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Trade preferences and the role of institutional quality in economic integration

Final Activity Report Summary - TRARIQ (Trade preferences and the role of institutional quality in economic integration)

Two main research papers have been written in line with the first objective of the project. The first paper has been coauthored with Annette Pelkmans-Balaoing (Erasmus University, Rotterdam). The work on this paper involved creating a dataset with disaggregated preferential tariff data for the ASEAN (Association of Southeast Asian Nations). We merged preferential tariff data with data on trade from the WITS database and data on other country characteristics. We then conducted an empirical analysis testing the importance of preferences for economic integration and estimating the costs of requesting preferences under the AFTA. We also examined in detail the importance of non-tariff measures for preferences.

The second paper has been co-authored with Joseph Francois (Johannes Kepler University, Linz, CEPR). In this paper we examined the linkages between import policy (in particular the role of tariffs) and export performance, both in aggregate and on a bilateral basis. This involved developing a theoretical framework linking aggregate tariffs to bilateral trade flows and estimation of the effects of import tariffs on trade flows both at aggregate and bilateral level.

The results of the first research paper looking at preferences in the ASEAN suggest that preferential tariffs might be expected to be exploited when the difference between third country tariffs and preferential tariffs are higher than 10-25 per cent. Thus preferences offered under AFTA have a positive effect only on a very small share of trade flows. When the difference between preferential and third country tariffs is below 5% or above 80%, it has a significant negative effect on trade flows; the former implying that administrative and other costs related to obtaining preferences exceed the benefits due to margins; and the latter due to the larger incidence of NTMs in these products, or the simultaneous implementation of a regional program which is exerting a more determinant role on production and trading patterns.

In the second research paper looking at the effects of the exporting country's import tariffs on its own export performance we found evidence at both the aggregate level, and also at the bilateral level, that import tariffs are a significant factor in explaining export performance. This reinforces the recent evidence on developing country export performance. Market access for imports matters empirically for performance in that same country's export markets.

The findings of the first paper have important policy implications not only for intra-ASEAN integration but also for preferential trade integration in general. Furthermore, it also provided a methodological approach which can be applied to other preferential trade schemes when assessing the costs of obtaining/requesting preferences and the effectiveness of the preferential scheme.

The second paper also derived important policy conclusions highlighting the important negative effect of an exporting country's import tariffs on its export performance. Moreover, the paper also had some methodological contribution by incorporating a 'multilateral resistance term' into bilateral gravity models and by treating the zero trade flows.

The objective of the third research paper was to develop a theoretical framework allowing us to assess to what extent the immigration could reduce transaction costs linked to offshoring. Moreover, to empirically assess to what extent immigration from new EU Members States to the EU15 might mitigated the informational constraint faced by old members' multinational firms willing to invest in migrants' countries of origin. In other words, we aimed to explore a specific channel through which the possible 'diaspora externality' associated with the current emigration of both poorly and highly educated workers may occur: the removal of informational, cultural and reputational barriers that could prevent firms of high-income countries from investing in the low-income immigrants economies of origin.