The World Economy Asia Annual Lecture University of Nottingham M alaysia February, 2012

1. Declining Protection in Developing Countries: Fact or Fiction?Chris MilnerGEP and School of EconomicsUniversity of Nottingham The World Economy Asia Annual Lecture University of Nottingham Malaysia February, 2012

2. Context • There has been substantial ‘unilateral’ trade policy reform across developing countries over the last two or three decades • dismantling of the old forms of non-tariff protection (import licencing and foreign exchange controls) • simplification of border taxation of imports and lowering of average tariff levels • There has also been greater discipline imposed on trade policy setting in developing countries through multilateral (e.g. WTO membership and binding of MFN tariffs) and regional commitments

3. Average MFN Applied Tariffs (%)

4. Case Study: Malaysia (2009)

5. Developing Country Exports (% of GDP)

6. Initial Assessment of the Evidence • A picture of import liberalisation and increased openness in developing countries • An associated reduction in protection for domestic producers in domestic markets • And an associated increased incentive to orientate production towards unprotected export markets • But is this the reality and is the picture painted of declining protectionism an illusion?

7. Tariff Peaks, Escalation and Protection • Average applied tariffs hide the tariff peaks and misrepresent the prohibitive and protective nature of tariff protection • There is much greater tariff escalation (between input and output tariffs) in tariff structures than implied by average tariffs, especially for local production competing with imports in the domestic market (see table below) • Evidence below excludes the protective effects of NTBs (traditional and new)

8. Further Details on MFN Applied Non- Agricultural Tariffs in Malaysia (2009)

9. Illustrative Effective Protection Effects

10. Case Study: Effective Protection from Tariffs in Mauritius (2009)

11. The Role of Non-Tariff Barriers • Continuing tendency for instrument substitution • replacing reduced tariff protection with non-tariff protection • replacing old forms with new forms of NTB protection • Developing countries have learnt or are learning (from industrial countries) to use new forms of administrative protection • greater use of standards and contingent protection (e.g. anti-dumping) measures (see table below) • Difficult to accurately measure the extent of NTBs in comparable way to tariffs • Kee et al.(2008) estimate average tariff equivalent of NTBs on affected tariff lines to be 31.9% for Malaysia (for 2000) • will tend to raise effective protection further, i.e. above generated by tariff protection

12. Use of Anti-Dumping

13. Trade Costs and Implicit Protection • Considerable amount of evidence now that trade policy is a relatively small component of trade costs • Transport and distributions costs affected by aspects of geography, but also by the scale of trade, the quality of infrastructure and institutions • These costs are absorbed by ‘small countries’ and serve also to have implicit taxing and subsidising effects (akin to those of trade policy measures) • even if these other trade costs uniformly apply to imports of intermediate and final goods they will raise effective protection for import-competing production substantially • likely to be some resistance domestically to reducing avoidable, ‘unnatural’ sources of these trade costs

14. Estimated Average Bilateral Trade Costs: Malaysia (2009)

15. Implicit Subsidy (+) and Taxation (-) Effects of Trade Costs

16. Protected Exporting • Tend to think of exporting being un-protected and not being implicitly or explicitly subsidised, but a growing proportion of the exports of developing countries is under some form preferential arrangement • preference scheme offered by industrial countries to developing countries • intra-regional trade behind a common external tariff • not such a feature of intra-Asian trade, but not unimportant from some Asian countries too

17. Share (%) of Intra-Regional Exports in Total Exports: Africa

18. Share (%) of Intra-ASEAN Exports in Total Exports (Manufactures)

19. Preference Margins on Asian Exports to European Union : (2009)

20. Preference Margins on Exports to Major Markets: Mauritius (2008)

21. Revised Assessment and Conclusions • Trade reform and import liberalisation do not necessarily reduce or reduce significantly the levels of protection for domestic producers • The degree of protection for domestic producers in developing countries is much understated by examination of average applied tariffs • much greater escalation and effective protection from peak tariffs • focus on tariffs misses protective effects of NTBs and non-trade policy sources of trade costs • The increased outward or export orientation of many developing countries may well also over-state the shift from protected to unprotected production • growing share of preferentially treated exports, including in intra-regional and intra-developing country trade

22. An After-thought! • As a much younger economist, I co-authored a Hobart Paper (Greenaway & Milner, 1979) entitled ‘Protectionism Again…?’ • I now wonder whether I should not have used the title ‘Protectionism Again and Again and Again!’ for this lecture • some decline in protection may be a fact for some developing countries, but it is and is likely to remain a fiction for many others!