Unilateral trade preferences are one of the most important instruments offered by developed countries to foster developing country exports. This paper analyzes the impact of unilateral trade preferences on developing countries by focusing on the experience of Mozambique. In this paper, we analyze whether unilateral preferences offered by the EU are “valuable” for Mozambican exporters based on the impact on preferential margins, utilization rates, and export prices. We use a detailed dataset with
Unilateral export preferences are an important trade policy tool for less developed countries (LDCs). Successive rounds of trade liberalization in developed countries under WTO agreements and the increasing number of preferential trade agreements (PTAs) have reduced the preferential margin that unilateral trade preferences provided. This so-called “erosion of preferences” has created concern among LDCs regarding the potential impact on their exports. However, the potential impact of “preference erosion” on LDCs depends on whether unilateral preferences are valuable.
This paper explores this issue using Mozambican exports to the EU as a case study. We focus on three main elements that may make unilateral preferences “valuable”: (i) whether unilateral preferences have been used; (ii) whether preferences provide a significant tariff margin; (iii) the degree of appropriation of the price margin theoretically induced by the preference margin.
The paper is organized as follows. The following section gives a brief introduction to the economic rationale of export preferences and their expected impact. Section
Unilateral trade preferences are tariff concessions given by developed to developing countries that do not require reciprocity from beneficiary countries. There are several elements that justify the rationale of those preferences (see Hoekman and Özden [
Existing unilateral export preferences were rationalized under United Nations Conference on Trade and Development (UNCTAD) in 1968 with the introduction of the Generalized System of Preferences (GSP), and GATT articles were amended in order to allow for discrimination. Since then, several other schemes have proliferated. The EU, for instance, granted unilateral preferences to former Africa, Caribbean, and Pacific colonies (ACP) in 1975 (the so-called Lomé Conventions) rationalized in 2000 under the Cotonou Agreement. The US targeted specific groups of commodities and countries with acts such as the Caribbean Basin Initiative (CBI). In addition, the last decade has also seen proliferation and expansion of the GSP, with the GSP-plus and the Everything but Arms (EBA) initiative granted by the EU to least developed countries (LDCs), or the African Growth Opportunity Act (AGOA) granted by the US to African countries.
Product coverage differs substantially, going from the nearly full coverage granted by EBA to roughly 6400 tariff lines in AGOA. Country coverage also varies, creating in some cases discrimination between DCs and LDCs. This has been the subject of some controversy. Commodity-specific provisions of the Cotonou Agreement, for instance, have been repeatedly challenged in the WTO (excluding banana and sugar). As a result, EU and ACP countries have been negotiating for a decade replacing Cotonou unilateral preferences by reciprocal free trade agreements (FTAs), the economic partnership agreements (EPAs). Other differences include rules on trade defense measures and, particularly, nontariff barriers such as rules of origin.
The analysis of unilateral export preferences is comparable to the analysis of free trade agreements.
Unilateral preferences under perfect competition and homogenous products.
If the EU now grants preferential access to Mozambican exporters, firms can continue exporting at the international price plus the tariff
In this setting, the price margin, the difference between the price that the exporter would pay under MFN regime and under the preferential scheme
Unilateral preferences, therefore, should have two main impacts. First, they allow the exporter to capture a higher price than otherwise it would have captured, the price wedge induced by the tariff
It is difficult to assess the impact that unilateral exports preferences have had in practice so far. This impact seems to be product and country specific. However, it is clear in aggregate terms that unilateral export preferences have not achieved very large increases in exports or substantial production transformation towards manufactures in DCs and LDCs.
Several factors may explain this lack of success of unilateral preferences. First, some authors have suggested that costs caused by stringent rules of origin associated with these agreements may offset any advantage given by tariff concessions (see Carrere and de Melo [
The following section assesses the impact of trade preference schemes granted by the EU to LDCs and DCs taking Mozambique as a case study.
The EU is the main destination for Mozambique’s exports with more than 60% of total value exported. In 2007, the EU imported from Mozambique around €1.9 billion growing by a factor of twelve between 2000 and 2007.
A big expansion in export growth came in 2001 following the opening of a large aluminum smelter (Mozal).
Main Mozambican export to the EU 2000/2007 by HS2 chapter.
