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Policy Research

WORKING PAPERS intemnatlonalTrade

IntemationalEconomicsDepartment The WorldBank September1993 WPS 1174

Asian Trade Barriers Against Primary and Processed Commodities RaedSafadi and AlexanderYeats

Tariff escalation to protect domesdc industries against more efficientproducersis not limitedto industrialcountries.Protection of domesticindustriesis alsocommonin Asian developing countriesand in intra-Asiantrade. netobtfinf PwlicyRowinaWogPapwdi adobbaundi_eboWaddBTmepatsepmsboa

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Thispaper-a productoftheIntemationalTradeDivision,IntemationalEconomicsDepartnent-is part of a largereffort in thedepartnment to analyzeand predictstructual changesin tradeand to identifyfactors affectingdevelopingcountries'exports.Copiesof thepaperareavailablefice from the WorldBank, 1818 H Street NW, Washington,DC 20433. Please contactJean Jacobson,room S7-037,extension 33710 (September1993,29 pages). againstimportsof processedgoodsis built into tradebarrierescalationamong Asiancountries and shouldbe addrrssed in regionalinitiativesto liberalizeintra-Asiantrade barriers.

Many developingcounties are being encouraged to shift toward incmasedprocessingand exports of domesticallyproducednatural-resource-based productsnow exportedin primaryform.But in manymajor importmarkets,the structureof tariffsand nontariffbarriersmilitateagainstsuch efforts.

Safadiand Yeats make three recommendations for dealing with escalationissues in muldlateralnegotiations: * Japanand, to a lesser extent, the Republicof Korea are the key to successfulnegotiationson these issues,as they have a far greater import bias againstprocessedcommoditiesthan do all othercountrieswith which Safadiand Yeats comparethem. That is, Japaneseand Korean trade barriersincorporatefar more escalation than do trade barriersin othercountrtiesstudied.

Zeroor low tariffsare generallyappliedto industrialcountries' importsof primary(unprocessed) comnodities; dutiesincrease,or "escalate," as the level of processingor fabrication increases.Tariff escalationproducesa tradebias againstprocessedgoods. In the past, such tradebanier escalationhas beenattributedchieflyto industrialcountries. Safadi and Yeatsexaminedthe structureof restrictionsin Asian countriesand foundthat most Asiancountries' tariffsincorporatedmore escalationthan do tariffsin industrialcountries. Apparentlytariffescalationis also often reinforcedby nontaiiffbarrierson processedgoods, althoughsupportingdata for this findingare less firm. This issue shouldnot be viewedas a NorthSouthissue, contendSafadiand Yeats.A bias

ThePolicyReseaWorkin

* Disproportionatelyhigh cuts in trade barriersfor unprocessedcommoditiesare not the solution,as they would increaseeffective protectionfor processedgoods. * Any approachto tradeliberalizationshould deal with both tariffs and nontariiffbarrizrs,to ensure that a reductionin one type of restriction is not offset by a futher tighteningin the other. SeveralAsiancountriesapplyboth types of restricdonsto commodityimports.

PaperSiesdisseminates thebmdinPsofwolkunderwayin theBis AnobjsidveofioesnC

is to got thee findings out quiclcly. even if presenations are less dfian fuDfypolised. The i'mdings. mtupretalions. md official Bank policy. coclcusionlsin thiem papers do nlotnecessarily resent Produced by the Policy Reseah

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Center

Asian Trade Barriers Against Primary and Processed Commodities

by Raed Safadi and Alexander Yeats

Economists, International Trade Divibion Intemational EconomicsDepartment World Bank, Washington, DC 20433

I. Introduction Theoreticalmodelsof the developmentprocess and actual plans for industrializationoften assign a key role to trade policy measures. Moreover, in addition to the maintenanceof steady growth in exports and accompanyingincreasesin foreignexchangeearnings,developingcountriesrepeatedlystress the need to reduce their dependenceon traditionalprimary product exports. Among the factors cited as the underlying reasons for this proposedshift are' (1) the purporteddeteriorationin the terms of trade for primarycommodities;(2) the substitution of synthetics for many of these items (plastics for metals, artificial for natural fibers, chemical sweeteners for sugar); (3) the instability of primary product pxices in international markets; (4) the increased employment opportunitiesassociatedwith the productionand export of manufactures;and (5) the realization of economy-wide linkagesand *learningeffects' resultingfrom the processing(manufacturing)function(see Helleinerand Welwood, 1978or Roemer, 1979). One method suggested for increasingthe proportion of developingcountries' trade in fabricated goods is to increase the processingof natural resource-basedproducts now exported in primary form. However, a factor often cited as worling againstefforts to increase domesticprocessingis the structure of tariffs and other trade barriers in major import markets. Specifically,zero or low tariffs are generallyappliedto industrialcountries' importsof primary(unprocessed)commoditieswith the dutiesincreasing,or 'escalating', as the product experiences increasedfabrication. Tariff escalationhas beenacknowledgedto produce a tmde bias againstprocessedgoods due to the higher import duties imposedon these items.'

'For example,Balassa (1968, p. 195)states that 'increases in nominaland effectiveduties from lower to higher stagesof transformationpoint to the existenceof discriminationagainst the processedexport productsof developing countries.- A similar position concerningthe influenceof escalatingt- Yfshas been taken by Johnson (1965). Representativestudies which documentthe existenceof tariff escalation-a developedcountries include UNCTAD (1968, 1980) and Yeats (1979). Yeats (1984) argues that a trade bias against processed commoditiesmay occur evenwhen there is no escalationin tariffs becauseof generallyhigher import demandelasticitiesfor processed as oppo99dto primary commodities.

2 The importance that developingcountries attach to trade barrier escalation is reflected in the extensivepolicy debateson this subjectthat haveoccurred in major intemationalforums. For example,developing countriesworeinstrumentalin havinga plankinsertedin the 1982GATT MinisterialDeclaration(p. 16) stating that "promptattentior shouldbe given to the problem of escalationof tariffs on productswith a view to effective action toward the eliminat.onor reductionof such escalationwhere it inhibitsintemationaltrade, taking into account the concemsrelating to exportsof developingcountries.' The Punta del Este Declarationalso stated that 'negotiations shallaim to achievethe fullest liberalizationof tradein natural resource-basedproducts, includingthosein processed and semi-processedforms. The negotiationsshallaim to reduce or eliminatetariffand nontariff masures, including tariff escalation.' UNCIAD (1979), CommonwealthSecretariat (1982), World Bank (1981 and 1987)have also viewed tariff escalationas a major problem for developingcountries. While trade barrier escalationhas been an importantpoint of contentionin the Uruguay Round and previous multilateral trade negotiations (MTNs), the topic's relevance to intra-Asian has not been clearly established. Yet a number of Asian countries like Astralia, China, Malaysia, Philippinesand Tailand have a major interest in promotingfurther processingof natural resource products that are now often exported in raw or semi-processedform (seeTable 4). However,almostaUof the empiricalstudies that have documentedthe existen of trade barrier escalation,and the resultingimport bias againstprocessedgoods, have focusedan Japanese,North American and European marketsand it has not beenestablishedthat developingcountries' trade barriers follow a similar pattern.' Moreover, it has not yet beendeterminedthat developingcountries' (purported)naturnladvanta in primary commodityproduction generally establishes cost diffeentdals of a sort tlrt

salating trade barrier

protectionis not required for domesticprocessingindustries. The purposeof thisstudyis to assessthe prioritythat shouldbeassigned to trade barrier escalation in any multilateral libealization effort involving Asian countries. Employing a commodity processing chain classificationschemedevelopedby the World Bank (see Box I for an example of a commodityprocessingchain), the structure of individualSouth and East Asian countries' imports is analyzed to determine if a significanttrade 2

One exceptionis a study by Laird and Yeats (1987) which showed that tariffs in 23 developingcountries or country groups often incorporate a high degree of escalation. However, the major focus of this study was on countries outside the Asian region so it is not directly relevant to an Asian Round.

3 bias exists againstsemi-fabricatedand processedcommodities. Next, using detailedinformationon tr&debarriers compiledby UNCTADand the WorldBank an attemptis madeto determineif Asian countries' tariffs and nontariff barriers (NTBs) escalatein the same manner, and to the same degree, as developedcountries' trade restnictions. The analysis also attempts to identify specific commodityprocessing chains where liberalizationcould make an importantcontributionto Asian intra-trade. The study concludeswith an overall assessmentof the priorities that should be assigned to trade barrier escalation issues in Asia and also provides several specific suggestionsfor a regional multilatermlliberalizationinitiative.

II. The Data and Methodology In this studya World Bankclassificationschemewas used to identifydifferentlevels of fabrication for 48 commoditiesexported in primary and processed form by Asian developed and developingcountries (see Appendix I for full detailson the componentsof each stage identifiedin terms of SITC products). At a minmnum, the schemedistinguishesbetweena primary and processedstage product (i.e., the primarystage of the coffee chain consistsof green androasted coffee beans (SITC071.1),while the processedstage consistsof coffee extracts(SITC 071.2)). In other instances, a semi-fabricatedstage or stagesare identified(i.e., the cocoa chain consistsof cocoa beans (primary stage), cocoa powder and butter (intermediatestages), with chocolatebeing the final stage item). Table 4 contains a ist of commoditiescovered by this classificationscheme, and identifiesmajor Asian country producers and exportersof these products.3 Statisticson Asian countries' 1990 imports of each processingchain's stages were drawn from United Nations SeriesD trade tapes, as were similar data for several earlier years. In a few cases, trade data for individu2icommodityprocessingchainswere aggregatedinto broadproduct groups (e.g., foodstuffs;ores, minerals and nonferrous metals; or energy products) to focus on broad trends in primary and processed products' import 3"Leakages

mey occur as one goes up the processingchains since some products may be employedas inputs for production processeswhich are not a formal part of the chain. For example,cotton fiber may be used for the manufactureof rubber tires and not appear in the textile stages of the cotton chain. Such leakages may cause the magnitude of the shift to processed commodity imports to be understatedand may also affect the accurv'y of estimatesof the es-alation in tariffs and nontariff barriers. If trade barriers are lower for productswhere leauges occur thanfor goodsincludedin the formaldefinitionof the processingchain, the extentand magnitudeof escalation will be overstated.

