Download Measuring and Decomposing Cost of Agricultural Trade Between

Measuring and Decomposing Cost of Agricultural
Trade Between Turkey, the EU and MPC Countries
Selim ÇAĞATAY* and Murat GENÇ**
Workshop on Agricultural Trade and Food Security
in the Euro-Med Area
25-26 September 2014
Antalya, Turkey
*Akdeniz University, Department of Economics, Turkey. [email protected].
**Otago University, Department of Economics, New Zealand. [email protected].
Motivation behind the work..
•
Two factors:
•
1st:
Anderson & Wincoop (2004) “...trade costs...”, Jour. of Econ. Literature
Novy (2012) “...measuring international trade costs...”, Economic Inquiry
Arvis et al (2013) “...trade costs in the developing...”, WB Discussion Papers
“...ad valorem trade cost for the developed countries reach about 170%... of which
border barriers are about 44%... of which 8% is only tariffs...”
“... we have transportation costs, wholesale and retail distributional costs,
information, security, language etc. barriers... left...”
•
2nd: Changing/unchanging shares of Turkey and MPC in the EU’s agricultural trade
since late 1990‘s
Motivation
Table 1: Share of various markets in EU's and Turkey's agricultural trade
EU
Turkey
Turkey-%
Main MPC Prt.-% Main MPC Prt.-%
Exports Imports Exports Imports Exports Imports
2000
1.15
3.55
4.79
0.11
7.90
2.36
2005
1.44
4.68
4.58
0.16
3.30
4.95
2006
1.36
4.44
4.28
0.15
4.00
4.33
2007
1.60
4.01
4.68
0.13
3.45
4.54
2008
1.72
3.87
6.47
0.12
4.56
1.81
2009
1.79
3.96
5.24
0.09
6.04
1.94
2010
2.29
4.09
4.97
0.07
6.02
2.26
. ...the shares change in a narrow range...
Motivation
25.00
30.00
20.00
EU-TR Agr. Trd.
25.00
15.00
EU-TR Trd. Cost
20.00
-15.00
40.00
TR-MPC Agr. Trd.
30.00
TR-MPC Trd. Cost
20.00
10.00
-20.00
2009-10
2008-09
2006-07
2005-06
-10.00
2000-01
0.00
2009-10
-20.00
2008-09
-10.00
2007-08
-15.00
2006-07
-5.00
2005-06
0.00
2000-01
-10.00
EU-MPC Trd. Cost
2007-08
-5.00
2009-10
5.00
2008-09
0.00
2007-08
10.00
2006-07
5.00
2005-06
15.00
2000-01
10.00
EU-MPC Agr. Trd.
Motivation
•
The change in agricultural trade might be partly due to the factors that affect
agricultural demand and production but the literature also attributes significant
attention to cost of agricultural trade...
•
From theoretical point of view trade costs are:
– the set of factors that drive a wedge between export and import prices
– can be fixed in the sense that they are paid once in order to access a market
– or variable in the sense that they must be paid once for each unit shipped
– trade costs matter as a determinant of the pattern of bilateral trade and
investment, as well as of the geographical distribution of production
•
Therefore trade costs are of great importance from the policy perspective
- to understand the sources of those costs
- they are important determinants of a country’s ability to take part in regional
and global production networks
Motivation
•
Empirical evidence provides that
– tariffs in many countries are now at historical lows but trade costs still remain
high
– trade costs in the developing world are likely to be even higher
– trade costs are lower at least in some parts of developing world but the rate of
change is slower compared to developed countries
– in addition to traditional sources of trade costs, such as tariffs and
transportation charges, a range of additional factors are now affecting the
pattern of trade and production in the developing world:
• trade facilitation and logistics performance
• “behind the border” measures
Motivation
•
This classification is important because
– it suggests that a significant part of the trade isolation of some developing
countries may be due to policy factors within their governments’ control
– deep regulatory and institutional features of countries that affect all firms
operating there and do not necessarily discriminate in law—although they
usually do in fact—against foreign firms
Aim of the Paper
Mainly:
• To find the effect/contribution of various tariff and non-tariff factors on
bilateral agricultural trade costs between:
- EU-MPC
- EU-TR
- TR-MPC
Methodology
A-Measuring agricultural trade costs
B-Econometric estimation of agricultural trade costs
Methodology
A-Measuring agricultural trade costs
Alternative measures of trade costs
Gravity approach
(vast literature)
“Bottom-up”
Product-line measures
(Kee et al., 2009).
