Trade Policy Development - WBG

The World Bank Group's trade policy work is divided into three broad components: trade policy and market access; regional integration and international cooperation; managing shocks and promoting inclusion.

International trade is critical to the World Bank Group’s twin goals of eliminating extreme poverty and increasing the welfare of those in the bottom 40 percent of the income distribution in all countries. It is also an often cited concern of many governments that are clients of the World Bank Group. Policymakers around the world want to know how they can increase their firms’ chances on the global market, create more jobs through international trade, and make their countries attractive to foreign investors.

Research shows that, in the long run, increased international trade is associated on average with higher economic growth. Indeed, no country has ever developed sustainably without trading extensively with others. Trade allows countries to specialize in the production of the goods and services that align with their comparative advantage. It also enables consumers and producers to access a wider range of products at lower prices.

In the short run, trade policy matters for poverty and shared prosperity. Certain goods that are important to the poor – food items, for example – are also likely to face the highest import tariffs and non-tariff barriers in many countries. Reducing prices by eliminating tariffs and lowering barriers helps to reduce poverty and increase real incomes in the bottom two quintiles of the population. Trade liberalization also means access to cheaper imported consumables and/or access to cheaper or higher quality inputs to household production, both of which raise household welfare. Finally, it can lead to increased demand for labor-intensive exported goods, which increases labor demand (through more jobs and higher wages). Thus, trade liberalization has a direct and measurable pro-poor impact.

At the same time, trade liberalization may have negative consequences, too. Changes in trade policy are likely to have winners and losers who may be situated differently in the income distribution. For example, broad trade liberalization may expose some workers to import competition. This can lead to decreased demand for uncompetitive domestic production of consumables or inputs, followed by layoffs and costly labor adjustment. It is important for countries to understand, anticipate and, if possible, try to mitigate these impacts when they hit the most vulnerable.

The extent to which changes in trade policy hurt poor households and workers in the bottom 40 percent of the income distribution will depend on which products are affected by trade integration or trade shocks. Countries that understand the impact of trade policy can address shortcomings in the social safety net: is it strong enough to accommodate the needs of displaced workers? How can it set the stage for broader political acceptance of further trade policy reforms?

The general consensus trade agenda has evolved significantly since the early 1990s when trade liberalization was the focus of policy debate; twenty years later, although average import tariffs are low, new challenges have emerged. For example:

• Non-tariff measures (NTMs) have increased sharply to protect domestic industries;

• Services play an increasing (and heretofore under-reported) role in trade;

• The financial crisis revealed significant vulnerability to external shocks from globally integrated markets;

• Commodity markets continue to suffer from volatility, creating risk for commodity exporters;

• The proliferation of regional and bilateral preferential trade agreements creates complicated incentive frameworks that do not necessarily mesh with multilateral trade arrangements;

• Logistics costs represent a significant share of trade costs; and

• Other non-tariff regulations create de facto barriers to trade.

Identifying key challenges

In this modern context, the World Bank Group economists work to help policymakers to identify the main trade-related constraints to achieving sustainable poverty reduction and shared prosperity. They might first examine the country’s specific environment, pinpointing what sectors currently benefit from trade agreements and patterns of trade, and look at how those sectors contribute to economic growth. Other questions to ask include:

• What has been the impact on employment and wages in these sectors compared to other sectors?

• Are these sectors competitive and sustainable in the long run?

• To what extent is the country’s export model based on high value-added products that incorporate innovation or technology adoption, and is the incentive framework effective in enabling innovation/adoption?

• How concentrated or diversified is the trade with respect to product mix and destination markets?

• Are there barriers to diversifying further (tariffs, NTMs, education policy, services inputs, trade/logistics constraints, regulatory environment)?

• Are current patterns of trade sustainable from the environmental, social and fiscal perspectives?

• What is the country’s capacity to weather trade/macro/current account/competition shocks?