4 shares. Due to differencesin factorslike the level of development,the import structures (and trade barriers) of countries in South Asia, non-OECD)East Asia, and OECD Asia are analyzedseparately. Table 1 identifies the major exporters in each group while the World Bank (1992,Table Al, p. 40) providesa full listing. Statisticson Asien countries' trade barriers were drwn from two sources. Tariff data were compileddirectly from GAIT documentsand thencompute.izedand stored in the World Bank-UNCTADSMART (Software for Market Analysis and Restrictions to Trarle) data base. (See UNCTAD-WorldBank, 1989 for a descriptionof the SMARTsystem). Informationon Asian countries' nontariiffbarriers was drawn from UNCTAD records and also incorporatedin the SMARTsystem. Since the tariff and NTB dati were recorded at the tariff line level, availableconcordanceswere used to aggregatethesedata to StandardInternationalTrade Classification(SITC) groups. This procadure allowedthe UN trade data to be matched directly with Asian countries' tariff and NTB infornation.

Im. The CoimmodityStructureof Asian Trade Three key points should be consideredin an assessmentof escalation issues: (1) whether Asian countries' imports reflect a major bias against semi-finishedand processed products; (2) whether a similar bias is reflectedin Asian commodityexports; and (3) whetherAsian trade barriers escalate. If these conditionsare found to exist, the subjectof escalationshould be addressedin Asian trade negotiations.'

'An importantconceptualatl ampiical issue is how to deternine if a bias exists in Asian trade and, if it does, what its magnitudeis. In this stusy, the _ mnmodity import structureof the EuropeanCommunity(EC) is sometimes used as a "standard' for comparison.Two po - - should be noted with regard to this choice. First, Balassa(1968), Yeats (1984) and othersargue " at a signifiu.. ias againstprocessedcommoditiesexists in EC imports and have assessed the influenceof contributingfactors. Here, any Asian import bias is measuredrelative to that of the EC. Second, separate tests conductedby the authors show #hatthe overall commodityimport structure of the United States is quite similar to that of the EC although there are some differencesfor several individualcommodities(see Box 2 for details). Thus, the conclusionsof this study would not differ significantlyif the United Stateerather than the EC were employedas the standard for comparison.

5 iox 1 Characteristics of SC-Based

C.i'uuodity Processing Chains

Althoughthe approach has several recognizedimperfections,a number of empirical studies have utilizedthe StandardInternationalTrade Classification(SITC) system to construct "commodityprocessingchains" (Balassa1968,Yeats 1979, Lairdand Yeats1987). Theswchains trace individualcommoditieslike cocoa and coffee beans, or cotton,jute and iron ore, throughsuccessivestageswith each experiencinga greater degree of processing then the former. After detailedanalysis of the SITC system, the World Bank was able to construct processing chains for 48 different commodities(see Appendix 1 for details). In 1990, the individual componentsof these chains accountedfor approximately85 percent of all developingcountries' exports. The major advantageof an SITC-basedprocessingchain frameworkfor analysis is that it provides a common basis for merging trade and trade barrier information. That is, the processing chains allow one to tabulatea country's imports or exports of each stage in a given chain and match this informationdirectly with statisticson tariffs and nontariff barriers. The followingexample shows the three stages of the lead processing chais, Japan's 1990 imports at each stage, as well as Japan's average (unweighted)tariff on each product. Note how the import duties increase or *escalate"as one move: from lead ore to wrought lead alloys.

1990JapaneseImports ProcessingStage (SITC)

Value (Smill.)

Share (%)

Tariff (%)

120.3 87.9 2.5 210.7

57.1 41.7 1.2 100.0

0.0 3.2 558

LEAR Lead Ore (283.4) UnworkedLead idloy (685.1) WroughtLead Alloys (685.2) All Stages

Two specificpoints should be noted concerningthese SITC-basedprocessingchains. First, the level of detail changesfrom chainto chain due to the nature of the SITC system. That is, sevedalchains like cocoa and wood pulp contain three and four stages wbile other commoditieslike coffee or copra only include an unprocessedand processedstage. Second,there is a problem of "leakages"in somechains, L.e., some commodities may be productioninputs for items not includedin the chain's componentsand lost from the analysis (see footnote 3 for a specific example). It is acknowledgeJthat the problem of leakages may produce biases in SITC-basod analysesof trade barrier escalation.

6 Table 1 presents summaryinformationon 15 major.Asian countries' commodityimports in 1990. The reported data are aggregatesof all 48 individualcommodityprocessingchains(see Appendix 1) that havebeen classifiedunder four broadheadings(agriculturalmaterials,foods and feeds, ores and metals, and energyproducts). The first five columns of the table show -acihcountry's imports of a" pnmary and processeJ stages of the chains while the next fivoshow the share of primary (unprocessed)stage productsin total imports. Finally, the individual country results are aggregated into an overall average for Asia (see the meme~item) and thbs information is compared with similar statisticson EC imports.' Overall, Table 1 shows the Asian countries' imports are considerably more biased against processed commoditiesthan those of the EC. This is surprsing given that the EC has often been criticized in UNCTADand GATT for its (purported)bias againstprocessedcommodityimports. Approximate'436 percent (by value) of EC commodityimportsare composedof primary(unprocessed)stagecommoditieswhile the corresponding share in all Asian countries is 16 percentage points higher (52.3 porcent). Relatively higher Asian import concentrationin unprocessedcommoditiesoccurs for all four productgroups, but is especiallypronouncedin ores and metals and agriculturalmaterials where the Asian share is, respectively,two and threa times that of the EC. A key related point is that the overall import bias reflected in Table 1 also shows up in Asian intra-tade. Asian countriesnow export a considerablygreater share of processedcommoditiesto non-regionalmarketsthan to Asian markets (see Box 2). Table 1 also reveals considerablevariationin individualcountry results. Japan records the second highest(behind India) overall degree of prmary commodityimport concentration(62.7 percent of Japan's total

MThesw overall averages can be affectedby an Asian country's natural resource endowments. If, for example, a country has abundantnatural resources it might tend to have relatively lower processed good imports, ceter* paribus, than countries not so well endowedif resource availabilitystimulatesdomesticprocessing. International transportcosts could work toward this end since many bulky low value prmary commoditiesoften have relatively high nominal freight costs which may decline significantlywith further processing,although this is not always the case (seeYeats 1977).For some commoditieslike metal ores, stowagefactorsdeclinesharply with processingwhich makesthe fabricatedproduct easier to transport. For these reasonsthere may be a tendencyfor processingactivity to be located close to available suppliesof some natural resoures. Of course, escalating rade barriers in major internationalmarketswould be an offsettingfactor. There are someproducts, however, like wood manufacturesth4A becomemore fragile or subject to pilferage after processingthan the primay commodityinput (wood). For such items transportcosts may have an insignificanteffect on the location of processing activity.

7 Table 1. 'Mb RelativeImponawceof AsianCouniee Importsof Primary*nd Ptocuead Commodliiesin 1990 Vaha of AlRFrimaryStageand Ftcesued Commotes (Smillion)'

Shar of Pinmay Stap Podus in ToalTb4mpos(%)

ImPorter(Year)

Foodsand Feeds

Agnicltural Material

OCa and Mtas4

Energy Products

AUl Connodities

Foodsand Feeds

South Asi. Ini (90) Paldsan (B9) Sri Lanka 490)

1,853 479 999 375

1,736 1,135 319 282

2,389 1,828 326 23S

4,587 3,342 1,144 101

10,565 6,785 2,787

74.3 86.8 72.6 62.9

Non-OECDEast Asi China (90) HongKong(90) lodonesia(90) Rep. of Korea(90) Malaysia(90) Philippines(88) Singapore(90) Taiwan, China(90) Tbailand(90)

18,139 3,244 S,000 745 2,352 1,207 462 2,464 1,632 1,033

26,840 7,098 1,479 1,270 7,342 1,102 392 2,421 3,595 2,141

28,492 3,261 1,309 1,381 4,146 1,S66 536 2,175 3,926 2,492

32,669 9S2 2X6 1,821 8,761 1,227 1,051 9,486 4,310 2,835

106,139 14,SS4 17,014 5,218 23,301 5,101 2,441 1656 13,463 8,501

OECD Asia Aurlia (90) Japan (90) New Zealand(90)

26,158 1,057 24,733 367

28,860 2,946 25,389 525

20,92P 814 19,S55 S60

33,85 1,748 30,99S 542

104,053 S7.436

61,534 51,810

81,045 70,S41

Menmo hem EuropeanCommunity(90) All AboveAsan Countries

90,671 46,149

Ors and Metals

Energy PIoducts

40.0 30.3 32.0 7.7

23.4 26.0 21.S 5.9

83.6 99.0 3i.0 100.0

63.1 (64.6) 70.8 (75.4) 47.4 (44-7) 54.7 (S63)

