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1 EVALUATION OF TRADE AND TARIFF REVENUE EFFECTS FOR THE ORGANIZATION OF EASTERN CARIBBEA N STATES UNDER ALTERNATIVE TRADE LIBERALIZATION SCENARIOS By MAX GRUNBAUM A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLOR IDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 2007
2 2007 Max M. Grunbaum Nagiel
3 ACKNOWLEDGEMENTS There are several people to whom I am grat eful for making my academic and personal endeavors at the University of Florida a re warding experience. I thank my dissertation committee members, whose guidance throughout the process has been exceptional. I first met Dr. Tim Taylor during the first year of the progr am. He distinguished himself as a superb and dedicated teacher. In th at role he provided invaluable suppo rt and encouragement, particularly during the most trying days of the core program. As committee chair, he has been a true mentor and offered exceptional guidance and support. W ithout these elements, this dissertation would have never been possible. Dr. Gary Fairchild and Dr. Robert Emer son have been tremendous examples of professionalism and dedication. Dr. Fairchild ha s always had an open door to share a joke or provide some of his contagious good humor. Dr Terry McCoy was instrumental in enabling me to come to UF in the early nineties and later o ffered me the necessary encouragement to return to school and pursue this degree. Throughout the years he kept an open door and was always open for a candid conversation and insigh ts on Latin American politics. I also acknowledge Dr. Jeffrey Burkhardt whose support throughout my stay at the FRE department has been invaluable. He was a tr emendous source of encouragement particularly during those dark days of qualifier exams. With out this support none of this would have been possible. I have also benefited from the interaction a nd conversations with fe llow students. Brian Condon, Carlos Trejo, and Oscar Ferreira made these years more interesting. I particularly thank Ronald M. Gordon. I am sure I would not ha ve made it past the first year without his encouragement and those long hours of study at the white house.
4 I thank my wife, Diana, who throughout this peri od shared in my effort to complete this dissertation project. She was certainly ki nd, supportive and patient when my mind was elsewhere. I also thank and honor my parents and grandparents who have always been a source of inspiration, who have taught me love, respect, ethics, and the value hard work. For all they have done throughout my life, this dissertation is for them.
5 TABLE OF CONTENTS page ACKNOWLEDGEMENTS.............................................................................................................3 LIST OF TABLES................................................................................................................. ..........7 ABSTRACT....................................................................................................................... ............11 CHAPTER 1 INTRODUCTION..................................................................................................................13 Problematic Situation.......................................................................................................... ....15 Problem Statement.............................................................................................................. ....18 Research Objectives............................................................................................................ ....19 Organization of this Study..................................................................................................... .21 2 ECONOMIC, STRUCTURAL AND TR ADE CONTEXT OF THE OECS.........................23 Organization of Eastern Caribbean States..............................................................................23 Geographic and Economic Characte ristics of OECS Members.............................................25 Geographic Characteristics..............................................................................................26 Economic Structure and Characteristics..........................................................................28 Recent Economic Trends.................................................................................................30 Trade and Trade Structure...............................................................................................32 Discussion and Implications...................................................................................................39 3 TRADE LIBERALIZATION AND EMPIRICAL METHOD S FOR THE ANALYSIS OF TRADE POLICY.............................................................................................................59 Trade Liberalization and Economic Performance..................................................................59 The Theory of Preferential Trade Agreements.......................................................................63 Empirical Methods in Trade Policy Analysis.........................................................................69 Gravity Models................................................................................................................71 Computable General Equilibrium Models (CGE)...........................................................78 Partial Equilibrium Models.............................................................................................83 The Verdoorn model................................................................................................84 The Baldwin-Murray model.....................................................................................85 Fiscal Impacts of Tr ade Liberalization...................................................................................91 4 TRADE AND TARIFF REVENUE EFFE CTS OF ALTERNATIVE TRADE SCENARIOS...................................................................................................................... ....96 The Empirical Model............................................................................................................ ..96 Scenarios Considered and Available Data............................................................................102 The Pre-Simulation Tariff and Trade Structure....................................................................104