Methodologies for diagnosing constraints

The World Bank Group’s trade experts have developed a range of analytical tools to answer these policy-related questions:

1. Assessment of trade policy/RTAs/WTO accession/PTAs on international trade flows;

2. Regulatory Assessment on Services Trade and Investment (RASTI);

3. Streamlining Non-Tariff Measures: A Toolkit for Policy Makers;

4. Trade Competitiveness Diagnostic Toolkit;

5. Toolkit for the Analysis of Current Account Imbalances; and

6. Conflict, climate change, food security and gender-related trade analysis.

Possible remedies

Experts in the field and Washington then use a range of instruments to address clients’ trade-related challenges, and publish possible remedies in various forms, including stand-alone trade analyses, Diagnostic Trade and Integration Studies (DTIS), and Country Economic Memoranda. Trade analysis informs some policy-based lending operations, and technical assistance plays a crucial role in enhancing countries’ ownership and understanding of trade-related reforms. This assistance sometimes addresses specific policy questions, such as the impact of joining a regional trade agreement, or more general objectives such as improving clients’ capacity to perform trade monitoring and policy evaluation.

Trade-related research

The Bank’s trade-related research is a major source of information and analysis, playing a vital role in informing developing countries of the implications of trade policy choices at the national or regional level, and for WTO negotiating options. For example, the Bank’s analysis of agricultural trade barriers has highlighted the importance of market access relative to domestic support or export subsidies in the WTO Doha Round. Bank research on trade covered, for example, (i) trade in services, firm-level determinants of export success; impacts of the financial and food crises on trade; (ii) the role of technology adoption and import competition for exporting firms; (iii) impact evaluation of trade support interventions; migration; and (iv) the interactions between labor mobility and trade, investment and technology flows. The World Bank’s research group has also developed a widely used index to measure the trade restrictiveness of countries’ trade barriers and a database for monitoring temporary trade barriers, e.g. antidumping. The Bank also provides assistance to research institutes based in developing countries.

COMPETITIVENESS

In recent years, support of trade growth has moved beyond trade policy to embrace a wider set of 'behind the border' issues, focused on establishing an environment conducive to the emergence of firms that are competitive in both export and domestic markets. Competitiveness is central to stimulating private sector growth and job-creation. This, in turn, is vital to the World Bank Group’s twin goals of eliminating poverty and increasing the incomes of the poorest 40 percent in countries around the world. Better integration in global flows of trade and investment helps firms to be competitive and, in turn, generate higher incomes through better-paid jobs.

Trade competitiveness is no longer about viewing exports and export performance in isolation. Increasingly, it is the result of strong interdependencies between imports and exports, as well as international flows of capital, investment, and know-how. Also, modern, competitive services are vital as intermediate inputs to a high-performing private sector. Indeed, the interactions between all of these factors determine firm productivity. Through trade and foreign investment, developing countries can benefit from a range of ideas that come from abroad: intellectual property, trademarks, managerial and business practices, marketing expertise, and organizational models. The flows of goods, services, people, ideas, and capital are now interdependent and should be assessed jointly.

Finally, a phenomenon important to developing countries is the emergence and endurance of global value chain (GVC) production. The flow of know-how from developed to developing countries often takes place in the context of vertical trade and production chains that cross many borders from raw material to finished product. Taking advantage of that structure is a key determinant of industrial development in the 21st century. Developing countries can now industrialize by joining GVCs instead of building their value chain from scratch, as Japan and the Republic of Korea had to do in the 20th century.

In this context, World Bank Group experts provide research, analytical work and other country-specific assistance to country officials trying to address barriers to firm productivity and private industry’s competitiveness in the international marketplace. Understanding how trade flows work and how they contribute to countries’ industrialization through GVCs is a fundamental precondition to ensure that the countries deliver pro-development outcomes. World Bank Group experts help developing countries’ policymakers, and private sector leaders better understand and take advantage of this dynamic.

For example, the World Bank Group can help countries perform analysis of the determinants of their competitiveness in the international markets (i.e. trade competitiveness). Professional technical assistance can identify drivers of growth and the relative importance of different factors of production, including technology, access to foreign vs. domestic assets, etc. The World Bank’s trade experts can perform firm-level analyses of trade and trade determinants, which look at trade and productivity jointly. These techniques have proven important to better understanding productivity and export performance.

The World Bank’s technical assistance also can include concrete proposals for embedding national GVC policies into broader portfolios of policies aimed at upgrading skills, physical and regulatory infrastructure and enhancing social cohesion. It also helps countries better understand whether entry into GVCs furthers development goals, such as enhancing job prospects for workers at home.

Tools for analysis

The World Bank Group has developed a range of diagnostic toolkits, indicators and analytical products that help countries understanding their position and competencies in national and global markets. This approach connects trade outcomes, potentials and diagnostics to deliver country-specific policy advice. It draws on the latest research and techniques, and increasingly relies on firm-level data of imports, exports, productivity, balance sheet and census characteristics as well as cross-country indicators to benchmark country performance.