64.7 83.6 43.9 91.5 69.8 71.9 73.1 48.5 69.1 94.1

36.4 25.8 7.8 47.8 53.1 21.3 24.2 25.6 40. 43.2

17.6 61.5 1.7 7.3 40.2 14.5 22.5 2.5 S.? 2.8

63.4 44.5 0.0 64.4 72.8 13.0 91.5 73.0 73 8 53.7

43.1 (52.1) 38.2 (54.0) 16.9 (15.2) 49.2(61.9) 57.2 (63.4) 29.2(32.8) 62.1 (62.2) 53.2 (46.2) 453 (56.8) 41.0(7.3)

109,232 6,566 100,672 1,994

63.5 47.7 64.3 53.1

30.3 4.0 33.8 7.4

37.6 21.0 39." 11.3

97.8 59.4 99.9 100.0

60.3 (64.8) 27.9 (38.5) 62.7(66.7) 42.1 (S4.0)

344,303 225,936

52 7 64.4

11.1 36.3

'2.2 25.7

70.6 80.0

36.3(44.5) 52.3 (58.7)

m

3ee AppendixI for the primaryand proceed stage productsclassifiedin eah group. Figuresinparuthesesshowaveragesbaedenweighutleing theindividualcommodity group'apone Soure: Trade datacompiledfrom UnitedNationsStatiw;cl Offie recors.

Agricuhural Matrias

AUl Conuoditics'

in worldtrad. Aooher gursare basedonthe Asiancounty'sowntradeweighu.

8 Box 2 Do Asian Processed Commodities Fare BettwrI Non-Asiar Markets? Tables 1 and 2 show a major Asian import bias exiss against processed somodities and, as a result, many Asian countries export a relativelyhigh share of their domesticallyproduced commoditiesin primary form (see Tabl,.s 3 and 4). This observation raises the question of whether the structur-I bias against Asian processed commoditiesexists in non-Asianmarkets and, if so, whether it is greater or smaller than in Asia. The followng tabulationscomparmthe total valueof othar countries' 1990imports of primary and pwcessed commoditiesfrom Asia and afro indicatethe share of this exchangewhichconsistsof unprocessedgoods. To assist in comparisons,the tabulationsprovide similar statisticson Asian intra-trade, and on trade with selected OECD markets. Importer

Food & Feeds

Ores & Metls

Agricultural Materials

Energy Products

Al Items

(Valueof all impor4 from Asia - USS million) ALL-ASIA Japan Korea

20,692 10,924 825

21,297 7,702 2,372

33,575 9,534 2,731

20,882 7,487 2,199

96j446 35,654 8,128

NON-ASIAOECD U.S.A. Canada Oermany U.K. Sweden

13,742 5,826 783 1,563 1,313 152

6,778 3,369 395 1,026 561 60

26,375 11,707 1,045 2,979 2,061 338

2,929 2,637 18 78 31 -

49,814 23,540 2,242 5,646 3,996 550

(Share of prinmay stage in all imports from Asia - percent) ALL ASIA Japan Kvrea

63.2 64.4 64.7

25.9 53.5 26.8

28.5 42.8 52.7

64.5 Q9.9 57.9

43.2 63.7 47.8

NON-ASIAOECD U.S.A. Canada Germany U.K

52.1 43.9 47.5 56.5 47.6

13.5 4.1 12.9 51.1 31.1

17.3 9.1 8.6 21.6 14.5

75.0 76.2 98.3 77.4 -

31.2 24.5 23.7 37.4 27.7

40.7

30.9

3.7

Sweden

-

16.9

The abovecomparisonsshowAsian processedcommodityexportsfare considerablybetter outside the region than in intra-Asian trade. Specifically,43 percent of all Asian intra-trade consists of primary stage products, a share which is 12 percentagepoints higher than exports to non-AsianOECD markets. Why is the share of processedcommoditiesin intra-Asian trade so low? The above tabulations show that Japan's import performance(and to a lesser extent the performance of Korea) has a strong influenceon the overall result. Both countries ar major commodityimporters and both have a clear bias against processed goods (i.e., 64 percent of Japan's total imports consists of primary stage products). This observation attaches special importanceto the level and sttucture of Japanese and Korean trade barriers.

9 Table 2. Trends in the RelativeImportanceof Asian Importsof Primary and ProcessedCommodities:1970to 1990 CommodityGroug ImportingRegion

Year

Foods and Feeds

Agricultural Materials

Ores and Metals

Energy Products

All Commodities

(value of total imports of primary and processed commodities- USS iillion) South Asia

1990 1980 1970

1,853 1,453 748

1,736 S61 281

2,389 1,522 307

4,587 3,251 39

10,56S 6,787 1,374

Non-OECDEast Asia

1990 1980 1970

18,139 7,977 1,423

26,840 10,532 1,;58

28,492 7,359 663

32,669 26,678 893

106,139 52,546 4,347

OECD Asia

1990 1980 1970

26,158 12,024 2,231

28,860 19,267 4,675

20,928 13,080 3,311

33,285 61,378 2,996

109,232 105,7S1 13,213

All Above Asian Countries

1990 1980 1970

46,149 21,454 4,402

57,436 30,360 6,324

51,810 21,961 4,281

70,442 91,307 3,928

225,837 165,082 18,935

(shareof primary stage in all imports of the group - percent) South Asia

1990 1980 1970

74.3 33.1 62.6

40.0 25.3 62.3

23.4 14.7 16.2

83.6 13.6 0.0

63.1 19.0 50.5

Non-OECDEast Asia

1990 1980 1970

64.7 61.6 63.1

36.4 52.3 51.9

17.6 16.7 15.3

63.4 79.0 57.4

43.1 62.3 51.1

OECD Asia

1990 1980 1970

63.5 76.9 85.0

30.3 47.9 56.1

37.6 56.0 70.6

97.8 86.4 74.0

60.3 74.5 68.7

All Above Asian Countries

1990 1980 1970

64.4 68.2 74.1

36.3 49.0 55.5

25.7 40.0 58.1

80.0 81.6 69.5

52.3 68.3 63.3

1990 1980 1970

52.7 57.9 60.6

11.1 16.3 25.3

12.2 16,3 20.7

70.6 76.6 82.6

36.3 51.1 46.1

Memo Im EuropeanEconomic Community

Note: SeeTable 1 for the countriesincludedin each regionalgroup. Appendix1 identifiesthe individualproducts classified as primay stage items in each processingchain. Source is as for Table 1.

10

imports are primary stage items), whiie the Korean average (57.2 percent) is also well above that of other Asian countries. Neither Japan nor Korea figures prominentlyamong importantAsian commodityproducers (see Table 4). Their combinedimports of primaryand processedcommoditiesare almost55 percent of the Asiae total. These facts highlightthe importan.e of tariff escalationissues in any multilateralAsian trade liberalizationeffort. SinceTable 1 shows that the current structureof Asian importsis heavilybiased againstprocessed commodities(whether these shipments originate in Asia or elsewhere), an important related point is how this structure is evolvingover time. Table 2 addressesthis point by tabulatingthe value of Asian imports of primary and processedcommodityimports at ten year intervalsover the last two decades and also by showing the share of unprocessed(stage 1) commoditiesin this trade.6 The importperformanceof the EuropeanCommunityfor these same goodsover the same period is also reported (see memo item). Between 1970 and 1990the share of Asian imports of all unprocessedcommoditiesdeclined by approximately11 percentagepoints (from 63 to 52 percent), which is about the sanm as the decline registered by the EC. In other words, the relative Asian trade bias againstprocessedcommodityimports has not narrowed over this 20-year period. This findingaccents the -eed for policy action to identify and remove existing constraintsto Asian intra-tradein processed commodities. Aside from the overall regionaltrend, several differentpatterns are reflected within the regional sub-groups. SouthAsia's import shares for unprocessedagriculturalraw materials declinedsharply betwoee 1970 and 1980, but this was primarily due to special factorsnot directly connected with a shift to processed products. For example, India all but discontinuedits (previouslymajor) imports of raw cotton while its imports of cotton thread and fabrics remained fairly constant in dollu terms- this produced the appearance of a shift toward fabricatedcotton goods. Historically,India was a major market for Egyptianlong-stemcotton -

dia's imports

averaged25,000 tons per year in the early 1970s - but, after developingdomesticproductionof a suitable cotton substitutefor spinningfine yams, its imports of Egyptiancotton declinedto an average of less than 3,000 tons per

'One importantdata problem to be noted is that it was not possibleto hold the compositionof importingAsian countriesconstantover the 1970-90period. The PeoplesRepublicof China did not report imports or exports to the UnitedNations prior to 1984 so the group of Asian countriesincludedin the 1970 and 1980statistics is somewhat differentfrom that for 1990.Tables 1 and 2 rely on trade data reportedby individualAsian countries (there are gaps in some country's reporting)while Tables 3 and 4 show imports reported by their trading partners. For this reason it was possibleto report a somewhatlarger selectionof smaller Asian countrieslike Bhutan, Nepaland the Maldives in the latter tabulations.

