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Trade As Aid: the Role of the EBA-Trade Preferences Regime in the Development Strategy

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Trade As Aid: the Role of the EBA-Trade Preferences Regime in the Development Strategy A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Gradeva, Katerina; Martínez-Zarzoso, Inmaculada Working Paper Trade as aid: The role of the EBA-trade preferences regime in the development strategy IAI Discussion Papers, No. 197 Provided in Cooperation with: Ibero-America Institute for Economic Research, University of Goettingen Suggested Citation: Gradeva, Katerina; Martínez-Zarzoso, Inmaculada (2009) : Trade as aid: The role of the EBA-trade preferences regime in the development strategy, IAI Discussion Papers, No. 197, Georg-August-Universität Göttingen, Ibero-America Institute for Economic Research (IAI), Göttingen This Version is available at: http://hdl.handle.net/10419/57333 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Ibero-Amerika Institut für Wirtschaftsforschung Instituto Ibero-Americano de Investigaciones Económicas Ibero-America Institute for Economic Research (IAI) Georg-August-Universität Göttingen (founded in 1737) Diskussionsbeiträge · Documentos de Trabajo · Discussion Papers Nr. 197 Trade as Aid: The Role of the EBA-Trade Preferences Regime in the Development Strategy Katerina Gradeva, Inmaculada Martínez-Zarzoso August 2009 Platz der Göttinger Sieben 3 ⋅ 37073 Goettingen ⋅ Germany ⋅ Phone: +49-(0)551-398172 ⋅ Fax: +49-(0)551-398173 e-mail: [email protected] ⋅ http://www.iai.wiwi.uni-goettingen.de Trade as Aid: The Role of the EBA-Trade Preferences Regime in the Development Strategy By Katerina Gradevaa and Inmaculada Martínez-Zarzosob* aUniversity of Göttingen bIbero-America Institute for Economic Research at the University of Göttingen, Germany and Institute of International Economics, Universidad Jaume I, Spain ABSTRACT This study focuses primarily on trade preferences offered by the European Union (EU) and in particular on the Everything But Arms (EBA) trade preferences regime, which is targeted exclusively on least developed countries (LDCs). Using the gravity model, an estimation of the influence of the EBA preferences on exports from the ACP LDCs to the EU-15 is presented. The model is applied to the time period 1995 to 2005 for the ACP countries’ exports to the EU-15 and estimated with the help of different econometric techniques. The core questions of the investigation are two: First, to examine the influence of the EBA preferences on the ACP LDCs’ export performance and second to compare the impact of the EBA scheme with the one of official development assistance. In addition to their separate effects the combined impact of EBA and aid flows is also analysed. The main results show a very poor performance of the EBA regime. However, the combined effect of the EBA and aid on exports is positive, indicating that the development strategy of the developed countries, in this case of the EU, needs to include both sorts of assistance, aid and trade preferences. JEL Classification: O24, C23, F13; F35, Keywords: development aid; trade preferences; Everything But Arms; panel data * Corresponding author: E-mail address: [email protected]. Funding from the Project SEJ2007-67548 in support of this work is gratefully acknowledged. - 1 - Trade as Aid: The Role of the EBA-Trade Preferences Regime in the Development Strategy 1. Introduction The role of trade preferences in the development debate is a very controversial topic. Established as a sort of aid to developing countries (DCs), its effects on growth and development are rather diverse (Brenton, 2003; Brenton and Ikezuki, 2005; Reinhardt and Oezden, 2005). The development debate turned its focus on trade as a more effective way of ensuring growth and economic and social prosperity in the DCs because of the mixed outcomes of aid programmes (Morrisey, 2006; Hansen and Tarp, 2000). The key advantage was seen in achieving substantial increase of exports from DCs to developed countries. Hence a Special and Differential Treatment (SDT) regime was introduced within the GATT/WTO framework in order to promote DCs’ exports without exposing their home industries to higher competition. This study will focus primarily on trade preferences offered by the European Union (EU) and in particular on the Everything But Arms (EBA) trade preferences regime, which is targeted exclusively on least developed countries (LDCs). The expectations about the EBA initiative have been very high, setting the hopes that this new scheme will deliver the breakthrough in the economic development of the poorest countries in the world. In contrast, this study