The OECD (2011) NTM study took the underlying data, mapping these to industrial sectors for the full G20. This was possible because firms also identified and ranked major third markets in the survey. Indeed, the finished product of the business survey generated bilateral NTM index numbers (between 0 and 100) based on the answers from 5,500 companies, which then were cross-checked against other indicators. $ ^{1} $ By using a less detailed aggregation than in the EU-US study, the OECD (2011) study works with a set of NTM indexes ranking G20 markets for 6 broad sectors: processed foods, chemicals, metals, motor vehicles, machinery, and other manufactured goods.

It should be emphasized that the resulting estimates reflect the feasibility of actually reducing apparent barriers. This reflects a concept known as "actionability." The rationale behind this approach is two-fold. First, most NTMs are based on domestic regulations that address certain market failures. In essence this implies that NTMs are put in place to assure that imported products
comply with the same standards and regulations as domestic products. Trade costs, and trade frictions, arise from differences in regulations and their implementation. Obviously, ‘reduction to zero’ is not a feasible option for those NTMs. Thus, one has to acknowledge that a certain amount of trade costs related to those measures will always exist. $ ^{2} $

Table 3 below provides an example of NTMs for industrial sectors, from the OECD (2011) study. For comparison, these are reported along with the corresponding level of MFN tariff protection. The NTBs are reported as tariff or trade cost equivalents. In other words, the values represent the increased cost of delivery of services to consumers cross-border. To take an example from the table, motor vehicles exported to the EU face an estimated 8.1 percent MFN tariff. At the same time, administrative and regulatory barriers add an estimated 17.1 percent to the cost of delivery. When the Doha Round is finally finished, the tariff barrier will be reduced to roughly 4 percent. However, the NTMs will remain. In contrast, in Brazil, where tariff bindings are well above applied rates, both tariffs and NTMs will be at roughly the same rate even after the conclusion of a successful Doha Round. For broad ranges of industrial goods and countries, NTBs are an important part of the cost structure linked to global trade and investment patterns. This helps explain the shift in emphasis (in response to pressure by business) to regulatory and administrative barriers in the structure of recent regional trade negotiations. This also implies a likely shift to these issues in Geneva once the Doha Round ends.

The impact of such barriers can be quite different from those that follow from tariffs. First, tariffs are collected as revenue, and do not involve substantial increases in actual cost of production and delivery. With NTMs, these can instead reflect real increases in cost of production and delivery. For example, in the ECORYS (2009) and Copenhagen (2010) studies, on average around half of
Table 3

NTM related trade costs	tariffs (MFN)
Motor vehicles
Brazil	27.2	15.5
Canada	2.6	3.8
China	33.9	20.4
European Union	17.1	8.1
India	27.0	17.2
Korea	20.5	8.1
Russia	34.3	15.3
United States	14.9	2.3

Processed Foods
Brazil	39.5	14.1
Canada	23.3	18.5
China	44.8	13.7
European Union	30.1	21.3
India	36.5	48.1
Korea	37.9	33.5
Russia	69.1	15.7
United States	49.5	6.4

the price impact of NTMs was linked to increased operational costs of firms serving foreign markets. The remainder was linked to higher price because of rents generated by restricted competition in the affected markets. In terms of welfare calculus, this means that a substantial portion of the price effect of NTMs (roughly half) is pure dead weight cost linked to higher costs. This in turn implies potentially large welfare effects relative to a comparable tariff barrier.