11

year. India also importedmajor quantitiesof wheat meal and flour on a temporarybasis in the late 1970sand early 1980sfor faminerelief. These importswere subsequentlyhaltedand thiscausedthe unprocessedfoods import share to declineby about 40 percent over the period 1970-80. The changes in crude and refined petroleum prices have alsoaffected the inter-temporalcomparisons. The fact that petroleumis largelytraded in (crude)unprocessedform, coupledwith relativelyhigh prices in 1980and 1990,greatly increasedthe weightof this commoditychain relative to all others. As a result, the progress that was made in shifting trade in some chains toward semi-finishedand processedgoods is masked in the overall averages. In Table 3 the focus of analysis shifts from the import performance of Asian markets to Asia's export experiencein prmary and processed commodities. The table addressesthueequestions:(1) how important are primary stage commoditiesin total exports (including all items whether or not they wero classified in a processingchain); (2) whichAsian countriesare the largest (absolute)exportersof prianry commodities, andwould therefore potentiallyexperiencethe largest benefits from a reductionin barriers facing procossedgoods; and (3) how has the concentrationin primary commodityexports changed between 1970and 1990. Table 3 reinforcesthe importanceof addressingtariffescalationissues. Primarystage commodities account for at least one fifth of total exports for one half of the 30 listed Asian exporters, while these items comprise at least 15 percent of total exports for 22 of the 30 countries. Australia is the single largest exporter of pdimary stage commoditieswith $9.6 billion in trade, while 12 of the 30 Asian countries have total primazy commodityexports of $1billion or more.' A second point to emerge from Table 3 is that primary stage commodities are particularly importantfor several smaller countrieslike Brunei, Fiji, Guamand Tonga where export shares range between 43 and 59 percent of total exports. (The share of these exports reachesa high of 73 percent for Papua New Guinea). Furthermore, the share of primary commoditiesin total exports has actuallyrisen for several of these countries between 1970and 1990(e.g., Tonga, Vanuatu,the Maldives). These countrieshave as much (or even more) stake in negotiatingtrade barrier escalationissues as do Australia,China, Indonesiaor New Zealandwhose total absolute 7If China's exportsare combinedwith those of territorieson which it has claims, i.e.,

Taiwan(China) and Hong Kong, its total primarystage commodityexportswould be roughly $11.3billion, or $1.7billionmore thanAustralia's exports.

12 Table 3.

The RelativeIMportnce of Primay (Uaproceused)StageCommoditiesin the Total Export of 30 Asian Countries: 1970, 1980and 1990

PrimaryStage Conmmodides' Share of Totai Export (%)

Country's ShameIn Asian Exposb of All Primry Stage Commodities(%)

Nominal Value of Aii Primary Staep Comnodity Exports (Smiilion)

AsianExpoter

1970

1980

1990

1970

1980

1990

1970

1980

1990

Ausalia China Indonesia Malaysia TMailand India Taiwan, China New Zeaand Philippines Rep. of Kora Btunei Japan Papua, NewGuInea Singapore Pldstan Sri Lanka HongKong angladeb F3ji Korea, DemocraticRep. Myanmr

28.6 23.7 61.5 44.5 35.6 31.9 10.5 14.7 29.7 14.3 93.0 1.6 68.9 17.1 20.2 69.9 1.0 n 71.4 243 12.8 333 33.3 43.6 90.9 37.5 3.5 97.3 27.1 99.5

27.4 25.4 62.6 39.3 31.0 20.9 4.8 17.0 29.7 4.2 62.9 0.6 83.1 4.5 18.6 45.4 1.1 23.4 56.4 6.2 33.1 31.2 36.4 28.6 56.6 47.4 29.8 55.6 18.4 66.6

25.5 10.5 33.5 18.6 18.5 14.5 3.1 22.7 16.1 2.2 43.7 0.3

23.8 7.2 14.1 7.6 4.4 9.9 3.0 3.4 6.2 2.0 1.8 4.4 0.9 1.9 2.0 3.6 0.4 na 0.8 0.3 0.3 0.3 0.2 0.1 0.1 0.1

12.6 10.1 31.5 13.2 4.4 3.6 2.1 2.1 4.3 1.4 5.7 1.7 1.9 1.4 0.9 1.0 0.4 0.4 0.4 0.1 0.3 -

18.5 16.7 16.7 11.7 7.8 4.4 4.2 4.0 2.9 2.4 2.0 1.9 1.3 1.2 1.1 0.7 0.6 0.6 0.3 0.3 0.2 0.1 0.1 -

1,397 420 829 446 258 579 176 200 366 115 106 260 51 112 120 209 25 as 45 17 15

5,784 4,628 14,423 6,033 2,006 1,664 947 966 1,969 6J6 2,586 785 881 620 423 469 180 199 166 S0 156 1 4 2 17 37 2 5 14 4

9,608 8,670 8,666 6,101 4,050 2,291 2,184 2,090 1,508 1,254 1,035 978 657 626 595 381 322 295 168 131 98 29

Guam Maldives DemocraticKampucbet

vanutu SolomonIlans Mongolia

Tonga Nepal

Kinbati

r,.2 1.6 12.6 21.0 0.7 17.4 50.5 17.3 19.7 46.8 36.8 48.6 69.2 21.0 23.3

58.8 2.0 66.6

Source: Compiledfrom UnitedNation's COMTRADE ecords using partner country imports.

-

-

1 2 17

10 3 -

1 7 6

28 18 18 17 16 8

5 2

13 value of commodityexports is far greater, In short, Table 3 showsconclusivel: that the potentialinterest in further Asian processingof primary commoditiesis spread amonga large number of countries. Table 4 profiles the primarycommoditiesin which each Asian country has an importantinterest. These tabulationsidentifythe largest exporters,sbow their share of all shipmentsof each commodity, and indicate the value of exports originating in South Asia, OECD Asia and non-OECD East Asia. The intention here is to discover how dispersed Asian interests are across regions, commoditiesand countries.' We want to determine whether majorexportershave a stake in escalationissues for one or two commoditiesonly, or whether their interests are likely to be spread over a wider range of items. The general impressionfrom Table 4 is that Asian exporters' interests are dispersedover a fairly large number of commodities. This has positiveimplicationsfor any multilateraltrade negotiationsin the Asian region since it creates greater opportunitiesfor trade-offs. Australia and China, for example, rank among the principalsuppliersof at least 16of the 42 commoditychains listedin the table (severalrelativelyunimportantchains like hom and bone have not been included)with China being a factor in 25 chai.

India, Indonesia, Papua New

Guinea, the Philippines,Malaysia,New Zealand, Taiwan(China) and Thailandare among the largest suppliersof five or more commodities.A further point to note is that Japan, which would play a major role in the negotiations given its prominenceas the largest import market for commodities(see Table 1), does not figue as an important primary stage exporter for any of the commoditychains listed in Table 4. This observation accents the need for analysisof the structure of Japan's trade barriers.

'Overall, 70 percent or $38.3 billion of the primary commodityexports originate in East Asian non-OECD countries,23 percent ($12.9 billion) come from OECD Asia, and 7 percent ($3.9 billion) originate in SouthAsia. However, these comparisons understate somewhat the true importance of commodities for the latter as these shipmentsaccount for roughly 20 percent of all SouthAsia's exports as opposed to 14 percent of the total exports of non-OECDEast Asia.

'4 Table 4. Major Asian Exporters of Primary (UProcesseO Stage Commodities in 1990 1990 Asian Eors Primary Stage Commoditv (SYIC) 1. Foodstuffs Shel frsh 031.3) Fish, frsh or child (031. 1) Vegetablks, fresh (054) Frun andnuts, fr^esh(051) Raw bedtand cane auger(061.1) Unmilledwheat (041) Tea (074.1)

Coffee, green or asted(071.1) Cocoa buans (072.1) Uve wine (001.3) Grounduuts(221.1) Soyabeam C221.4) Lve poultry (001.4) Live cows and sheen (001.1, 001.2) Rice inhusk (042.1) Copra (221.2) Paln nuts (21.3) Lineed (221.5) B. AgriculturalMaterials Rubber(231.1, 231.2) Rough log (242.21,242.31) Couon(M63.1,263.4) Wool (262.2,262.6, 262.8) Hides and kinsa(2l1 Ies211.8, 211.9) Raw silk (261.3) Feathers (291.96) lute(64) Hom andwhalebone(291.12) Flax, hebanp anie a6s.1 to 265.3) UnwokedLmm hair (291.91)

of the Commodity(Smill.)