6 Simulation Results............................................................................................................. ...106 Trade Effects.................................................................................................................106 Tariff Revenue Effects..................................................................................................110 Imports Most Affected by Tariff Elimination...............................................................114 Policy Implications............................................................................................................ ...119 Discussion and Implications.................................................................................................122 5 SUMMARY AND CONCLUSIONS...................................................................................145 Summary........................................................................................................................ .......145 Conclusions.................................................................................................................... .......147 Considerations for Further Research....................................................................................153 APPENDIX: MOST AFFECTED PRODUCTS BY TRADE AND TARIFF REVENUE EFFECTS........................................................................................................................ ......154 LIST OF REFERENCES.............................................................................................................178 BIOGRAPHICAL SKETCH.......................................................................................................187
7 LIST OF TABLES Table page 2-1 Selected statistics........................................................................................................ .......42 2-2 Sectoral composition of OECS economies........................................................................42 2-3 Selected public and mone tary sector indicators 1998-2003..............................................43 2-4 Selected economic pe rformance indicators.......................................................................43 2-5 Export, imports and trade share.........................................................................................44 2-6 Exports of services 1980-2004...........................................................................................44 2-7 Imports of services 1980-2004...........................................................................................45 2-8 Average export of goods 1980-2004..................................................................................45 2-9 Imports of goods 1980-2004..............................................................................................46 2-10 Top ten export categories for Antigua and Barbuda..........................................................47 2-11 Top ten export partners for Antigua and Barbuda.............................................................47 2-12 Top ten import categories for Antigua and Barbuda.........................................................48 2-13 Top ten import partners for Antigua and Barbuda.............................................................48 2-14 Top ten export categories for Dominica............................................................................49 2-15 Top ten export partners for Dominica................................................................................49 2-16 Top ten import categories for Dominica............................................................................50 2-17 Top ten import partners for Dominica...............................................................................50 2-18 Top ten exports categories for Grenada.............................................................................51 2-19 Top ten export partners for Grenada..................................................................................51 2-20 Top ten import partners for Grenada.................................................................................52 2-21 Top ten import categories for Grenada..............................................................................52 2-22 Top ten export categories for St. Kitts and Nevis..............................................................53 2-23 Top ten export partners for St. Kitts and Nevis.................................................................53
8 2-24 Top ten import categories for St. Kitts and Nevis.............................................................54 2-25 Top ten import partners for St. Kitts and Nevis.................................................................54 2-26 Top ten export categories for St. Lucia..............................................................................55 2-27 Top ten export partners for St. Lucia.................................................................................55 2-28 Top ten import partners for St. Lucia.................................................................................56 2-29 Top ten import categories for St. Lucia.............................................................................56 2-30 Top ten export categories for St. Vincent and the Grenadines..........................................57 2-31 Top ten export partners for St. Vincent and the Grenadines..............................................57 2-32 Top ten import categories for St. Vincent and the Grenadines..........................................58 2-33 Top ten import partners for St. Vincent and the Grenadines.............................................58 4-1 Assumed elasticity values................................................................................................124 4-2 Pre-simulation values for tota l imports and government revenues..................................124 4-3 Trade tax and tariff stru cture for OECS members...........................................................125 4-4 Ten major trading partners for OECS members in 2004.................................................127 4-5 Top ten imports pre-simulation imports in 2004 for OECS members.............................128 4-6 Trade effects from tariff elimination on EU imports.......................................................131 4-7 Trade effects from tariff elimin ation on EU and Caribbean imports...............................132 4-8 Trade effects from tariff eliminati on on EU, Caribbean and NAFTA imports...............133 4-9 Trade effects from tariff elim ination on EU plus FTAA imports....................................134 4-10 Summary of trade effects as percent of total imports according to liberalization scenario....................................................................................................................... .....135 4-11 Tariff revenue effects from tariff elimination on EU imports.........................................136 4-12 Total trade tax revenues in clusive of total tr ade counterbalance effects from tariff elimination on EU imports...............................................................................................137 4-13 Tariff revenue effects from tariff el imination on EU and Caribbean imports.................138
