ECONOMIC BENEFITS OF TRADE LIBERALIZATION:
THE CASE OF NIGERIA IN THE NEW MILLENNIUM
By
DR. KOLA IGE, F.C.E
Vice President
THE INSTITUTE OF CHARTERED ECONOMISTS OF NIGERIA
Being a paper presented at the National conference of the Institute of certified Economist of Nigeria held at Glover Memorial Hall,
4 Custom Street, Marina Lagos between 10th and 11th November, 2006.
CONTENT
Abstract
ABSTRACT:
The recent Government reforms in trade policy Nigeria have produced a foreign trade regime that exhibits very little antiexport bias on average, A quantitative multicultural general equilibrium model of the Nigeria economy shows that piecemeal trade policy reform, based on first best rationales that are appropriate for highly distorted economies would not be appropriate. Further tariff reduction must be co-ordinated with export subsidy reductions to attain significant welfare benefit. The dispersion of distortions; especially export subsidies, is more important than their level. A policy of harmonizing tariffs to the common external tariff of the European community has virtually no effect on welfare.
The trade policy of a developing country, especially Nigeria, is closely related to the problem raised by the foreign exchange constraint on the country’s development. A member of theoretically sophisticated argument support a protectionist trade policy for a developing country. In actual practice, however protectionist policies have rarely been adopted out of a reasoned consideration of how protectionism might improve the terms of trade, raise the savings ratio, take account of external economies, or over come distortions in the labour market. On the contrary, it has been the persistent shortage of foreign exchange that has dominated consideration of trade policy, and protectionist policies have been much more in the nature of adhoc responses to recurrent balance of payment crises. In essence, the constraint means that if the developing country’s demand for import were uncontrolled, the value of imported goods would exceed the level that could be supported by export revenue along. At the same time, the flow of foreign capital from developed countries to LDCs. Has leveled off, and the external debt-saving problem has intensified, the import surplus supported by foreign capital has therefore fallen markedly in recent years, and the net transfer of resource beyond import based on exports has become relatively insignificant for the majority of LDCs. To extent that if foreign exchange constraint is not removed, an LDC cannot fulfill the import requirement of its development programme. The LDC must then undertake policies that will do one or a combination of the following; reduce the Country’s rate of development, replace import, expand exports, improve the country’s terms of trade, induce a large inflow of foreign aid.
It may be argued that developing countries should not have to wait for agreement among developed countries before attention is paid to their trade problems. Therefore it may appear justified to consecrate the next step in world trade to the liberalization of the imports from developing countries.
The case for preferences rest on more than the limitation inherent in tariff reductions on an most-favored-nation (m.f.n) basis. Paradoxically, preference would be a means for enabling the developing countries to come closer to real equality of treatment. The traditional most-favoured-nation (M.F.N.) principle is designed to establish equality of treatment among the various sellers to a particular market, but it does not ensure equality of treatment in several respects that are of considerable importance to developing countries.
First, unless the M.F.N. Tariff is zero; there is no equality of treatment with the domestic producers, nor with the producer inside the recently established regional groupings in the developed world. Secondly, the M.F.N. principle does not take account of the fact that there are in the world inequalities in economic structure and level of development, to treat equally countries that treatment only from a forma point of view but amounts actually to inequality of treatment.
Thirdly, partly as result of negotiations conducted on the basis of reciprocity and of the m.f.n. Clause, typical manufactured and semi-manufactured export products of developing countries are frequently subject to higher nominal and in most cases still higher, effective duties than typical imports from developed countries. Preferential reductions on import from developing countries bring them closer to achieving equality of treatment with producers inside the national or multi-national markets, take into account the fact that they are at a lower level of development, and correct a situation where they have in actual fact disadvantages in comparison with imports from developed countries.
Nigeria undertook a major liberalization of trade policies in the 1980s. Import quotas have become nonexistent, the Nigeria Naira has been made covertible, and tariffs have generally been lowered so that the average nominal tariff rate is less than 10 percent. Given these changes and remaining exports subsidies Nigeria has, on average, removed the antexport bias from its external incentive regime. The impact of Nigeria of its import-substitution trade policies in the 1970s and of its trade liberaliation in the early 1980s has been the subject of several earlier studies, notably Baysan (1984); Aboyade, O. (1983); Rodrile (1988); and Grais, de Melo and Vrata (1986). Starting with the relatively liberal trade regime of Nigeria in the lat 1980s, we use a 40-sector computable general equilibrium model to consider further trade liberalization options that are now open to the Nigerian government. The first option is across the board liberalization of the current Obasanjo’s regime. Under this option, Nigeria would completely reduce or remove its trade distortions. That is its import tariffs and export subsidies. The second option is to consider sectoral liberalization of tariffs or export subsidies. In this connection, we evaluate the reduction of tariffs and expert subsidies that Nigeria implemented during the late 1980s, the final option is the principal trade policy change Nigeria is planning to implement: harmonization of its tariff structure to the common external tariff of the European community (EC).