“Top-down” approach
(Novy, 2012)
“Bottom-up”
Unified measure of
trade cost
(Anderson and Van
Wincoop, 2004)
Methodology
A-Measuring agricultural trade costs
Gravity approach:
•
use particular factors, such as geographical distance, cultural similarity, etc. as
sources of trade costs
•
one drawback- it does not produce an overall estimate of the level of trade
costs between countries, of the type that is frequently included in theoretical
models of trade
•
another drawback- concerns about omitted variables bias due inclusion of some
variables but not others
Methodology
A-Measuring agricultural trade costs
“Bottom-up” Product-line measures:
•
focus on aggregating product-line measures of trade policies -Trade
Restrictiveness Indices; tariff (TTRI) and non-tariff barriers (OTRI)
•
these suffer from the limitation that they are “bottom up” measures– they take account of those sources of trade costs included in the datasets
used to build them, but not other potential sources
– these indices leave out other major sources of trade costs, such as transport
costs, and differences in cultural or legal heritage between countries which
magnify the costs of doing business across borders
Methodology
A-Measuring agricultural trade costs
“Bottom-up” Unified measure of trade cost:
•
they unify various determinants of trade costs such as tariffs and non-tariff
measures, transport costs, and domestic distribution costs
•
a “bottom up” approach in the sense that it builds up an estimate of the overall
level of trade costs based on assumptions as to what the likely components of
the total costs are
Methodology
A-Measuring agricultural trade costs
“Top-down” approach Novy Index:
•
“top down” measure in the sense that it uses theory to infer trade costs from
the observed pattern of trade and production across countries
•
derives an all-inclusive measure of trade costs based on the observed pattern of
trade and production, without the need to work up from individual policy
measures as in other work
•
trade costs therefore include both observable and unobservable factors: tariffs
and traditional non-tariff measures; transport costs; behind-the-border barriers;
and costs linked to the performance of trade logistics and facilitation services
•
it includes all factors that contribute to the standard definition of iceberg trade
costs in trade models (anything that drives a wedge between the producer price
in the exporting country and the consumer price in the importing country)
•
provides a summary indicator of the level of trade costs between any two
country pairs
Methodology
A-Measuring agricultural trade costs
Novy Index to Measure Trade Costs
ciJ: cost of trade between countries i and j
xii: domestic trade flow in country i
xjj: domestic trade flow in country j
xij: nominal exports from country i to country j
xji: nominal exports from country j to country i
σ: elasticity of substitution between all goods
• final measure represents the geometric average of international trade costs
between countries i and j relative to domestic trade costs within each country
•trade costs are higher when countries tend to trade more with themselves than
they do with each other
•data for domestic trade flow are not directly available but can be calculated by
subtracting total exports of the country from its gross domestic product
Methodology
A-Measuring agricultural trade costs
Novy Index to Measure Trade Costs
• if the measure is expressed for a specific industry k (rather than total exports),
the trade flow variables will have a superscript k and will have a subscript k
• all the variables except σ are observable (although it is possible to estimate,
Novy (2012) shows that the overall results are not sensitive to its value and
suggests setting it equal to 8 based on the surveyed estimates of it in Anderson
and van Wincoop (2004)
•the calculated value ciJ measures international trade costs relative to domestic
trade costs, and captures bilateral trade barriers in both directions
Methodology
B-Econometric estimation of agricultural trade costs
•
Data sources:
•
Estimation period: 1995-2010
•
Estimation methods: Unbalanced, static panel econometrics
•
Sample:
UN/ESCAP (Econ. and Soc. Commission for Asia & the Pacific)
World Bank/WDI (World Development Indicators)
UN/UNCTAD (UN Conf. On Trade & Development)
CEPII
Major trade partners of Turkey in the EU
Major trade partners of the EU in MPC
Major trade partners of Turkey in MPC
Methodology
B-Econometric estimation of agricultural trade costs

cTjt  distTj e
0  1 X Tjt Tjt
,
ln cTjt  0   ln distTj  1 X Tjt  dt  Tj  Tjt ,
cTJt: cost of trade between Turkey and country j at time t
distTj: great-circle distance between capital of Turkey and capital of country j
XTjt: set of covariates that represent observable determinants of trade costs
ηTjt: composite error term (allowed to consist of a country-pair specific
component μTj (that is, a fixed or random effect) and a country-pair white noise
error term εTjt
dt: vector of year indicators representing the time fixed effects
Methodology
B-Econometric estimation of agricultural trade costs
XTjt: covariates that represent observable determinants of trade costs
Continous variables
•
•
•
distance between the two principal cities of countries
real exchange rate of country
trade-weighted average effectively applied tariff
Discrete variables: Non-tariff measures
Transportation
. air freight
. rail freight
. road freight
. liner shipping connectivity
. road density
. port quality
. port traffic
Trade facilitation
. cost to export
. cost to import
. time to export
. time to import
. customs procedures
. customs clearence time
Business env.
