Wallonia's CAN trade continued

A couple of questions have been posed regarding the graph I developed for Wallonia’s trade share with Canada. Here are some of my explanations and further thoughts on the issue.

One remark that was made related to the fact that these figures would be biased because Flanders has Antwerp. Antwerp, like Rotterdam, are known for what trade-economists call their “entrepôt” activities. These two cities import lots of goods because of their ports, store them, and then re-export them again to other parts of Europe, i.e. the hinterland, which I indeed allude to in the piece.

This bias is true, but only to some extent. The NBB source that separates regional trade between Flanders and Wallonia on the one hand and Canada on the other presents data at a level where these imports and re-exports of non-residential entities are excluded, i.e. pure transit trade appears to be out. 

Wallonia's 0.45% EU-CAN trade

Since there is a crisis around CETA this week where the Wallonia region appears to be reluctant to sign the deal, I thought some economic numbers might be in place. It got me inspired by Politico who used rough community-level numbers for Belgium. Below you find my numbers:

The figure of Wallonia’s trade relations with Canada, compared to the rest of the EU, are astonishingly low with an overall figure of 0.45 percent. Note that I have been generous here with my back-of-the-envelope calculations.

In 2015, Wallonia seems to export more than it imports with Canada with a figure of almost 9.5 percent of total bilateral trade between Belgium and Canada. However, Wallonia barely imports anything from Canada, a low 1.37 percent of total bilateral trade between Belgium and Canada.

Now, a couple solutions to this puzzle might help explain Wallonia’s opposition. One, import-competing sectors are extremely powerful in this region. Second, Antwerp is in Flanders, not in Wallonia. Third, Wallonia’s current Minister-President has another agenda for which he likes to use CETA. 

Why concluding CETA is so important for the EU

Passions have been running high this week as the EU failed to get an agreement about signing off its trade deal with Canada, what is called CETA. As it stands now, some countries remain critical of the deal, or cannot sign the deal because of internal political differences. Whatever those reasons may be, they should think twice. Other countries have been catching up with the EU in the past decades and are already today more attractive places to trade with. 

Trade agreements are concluded with one simple goal: to lower the costs of trading between countries. In other words, the objective is to lower the costs of imports and exports of goods, with the view of staying competitive in the world. The most efficient way of doing this is through the multilateral system. If that doesn’t work, trade costs could be lowered between countries directly, i.e. through bilateral or regional trade agreements.

The CETA agreement is no exception. The figure below shows that trade costs between the EU and Canada have been decreasing over time starting from a common base, i.e. 100, as illustrated by the dark blue line except during the Global Financial Crisis. Note that trade costs include tariffs as well as non-tariff measure. This picture shows a rather good sign and therefore one may wonder why a trade agreement is necessary in the first place.

The answer to that is related to the orange line, which denotes the trend of trade costs between China and Canada. Trade costs between these two countries have been decreased more rapidly over time suggesting that it has become more advantageous for Canada to deal with China than with the EU. 

Read more about this in ECIPE's Bulletin that just came out!

The Digital Trade Estimates (DTE)

Yesterday, me and my colleague Martina Ferracane at ECIPE launched the DTE database which describes all digital trade policies for 65 countries worldwide.

The DTE database is part of the wider DTE project that aims to provide transparency regarding digital trade policies in the world of international trade and trade policy. Besides the database, the project also covers an index summarizing all these cost-enhancing measures in the digital economy for all countries and issue areas. It also provides a website where you can find all this information and a final report.

The DTE database covers 13 chapters, each comprising a digital trade policy area, namely (1) Tariffs and trade defence, (2) Taxation and subsidies, (3) Public procurement, (4) Foreign investments, (5) IPRs, (6) Competition policy, (7) Business mobility, (8) Data policies, (9) Intermediate liability, (10) Content access, (11) Quantitative trade restrictions, (12) Standards, and finally (13) Online sales and transactions, i.e. e-commerce.

Although the full index and report will come out in November, people can already access the database as of now through the following website: http://ecipe.org/dte. Moreover, during yesterday’s presentation of the database, I showed a small snapshot of the index as shown below. Note that all other countries that are coved by the DTE project, including all EU member countries separately, will be disclosed during the launch of the report which will also explain our methodology.

The index ranges from 0 (most open) to 1 (least open). Unsurprisingly, one can see that China is the country with the highest score, meaning it is least open of all countries covered whilst the US and the EU have a far lower index score though still higher than the average score of the entire range of countries covered. Note that the EU score is a weighted average in the sense that this score corrects for the size of each member country’s market. If this weren’t taken into account, the index for the EU would be somewhat lower, i.e. a score of 0.22.

One surprising result, however, is the fact that that the US and the EU are actually on (almost) equal par with each other when taking into account all 13 chapters. The main reason for this outcome is that the US still has quite some cost-enhancing digital trade measures in place when it comes investment and competition policy, but also related to public procurement and even standards.

More on that in the database and the report that will come out soon!

Russia in a Post-sanctions Era

Later this year EU leaders will be sitting together to discuss the Russia sanctions. Some countries are in favor of dropping these sanctions, others want to stick to the current approach. At the same time, according to this source it seems EU member countries are willing to nonetheless explore “other ideas for improving ties with Moscow including encouraging more trade”. This idea seems nice for European exporters, but if such statement also aims at helping Russia to develop it can really only do so much.