The evaluation of removing trade barriers yield what is perhaps our most important findings: first-best rules of thumb that may be appropriate for highly distorted economies are not necessarily appropriation for economies that have liberalized as much as Nigeria (other developing countries that have achieved a relatively liberal trade regime in the 1980s include Turkey, (hile, Indonesia, Mexico and Poland). In particular, piecemeal across-the-board tariff reductions in Nigeria are not always beneficial from a welfare perspective and generally must be coordinated with export subsidy reductions to ensure welfare gains. The explains the reason(s) why President Obasanjo in his contemporary trade policies travel to some of the advanced nations of the world.
We show that, because there is no antiexport bias, the principal distortion remaining in the trade regime derives from the dispersion in the external incentive. The primary source of this dispersion is the export subsidy structure. Neutrality of external incentives is therefore able to achieve a high proportion of the benefits of full ……… external liberalization.
As Nigeria turned away from import substitution in the late 1980s it adopted strong export promotion measure. We estimate that Nigeria’s policy in the late 1980s of reducing direct export incentives yielded very substantial welfare benefits.
We present our results by examining the principal trade policy option currently facing Nigeria: across-the-board-liberalization.
ACROSS THE BOARD LIBERALIZATION
Quantitative restraints have been virtually eliminated in Nigeria, and tariffs have been lowered, but some subsidies remain. Does it enhance welfare to continue to reduce tariffs across the board while leaving export subsidies in Place? Conversely, as a second-best measure to reducing the tariff, would it beneficial to increase export subsidies to off set the anti export bias of the tariff? We first consider the theory and conventional policy advice on is question in the context of the arguments for export subsidies.
Export subsidies per se in the manufacturing sector are proscribed by the General agreement on Tariff and Trade (The GATT); those who argue for export subsidies suggest the use of export subsidies that are legal under the GATT. Thus Balassa (1989) has recommended that developing countries rebate, both to direct and to indirect exporters, the import duties and indirect taxes on export and that they provide, as well, preferential export credit and export insurance in the absence of private insurance. These ‘duty drawback’ schemes have the effect of automatically linking tariff and tax reform with export subsidies reform.
Welfare effects of across –the-board reduction in tariff and export subsidies.
Figure 1 displays the welfare effect of reducing tariffs and export subsidies across the board. Reductions of tariffs alone cause some welfare gains initially, but these deteriorate into a welfare loss for reductions greater than 40 percent. This welfare loss is attributable to the learner (1936) symmetry effect, which states that a tax on imports is equivalent to a tax on exports.
The average tariff is only slightly above the average export subsidy, so there is only a slight anti export bias in external incentives. When tariffs, are progressively reduced in a piecemeal manner, external incentives eventual become biased toward exports.
The benefits of export subsidy reductions continue up to a 70 percent reduction and are much more substantial at about 1 percent of gross domestic product (GDP) because there is significantly greater dispersions in benchmark export subsidies.
In this model the Nigeria Economy would gain about 1 percent of GDP from providing neutral incentive to all export sectors but less than 0.2 percent from tariff uniformity. The process of taking an across-the-board reduction in export subsidies has the simultaneous effect of also reducing the dispersion the in export subsidies, and it is the reduction in dispersion that is driving result of figure I for export subsidy reduction.
Because of the off setting effects of tariffs and export subsidies, reduction export subsidies and tariffs jointly leads to even greater welfare gain than just reducing export subsidies does. Similarly, because of the presence of domestic distortions, reductions in foreign distortions fails to generate welfare gain at the margin when they reach the 80 percent level. Only when all distortions are removed is the optional policy to reduce export subsidies and tariffs jointly by 100 percent. This is the first-best-policy, Removing all domestic as well as foreign distortions results in further, small enhancements of welfare.
