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Spotlight on Economics: Role of Nonreciprocal Trade Liberalization Programs in Value-added Exports

Nonreciprocal trade agreements impact value-added trade.

By Anupa Sharma, Assistant Professor

NDSU Agribusiness and Applied Economics Department

The World Trade Organization (WTO) and its predecessor, the General Agreements on Tariffs and Trade (GATT), have facilitated multilateral trade negotiations since the 1950s.

In recent years, though, countries increasingly have sought to facilitate trade through bilateral and regional trade agreements (RTAs). As of March 2017, the WTO notifications show that 301 RTAs and preferential trade agreements (PTAs) are in operation.

Often, these agreements provide significant tariff reductions, compared with those negotiated through the multilateral process. Central to such agreements are nonreciprocal trade agreements (NRTAs) aimed at facilitating exports from low- to high-income countries through customized and unilateral tariff reductions by developed countries, and not vice versa.

While the impact of NRTAs on internationally traded final goods has been studied extensively, their impact on trade of value-added products - domestic value addition originating from the agriculture sector - and particularly the mechanism through which they affect value-added trade, is largely untested. More precisely, do NRTAs change the “size of exports” or change the “set of exporters” of value-added trade?

The traditional metric of trade focuses on trade in final goods and services. However, more often than not, goods and services span multiple countries during the production process. As a result, when a good passes from its first to the final stage of production, tariffs and transportation costs are incurred multiple times.

What is well known is that if a policy reduces the trade cost even by a small amount, it leads to a “multiplied reduction” in sequential production costs, thereby increasing the value-added trade.

For most research in this area, the focus so far has been on the manufacturing/nonagriculture sector. However, this sector purchases inputs from the nonmanufacturing or agricultural sector. For example, in 2011, France’s agriculture, hunting, forestry and fishing sector contributed value additions worth $84.1 million U.S. to U.S. gross manufacturing exports.

The nonagriculture sector has benefitted from decades of multilateral tariff liberalization. Although the agriculture sector was liberalized more recently, my research (my dataset includes 64 countries and spans a period of 15 years from 1995 to 2011) shows that the sequential production process has allowed low-income countries to engage in the slice of the process where they have the most comparative advantage: the primary and intermediate stages of the production process.

Further, preliminary results indicate that, on average, value-added exports in the agriculture sector from NRTA beneficiaries were about 0.17 percent higher, compared with that of nonrecipients’ annual exports. In dollar value, this annual difference in exports amounts to about half a million dollars.

Also, my research shows that in the most recent year of my sample period, a unit increase in distance between trading countries resulted in about 3 percent overall and a 6 percent decrease in agricultural value-added exports from NRTA beneficiaries.

Interestingly, during the sample period, a tremendous increase occurred in the number of PTAs. The WTO notifications show that in 1995, only 35 PTAs existed, but by 2010, 230 such PTAs had been reached. Perhaps, given the trade agreements with multiple nations, countries are able to choose their closest partners to outsource intermediate components and/or export their final products.

In short, my preliminary findings indicate that NRTAs impact value-added trade through both the channels by changing the size of exports and also by changing the set of participants (set of exporters).

NDSU Agriculture Communication - Sept. 26, 2017

Source:Anupa Sharma, 701-231-7448, anupa.sharma@ndsu.edu
Editor:Ellen Crawford, 701-231-5391, ellen.crawford@ndsu.edu
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