South Asia

Non-OECD East Asia

OECD Asia

All Asia

792 101 85 280 7 -

4,168 2.907 2,218 1,135 964 S06 703 356 288 279 207 171 29 32 64 4

681 620 352 856 757 1,159

5,641 3,628 2,655 2,271 1,728 1,159

467

76 5 1 1 36 4

1

4

977

2

781 356 288 285 210 174 112 s0 67 4 2

-

1 3 82 12 -

-

-

69 167 81W 13 3 1 94 9 2

3,811 2,768 252 141 147 488 366 27 17 18 8

723 7 1 15 1 3 1 1

241 1,208 25 139 6 40 59 IS 33 12 2 I

2,510 192 49S 214 224 el 44 65 5 3 -

14,469

1,371

472 282 525 1,172 736 12 2 -

IS 1 -

Major Asian Exponers (Share of Total Ain Exponls- in percent) China (21),Thailnd (19), Indonesia(12) Tiwan, Cbina (26), Koe (19), China (10) Thiland (34), China (23), Taiwan, China (12) NwZland (29), 1hipmnes(21), Chit (13) Auslia (44), Th,ilanl P0 Philpines (7) Ausalia (99) China (35), Sri Lank (25), India (21)

Indonesia(52), Papus New Guinea (16), lTailand (15) Malaysia (61), Inoa (2), Papua New Guinea (11) China (74), Malays (26) China (85), Taiwan, China (10) China(93), Taivan, China (2) China (55), Ma a (41) Ausrali (63), Cina (24), New Zealand (10) Thailand (39) India (38), Austalia (1) Ph7ilippines (3), Papua New GuuQ7 Papu- New Guinea (52), Malay (45) In& (18), New Zeand (15)

4,353 3,217 1,593 1,326 885 50 370 121 41 19 10

Malysia (37).Thail (22), Indonesia(20) Malaysa (77), New Zealand(S), PFpua New Guinea (4) AutAia(33),Pakistan(28),India(23) Austalia (58), New Zelmd (30, Malaysia(3) Aualia (49), New Zealand(34), China (14) Chia (83), Taiwan, China (8) Chin (46), Taiwan, China (34), Hong Kong (9) Banltab (76),1China(1) New Zland (37), China (17), India (17) China (74), Taiwn, China (16) China(60), India (20

3,474 1,408 521 352 246 122 105 81 39 IS 2 2

Atutrlia (72), ndi (22), Phipies (6) PapuaNew Guinea (32), Idonesia (27), hilippines(21) Ausralia(95), China(3) Ausria (59),China a(8) Ausalia (91), India (6) Austalia (63), Chia (15) China(SO),Ausralia (42), Maysia (2) Anamra (80), Thailad (IS), Koes (2) China(77), Aus;tia (13) China(67), Australia(0. Singaooe(7)

XI. Ores and Minerals

Ironm e81.3) Copper or (83.11, 283.12) Zinc Ore(83.5) Bauxiteor (283.3) Mangane ore(283.7) Sand, excluding meta beaing (73.3) Tin oe a83.6) Leadore (283.4) Tungtn ore 283.92) Naturalphosphate (271.3) Silverore (285.01) Cade abesto (276.4)

-

-

-

Indonesia (99)

Sinppore (50),Cbina(30)

IV. Enemyhw

Cmdepetroleum(331.01) Source: Compiledfiom UnitedNaio'

74

COM1RADErecord usingt% -ad part

cury

15,914

iaoma.

hIdonesia,(36), Ca

(24),Malaysia (23)

15 Box 3 Can a Trade Bias Against Processed Goods Still Occur if there is no Escalation of Trade Barriers? For trade negotiations,it is importantto distinguishbetween two points: trade barrier escalation which refers to tariffs and NTBs risingwith fabrication,and the influenceof these barriers on the structure of trade. To accountproperly for the latter, one must analyzechangingconditionsof demandat differentlevels of processing. Sinceempiricalstudies show importdemandelasticitiesnormallyincreasewith fabrication,constanttariffs will have than on unprocessedcommcdities. relatively larger trade effects on fabricatedcommnodities This point can be clarified through the use of the examplecited below. Here, it is assumed that the leather processing chain is composed of three distinct stages (hides, leather and leather manufactures),and import demand elasticitiesrange from 0.6 for hides to over 2.0 for leather manufacturesin developedcountries. For illustration,it is assumedthat the importingcountry ap2 lies a constant 10 percent tariff and imports $20 million in each processing stage. There is no tariff escalation, yet the tariff has more of a retarding effect on leather manufacturesdue to the more 'sensitive demandfor these products. Specifically,reducing the tariff for hides to 5 percent would increase imports by $558,000. A similar cut applied to leather manufactureswould increase imports by more thanthree times thisamount. Thus, in assessingthe influenceof trade barriers, considerationmust be given to underlying demad conditions to draw meaningfulconclusionsabout their influence on the trade structure. Stated differently, the escalationof trade barriers is normallya sufficient condition to concludethat an import bias against processed goods exists, but it is not a necessarycondition.

Processing Stage Hides and skins Leather Leather mfg.

Nominal Tariff

imports (S mill.)

Import demand elasticity

Projected Change with a 50% tariff cut ($000)

10 10 10

20 20 20

-0.62 -1.28 -2.11

558 1,152 1,899

Note: The projectedimport change is based on the use of a partial equilibriumtrade model in which the estimated changein imports is derived from a multiplicativefunctioninvolvingthe initiallevel of imports, the import demand elasticity, and the clange in the landed price of the good due to the tariff reduction. See Stern (1976) for a discussionof this type of analysis.

16 IV. The Structure of Asian Trade Barriers The analysis to this point has demonstratedthat Asian commodityimports reflect a strong bias against processed goods (Table 1), and that the bias against Asian exports of processedcommoditiesis greater in intra-Asian trade than in non-regionalmarkets (Box 2). Furthermore, between 1970 and 1990, Asian markets' import bias showed no evidenceof narreiwingrelative to other markets (Table 2). These facts raise the question of whether, and to what extent, this sub-par performance can be accounted for by escalation in Asian trade barriers.9 Table 5 draws on GATT tariff data for 10 Asian countnies in order to provide relevant information." The table shows the average import duty each country applies to the primary stage item in the 48 commoditychains, as well as the tariff on the final stage product. Tariff averageshave been computed for all 48 commoditychains and their differencesare used as an overall measure of escalationfor each market. It is clear from Table 5 that ther are major differencesin Asian tariff levels, and that tariff escalationoccurs in most processingchains. Concerningthe first point, GATT records indicate that Hong Kong has no tariffs on any primaryor processedcommodity(for this reason Hong Kong is not includedin Table 5), while Singaporehas minor duties of under 4 percent on seven processedcommodities(refinedpetroleum is an exception with a 10 percent tariff). In contrast, tariffs of over 30 percent occur in Australia, Indonesia, Japan, Korea and

'It mw: te acknowledgedthat studies have identifiednumerousother problemsbesidesexternal trade barriers that developingcountriesface in trying to increaseprocessingof domesticallyproducedcommodities.Theseinclude: inappropriateeconomicpolicies(importsubstitution)pursuedby the country itself;insufficientaccessto intemational capitalor technicalmarkets;tansnational corporationpolicies;monopolypricingpracticesof liner conferencesthat may increasefreightcosts; and anticompetitivepracticesof establishedfirms in major OECD markets. For a survey of these problemssee UNCTAD(1979).It shouldalso be acknowledgedthat somecountries' comparativeadvantage may be in exportingunprocessedcommoditiesand not in processingthese commodities. 'The underlyingtariff data were compiledby GATT and then recorded in the UNCTAD-WorldBank SMART system. No data on China's tariffs were collected since this country currently is not a member of the General Agreement. Due to the magnitudeof the effort required to compile matchedtrade and tariff statisticsfor a single country - more than 12,500 tariff line level productsmay be involved- GATITdid not attemptto compilestatistics for several of the smaller Asian countries that are GATT members. UNCTAD's Inventory of Trade Control Measures was the source of informationused in this study on nontariff barriers - see Table 6.

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18 Malaysia - Korean import duties actuallyexceed 100 percent in several processing chains." The importance of in the EC (our these observationsiF accentuatedby the fact that average applied tariffs on processed comnmodities standardforcomparison)are about 6 percent (Laird and Yeats, 1987), w}ich is less than one third the average duty on Indonesian,Korean or Malaysiancommodityimports. The second importantpoint that emerges from Table 5 is that tariff escalation occurs in most commodityprocessingchains. In Japan, 89 percent of the processed commoditieshave higher average applied tariffs than do the primary stage components,and in several cases the spread in duties over a chain exceeds 30 percentagepoints (e.g., the cocoa and tobacco chains). Overall, the average difference in tariffs on primay and processedcommoditiesis 16 percentagepoints or more for Thailandand Indonesiaand about 12 percentagepoints for New Zealand. Japan's tariffs increase by 7 percentagepoints, which is approximatelydouble that for the EC taiffs over the same processing chains.'2

The overall tariff difference for the Republic of Korea (about 9

percentage points) understatesthe true importanceof escalationin most chains due to the perverse results in two chains -vegetables and tea, where relatively high tariffs are appliedon the primary stage items. In both cases, nontariff protection may have been substitutedfor tariffs on the final stage good (see Table 6). While Table 5 indicates most countries' tariffs escalate sharply, other trade barriers may also contributeto Asia's import bias againstprocessedcommodities. SeveralAsian countries employnontariff barriers, like quotas, licensingrequirements,ot variable import levies to control imports. Thus, the presence (or absence) of NTBs over commodityprocessingchainsshouldbe examinedto determineif these restrictionsgenerallyreinforce Asian tariffs.

" The Japaneserates are 'applied' tariffs in that they are the average of the MFN or GSP duty actuallypaid on imports. The GSP rates may provide developingcountries with important margins of preferences for many manufactured goods, but our analysis indicates they are not of major importance for primary or processed commodities. In some cases Australia, New Zealand and other countries that face MFN tarrifs may pay higher tariffs on a few productsthan indicatedby the average rates shown in Table 5. 12Yeats(198X p. 115) providesa cross-countrycomparisonof the degree of escalationin 10 OECD countries' tariffs. Japan's tariffs escalatefar more sharply thanany of the other countriesused as comparators. The increase in Japanesetariffs over commodityprocessing chainswas about three times greater than that for the United States and at least six times greater than that for Norway, Swedenand Switzerland.