will present arguments, which highlight the various threats of implementing trade preference regimes, not only to the beneficiary countries but also to the WTO framework. The main questions, which will be examined, deal with the following: whether trade preferences are an effective development strategy and what is the impact of the EBA regime in particular on the African, Caribbean and Pacific (ACP) countries’ exports into the EU. The effect of trade preferences will be compared to the one of official aid flows in order to show which one of the two development tools contributes more to the export performance of the ACP countries and whether trade preferences and aid act as complements or rather as substitutes to each other. Beginning with the economic and political effects of trade preferences as a whole the discussion will focus on the design of the EBA agreement and its impact on the beneficiary countries’ exports. On the one side, ex-ante studies, based on general equilibrium models, generally predicted a small positive impact on exports and - 2 - welfare of the EBA scheme1. On the other side, ex-post studies lead to mixed results (Evenett, 2008). The gravity model is used as the theoretical framework to investigate the influence of the EBA preferences on exports from the ACP LDCs to the EU-15. The model will be applied to the time period 1995 to 2005 for the ACP countries’ exports to the EU-15 and estimated with the help of different econometric techniques – random- and fixed-effects, Hausman- Taylor estimator and Heckman regression method. The core questions of the empirical investigation will be two: First, to examine the influence of the EBA preferences on the ACP LDCs’ export performance and second, to compare the impact of the EBA scheme with the effect of official development assistance (ODA). In addition to their separate effects the combined impact of EBA and aid flows will also be analysed. To our knowledge, this is the first study that specifically evaluates the influence of the EBA regime and compares trade preferences and development aid as development tools within the framework of the gravity model of trade. The main findings are that the EBA agreement seems to have exactly the opposite effect on ACP LDCs’ exports as its goals: instead of increasing the size of exports the arrangement actually reduces exports. In contrast, the interaction effect between EBA and ODA turns out to be a significant determinant of exports from ACP LDCs to the EU-15, showing a small and positive effect on exports. The ODA variable performs differently in the regressions but it has a significant and positive effect on exports when the model is estimated using the Heckman approach, although the results are not robust to changes in the specification of the model. It appears that neither the EBA scheme nor the ODA achieve their goals on its own but a mixed strategy using both development approaches seems to have a significant positive effect on LDCs’ exports to the EU. The study is structured as follows. Section 2 deals with the theory on which trade preferences are based, presenting also the problems caused by implementing these schemes. These concern issues such as the economic effects of trade preferences on the beneficiaries’ economy, on their trade policy and on the future of the WTO. Section 3 focuses on the EU preference regimes and especially on the EBA initiative and its characteristics. The main differences between the EBA and the General Scheme of Preferences (GSP) of the EU will also be discussed in this section. Section 4 analyses the empirical effects of the EBA arrangement on trade. A review of previous studies is followed by estimation, applying the 1 Somwaru and Trueblood (2002), Cernat, Laird, Monge-Raffarello and Turrini (2003) and Jensen and Yu (2005). - 3 - gravity model in order to measure the effect of the EBA initiative on ACP LDCs’ exports. The empirical results will serve as the basis for our conclusions, outlined in Section 5 with regard to the main concern here – whether trade preferences should be a part of the development strategy of developed countries. 2. The political economy of Trade Preferences After the Second World War, at the time of the Marshall Plan, aid was the tool most often used for supporting economic development and growth in the DCs. Official development assistance was seen as a very efficient and powerful instrument for stimulating growth (Jayasuriya, 2006). In the next decades the success of many countries following mainly the strategy of trade and investment liberalisation, like those in East Asia, attracted attention and induced a shift in the development strategy from aid to trade.
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