9 4-14 Total trade tax revenues in clusive of total tr ade counterbalance effects from tariff elimination on EU and Caribbean imports.......................................................................139 4-15 Tariff revenue effects from tariff elim ination on EU, Caribbean, and NAFTA imports.140 4-16 Total trade tax revenues in clusive of total tr ade counterbalance effects from tariff elimination on EU, Caribbean and NAFTA imports.......................................................141 4-17 Tariff revenue effects from tariff elimination on EU plus FTAA imports......................142 4-18 Total trade tax revenues in clusive of total tr ade counterbalance effects from tariff elimination on EU plus FTAA imports............................................................................143 4-19 Change in tariff revenue as a percentage of total government revenue and change in tariff revenue as percentage of to tal government revenue inclusive of counterbalancing effects accordi ng to liberalization scenario.........................................144 A-1 Antigua and Barbuda top ten imports mo st affected products by trade and tariff revenue effects under mid elas ticity EU liberalization 2004...........................................154 A-2 Antigua and Barbuda top ten imports mo st affected products by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004...................155 A-3 Antigua and Barbuda top ten imports mo st affected products by trade and tariff revenue effects under mid elasticity EU, Caribbean, and NAFTA liberalization 2004..156 A-4 Antigua and Barbuda top ten imports mo st affected products by trade and tariff revenue effects under mid elasticity EU and FTAA liberalization 2004.........................157 A-5 Dominica top ten imports most affected products by trade and ta riff revenue effects under mid elasticity EU liberalization 2004....................................................................158 A-6 Dominica top ten imports most affected products by trade and ta riff revenue effects under mid elasticity EU and Caribbean liberalization 2004............................................159 A-7 Dominica top ten imports most affected products by trade and ta riff revenue effects under mid elasticity EU, Caribbean and NAFTA liberalization 2004.............................160 A-8 Dominica top ten imports most affected products by trade and ta riff revenue effects under mid elasticity EU a nd FTAA liberalization 2004..................................................161 A-9 Grenada top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU liberalization 2004....................................................................162 A-10 Grenada top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004............................................163 A-11 Grenada top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU, Caribbean and NAFTA liberalization 2004.............................164
10 A-12 Grenada top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU a nd FTAA liberalization 2004..................................................165 A-13 St. Kitts & Nevis top ten imports most affected products by tr ade and tariff revenue effects under mid elasticity EU liberalization 2004.........................................................166 A-14 St. Kitts & Nevis top ten imports most affected products by tr ade and tariff revenue effects under mid elasticity EU a nd Caribbean liberalization 2004................................167 A-15 St. Kitts & Nevis top ten imports most affected products by tr ade and tariff revenue effects under mid elasticity EU, Caribb ean and NAFTA liberalization 2004.................168 A-16 St. Kitts & Nevis top ten imports most affected products by tr ade and tariff revenue effects under mid elasticity EU and FTAA liberalization 2004......................................169 A-17 St. Lucia top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU liberalization 2004....................................................................170 A-18 St. Lucia top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004............................................171 A-19 St. Lucia top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU, Caribbean and NAFTA liberalization 2004.............................172 A-20 St. Lucia top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU a nd FTAA liberalization 2004..................................................173 A-21 St. Vincent & the Grenadines top ten im ports most affected products by trade and tariff revenue effects under mid elas ticity EU liber alization 2004..................................174 A-22 St. Vincent & the Grenadines top ten im ports most affected products by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004..........175 A-23 St. Vincent & the Grenadines top ten im ports most affected products by trade and tariff revenue effects under mid elasticity EU, Caribbean, and NAFTA liberalization 2004........................................................................................................................... .......176 A-24 St. Vincent & the Grenadines top ten im ports most affected products by trade and tariff revenue effects under mid elastic ity EU and FTAA liberalization 2004................177
