Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Diagnostic Toolkit Toolkit Diagnostic Competitiveness José Guilherme Reis • Thomas Farole Thomas Farole • Reis Guilherme José Trade Trade Competitiveness Diagnostic Toolkit Trade Competitiveness Diagnostic Toolkit José Guilherme Reis Thomas Farole © 2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 :: 15 14 13 12 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomina- tions, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permis- sion may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750- 4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-8937-9 eISBN: 978-0-8213-8938-6 DOI: 10.1596/978-0-8213-8937-9 Library of Congress Cataloging-in-Publication Data Reis, Jose Guilherme. Trade competitiveness diagnostic toolkit / by Jose Guilherme Reis and Thomas Farole. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8937-9 — ISBN 978-0-8213-8938-6 (electronic) 1. Foreign trade promotion. 2. Competition, International. I. Farole, Thomas. II. Title. HF1417.5.R45 2012 382'.63—dc23 2011039745 Cover design: Debra Naylor, Naylor Design, Inc. CONTENTS Foreword xi Acknowledgments xiii Abbreviations xv Introduction to the Toolkit1 Overview and Guidelines for Conducting a Trade Competitiveness Diagnostic3 Understanding Trade Competitiveness: Issues and Current Debates 3 The TCD Framework 6 Organizing to Conduct a TCD7 Module 1 Summary: Conducting the Trade Outcomes Analysis9 Module 2 Summary: Conducting the Competitiveness Diagnostics 18 Module 3 Summary: Moving from Analysis to Policy Options 26 Notes 27 References 27 Module 1 Trade Outcomes Analysis 29 Growth and Share: The Intensive Margin 29 Diversification: The Extensive Margin 41 Quality and Sophistication: The Quality Margin 44 Entry and Survival: The Sustainability Margin 54 Annex A. Product Classifications 59 Notes 60 References 61 Module 2 Competitiveness Diagnostics 63 Market Access 63 Incentive Framework: Trade and Investment Policy 75 Incentive Framework: Domestic Policies and Institutions (Competition, Business Environment, and Governance) 88 Factor Conditions: Access to Finance 97 Factor Conditions: Labor Markets, Skills, and Technical Efficiency 100 Factor Conditions: Intermediate Inputs and Backbone Services 105 Factor Conditions: Trade Facilitation and Logistics 110 Trade Promotion Infrastructure: Export and Investment Promotion 119 Trade Promotion Infrastructure: Standards and Certification 124 Trade Promotion Infrastructure: Special Customs Regimes and Special Economic Zones 140 Trade Promotion Infrastructure: Industry Coordination and Sector Support 144 Trade Promotion Infrastructure: Innovation 148 Notes 159 References 160 v vi Contents Module 3 Policy Options for Competitiveness and Case Studies 163 Market Access 163 Trade and Investment Policy 164 Domestic Policies and Institutions: Business Environment and Governance 167 Access to Finance 169 Labor Markets, Skills, and Firm-Level Technical Efficiency 172 Intermediate Inputs and Backbone Services 174 Trade Facilitation and Logistics 175 Trade and Investment Promotion 177 Standards and Certification 181 Special Customs Regimes and SEZs 183 Industry Coordination and Sector Support 184 Innovation 186 References 187 Appendix A: Summary of Recent Papers on Determinants of Trade Competitiveness 189 Olivier Cadot, Céline Carrère, and Vanessa Strauss-Kahn. 2011. “Trade Diversification: Drivers and Impacts.” World Bank, Washington, DC. 189 Jean-Jacques Hallaert, Ricardo Cavazos Cepeda, and Gimin Kang. 2011. “Estimating the Constraints to Developing Countries Trade.” Organisation for Economic Co-operation and Development, Paris 191 Murat S˛eker. 2010. “Trade Policies, Investment Climate, and Exports across Countries.” World Bank Policy Research Working Paper No. 5654, World Bank, Washington, DC. 194 Ana Paula Cusolito. 