;'

19

Table 6 summarizesavailableinformationon nontariff .arriers applied by Asian countrieson the 48 processing chains. The table indicates the specific types of nontariff measures that Indonesia, Japan, Korea, Malaysiaand Thailanduse to regulate primary and processed commodityimports. Since Australia, Hong Kong, New Zealand ard Singaporeappear to make in"requentuse of nontariff barriers on either primary or processed commoditiesthese countries are not included in Table 6. Box 4 provides a somewhat different perspective by showingthe share of processed commodityimports (in value terms) coveredby nontariff measures. Table 6 shows that Asian NTBs are most highly concentrated in the foods and feeds and agricultural materials sectors. Japan uses eight different types of nontariff barriers to regulate food imports, including variable import levies on sugar, poultry znd pork and bovine meat and global quotas on fish and fruit. Related studies estimate that these Japanesenontariff barriers often have ad valoremequivalentsgreater than 100 percent (see Box 4). Other studies reach similar conclusionsconcerning the importanceof Korea's NTBs on a number of food commodityimports (for example, see Anderson 1981). The key point that follows from these observationsis that tariffs and nontariff barriers are of sufficientimportancethat both must be addressedin an Asian multilateralliberalizationeffori

V. Suymma and Policy Recommendations While numerous studieshave examinedtrade barrier escalaton and its implicationsin industral countries,very few relatedanalyseshave been undertakenfor developingcountries. This studyundertook such an investigationin order to assess the priority to be given to the issue in intra-Asian trade. After compiling a comprehensivedata base on Asian trade, tariff and NIB restrictions, this study examinedthe structure of these restrictionson primary andprocessedcommodities. Most Asian countries' tariffs were found to be set at high levels and to incorporategrater escalationthan industrial countries' import duties. Evidencewas also presented that the escalationin the tariffs is often reinforcedby nontariff restrictionson processedgoods althoughit was not possible to draw firm conclusionson this point due to the lack of reliabltJNTB ad valoremequivalents.

20 Tabl 6. Asira NondffMcea

I 2 3 4 S 6 7 9 10 11 12 13 14 IS 16 17 Is 19 20 21 22 23 24 2S 26 27 2B 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46. 47 48 GQ [A U Sec

-

s Applied to Pimsfy and Fnal Stage Pocd

Meet of aow, .sbp. lamb, goat Swim Pouay Fih fth, cbilod, Shellah fresh, cild, fxen Whlat Rice Fruit Vegetabls Suar Coffee Coeca Tea Tobao Le-t%rr G _uesat Capes , _hbnub.keh Sy abem L_med Comm wod C" oil seed Rubber Pu ood Wood Codak Silk Wool Conoka Jute Flax 1hmpbat SeI Sulphr Asbeda Ion Copper flausite Lead ZiDC Tm Manganese Tungam Siler Hom & wlebeom Hair Fcasho Pletromasm Gb6alQaud l=mt Amrhemw Lic*c

U U U, SP, GQ U

U

Prod

U. SP. GQ U, SP. GQ U,SP U U

U, Sp, GQ SP. SM

isn48 Commodity Procesing Csin.

TQ

I AQ [A. GQ GQ, Su GQ. SM ST.GQ GOQ,ORA VL

SP, GQ

VL VL VL IA. GQ IA, GQ

IA IA

GQ,SM IQ, GQ IQ, im GQ 1, GQ IA, GQ, SM

U, SP, Q

IA IA ET, IA ET ET IA

IA IA IA IA IA

IA IA

CS IA

IA CS CS. IA U IA

Er ET, A

SEA

CS TQ

U

GQ

IA

U

CS

IA IA IA

U

CS CS

IA

U

U

U

SP SP

U. SM

U

U

SP

SM

U U

CS CS CS CS

IA IA

Su

SP

CS IA CS CSCS

CS CS OIM IA

IA

U CS, U CS CS.,U CS. U

Er

U. SP. Su

U

CS IA

SP. SM

CS. U GQ IA U, GQ IA, GQ [A. GQ

SM - Soat moolp SP = Selce lhdms ST Semina

C_oputed fiee ekbWodd Busk-UNCTADSMARTdat bae. No NITf an awardedbow

CS GQ TQ TQ - TaniffQua VI - VaSPi Er - SETci- Tax

rumay at prosd

mpost

proa

A IA

ET

CS CS OIM =ehr Impost l MOame SIA VtSolkImo Atamy CS - C Swcbmga

a Autmrs. Now Zeskd at Sigapoe

IA

21

Box 4 The Nature of Nontariff Protection for Processed Commodities Table 5 shows that some Asian e:ountries'tariffs are higher than those in OECD markets and frequentlyincorporategreater escalation. However, primary and processed commoditiesmay also face nontariff barriers in Asian trade. GATT records show that while NTBs are applied infrequentlyto commodityimports by Australia,Hong Kong, New Zealandand Singapore(records for the Philippinesare not available), they are widely used in countries like Japan, Korea and Malaysia. Share of prccessedcommodityimports covered by nontariff barriers (9) ImportingCountry Indonesia Japan Rep. of Korea Malaysia Thailand

Foods & Feeds

Ores & Metals

Agricultural Materials

Energy Products

18.3 '9.8 18.4 23.2 11.9

6.2 0.9 0.0 22.3 1.3

0.4 0.7 22.2 36.5 2.6

0.0 8.2 85.4 52.5 22.2

To illustrate this point, the above statistics show the percentage of tariff-line level processed commoditiesfacingnontariff barriers in five Asian markets. In preparingthese data, the 48 commodityprocessing chains wen aggregatd into four broad product groups. Processedfoods are most often subject to NTBs - these restrictionscover approximately50 percent of Japan's imports - but Korea, Malaysiaand Thailandfrequentlyapply nontariffmeasuresto energyproducts(see Table 6 for informationon the types of measures used in these markets). Although informationon the trade effects of nontariff barriers is limited, several studies suggest Asian NTBs often convey very high levels of nominal protection. For example, Ss-on and Anderson (1982) estimatethat Japan's NTBs on primaryand processedfoods often havenominalequivalentsover 100 percent, while ECAFE(UnitedNations,1982)reachedsimilar conclusionsconcerningnontariff protectionin other Asian countries. The messagefrom these studies is that nontariff barriers, as well as tariffs, must be addressed in any multilateral liberalizationeffort. At a minimum, the NTBs shouldbe bound" to ensure that they cannot be tightenedto offset the effects of any tariff cuts that might be achievedin negotiations.

22

These findingsstrongly suggestthat Asian trade bariers have an importantrestrictive effect on intra-Asian processed commodity trade. In short, this study demonstratesthat trade barrier escalation is an importantissue to be addressed in regional initiatives to liberalize trade barriers. The implicationsare that this problem should not be viewed as a pure South-Northtrade issue, which was the case in the Tokyo and Uruguay Round negotiations,but must be approachedin a broader context. However, relatedlessons from previousMTNs haveimportantitplications for future liberalizationefforts. Onekey point is to ensurethat disproportionately high trade barrier cutFiare not made for unprocessed(as opposed to processed)commoditiessince this would work against expanded trade opportunitiesfor processed products.13 A second message is that negotiationsmust deal jointly with tariffs and NTBs to ewsurethat a reductionin one typeof restriction is not offset by a further tightening in the other. As an illustraion, Laird and Yeats (1989) show that, over the 1966-86 period, industrial countries increasinglyused nontariff barriers as a substitutefor tariff protection. The resultsof thisstudy callinto questiontraditionalexplanationsas to why tradebamier escalation exists. For example, Balassa (1968, p. 19S)indicatesthat trade barriers in the North increase with fabricationto 'discriminate against the processed export products of developingcountries' and thereby protect the formers' producers from their more efficient counterpartsin the South. However, the fact that Asian developingcountries find it necessary to escalate their own trade barriers suggests that alternativeor at least, less broad, explanations must be found. As a minimum, the South-Northorientation suggested by Balassa must be dropped since tariff escalationto protect domesticindustry againstmore efficient producers is not limited to developed countries.

'MTis conclusion follows from numerous studies that have analyzed the influence of trade barriers within a theoretical frameworkknown as the "effectiveprotection concept. Amongother points, this concept holds that a proportionatelygreater reduction in trade barrers for production inputs as opposed to the final (manufactured) productmay actuallywork againsttrade in the latter since these cutswould lower productioncostsand actuallyraise protectionfor the value added componentof the manufacturingprocess. For a useful nontechnicaldiscussionof the effective rate concept see Grubel (1971). For applicationsof the effective rate concept see Balassa, et. al. (1971) or Finger and Yeats (1976).