We should explain this structural welfare foundation vis-a-vis the equilibrium of the economy. We do this in term of the balance of trade function, which equals the economy’s total net expenditure on traded goods less the revenue from trade restriction’s all of which is assumed to be returned in a lump sum to the representative consumer.
For the importing country the balance-of-trade function is
B(II,q,U,II*,P*) = E(II,q,U) – Eqq – (II-II*)1 EII-R………………….(1)
The left-hand side of equation 1 states that the balance of trade depends on the home prices of unconstrained goods, II the permitted import levels of quota-constrained goods, q; the utility of the representative consumer, U; and the world price of both sets of goods, II* and P*. Besides these active arguments the balance of trade function depends on variables such as technology and factor endowments which are inactive here and are hence suppressed: The first term on the right-hand side of equation 1 is equal to the “distorted” trade expenditure function, giving the net expenditure on the unconstrained goods. (expenditure on the unconstrained goods is distorted by the presence of binding quotas). The second term equals the total expenditure on the quota-constrained goods because-Eq equals P, the vector of the prices of those goods in the importing country’s. The third term equals tariff revenue from unconstrained goods because EII equals net imports of those goods. The fourth and final term is the importing country’s portion of the rents generated by the quota constraints.
B* (II*,q, u*. II, P) =E* (II*, q, u*) – E*q’q – (II* - II)’ E* II – R* -------(2)
The description of the individual terms in equation 2 is identical to that of the corresponding terms in equation 1, with R* denoting the exporting country’s portion of the quota rents. The assumption that P* is constant means that – E* q is constant in equation 2. The exporting country is assumed to be a price taker for its imports or various products, so II is a constant. In practice, II denotes a vector of prices for a different set of non-quota-constrained goods from those in the importing country’s, so that EII and E*II refer to different sets of goods.
CONCLUDING REMARK
It can be seen that conflicting interests between the developed and the developing countries can arise by in articulate use of trade restraining measures and that the course of world trade and growing world prosperity can thereby be hampered. It was partly this realization which has prompted the series of attempts at tariff reduction since the 1950s, (Ojetunji Aboyade, 1983) under the aegis of the General Agreement of Tariffs and Trade (GATT).
These exercises are guided by two main principles namely, non- discrimination and reciprocity. Non-discrimination implies that any tariff concession between two trading partners is to be applied by extension to all member countries under the most-favoured-nation (m.f.n.) clause, the only exception recognized being in the context of a customs union of free trade area. Reciprocity, on the other hand, requires that conscious efforts be made to balance out the conflicting interests of participating countries in any negotiation for tariff concessions. Some steady progress has been made since 1980 in the succession of negotiations to reduce tariffs a cross-the-board (as apposed to the long- winded and frustrating commodity-by-commodity approach) under the Kennedy Round and the Tokyo Round of multilateral tariff conferences.
The benefits that the developing countries have achieved from these rounds of negotiations are more indirect that direct. They have really not been active parties to the negotiations and have only been beneficiary under to most-favoured-nation (m.f.n.0 clause. But these benefits are also to be judged against the escape exceptions of tariff arrangements by the industrialized countries in the context of customs unions or free trade areas. It may also be noted that the movement towards trade liberalization generally has related more to manufactured products and raw materials, but not to food trade; and the underdeveloped and developing countries probably have the highest immediate stake in food trade.
In conclusion, the far larger issue, however, is that these trade liberalizing concessions are indeed really marginal to the central core of the distribution of world economic power, which is itself what determines the ultimate magnitude of each nation’s benefits from external trade, it would seem that even five decades of GATT have not been able to address the problem of neo-Colonialist trading relationships and the negative role of transnational corporations. It is a fact that in many advanced industrial countries, state power is harnessed to direct international trade for narrow national and international class interest. From Africa’s standpoint, the kind of international specialization that was fostered in the continent has meant that its economies have for long on the wrong end of the trading gun, via resource exploitation, prices, investment and finance. Now that African Countries and Nigeria in particular, are about ready to get the process reversed and get meaningful development going, the same previous advocates of free trade now seem to be turning the trade now seem to be turning the trade theories around to protect their historical gains and competitive advantages.
Dr. Kola Ige, fce a consultant Economist is currently the vice President of the Institute of Chartered Economists of Nigeria, the Director-General (Training) of the Institute of Treasury Management and financial Accountants of Nigeria and the Registrar – General of Adam Smith University, Nigeria International Liaison Office.
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