# 4.1.1 Different Types of Trade Policy

Liberal trade policies, including reductions in tariffs and NTMs, and engagement in preferential trade agreements (PTAs), help reduce trade costs, and thus enlarge effective market size (World Bank 2020a). While the positive trade effects of reduced trade barriers on imports and exports have been welldocumented, the gains can be even larger in a GVC world where value-added crosses multiple borders, as they reduce the price of both exported goods and input costs (e.g., Yi 2003, 2010; Caliendo and Parro 2015, Antràs and DeGortari 2020, Fernandes et al. 2022). Reduced tariffs on intermediates have also been shown to raise export performance at the firm level (Bas and Strauss-Kahn 2015; Pierola et al. 2018). Similarly, reciprocal tariff reductions by partner countries reduce the costs of exporting.

Liberalizing trade is about more than just tariffs, however. Recent evidence for Indonesia suggests that higher exposure to selected protectionist NTMs significantly reduces the survival probability of firms in export markets and negatively affects exporters’ extensive and intensive margins. Importantly, the negative effects of NTMs are larger than for import tariffs (Calì and Montfaucon 2021). However, other research on Indonesia emphasizes that some NTMs on imported inputs like anti pest treatments have beneficial welfare effects, while protectionist NTMs such as pre-shipment inspections have negative ones (Calì et al. 2021). Reforming non-tariff measures is often more important in creating welfare gains, as evidenced by recent estimates for the African Continental Free Trade Area (AfCFTA) using a Computable General Equilibrium (CGE) approach. In fact, tariff reductions are estimated to raise the welfare of AfCFTA member countries by 0.2 percent, whereas lowering NTMs in goods and services by half would increase it by 1.6 percent (World Bank 2020b). The estimated gains are even larger accounting for improvements in trade facilitation (see section 5.2). In addition, deep PTAs have been shown to enhance GVC participation, as they also include policy areas such as movement of capital, investment, visas, competition and intellectual property rights – beyond mere market access (see, e.g., Orefice and Rocha 2014, Kowalski et al. 2015, Johnson and Noguera 2017, and Laget et al. 2018).

Facilitating imports of intermediates is not only about goods: it is also important to have access to producer services, such as transport, finance, and research and development. Where the local economy does not have comparative advantage in these areas, as is common in low and middle-income countries, it is advantageous to import these services with a view to upgrading productive activities in other parts of the economy. There is evidence that liberalizing services policies can produce significant benefits for manufacturing exports within subnational regions (Hoekman and Shepherd, 2017) and for the productivity of manufacturing firms downstream (Arnold et al. 2011, Arnold et al. 2015), which is important in terms of helping the economy generate employment gains following a trade policy reform. Rodrik (2022) goes further, to argue in favor of an industrial policy for services, focusing in particular on support for good quality jobs in that sector.

The latter point illustrates that trade policy has a sector-specific component with implications for labor market outcomes. Lowering tariffs and NTMs in sectors that play a strong role as input suppliers for other parts of the economy can boost the gains from trade liberalization. The rationale for this approach is that, as shown by Ngoma (2022), improved access to inputs can drive productivity growth in sectors using these imported inputs downstream, which in turn increases demand for labor. Since imported intermediates are often not perfect substitutes for locally produced varieties, the displacement effects of trade liberalization in intermediates are not as strong as they are for final goods, where substitution effects may be stronger. Recent evidence suggests that the impact of imported inputs on labor market outcomes is more favorable than that of final imports, both at the cross15