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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