HS 2 chapter | Product | Value (millions EUR) | % share |
---|---|---|---|
76 | Aluminum and articles thereof | 11,437,495.00 | 77.79% |
3 | Fish and crustaceans | 1,508,769.60 | 10.26% |
24 | Tobacco and manufactured tobacco substitutes | 936,790.14 | 6.37% |
25 | Salt; sulphur; earths and stone; plastering material, lime, and cement | 267,836.09 | 1.82% |
17 | Sugars and sugar confectionery | 228,689.40 | 1.56% |
52 | Cotton | 115,070.22 | 0.78% |
8 | Edible fruit and nuts; peel of citrus fruits or melons | 82,720.88 | 0.56% |
44 | Wood and articles of wood; wood charcoal | 52,284.92 | 0.36% |
27 | Mineral fuels, mineral oils, and products of their distillation; bituminous substances; mineral waxes | 20,881.43 | 0.14% |
9 | Coffee and tea | 16,185.38 | 0.11% |
41 | Raw hides and skin leathers | 11,103.54 | 0.08% |
12 | Oil seeds and oleaginous fruits; miscellaneous grains, seeds, and fruit; industrial or medical plants; straw and fodder | 10,030.34 | 0.07% |
56 | Wadding, felt, and nonwovens; special yarns; twine, cordage, rope and cable, and articles thereof | 6,583.09 | 0.04% |
61 | Articles of apparel and clothing accessories, knitted, or crocheted | 3,599.13 | 0.02% |
64 | Footwear | 1,275.65 | 0.01% |
Source: authors’ calculations based on EUROSTAT.
At first glance, what emerges from the data is the low level of processing of Mozambican exports, clustered around primary agriculture products, low-processed fishery products, and mineral resources. Cotton is only ginned in Mozambique, while tobacco and wood products are exported mainly not manufactured.
Mozambique enjoyed preferential market access for exports to the EU through different schemes: the Cotonou Agreement, replaced in 2008 by the EPAs and the EBA initiative. Coverage, tariff margins and compliance procedures
The main data source for the analysis is the EUROSTAT COMEXT database. It includes information on volume, quantities, country of origin, and whether exports were eligible and used preferences. It is important to point out that by preference use we understand whether preferences were requested, since the database does not provide information on whether preferential regime was rejected at EU arrival.
Any Mozambican export is eligible for duty-free access under the EBA initiative.
In terms of MFN tariffs, more than 42% of the tariff lines analyzed had MFN duty-free access.
We define the preference margin as the difference between the MFN tariff and the tariff actually applied on good
If the MFN tariff is equal to the tariff applied or it is zero, then it means that there is no positive preference margin and
On average, the preference margin enjoyed by Mozambican exports is between 5% and 7% (See Table
Average preference margins (Mozambique).
Average preference margin (all tariff lines) | Average preference margin (tariff lines with MFN > 0 only) | |||
Year | Average | Max | Year | Average |
2000 | 5.13% | 15.00% | 2000 | 8.51% |
2001 | 6.39% | 63.05% | 2001 | 9.94% |
2002 | 7.34% | 82.80% | 2002 | 12.45% |
2003 | 6.72% | 82.31% | 2003 | 10.55% |
2004 | 5.67% | 80.91% | 2004 | 9.85% |
2005 | 5.92% | 86.37% | 2005 | 10.79% |
2006 | 6.49% | 69.68% | 2006 | 12.94% |
2007 | 7.12% | 69.68% | 2007 | 13.33% |
Source: authors’ calculations based on TARIC and EUROSTAT.
Note by the authors: the substantial change in the max preference margin is due to the specific duties applied to sugar.
As discussed in Section
The main challenge when analyzing price margins is the lack of counterfactual. This implies that we do not observe the MFN price for most periods since most exports use preferential schemes. Interestingly, in our sample, we find cases of Mozambican firms exporting the same good through the MFN regime and also via preferential schemes, in the same year or the same month. These are cases where both utilization and nonutilization of preferences occur in the same period. As a result, we use nonutilization prices as one of the main reference prices to further reduce the potential quality bias and compare the results using alternative reference MFN prices.
Figure
At the product level, we find that only five products always report price ratios above one, consistent with a positive tariff margin.
It is important to point out that when using price margin 1, the results may be biased due the reasons behind preference nonutilization. Preferential exports need additional documentation (i.e., certificate of origin to be provided by public authorities). If there is a delay in obtaining such documents, the exporter may choose to export via MFN in order to honor the export contract, especially when delays may trigger penalties or in case of perishable goods.
A final element that needs to be assessed when analyzing the “value” of preferences is the degree of
For those lines with MFN greater than zero, Mozambique shows a high utilization rate, on average across products and years equal to 93% of the value of eligible exports. Manchin [
There are two main potential explanations for lack of preference utilization. The first explanation is related to the costs of compliance attached to preferential schemes and induced by rules of origin (Cadot et al., [
The second explanation for nonutilization is related to the delays by public authorities in delivering documentation for preferential export. Considering this explanation, we should observe unexpected jumps in preference utilization uncorrelated with price or tariff margins (random events due to random delays).