. cost of st. bussiness
. proc. of. st. business
. credit depth
. cost of enfor. contr.
. str. of legal rigths
. transp. in publ. sec.
Methodology
B-Econometric estimation of agricultural trade costs
XTjt: covariates that represent observable determinants of trade costs
Discrete variables : Non-tariff measures
Infrastructure
. cell phone
. phonelines
. internet users
Intercept dummy var.: Gravity var.
. colonial relationship
. common land border
. colonized by the same power
. ever part of the same country
. share a common official language
. share a common language
(ethnographic basis)
. both landlocked
. members of the same RTA
Findings: measures of elasticity on the horizontal axis
road freight
ALG-EU
rail freight
MOR-EU
transportation
EGY-EU
liner shipping connectivity
TR-EU
TR-MPC
legal rights
business env.
credit depth
cost of business st.
customs proc.
cost to import
trade facilitation
cost to export
avg tariffs
border
distance
-2
-1.5
-1
-0.5
gravity
0
0.5
1
1.5
2
2.5
3
Findings
- No endogeneity problems expected due to how trade costs are calculated
- Adjusted R2 ranges between min 0.55 and max 0.88
- Variables included in the figure are statistically significant ones (at least 0.05)
The messages we got:
-Physical distance still remains as a major cost factor for all country pairs
-Tariffs are important especially between Morocco-EU & Egypt-EU
-Factors that improves trade facilitation especially in the EU are important both
for MPC and TR
-Improvements in business environment in the EU developes more intra trade
rather than international trade but this becomes more important in trade with
Algeria
-Improvement in shipping connectivity and increase in rail freigt decreases the
trade cost between Morocco-EU and Turkey-EU
Decomposition...
•Although the estimated coefficients represent the impact of different components
of costs, their share in trade costs still needs to be determined.
sm 
 m cov( xm , cTj )
var(cTj )
,
sm: denotes the contribution (in percentage) of covariate xm to total trade costs
βm: partial regression coefficient
Novy Index to Measure Trade Costs: should be interpreted cautiously
•
first, it is the geometric average of trade costs in both directions: from a policy
perspective, it is therefore impossible to say without further analysis
(decomposition analysis) whether a change in trade costs between two
countries is due to actions taken by one government or the other, or both
together (recognize that only part of the total will be amenable to direct policy
action by governments)
•
second, it measures international relative to domestic trade costs: a change in
cost might be due to a change in either component, or both simultaneously, it is
therefore impossible to disentangle the effects of particular policy actions
without further analysis (decomposition analysis)
•
third, the interpretation depends to some extent on the theoretical model from
which it is derived; in the Anderson and Van Wincoop (2003) model, trade costs
are variable only; in other models of trade with fixed costs as well, such as
Chaney (2008), a similar expression for trade costs can be derived
Novy Index to Measure Trade Costs: should be interpreted cautiously
•
the numerical value of trade cost is sensitive to the choice of parameter value
for 𝜎, the elasticity of substitution (but the choice of parameter value largely
remains an issue of assumption rather than measurement)
•
the possibility that different countries and sectors might exhibit different
elasticities gives some cause for concern at the level of interpreting across
countries and through time
•
nonetheless, on the assumption that the elasticity is indeed constant, the choice
of parameter value only affects the level of ad valorem trade costs, not their
relative values across countries and through time
•
indexing trade costs on a base country-year combination reduces the problem
of sensitivity to negligible proportions, although it does not totally eliminate it
as trade costs are a non-linear function of the elasticity of substitution