In general, cost-raising trade barriers imply direct, and significant, gains from trade liberalization relative to comparable tariffs (where comparable is defined in terms of price impacts.) Their allocation depends, like terms of trade effects, on relative supply and demand elasticities. Regardless of their national allocation, however, global welfare effects will be bigger. For the purpose of this study, we have focused on a partial reduction of NTMs (50%) and have modelled them as involving trade costs.
### 3. The Model and Experiments

### 3.1 The Model

The policy assessment that follows uses a computable general equilibrium model (CGE) of global world trade. CGE models help answering what-if questions by simulating the price, income and substitution effects in equilibrium on markets under different assumptions. Here, the economic outcomes of the "baseline" scenario with no policy effects is compared to the scenario with a tariff and quota free trade for developing countries are evaluated. The "baseline" for the model is the equilibrium before the policy change, and the 'scenario' is the equilibrium after the policy change. The effect of the policy change can then be quantified as the difference between the two. The CGE model employed is based on Francois, van Meijl, and van Tongeren (2005). The most important aspects of the model can be summarised as follows:

it covers global world trade and production

it allows for scale economies and imperfect competition

it includes intermediate linkages between sectors

it allows for trade to impact on capital stocks through investment effects

The inclusion of scale economies and imperfect competition implies agglomeration effects like those emphasized in the recent economic literature.

The model runs on the GTAP database, version 7. This database provides internally consistent data on production, consumption and international trade by country and sector. $ ^{3} $ The GTAP agricultural and food processing sectors are classified according to the Central Product Classification (CPC). The other GTAP sectors are defined by reference to the International Standard Industry Classification (ISIC rev.3 as defined by United Nations Statistic Division). Services and utility classifications predate the GATS and are based on IMF balance of
payments statistics (BOP) and UN definitions. The model, as implemented, includes 38 regions $ ^{4} $ and 20 sectors. $ ^{5} $

Sectors are linked through intermediate input coefficients (based on national social accounts data) as well as competition in primary factor markets. The model includes imperfect competition, short-run and long-run macroeconomic closure options, as well as the standard static, perfect competition, Armington-type of model as a subset. It also allows alternative labour market closures. On the policy side, it offers the option to implement tariff reductions, export tax and subsidy reduction, trade quota expansion, input subsidies, output subsidies, and reductions in trade costs. International trade costs include shipping and logistic services (the source of fob-cif margins) but can also be modelled as Samuelson-type deadweight costs. This can be used to capture higher costs when producing for export markets, due to regulatory barriers or NTBs that do not generate rents (or where the rents are dissipated through rent-seeking). For several of the industrial sectors, and most service sectors (except public services, utilities, and transport) monopolistic competition is specified. Others have perfect competition. Econometrically-based substitution elasticities for goods originate from Ecorys (2009) while elasticities for the services sectors were obtained from Dee (2010). (See OECD 2011, and Francois, van Tongeren, and van Meijl 2005 for more information on model structure.)

The long-run closure used here examines changes along a steady-state growth path (level effects) following from induced increases in the capital stock. The long-run effects are based on Francois et al (1997). Here we link capital stocks to long-run changes in investment in response to changes in incomes and returns.
to investment. The long-run closure provides an assessment of the impact of reductions of barriers to trade induced policy changes on the capital stock, thereby capturing the induced expansion (or contraction) of the economy over a longer time horizon following trade barrier reductions. The long-run, dynamic effects involve a mix of induced investment and also productivity effects. The productivity effects follow from an interaction of investment and variety/specialization gains.

### 3.2 The experiments

The policy experiments involve a range of recent and prospective PTAs imposed on the base data. These agreements are modelled as involving elimination of tariff barriers, as well as a 50% reduction in estimated NTMs for industrial goods (excluding energy goods): processed foods, chemicals, metals and metal products, motor vehicles, machinery, other manufactures. The PTAs involve the following blocks of countries and regions: Japan, Korea, Canada, USA, Latin America (Argentina, Brazil, Other), India, ASEAN (Indonesia, Thailand, Other ASEAN). Each PTA is modelled individually. They are also modelled collectively. The individual PTAs are actually modelled as follows. We first impose the full set of PTAs as a baseline. We then examine the full set of PTAs, without a given PTA. For example, we model the full set of PTAs, and then compare this to the full set of PTAs to a set that excludes the recent EU-Korea agreement. Comparison then tells us what the net impact of the EU-Korea agreement is, given the other agreements. This allows us to identify two things: the marginal impact of each agreement (what is the benefit of signing an agreement with the EU?); and the collective impact of the agreements, which is likely to be different from the marginal impact.