11 Abstract of Dissertation Pres ented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy EVALUATION OF TRADE AND TARIFF REVENUE EFFECTS FOR THE ORGANIZATION OF EASTERN CARIBBEA N STATES UNDER ALTERNATIVE TRADE LIBERALIZATION SCENARIOS By Max Grunbaum August 2007 Chair: Timothy G. Taylor Major: Food and Resource Economics The Organization of Eastern Ca ribbean States (OECS) has benefited for years from trade preferences granted by its majo r trading partners. The Cari bbean Basin Trade Partnership Agreement (CBTPA) grants prefer ential access to the United Stat es while the Caribbean-Canada Trade Agreement (CARIBCAN) regulates preferen tial access to Canada. These agreements are framed within the World Trade Organizati on (WTO) sanctioned Gene ralized System of Preferences (GSP). Non-reciproc al trade preferences granted by the European Union (EU) and framed under successive Lom Convention Agreem ents, however, are incompatible with WTO rules. Economic Partnership Agreements (EPA s) being negotiated between the OECS and the EU are intended to replace European non-recipr ocal preferences by essentially creating a free trade area between these parties. These agreements exclude the OECS largest trading partners and can have unwelcome effects as they offer th e potential for trade diversion and losses in welfare. This dissertation research eval uated the trade and fiscal effects for the OECS of an EPA with the EU, as well as three other alternativ e trade liberalization scenarios using a partial equilibrium model and highly disaggregated trade data. The first scenario simulated an EPA
12 where all import tariffs were eliminated for EU goods, yet barriers for other countries remained. A second scenario contemplated the total elimination of import duties and exemptions for the Caribbean Community (CARICOM). The third s cenario added members of the North American Free Trade Agreement (NAFTA) into the previous scenario and a final simulation considered the OECS joining the now stalled Free Trade Area of the Americas (FTAA). The simulations performed in this dissertati on provided some surprising insights into the effects of trade liberalization in the OECS. Th e quantification of trade creation, trade diversion and fiscal impacts of the alternative scenarios sugge sted that trade liberalization results in small to modest trade and fiscal impacts. The result s also shed light into what would be a prudent course of action for the OECS. They also prov ided empirical support to theoretical arguments and policy suggestions that, for sm all countries such as the OECS, broader trade liberalization is superior to limited region al trade agreements.
13 CHAPTER 1 INTRODUCTION Trade liberalization and the formation of ec onomic integration agreements has been a major economic feature of the latter part of the twentieth century. During this period technological innovations led to the reduction in transportation and communications costs making physical distance less significant. Simila rly, cultural distances ha ve been reduced as information flows, consumption patterns and tastes and preferences have begun converging. Thus, the world economy has grown closer as inte rnational trade regimes were modified, trade barriers reduced, and flows of international capital and investments increased. The role of trade and trade policy has of ten been linked to economic outcomes and performance. An open trade regime is considered to have positive economic impacts and is seen as a vehicle towards achieving superior rates of economic growth. Trade openness has also been associated with a more disciplined insertion in to the world economy. In this sense, broad domestic economic reforms and improvements in domestic institutions have been linked with increased openness (Krueger 1997, 1998). Good gove rnance, respect for property rights and the rule of law, as well as a macroeconomic envir onment with stable and undistorted prices have been noted as elements that often follow trade liberalization (Berg and Krueger 2003). However, opposition and disagreement with poli cies of openness and trade liberalization have been commonplace. Arguments that openne ss and liberalization have significant negative effects on poverty, unemployment and a host of other issues have often been made (Weisbrot and Baker 2002). Others have further viewed liberal ization policies as harmful for development, growth and equity (Conway 1997). Underlying some of these arguments, and in particular when related to small countries, is the notion that sm allness makes them more vulnerable to external shocks. Hence, special consider ations and exemptions should be made for such countries in
14 trade liberalization and other po licies. Easterly and Kraay (1999), however, have argued that there is no need for special cons iderations and policies followed in small countries should be similar to those in thei r larger counterparts. Despite the arguments and disagreements regard ing trade policy, it is undeniable that the movement towards more liberalized trade not only creates challeng es but also offers opportunities for achieving growth and prosperity. This is especially true for the small nations of the Organization of Eastern Caribbean States (OECS) who are facing the erosion of trade preferences while simultane ously having to liberalize their domestic markets. The OECS was established in 1981 and includ es nine members: Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Anguilla, and the British Virgin Islands. While the first six members are all independent nation states, Anguilla, the British Virgin Islands and Montserrat, are overseas te rritories of the United Kingdom. The principal concern behind the formation of the organization was the pursuit of economic integration and coordination a nd cooperation in foreign policy. The countries of the OECS have a combin ed GDP of $ 371 million, a population of about 586,000 and a total geographic surface area of 2,900 sq km. They are located in an area prone to natural disasters and their producti on and export structures are limite d both in diversity and size. These characteristics are considered limiting factor s in their ability to fu lly integrate into the global economy. However, OECS members are hi ghly integrated into the world economy and international commerce occupies a sizable share of GDP. For the OECS the ratio of imports and exports to GDP is above one and this high trad e share ratio is indicative of the relative importance trade and foreign sources of income have (World Bank 2005a).