23 References Anderson, Kym (1981). Nolthi(astAsian AgricullturalProtection in Historicaland ComparativePerspective:The Case of SouthKorea, (anberra: Australia-JapanResearch Center, May. Balassa, Bela (1965). 'Trade Liberalizationand Revealed ComparativeAdvancage,"The Manchester School of Economic and Social Studies,May. Balassa, Bela (1968). 'The Structure of Protection in Industrial Countries and its Effects on the Exports of ProcessedGoods from DevelopingCountries." in UNCTAD. The Ke_edy Round: Estimated Effects on Tariff Barriers. TD/6/Rev. 1, New York: UnitedNations. Balassa, Belaet. al. (1971). TheStructure of Protectionin DeNelmingCountries, Baltimore:JohnsHopkinsPress. Basevi,G. (1966). "TheUnited States Tariff Structure:Estimatesof EffectiveRates of Protection of United States Industries and IndustrialLabor," Review of Ect tmics and Statistics, vol. 48. Commonwealth Secretariat (1982). Protectionism: Threat to International Ordej, London: Commnwealth Secretariat. Finger, J.M. and AlexanderYeats (1976). "EffectiveProtectionby Transport Costs and Tariffs: A Comparisonof Magnitudes,"Ouarterlv Joumal of Economics, vol. 90, February. Grubel, Herbert (1971). "Effective Tariff Protection: A Non-Specialist Introduction to the Theory, Policy Implications,and Controversies," in Herbert G Grubel and Harry 0. Johnson (eds.), Effecdvo Tagff

rotection,Geneva:GATT. Helleiner, G.K. and Douglas Welwood(1978). Raw Material Processingin DevelopingCountriesand Reductions in the CanadiaTariff Ottawa:Economic Councilof Canada. Johnson,Harry (1965)."The Theoryof Tariff Structr with SpecialReferenceto World Trade and Development, in H. Johnsonand Peter Kenen, eds., Trade and Development,Geneva: Librairie Droz. Laird, Samuel and Alexarder Yeats (1987). "Empirical Evidence Concerning the Magnitude and Effects of DevelopingCountry Tariff Escalation, The DevelopingEconomira. vol. 25, June. Laird, Samueland AlexanderYeats (1989). "NontariffBarriers of Developed Countries, 1966-1986,"Fijne and Development,vol. 26, March. LAird,Samueland AlexanderYeats (1990). OuantitativeMethods for Trade Barrier Analysis, London: Macmillan Press. Roemer, M. (1979). Resource Based Industrializationin Develoning Countries: A Surve of the Literatur, Cambridge:Harvard Institutefor InternationalDevelopment. Saxon, Eric and Kym Anderson (1982). Japanese AgriculturalProtection in Historical Perspective, Canberra: Research School of Pacific Studies, AustralianNational University,July. Stern, Robert (1976). "EvaluatingAlternativeFormulae for ReducingIndustrial Tariffs, Journal of World Trade

L*w,January-February.

24 UNCTAD (1968). The KennedyRound: EstimatedEffects on Tariff Barriers, TD/6/Rev. 1, New York: United Nations. UNCTAD (1979). The Processing Before Export of Primara Commodities: Areas for Further Intemational Cooperation,TD/229/Supp. 2, Manila: UNCTAD. UNCTAD (1980). The Influence of Protectionism on Trade in Primara and Processed Commodities, TD/B/C.1/207/add.1, Geneva: UNCTAD. UNCTAD(1991). Handbookof InternationalTrade and DevelopmentStatistics, New York: United Nations. UNCTAD-WorldBank (1989). A User's Manual for SMART, Washington:World Bank. UnitedNationsEconomicCommissionfor Asia and the Far East (1982). IntraregionalTrade Proiections:Effective Protectionand IncomeDistribution,vol. 2, Bangkok:United Nations. Walter, Ingo (1971). 'Nontariff Barriers and the Export Performance of Developing Countries,' American EconomicAssociationPagers and Proceedings,vol. 61, May. Walter, Ingo (1972). 'Nontariff ProtectionAmongIndustrialCountries:Some PreliminaryEvidence,"Economica Internazionale, vol. 55, May. World Bank (1981 and 1987). World DeveloomentRenort, New York: Oxford University Press for the World Bank. World Bank (1992). Global EconomicProspects 1992, Washington:World Bank. Yeats, Alexander(1977).'Do InternationalTransportCosts Increase with Fabrication?Some EmpiricalEvidence,' Oxford EconomicPapers 29, November. Yeats,Alexander(1979).Trade Barriers FacingD2eveloDing Countries:Shiggingand CommercialPolicy Measure London: MacmillanPress. Yeats,Alexander(1984). 'On the Analysisof Tariff Escalation:Is therea MethodologicalBias Againstthe Interests of DevelopingCountries?' Journal of DevelopmentEconomics, vol. 15, Spring. Yeats, Alexander(1987). 'The Escalationof Trade Barriers,' in J. MichaelFinger and Andnej Olechowski(eds.) The Urunuav Round: A Handbookfor the MultilateralTrade Negotiations,Washington,World Bank. Yeats, Alexander(1991). 'Do NaturalResource-BasedIndustrializationStrategiesConveyImportant(Unrecognized) Price Benefits for Commodity-ExportingDevelopingCountries?' World Bank PRE Working Paper No. 580, Washington:World Bank, January.

25

APPENDIX 1

Elements of Primary Commodity Processing Chains Defined in Terns of Revision 1 of the Standard International Trade Classification System

TableAl providesdetailson the commodityprocessingchainswhich form the basis for this study's empiricalanalysis. Each individualcommodityis classified as fallingin the primary, intermediateor final stage of a processing chain. To assist in clearly defining the nature of each item, its Standard International Trade Classification(SITC) Revision 1 number is also given.'4 A point to note is that chainsdefinedin Table Al are based on the SfTC systemand thereforemay have certain limitations.Cne problem is that some of the SITC-basedstages define products at too high a level of aggregationwith the result that product compositionmay vary in ways that influencethe empirical analysis. For example, the primary and processed stages of the fruit and vegetablechains may contain differentproportionsof (say) temperate and tropical products so they need not accurately represent a given (well-defined)commodity undergoingincreased fabrication. A second problem concerns leakages from the chain. In these cases a given commodityexperiencesfurther processing,but is not used as a direct input into the next highest stage item. As a result, analysisof trade changes in a SITC-definedprocessingchain may understatethe actual level of commodity processing and trade by developing countries. Finally, the SlTC system may contain some product groups that containindividualitems which are at differentlevels of fabrication.As an example,the vegetable oil stages of the groundnut,linseed, soya bean, copra, and cotton seed chains do not distinguish between crude and refined oils although differentlevels of processingare involved. Severalof the commoditieslistedin Table Al haveend uses at the primary or intermediateetages of processing. For these items a processingchain analysis may show little progress in shifting exports to higher levels of fabrication.Soyabeans are an exampleas the primary stage item is a feedproduct. Vegetables, fruits, fish, and shellfishare other processingchains where a strong consumerpreferencemay exist for the fresh (unprocessed) stage of the product - a factor that would work againstprocessing(preservation)in exporting countries. A final point to note is that there may be major differences in the number of stages that are identifiedfor the processingstageslisted in Table Al and this is often due to the nature of the SITC system. For example,several commoditieslike fruit, vegetablesand fish have only a primary and final stage identifiedas SITC products. This contrastswith the wood (manufactures)chain wherea primarystage, two intermediate,and two final stages can be identified. As a result of these differences in detail, it is very difficult to make cross-commodity comparisonsof trade at similar levels of fabrication.

"As an example, Table Al shows that the cocoa chain has three distinct stageswith cocoa beans (SITC 072.1) representingthe primary stage (unprocessed)product. Cocoa powder (SITC 072.2) and cocoa butter (072.3) are two itemsclassified in the next highest stage of processing,while chocolate(SITC 073) representsan even higher level of processingactivity. For products like wood manufacturesit is possible to identify five different levels of commodityfabricationalthough some other chains, like petroleum,have only a primary and processed stage.

26 Table Al. Elements of the Wodd Rank's CommodityProcessing ClassificationSchemc Processing Chain 1. FOODSTUFFS AND TOBACCO Pig meat Poultry Meatof Cows, sheepor goats Fish other than shellfish Shellfish Wheat Rice Fmnit Vegetables Coffee Cocoa Tea Sugar Groundnuts Copra Palm nuts and kernels Soya beans Unseed Cotton seed Castor seed Tobacco D. AGRICULTURALMATERIALS Wood

Prinary state product

Sc

intermwdiate oroduct(s)(SITC)

Live wine (0013) Live poultry (001.4) Live cattle, sheep or goats (001.1,001.2) Fresh or frzen fisb(031.1) Fresh or fren sdelfish (031.3) Unmilkd wheat (041) Rice in husk or husked (042.1) Fresh fruit (051) Fresh vegetables (054) Green or roasted beas (071.1) Raw or roasted beam (072.1) Tea (074.1) Raw beet and cane sugar(061.1) Groundtat(221.1) Copra, excl. flour and meal(221.2) Plm nuts and kemeb (221.3) Soya bean excl. flour (221.4) Linseed cxcl. flour (221.5) Cotton seed excl. flour (221.6) Caster seed excl. flour (221.7) Unmanufacturedtobwco (121)

Frcsh or fin pork (011.3) Fresh or fioe poujiy (OIIA, 011.81) Fresh or frzen beef or mutton(011.1, 00.2) noneidentified none identified Wheat meador flour (046) none identified none identified none identified none identified cocoa powder andbutter (072.2, 072.3) none identfified Refined sua (061.2) none identified none identified none idaetified none identified none identified none identified none identified noneidentified

Rough logs (242.21,242.31)

Cork Paper-pulpwood

Cork unworked (44.01) Pulpwood(242.1)

Log roughly equre (242.22,242.32)b Lumbersawn and planed Cork simplyworked(244.02) Woodpulp(251.2,251.6,251.7,251.8)

Rubber

Natural and synhetic bber(231.1, 231.2) Hides and skins(211less 211.8, 211.9) Feathers (291.96) Horn and whaebone (291.12) Human hair (291.91) Raw silk (2613) Raw jute (264) Wool greasy (262.l)b