2010. “Export Competitiveness and the Intensive and the Extensive Margins of Trade.” World Bank, Washington, DC. 196 Notes 198 Boxes A The World Bank and the Trade and Competitiveness Agenda2 B Appropriate Use of the Toolkit2 O.1 Key Issues and Debates 5 O.2 Using Trade Competitiveness Diagnostics to Develop Policy Notes8 O.3 A Note on Data for the Services Sector 12 O.4 Why Firm-Level Analysis? 13 O.5 Example Questions 17 O.6 Linking Supply-Side Constraints to Trade Outcomes—Econometric Approaches 21 O.7 Value Chain Analysis 25 1.1 Gravity Models 37 1.2 The Drawbacks of PRODY and EXPY 50 2.1 Key Issues and Debates—External Market Access 70 2.2 Tariffs, Preferences, and ROOs 71 2.3 Quotas in Textiles and Clothing 72 2.4 Catfish and the Politics of Antidumping 73 2.5 The Increasing Importance of Standards 74 2.6 Sanitary and Environmental Concerns as an NTB 74 2.7 Use of Export Restrictions by Developing Countries 81 2.8 Avenues to Reduce Tariffs 84 2.9 Investing Across Borders—Reviewing Good Practices 86 2.10 Maximizing the Benefits of Regulatory Reform—Factors for Success 94 2.11 Doing Business Data and Enterprise Surveys—Facts and Shortcomings 95 2.12 Financing Trade in a Postcrisis World 99 2.13 Channels Linking Trade and Productivity 102 2.14 The Gap Between Industrial and Developing Countries in Trade Logistics 118 2.15 Examples of Existing Handbooks, Manuals, and Diagnostic Tools for Standards Assessment 127 2.16 Analytical Challenges and Issues for Consideration 132 Contents vii 2.17 Standards in South-South Trade 134 2.18 Definitions 135 2.19 Sectoral Differences in Compliance Costs 137 2.20 Kenya’s MUB Program 143 2.21 Upgrading Quality for Competitiveness in Pakistan’s Sialkot Surgical Instruments Cluster 146 2.22 WTO Prohibitions against Export Subsidies—the SCM Agreement 147 2.23 Moving up the Production Ladder in Finland—Sector Linkages, Diversification, Sophistication, and Exports 156 2.24 Linear Model of Innovation 158 3.1 Case Example of Good Policy Practice—Securing Market Access through a South-South Bilateral Trade Agreement 164 3.2 Case Examples of Good Policy Practice—Trade and Investment Policy 165 3.3 Case Examples of Good Policy Practice—Domestic Policies and Institutions 167 3.4 Case Examples of Good Policy Practice—Access to Finance 169 3.5 Case Examples of Good Policy Practice—Training, Skills Development, and Technical Efficiency 172 3.6 Case Examples of Good Policy Practice—Intermediate Inputs and Backbone Services 174 3.7 Case Examples of Good Policy Practice—Trade Facilitation and Logistics 175 3.8 Case Examples of Good Policy Practice—Export and Investment Promotion 177 3.9 Case Examples of Good Policy Practice—Standards and Certification 182 3.10 Case Examples of Good Policy Practice—Special Customs Regimes and SEZs 183 3.11 Case Examples of Good Policy Practice—Industry Coordination and Sector Support 184 3.12 Case Examples of Good Policy Practice—Innovation 186 Figures O.1 Evolution of Trade Share of GDP, 1970–2008, and Trade Share of GDP by Region, 20084 O.2 The Three Pillars of Trade Competitiveness4 O.3 TCD Framework 6 O.4 Work Stages for the Trade Competitiveness Diagnostic9 O.5 Decomposition of Export Growth—a Framework for Measuring Trade Competitiveness 10 O.6 Steps to Conducting the Trade Outcomes Analysis 10 O.7 Linking Trade Outcome Categories to Competitiveness Challenges 16 O.8 Competitiveness Diagnostics Components 18 O.9 Steps to Conduct the Competitiveness Diagnostics 18 1.1 Openness to Trade 30 1.2 Adjusted Trade Openness—Examples 31 1.3 Analyzing Broad Trends in Trade Growth, Indonesia, 1990–2008 31 1.4 Compound Annual Growth Rate (%) of Goods and Services Exports, 1998–2008 32 1.5 Change in Costa Rica’s RCA, 2000–08 34 1.6 Share of Parts and Components in Manufacturing Exports for Selected Countries 35 1.7 Market Share for Selected Manufacturing Products: Indonesia versus China in the European Union, 2000–08 36 1.8 Change in Morocco’s Exports by Destination, 2000–08 36 1.9 Example of Gravity Model Analysis of Senegal’s Bilateral Trade 36 1.10 Trade Complementarities Index for ECOWAS Countries, 2007 38 1.11 Macro Analyses of Export Competitiveness 38 1.12 Orientation of Exports and Destinations, Pakistan,