15 Although the countries of the OECS have fo r years benefited from unilateral trade preferences with the EU, the United States and Canada, grow th performance lagged while unemployment and poverty continued to be a problem (World Bank, 2005a). The active promotion by the World Trade Organization (WTO) of a multilateral trading system has posed challenges to the OECS and other small economies. Whether an open liberal trade regime will foster improved economic performance and better economic outcomes is an empirical issue and the assessment of such effects ha s to be made individually. Countries such as the members of the OECS, who have for so long benefited from trade preferences, lack the in centive to pursue liberalization unila terally. Although it is likely that their preferred trade policy posit ion would be to continue bene fiting from preferences without engaging in any further liberalization, they fi nd themselves pressured to enter liberalization agreements, perhaps much to their sorrow. Problematic Situation As a subgroup of the African, Caribbean and Pacific nations (ACP), OECS members have maintained a special trading relationship with th e EU based on non-reciprocal trade preferences. This relationship has been driven by cultural, hi storical, and past coloni al links. The OECS, as an integral and fundamental part of the Cari bbean Community (CARICOM), is also granted trade preferences by the United States and Cana da on the basis of the Caribbean Basin Trade Partnership Agreement (CBTPA) and Caribb ean-Canada Trade Agreement (CARIBCAN), respectively. The OECS has also been involved in hemispheric negotiations for the creation of the proposed, and now stalled, Free Trade Area of the Americas (FTAA). However, trading arrangements with former European colonial powers have been particularly important to these countries. The successive Lo m Convention Agreements were the framework under which non-reciprocal duty-fr ee access to the European market was granted
16 to products originating in ACP countries. The Lom Convention Agreement was replaced by the Cotonou Agreement in 2000, with which the EU and ACP countries agreed to negotiate arrangements that would, due to their incompatibility with World Trade Organization (WTO) rules, lead to the elimination of non-reciproc al preferences granted by the EU. The gradual elimination of domestic trade barriers and th e reduction in the Comm on External Tariff (CET), within the provisions stipulated by the Cot onou Agreement, will modify the existing trade relations between the EU and ACP countries. The Cotonou Agreement contemplated the intr oduction of trading re lationships based on Economic Partnership Agreements (EPA). Exte nding reciprocity on the basis of the mechanism provided by EPAs effectively turns the trade relationship into a fr ee trade area. Negotiations on the formation of EPAs between the EU and si x sub-regional ACP groupi ngs have been taking place since 2003 and implementation is expect ed by 2008. The EPA negotiations, which are expected to have far reaching implications for the OECS, are being conducted within the grouping of Caribbean Forum of African, Ca ribbean and Pacific States (CARIFORUM).1 In the process, several difficult prerequisites were to be attained and negotiate d in order to lead to successful outcomes (Borrmann, Busse and Neuha us 2005). Economic Partnership Agreements, not only are to include trade lib eralization, but consider foster ing greater regional integration, providing development assistance, promoting growth and reducing poverty. The OECS economies have followed a devel opment strategy based on non-reciprocity and inclusion into reciprocal trade agreements is per ceived as a threat. Much of this perception is born from the disparities between the OECS and the larger more developed countries with which trade would open. This disparity ha s also raised concern related to the ability of these countries 1 CARIFORUM includes a ll CARICOM members and th e Dominican Republic.