Although the EU is Russia’s most important trading partner, most of trade policies that helps Russia to develop would need to come from inside. Moreover, Russia is hyper-dependent on oil and gas and other raw materials. This pattern as such does not necessarily need to be bad for economic development, but if Russia had any intention to sophisticate its export to profit better from trade, it would have to start thinking about becoming (a) more globalized, (b) improve its services markets, and (c) develop its domestic institutions.

On the first point, a recent World Bank study that examines Russia’s performance across its regions shows that those Russian regional areas which have most open trade and investment policies are also the ones having higher economic performance. In fact, Russian regions have very unequal development levels which is in great part explained by their very uneven degrees of foreign orientation. Hence, one development strategy for Russia is to lower its investment policy. Currently, Russia ranks above the non-OECD average in terms of FDI restrictiveness. Russia would also need to respect its WTO commitments.

On the second point, those richer regions are dependent on mineral exports. If Russia wants to diversify into other (sophisticated) industries, moving away from this one-sector dependency would be a prerequisite. One way to do that would be through opening up its services sectors as another World Bank report argues. However, today Russia’s services policies are clearly less trade-friendly. In particular, some business services that are so important to differentiate into other sectors such as banking, telecom or insurance are still highly restricted.

On the third point, if Russia decides to capitalize on becoming more globalized by receiving more investments in other areas than oil and gas and / or through opening up its domestic services markets, it might as well improve its domestic institutions such as rule of law. There is vast evidence that economic development through services depends on strong institutions so that contracts of the many services that function as inputs in to Russia’s value chains are guaranteed, enforced and ensured.

In short, although potential bilateral trade policies between Russia and the EU can certainly help stimulate trade on both sides to some extent, most of the work for Russia to develop really would have to come from Russia itself. 

EU Services Part II

Today the new EU Regional Economic Report from the World Bank together with its background paper came out which I have co-authored. The report and paper focus on how to increase EU growth. The EU’s growth record has been sluggish, which is particularly due to its low productivity. And productivity is today’s engine of the EU’s economy.

How to revive this productivity? One big answer the report provides is through services reform, particularly in Eastern European countries. I agree, but would also look at Germany and France. Three focus points that arise from the report are important in this regard.

First, reforming services markets any further is important. Of course, this can be done by lowering burdensome services regulations through, for instance, abolishing state interventions so that new services firms can have easier access to the market. However, a particularly striking feature that we find is that eliminating entry barriers is not sufficient. On the contrary, regulations on how firms operate appear to be a particular negative factor for EU productivity. These regulations include administrative rules on the form of businesses, rules on inter-professional cooperation in professional services or even rules on regulatory transparency among many others.

Second, the report also emphasizes that EU countries’ domestic institutions matter. What do we mean by that? Various items such as a lower level of corruption, a stronger judicial system that enforces business contracts when things go wrong or just the quality of regulations implemented by qualified and competent market regulators. With these institutions in place, some European countries would gain a lot more from liberalizing services markets. This can be seen in the figure below.

EU change in productivity levels with or without strong institutions

Source: Author’s calculations; horizontal line reflects percentage changes in productivity (TFP) levels in 2013.

On the whole, countries that gain a lot from lowering regulations in services markets are in fact some of the Eastern European countries as shown by the blue bars. That is no surprise as these countries have lower productivity levels to start with and services regulations in some of these countries are still high. Hence, the greatest bang for the buck would be realized there from reforming. Other countries have already reformed a lot such as Denmark, Finland or the Netherlands. Reforming any further would still give productivity gains, but to a lower extent.

But, the figure also shows that if Eastern European countries (and others) had better institutions in place, their productivity would be much higher as seen by the red bars. Conversely, if Denmark hadn’t developed good functioning institutions, its productivity would have been lower. The point is that good institutions are important for productivity dividends to be realized when reforming services markets.

Third, reforming in professional markets would be particularly rewarding. These include accountants, lawyers, architects or engineers. Benefits from reforming professional services would accrue to all EU countries, but let’s focus on those countries which already have strong institutions in place.

The figure below shows two panels for productivity growth as opposed to levels that was presented in previous bar chart. The reason is because ultimately, this is what matters most to push for further economic growth. The left-hand panel shows realized productivity growth for countries with strong institutions, but who still have high professional services regulations in place. They include countries such as Germany, France, Austria or even Belgium and Luxembourg. Lowering regulations (albeit at small changes) results in some productivity gains, but not much.

On the other hand, the right-hand panel shows the reform efforts implemented by countries that also have strong institutions, but have reformed whilst already having lower services regulations in place. These countries are for instance Netherlands, Sweden, Denmark or Estonia. Their productivity pay-off for growth has been considerably higher compared to the first group of countries. The bottom line here is that some countries are actually ready to realize greater growth benefits from services because of their strong institutions, but all that is holding them back is a lack of reform in services themselves.

  Strong institutions, but high regulations  Strong institutions and low regulations

Source: Author’s calculations; World Bank; productivity growth is TFP percentage changes computed over 2006-2013.

In sum, several conclusions can be derived for EU growth. One is to focus on services. Second is to focus on regulatory reform in services, particularly in professional services that will push EU growth further. Third is to focus on countries with weak institutions since a lot of potential growth from services reform can still be realized from this part of Europe. Fourth, focus on countries with stronger institutions, but still have higher professional services regulations in place such as France, Germany or Austria. Here too, potentially greater EU growth could come from here provided that these latter countries are willing to unlock their service sectors further.