In Figure
Products showing highest nonutilization rates.
HS8 | Product | Nonutilization rates | Average MFN tariff |
17031000 | Cane molasses | 47.37% | 3.49% |
08051030 | Fresh navels | 28.63% | 17.11% |
61091000 | T-shirts, knitted or crocheted | 26.34% | 12.00% |
56072100 | Binder twine of sisal | 24.70% | 12.00% |
08054000 | Fresh or dried grapefruit | 23.31% | 2.25% |
Source: authors’ calculations.
Utilization rates and MFN tariff (Mozambique). Source: authors’ calculations.
The existing narrow export base in Mozambique implies that each product is probably exported by one or two firms. At the same time, preference margins have been quite stable over time. If the cost of compliance would impact significantly the choice of trade regime, we would expect lower utilization for products facing low MFN tariffs. In contrast, in our data, we observe high utilization rates across products and few isolated drops in utilization rates. Therefore, unforeseen administrative problems may be a much more likely explanation for the discontinuous utilization rates in Mozambique, and any estimates of average costs of compliance would ignore the fact that we observe utilization of preferences at very low preferential margins.
So far, we have performed an analysis based on simple correlations. However, it is possible that this analysis is not able to isolate the quality bias when comparing products. In addition, we cannot exclude that other factors other than tariff differentials may impact on price margins. For these reasons, we now proceed to test econometrically the relationship between prices and preference margins.
The starting point is to assume that the price of the same good in the same period in the EU market is the same for imports under the MFN and under the preferential scheme. Since most of the products in the sample are primary commodities, it is therefore plausible to assume that these are homogenous products. However, in order to allow for some quality differences that may arise when using alternative reference MFN prices, we allow for a quality adjustment
The price paid for good
Substituting (
We expect to find a positive sign for
Equation (
As tariff ratio, we use MFN and preferential tariffs faced by country
Since it is possible that product-fixed effects may not fully control for such quality differences, we introduce a further control and estimate (
The coefficients in (
After cleaning for outliers, we obtain a dataset with 2,088 observations for 55 products defined at HS-8 digits. Trade flows are differentiated on the basis of access regime: MFN zero (42.34%), MFN positive or nonutilization of preferences (6.70%), preferential tariff zero (50.4%) or greater than zero (0.57%).
We estimate (
Price margin estimates.
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | |
---|---|---|---|---|---|---|---|---|
Tariff ratio | −10.6234 | −1.0725 | −3.5494*** | −3.4203*** | −1.7310*** | −1.3966*** | −1.4366*** | −1.2634*** |
(14.5113) | (0.8414) | (0.4325) | (0.4055) | (0.2638) | (0.2368) | (0.3195) | (0.2951) | |
Market share | −0.1305 | −0.0532 | 0.2562 | 0.3207* | −0.0538 | −0.0426 | −0.1007 | −0.0703 |
(0.1641) | (0.1365) | (0.1331) | (0.1303) | (0.0812) | (0.0782) | (0.0983) | (0.0957) | |
Constant | 0.8903 | 0.1432 | 0.8399*** | 0.7040*** | −0.1031*** | −0.1769** | −0.0296 | −0.0590 |
(1.2061) | (0.1041) | (0.0339) | (0.1139) | (0.0207) | (0.0542) | (0.0251) | (0.0764) | |
Obs. | 98 | 98 | 1917 | 1917 | 1916 | 1916 | 1915 | 1915 |
0.0114 | 0.0371 | 0.0228 | 0.0112 | |||||
0.0114 | 0.00744 | 0.0371 | 0.0369 | 0.0228 | 0.0228 | 0.0112 | 0.0112 | |
0.113 | 0.104 | 0.117 | 0.125 | 0.000362 | 0.000639 | |||
0.0236 | 0.0225 | 0.0996 | 0.106 | 0.00278 | 0.00277 | 0.000911 | 0.000920 |
Robust standard errors in parentheses.
***
Columns (3) to (8) show the estimates for the rest of price ratios specifications. In this case, we have around 1900 observations. We implement the Hausman test for fixed versus random effects, and the test results indicate that, only for price ratio 2, the ratio between the preferential unit value, and the minimum MFN unit value, the RE specification should be preferred. The main results are consistent across specification, a negative and statistically significant coefficient for the preference margin and negative but not statistically significant for the market share ratio coefficients. The results also show consistent low
In order to check the heterogeneity of results, we reestimate the model for each product. For some products identification of the coefficient for the preference margin proves difficult to estimate due to the lack of tariff margin variation. Figure
Distribution functions for estimated
(a) Distribution of Margin_price1. (b) Distribution of Margin_price2. (c) Distribution of Margin_price3. (d) Distribution of Margin_price4. Source: authors’ calculations.