17 to effectively negotiate substitutes for the preferential trade agreements. Furthermore, there is certain fear that extending reci procity and the erosion of prefer ences will lead to detrimental effects for small developing countries (Peters 2002). The OECS past reliance on trad e preferences has not been in consequential and there were some drawbacks. Production of export goods wa s biased toward those sectors protected by the preferences, such as bananas and sugar, and resulted in an export sector that became gradually less efficient. Although preference s were intended to serve as a vehicle for the achievement of trade, development and growth under favorable ci rcumstances, these were not fully obtained. Preferential agreements might have made th ese countries complacent and non-competitive and may have introduced a series of distortions and disincentives. Pref erence beneficiaries ultimately would benefit from the removal of preferences and the extension of reciprocity (Ozden and Reinhardt 2005). In this sense some have questio ned whether there actually were any benefits at all from tr ade preferences (DeRosa 2000). The gradual elimination of preferential trad ing agreements suggests that these countries will have to make choices among alternative paths. The formation of EPAs and the elimination of longstanding trade arrangements between the OECS and its largest trading partners will indeed provide significant challenges for the group. However, beyond the challenges posed, these conditions present opport unities for restructuring thei r economies, development and institutional frameworks in the OECS countries. The changes in economic environment centered on the elimination of trade preferences and the requisite of liberalization are of enormous significance. However, of equal or greater concern for the governments are potential fiscal imp acts involved. Fears have been centered on tariff revenue losses and the links these might have to growth, development, and poverty
18 alleviation (Peters 2002). The implication is that adjustment costs will exist and that countries involved in EPA negotiations lack the conditions necessary to deal with these adjustment costs (Boormann, Grossmann a nd Koopmann 2006). This significant change in the economic e nvironment will require these countries to respond rapidly to external change s. An open world requires agil ity and the rapid adaptation to changing environments as well as the embr ace of new technologies and opportunities. Integration and liberalization beco me necessary conditions to foster the acquisition of such skills to develop competitiveness. The relatively prot ective structure of the OECS and the one-way street of the system of preferenti al agreements do not seem to have not contributed in these larger pursuits. Problem Statement The problem posed by the gradual elimination of a system of non-reciprocal preferential trading agreements is clearly of significant concern for the OECS countries. On the one hand, such a situation creates opportuni ties to address and co rrect distortions created by unilateral trade preferences. Trade libe ralization raises the issue of the sele ction of options available for these countries. They will have to decide what po licy directions to pursue to minimize negative impacts and take advantage of opportunities pr eference erosion and liberalization presents. Choices available relate to: unilateral liberaliza tion and reforms, integration with other small developing countries, integration w ithin the larger trade bloc ne gotiations including the proposed Free Trade Agreement for the Americas (FTAA), full multilateral liberalization or the formation of Economic Partnership Agreements (EPA) with the European Union under the provisions of the Cotonou Agreement. The issue of how to pro ceed on the basis of what is likely to be most beneficial needs to be assessed. The strategies to be pursued in negotiations need to be evaluated in the context of costs and benef its different alternatives offer.