Unvuleanizedtubber (621.01 to 621.03)b Vulcanizedrubber(621.04 to 621.06p Bovineand sheepleather (611.3, 611.4, 611.91, 611.92)b Chamois tndpcahm kentlcthe(611.93, 611.94)c none identified noneidentified nmneidentified Silk yam andtded(6SI.1) Jute yar (6S1.9) Combed and rded wool (651.21,65122,651.25)

Leather Feathers Horn and whalebone Hair Silk lute Wool

Fina stage oducZ(s) (STC Presred pork (021.1, 013)a Prepared or tinned mea (013)a Met tinned or aoked (012les 012.1,013)P Sated orpr-Aseved fis (031.2,032.01) Pepard or presrved shelfish (031.02) Breador biuits (04S.41) Rice gltad or pofished (042.2) Preeved fruit (053) Prerved vegetables(055) Coffee exracs (0713) Cbocolate (073) Tea extracts (099.02) Flavored -gar and ugar candy (062) Groundwutoit (421.4) Coconutoil (4223) Palm kernel oil (422.4) Soya bean oil (421.2) Linmseed oil (421.2) Cotton seed oil (4213) Castor oil (422.5) Cigars, cigarettes, etc. (122) Plywood and veneer (631.1,631.2)b Wood manufatures (632)c Cork manufacwu (633) Paper (641.1 to 641.4, 641.7, 641.9)f, Paper atticles (641.1 to 6423. 642.9W ure, tubes and belts (629.1, 629A, 655.45)d Rubber clothing (841.6)d Leather belting (612.1,612.2, 612.9)d Leatherclothing(841.3,851.02) Feather goods (899.26, 899.92) Carvedhon andwhalebone(899.15) Humianhair worked (899.94) SilkfMicka (653.1) lute fabrics (653.4) Wool fabrics (653.21, 653.22)d

~2' Table Al. Elemens of the WorldBank's CommodityProcessingClassificationSchemaand Sourcesof Uni VahleInformation Processin, Chain

Cotton Flax, hempand ramie

Pimary sRe product (ST)

We : degeaed (62.2, 262.6, 262.8)c Rawrcotton(263.1)b Coton combedad carded(63.4)c Raw flax, hempad wmie (265.1 to 2653)

IntermediateWooducts)(S)lrM

Findl staee producl(s) (STrC)

Woolblankets(656.61)d Conaonyarn(6513,651.4) none identified

Cotton librics (652.11to 652.13,652)d Cottonblankets(656.62)d Flax, hemrpad raie yamn(651.5)

m. ORES, MINERALS AND METALS Phosphate

Natural pbosphate (271.3)

Pboswhic esktrs (512.63)

Phosphoric acid (513.35)d Phosphate fenilizer (561.2)d

Sulphur

Sulphur (274.1)

Asbestos Glass

Crude Asbestors (276.4) Sand excl. metal bearg (273.3)

Ester and purified sulphur (512.61, 513.2) none identified Glass in mss (664.11, 664.13, 664.3)b

Sulphuric acid and conpounds (513.33, 513A2) Asbet fiber and material (661.83, 663.8) Safety or contruction gala (664.5 to 664.7)d

Glass surface gromud (664)c

Ghss ma

665.2)d Iron

ftcattres (664.91 to 664.93, 665.1,

ron ore (281.3)

Pig iron (671.2)b

Manganese

Manganese ore (283.7)

Iron wire and tod (673)c none idetified

Copper

Copper oe (283.11,283.12)

Copper unrfined (682.1 )b Copper refined (682.12, 682.13)c

Nickel Bauxite

Nickel ore (283.21, 283.22) Bauxite ore (283.3)

Unwrought nickd (683.1) Aluminum oxide (513.65)b

Nickel bars and sheet (683) Aluminum bars, plate, wire (684.2 less 684.24)

Lead

Lead ores (283.4)

Unwrought alumium (684.1) Unwrought tead (685.1)

Lead bars, plate, wire (685.2)

Zinc

Zinc ores (283.5)

Unwrought zinc (686.1)

Zinc bars, plate, wir (686.2)

Tin Tungsten Silver

Tin ores (283.6) Tungstenore (283.92) Silver ore (285.01)

Unwroughttin (687.1) noneidentified Unworkedsilver(681.1)

Tin bars, plate, wire(687.2) Tungsten(689.41) Rolledsilver(681.12)

CrudePetroleun (331.01)

noneidentified

Gasoline,kerosene,f6els(332.1t2.332.3/4)

Ion and steel plate (674.1 to 674.3)d io strip, rails, wires (67S, 676, 677)d Fenno-manganese (674.1) Copperbars, wire, plat (686)

IV. PETROLEUM

Petroeum

a b c d

STC 013 (preservedmat) mnaycontainother meatsthatdo not strictlybelongin the prcservingdin. Of the two productsshownin this stageof the chain this itemis less processedandmay be a production This itemis consideredto bethe more highlyprocessedof the twoin th mae stageof th. prcessing chi. lbe items in tbisstage of the processingchain are classifiedas havingsinilar levelsof fabrication.

28 APPENDIX 2

Do Asian Countries Have a Comparative Advantage in Processing Natural Resource Products

The previousanalysis establishedthree points relating to the priority that trade barrier escalation should receivein any Asian multilateralliberalizationinitiative. First, primary commoditiesconstitutea relatively high share of many Asian countries' exports. Second, Asian imports are biased againstprocessed products;in fact, processed Asian commodities fare considerablybetter in non-Asian markets than in intra-trade. Third, some importantAsian countries,like Japanand Koreahaverelativelyhigh tariffs that escalatesharply. A further important considerationthat has not yet beenaddressedis whetherAsian countrieshavea comparativeadvantagein processing primary commodities. Economistshave employedthe 'revealed*comparativeadvantageconcept to ans-werquestions of this sort. Stated simply, the revealedcomparativeadvantage(RCA) of country i in productj is measured by the item's share in the country's total exports relative to its share in world trade. That is, if x3 is the value of country i's exports of j, and Xo is the country's total exports, its revealed comparativeadvantageindex is, RCAU = (qj1X)/(XX),

where the w subscriptsrefer to world trade totals. The index RCA, has a simple interpretation. If it takes a value of less than unity (which indicatesthat the share of productj in i's exports is less than its share in world trade) this impliesthat the country has a revealedcomparativedisadvantagein the product. Similarly,if the index exceedsunity this implies that the country has a revealedcomparativeadvantagein the item. (See Balassa (1965) for a discussion of the properties of this index)."

'5Onepotentialproblem is that the measurecan be influencedby other countries' trade barriers. If marketswith which a given country has a strong tendencyto trade have relatively high tariffs and NTBs, this could cause the RCA index to incorrectly indicate the lack of a revealedcomparativeadvantage.Anotherpotential problem is that the index can be biased by inappropriateeconomicpolicies.For example,a national strategyof import substitution could cause the RCA index to depart from its pattern under a "neutrald"trade regime.

29

Table A2. Asian Countries'RevealedComparativeAdvantagein ProcessingPrimary Commodities Procesed CommodityGroup Exporter Australia China India Indonesia Malaysia Thailand Taiwan, China New Zealand Philippines Rep. of Korea Brunei Japan Papua New Guinea Singapore Pakisan Sri Lanka Hong Kong Bangladesh Fji KoreaDem. Rep. Myarmar Guam Maldives Kampuchea,Dem. Vanuatu Solomonllands Mongolia Tonga Nepal Kiribati

Foodsand Feeds

AgriculturalMatenials

Ores and Metals

EnergyProducts

0.75 1.00 0.56 1.21 3.07 3.86 0.60 0.95 4.24 0.64 0.00 0.12 3.52 0.71 0.28 0.50 0.39 0.25 5.96 0.89 0.59 0.55 15.04 0.30 0.10 11.19 0.04 1.66 0.82 0.28

0.55 2.16 3.39 5.51 1.24 1.29 1.46 0.54 1.44 2.75 0.01 0.65 0.47 0.38 6.17 1.21 3.56 2.65 2.46 0.29 0.19 0.17 0.01 0.10 0.19 0,01 3.34 0.54 0.32 0.00

1.91 0.42 0.43 0.44 0.37 0.20 0.49 1.19 0.88 1.14 0.01 1.19 0.09 0.20 0.00 0.06 0.11 0.12 0.01 4.96 0.16 0.S3 0.10 0.03 0.00 0.04 0.46 0.00 0.01 0.00

0.42 0.46 0.99 2.23 0.52 0.19 0.0S 0.39 0.38 0.37 1.62 0.12 0.01 6.40 0.11 0.42 0.07 0.62 0.25 0.54 0.21 1.59 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00

10

14

5

4

Memo Item No. of countries With RCAs over unity

Source: Computationsbasedon 1990trade data drawn from United NationsStatisticalOffice COMTRADErecords.Table Al identifiesthe specificprocessd commoditiesincludedin each of the above productgroups.

Table A2 shows 1990revealedcomparativeadvantageindices for 30 Asian countries' exports of four groups of processedcommodities,namely,foods and feeds, agriculturalmaterials, ores and metals, and energy products (seeTable Al for a list of the processedcommodities in each group). Overall, 25 of the 30 countrieshad a revealed comparativeadvantage in at least one of the four groups - a point that should indicatebroad-based interest in escalationissues. Almost half of the countries (14 out of 30) have a revealed comparativeadvantage in processedagriculturalmaterials,with 10 countries also havingRCAs above unity for processed foods. Sevenhave a revealedcomparativeadvantagein at leasttwo of the four product groups, with Indonesiarecordinga comparative advantagein every group exceptprocessed ores and metals.

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