To further eliminate the potential quality bias when using other countries MFN prices as reference (price ratios 2 to 4), we reestimate the same specifications but changing the way how the unit values are calculated. Unit values tend to be correlated with GDP per capita levels. As a result, we adjust prices to income per capita by regressing yearly unit values on GDP per capita and use the estimated residuals as our proxy for prices. With the new adjusted unit values, we recalculate the reference prices and reproduce the estimations in Table
Price margin estimates-GDP per capita adjusted.
(1) | (2) | (3) | (4) | (5) | (6) | |
---|---|---|---|---|---|---|
Tariff ratio | −0.0757 | −0.0539 | −0.1341** | −0.1205*** | 0.0287* | 0.0348** |
(0.0482) | (0.0353) | (0.0431) | (0.0353) | (0.0137) | (0.0112) | |
Market share | 0.0274 | 0.0359* | 0.0214 | 0.0359* | 0.0009 | −0.0029 |
(0.0209) | (0.0172) | (0.0187) | (0.0166) | (0.0059) | (0.0053) | |
Constant | −0.0166*** | −0.0195** | −0.0788*** | −0.0791*** | −0.0407*** | −0.0413*** |
(0.0042) | (0.0063) | (0.0038) | (0.0070) | (0.0012) | (0.0022) | |
Observations | 352 | 352 | 351 | 351 | 352 | 352 |
0.0133 | 0.0349 | 0.0148 | ||||
0.0133 | 0.0120 | 0.0349 | 0.0326 | 0.0148 | 0.0138 | |
0.0549 | 0.0721 | 0.0920 | 0.118 | 0.103 | 0.125 | |
0.0335 | 0.0419 | 0.0872 | 0.112 | 0.0729 | 0.0797 |
Robust standard errors in parentheses.
***
A final check for the robustness of the results is to estimate the model in differences (
Price margin estimates-model in differences.
Variables | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) |
---|---|---|---|---|---|---|---|---|---|
L. traiff ratio | −1.8364* | 0.0982 | −1.2985 | 0.5135 | 0.1403 | 0.5270 | 0.1211 | 0.2224 | 0.2347 |
(0.8842) | (2.0520) | (1.0787) | (0.5255) | (1.3303) | (0.5460) | (0.6598) | (1.4369) | (0.6027) | |
L. market share | 2.2838*** | 1.5857* | 1.9810*** | 0.3694 | 0.9140* | 0.6267* | 0.6510* | 0.6180 | 0.7496* |
(0.5181) | (0.6754) | (0.5139) | (0.2347) | (0.4379) | (0.2816) | (0.3154) | (0.4730) | (0.3094) | |
Constant | 0.6345*** | 0.6415*** | 0.5535** | −0.3863*** | −0.4528*** | −0.4514*** | −0.3130** | −0.3132** | −0.3525*** |
(0.1780) | (0.1590) | (0.1716) | (0.0929) | (0.1031) | (0.0859) | (0.0979) | (0.1113) | (0.0948) | |
Observations | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 | 224 |
0.1927 | 0.0311 | 0.0171 | 0.0248 | 0.0367 | 0.0100 | ||||
0.0311 | 0.0294 | 0.0248 | 0.0236 | 0.00997 | 0.00996 | ||||
0.198 | 0.226 | 0.0290 | 0.0385 | 0.0948 | 0.0946 | ||||
0.169 | 0.192 | 0.0111 | 0.0159 | 0.0365 | 0.0366 |
Robust standard errors in parentheses.
***
Due to the small sample, we omit from the estimations price ratio 1 specification. The results show a positive and statistically significant coefficient for most of the market share ratio coefficients. This suggests that increases in market share tend to increase price margins. Regarding the main coefficient of interest, the tariff margin, the results suggest a positive coefficient but not statistically significant. Again, there is no evidence that changes in tariff margins are transmitted to price ratio changes.
