# A profile of border protection in Egypt: An Effective Rate of Protection approach adjusting for energy subsidies

Alberto Valdés and William Foster

## **1. Introduction**

Since the mid-1980s the Egyptian government has moved from an emphasis on state planning and high level of protection towards a reliance on private economic activity and trade openness. Especially since the late 1990s, Egypt has been committed to macroeconomic stability and private sector development; it has privatized several stateowned firms, and made legal reforms to spur private investment. In addition, the government has also pursued a policy of trade liberalization, the elimination of quantitative restrictions on imports, and the reduction in tariffs overall. Egypt made significant unilateral reforms to reduce border protection in 2004 and 2007, and has participated in regional and global negotiations in the WTO.

These reforms, especially the greater openness to trade, would imply significant reduction in the levels of protection of Egyptian industries, and perhaps a lower dispersion of protections across industries, treating economic sectors more uniformly. One simple method of measuring protection to industries is to observe applied tariffs. But tariffs by themselves do not reveal all of the practical incentives arising from the trade regime that face real-world investors. One should look at the effects of trade policy on the net income – value added – generated by industries. A more accurate measure for practical policy analysis should account for both protections on the output side as well as tariff effects on the costs of tradable inputs. This is the effective rate of protection approach used in the present study to capture the incentives for resource flows between various sectors. The same nominal tariffs on final products can imply large differences in effective protection of industries, because industries differ with respect to their use of import-competing inputs and their cost structures are impacted differently depending on how such inputs are taxed at the border. In addition there could be non-tariff barriers (NTBs) related to policies that effectively raise the price wedge between a domestically sold good and its price at the border.

When assessing levels of industry protection in Egypt, one faces the additional major complications that the government has maintained subsidies on the provision of some goods and high levels of subsidies on energy sources that impact across many industries. So one should not only account for the effect of the trade regime at the border but also internal advantages to certain industries that result from these two sources of subsidies. This study takes care to separate two effects: that of the tariff schedule and output subsidies and that of energy subsidies. As a practical matter, we make use of information from the 2006/2007 input-output matrix that indentifies five fuel-energy sectors (natural gas, industrial and diesel fuels, LPG and gasoline) and estimates of price subsidies associated with these energy sources.

After several years of economic reforms and trade liberalization, this is a good moment to assess the level of protection of various Egyptian industries, and to discuss the implications of the current profile of protection and subsidies for the at-least implicit (and perhaps unintended) discrimination between sectors, privileging some and 1