Descriptions of some of the data tools and customized assistance available for trade competitiveness analysis are below:

• The Trade Outcomes Indicators. The Trade Outcomes Indicators is a data module that allows for review of four dimensions of country-level trade performance: (i) the composition, orientation, and growth of exports and imports; (ii) the degree of export diversification across products and markets; (iii) the level of sophistication of a country’s main exports; and (iv) the survival rate of its export relationships. This framework allows the analyst to evaluate the dynamics of the country’s exports along different margins of trade and to benchmark specific countries’ position with respect to their peers. The toolkit can be used to assess the competitiveness of a country’s overall basket of products as well as specific traded sectors. It facilitates the identification of the primary constraints to improved trade competitiveness and the policy responses to overcome these constraints.

• Trade Competitiveness Diagnostic Toolkit (TCD). The TCD is a simple guide that facilitates a systematic assessment of a country's position, performance, and capabilities in export markets. The TCD combines quantitative analysis – including comparison of the country against global averages, regional and income-level peers – with an emphasis on in-depth, qualitative analysis, focusing on in-country interviews with key stakeholders across trade value chains. The TCD includes Trade Outcomes Analysis: a quantitative and qualitative analysis of historical trade organized around four components: (i) the intensive margin, with a focus on the level and growth of exports as well as market share performance; (ii) the extensive margin, including diversification of both products and markets; (iii) the quality margin, focusing on the quality or sophistication of exports; and (iv) the sustainability margin, including the participation and survival of firms in export markets.

• Competitiveness Diagnostics. Competitiveness Diagnostics cover a broad set of factors that impact trade performance, organized around three themes: (i) The incentive framework for trade, including an analysis of trade and investment policy, and the business regulatory environment; (ii) Factor inputs, productivity, and trade costs, including issues of labor, technical efficiency, access to inputs and backbone services, and trade and logistics; and (iii) Proactive policies to support trade, including standards, export promotion, and spatial industrial policies like clusters and economic zones.

• Firm-level analysis of trade and determinants. These are customized to countries and carried out by an expert team of trade economists.

• Analysis of the incentive framework to export. This is a customized analysis that links trade outcomes, potentials, and diagnostics. It includes desk-based quantitative and econometric analysis and field-based qualitative survey and direct engagement with the public and private sector stakeholders in the country to take stock of relevant trade and industrial outcomes. This guides the systematic generation of hypotheses about a country’s performance, its determinants, and potential. We then connect challenges to proximate causes typically clustered around the (i) incentive framework; (ii) factor and transaction costs; and (iii) pro-active trade and industrial policy. The use of firm-level data and the possibility to connect production data to employment data at the firm level allows discussing not only growth but also shared prosperity issues.

Recent projects

101. work often extends from the identification of the biggest challenges in trade performance through quantitative and qualitative stocktaking. Such examples of specific analytical issues include: augmenting quality of exports and moving up the value chain in Turkey and Croatia; exploring options for diversification in Kazakhstan; sustaining durable export relationships in Macedonia and Kazakhstan; increasing the size of the export sector in Ethiopia; creating export opportunities by linking services to manufacturing in Nepal; and overcoming dual economy characteristics and extending benefits of export participation from original enclave of select exporters to the country in Nicaragua.

20. World Bank Group’s experts in trade competitiveness support a mix of (i) policy reforms; (ii) capacity building of institutions, and (iii) horizontal or sector-based support to the industry. Policy reforms in the area of trade and competitiveness are often addressed through Development Policy Loans and Development Policy Credits that address policy incentives that are misaligned with the goal of improving competitiveness. This generally involves trade policy reform, including streamlining of tariffs and non-tariff measures inhibiting both imports and exports, rationalization of taxes, enforcement of competition laws, and guidance on the type of “light-handed” industrial policy initiatives that can help foster both participation in GVCs and linkages between GVCs and the domestic economy by overcoming market failures or capturing coordination externalities.

Projects aimed at building capacity of institutions range, for instance, from improving the analytical competencies of staff and inter-governmental coordination to physical investments in the upgrading of export quality and standards and creation of new institutions like a skills development center. Finally, sector-based lending can support the creation of industrial zones, as in Ethiopia, or promote exports through matching grants, as was done in Cambodia. In certain cases, the World Bank Group works with governments to target specific industries for improvements in competitiveness, as seen in the garment industry in Lao PDR.