The question that we formulated at the beginning of the paper is whether EU unilateral preferences are valuable according to use and price advantage for exporters. In the case of Mozambique, a first element to be stressed is that the joint coverage of both Cotonou and EBA reaches 100% of the products exported and the large majority of these exports enter duty free under both schemes. On the other hand, more than 42% of the tariff lines and 5.4% of value exported by Mozambique does not benefit from any “preferential” advantage compared to world exporters (MFN zero). Thus, for these goods, Mozambican firms are able to compete with world exporters without the advantage of preferences. On the remaining exports, Mozambique enjoys a significant
The second element to be highlighted is the relatively high and fairly stable preference utilization rate (92% on average). There are no drops of utilization in correspondence of low tariff margins, suggesting that the negative effect of costs of compliance on utilization does not hold for Mozambican exporters. In addition, since exported products are primary or with very low level of processing, rules of origin are not impacting substantially on producers’ costs. Therefore, nonutilization episodes are likely to be the result of sporadic problems in the certification process required by preferential schemes.
A third and more important element is that when comparing unit values, we do not find evidence of a positive price margin for preferential exporters compared to MFN competitors. On the contrary, most statistically significant coefficients indicate a negative relationship between tariff margins and price ratios, suggesting that preferential margins are not passed into exporters’ prices. This result is robust to different controls for potential quality biases.
The findings of this paper have significant policy implications. Unilateral preferences are one of the main instruments offered by the EU to foster export growth in developing countries. The findings of the paper indicate, however, that the “value” given to these schemes and their potential impact is likely to be overstated. This is due to the fact that a significant number of products exported by developing countries do not experience any positive preferential margin and, more importantly, the fact that exporters are unable to capture the price margin associated to preferences. Considering these findings and the increasing trend in preference erosion due to further liberalization in the EU market in the future suggest the need to focus in other instruments to support developing countries exports.
A final element to consider is the fact that the potential impact of export preferences goes beyond its limited impact on prices. It is possible that preferences may shape importers’ choice among potential suppliers, thus positively contributing to export volume growth in some preference receiving countries. This is an empirical question that we have not analyzed in this paper but that is worth noting. The extension of the analysis to other countries and other preferential schemes may offer some more guidance and should be considered for further research. In addition, more empirical work is needed in order to determine quality differences within product lines.
The authors would like to thank Channing Arndt, Finn Tarp, and Alan Winters for useful comments and suggestions, Ramon Ynaraja for providing relevant data, and DANIDA for financial support. This paper was carried out as part of the trade component of the DANIDA-funded project “Capacity Strengthening and Technical Assistance to the National Directorate of Studies and Policy Analysis” to the Ministry of Planning and Development, Mozambique. A. Alfieri would like to thank USAID for financial support.
This would allow DCs to replace exports of primary commodities that exhibit declining terms of trade, the Prebisch-Singer hypothesis (Singer, [
The general equilibrium impact of unilateral export preferences is different from reciprocal liberalization on its impact on the terms of trade, tax revenue, and allocation of the resources between protected, export sectors with preference, and other sectors.
Mozal is actually selling to a company belonging to the same multinational group (BHP Billiton) so this export can be classified as intrafirm trade.
UNCTAD [
We consider exports as “significant” (nonoccasional) if the amount exported from 2000 to 2005 is higher than 600,000 EUR or if, in the last year (2005), the total exported is higher than 100,000 EUR. In this way, we hope to capture both products being consistently exported by Mozambique in the past as well as emerging exports.
For example, rules of origin, safeguards clause, eligibility criteria, and so forth.
The COMEXT database establishes that a preference is used when the exporter requests a preferential regime. It is possible, however, that if on arrival EU customs authorities find any problem related to the validity of the certificate of origin or issues related to the eligibility of the shipment to preferential treatment, the shipment will only be allowed to enter under the MFN regime. In these cases, the export flow is classified as preferential when
In order to smooth the series, we apply Hadi’s [
Except sugar which enters through quotas at a fixed price. Banana and rice are not being exported to the EU.
See Alfieri and Cirera [
Lower MFNs were due to WTO liberalisation schedule; GSP rates changed in 2001 and some FTAs (Chile, Mexico, EUROMED, etc.) came gradually into force in our period of reference.
This phenomenon is well illustrated by Schott [
We initially use the minimum
Crayfish (HS 03061190), raw sugar (17011110), tobacco products (HS 24012020), yarn and vegetable fibers (HS 53089090), and twine (HS56072990).
One common complaint offered by Mozambican private sector firms is that the person in charge of signing certificates is sometimes far from production sites and sometimes absent. In both cases, the exporter would have to waste precious time in order to get the signature entailing an additional cost for preferential exports.
We define
See Brenton [
Preferential and MFN exports both face costs due to compliance with quality standards, SPS, and so forth. We assume these costs to be the same and included in the
Market share is defined as the ratio between the value of product