19 The economic analysis of customs unions or economic integration agreements suggests that the formation of a free trade agreement leads to a series of economic effects. A major trade effect is related to the expansi on of trade due to underlying adva ntages driving the direction of trade. An expansion in trade can be expect ed when less efficient domestic production is substituted by imports from a more efficient member of the trade agreement. There can also be an expansion in trade flows due to the preferen tial access the agreement grants imports from member countries at the expens e of excluding imports, which in fact can be less costly, from non-member countries (Viner 1950; Pomfret 1988). Entering into an integration agreement or the expansion of existing agreements may either lead to gains or losses. Traditionally OECS c ountries have relied heav ily on tariffs or trade related taxes as a source of reve nues and significant fiscal impact s are expected as further trade liberalization proceeds. The fiscal impacts also have the potential to carry consequences for growth, development, poverty alleviation and pr ovision of public goods. The alternatives posed by alternative integration agreements must be an alyzed empirically and individually. The likely impact for the OECS of joini ng and EPA with the EU or the other options that may become available can be assessed with a partial equi librium model. Such analysis would provide a framework to examine the likely trade effects an d the fiscal implications for countries of the OECS. Research Objectives The objective of this dissertation is to eval uate and assess the trade effects and fiscal impacts of alternative trade liberalization scen arios for the OECS. An evaluation of such scenarios is timely as the OECS faces the pr ospect of joining an Economic Partnership Agreement with the European Union. The recipro cal nature of the agreement poses significant challenges and concerns for the group. Not only is it timely to evaluate the agreement with the
20 EU, but it also becomes essential to evaluate alternat ives and their effects as the EPA excludes the OECS largest trading partners. Such exclusio n can have unwelcome effects as they offer the potential for trade diversion. Joining an EPA with the EU raises important qu estions. Is it in the interest of the OECS to enter an EPA? How large is the scope for tr ade diversion given the ex clusion of major trading partners? How severe are the e xpected fiscal impacts? Are th ere other less exclusionary trade liberalization options more congruent with OECS interests? Is it in the interest of the OECS to even consider these alternatives? How large is the scope for trade dive rsion and trade creation under these alternative li beralization schemes? How severe are the fiscal impacts under these alternative scenarios? How do they compar e with an EPA and among each other? These questions need to be analyzed empirically and individually. To achieve the objective posed, highly disa ggregated trade data will be used to quantitatively assess the impacts of alternative trade liberalization scenarios with a partial equilibrium trade model. The model is deri ved from Vinerian theory and was originally developed by Verdoorn (1960) as a means to anal yze the integration of the BENELUX countries. The alternative trade scenarios proposed for exam ination begin with the evaluation of the OECS joining the proposed EPA with the EU. In this scenario, the complete elimination of existing import tariffs is contemplated, yet barriers for othe r countries are left int act. A second scenario will consist of the elimination of all tariff ba rriers to the Caribbean Community (CARICOM), including candidates for membership and associate members of the OECS. Hence, this scenario includes most of the Caribbean islands and the EU. The third scenario will add the members of NAFTA into the previous scenar io. A final simulation envisages the OECS joining the now
21 stalled FTAA and will also include the EU as well in what would be a rather comprehensive liberalization scheme. This study is concerned with the challenges that the OECS will face in the context of a changing economic environment. The likely im pact of the alternatives proposed and an understanding of the implications posed by these s cenarios will be addressed. Trade effects such as trade creation and trade diversion, as well as the fiscal effects of alte rnative trade liberalization scenarios should shed light on the benefits or costs of these types of arrangements. The specific objectives of this study are: First, to qualitatively assess the economic a nd trade conditions of OECS members in the recent past and to review and assess methods for the analysis of preferential trading agreements. Second, to quantitatively assess trade eff ects and tariff revenue effects by performing alternative scenario analyses under different liberalization agreemen ts with the use of highly disaggregated trade data. Trade crea tion, trade diversion and fiscal impact calculations of alternative scenarios shed light on the benefits or co sts of these types of arrangements. Third, to assess the empirical results and what these suggest would be a prudent course of action for the OECS in light of theoretical contributions on regionalism and broader trade liberalization. Organization of this Study This study consists of five chapters. Fo llowing this brief introduction, chapter two reviews background information on the countries of the OECS, their economic history and the context of their evolution and current economic ci rcumstances. Assessments of the conditions in 1980 and those of 2000 are made, which allo w observing the relatively recent economic evolution of these countries. Th is context is necessary to bette r understand the implications of trade liberalization. The third chapter overviews the literatu re on the trade and economic performance relationship so as to develop a se nse of the implications involved in liberalization processes. The
22 trends in the debate in the last half of the twen tieth are discussed, as are issues related to fiscal aspects of trade liberalization. Chapter 3 also review s the theoretical founda tions on preferential trading arrangements. The major quantitative framew orks or tools used in the empirical analysis of such arrangements are discussed. Chapter 4 presents a more in depth examina tion of the partial equilibrium model based on Verdoorn (1960), a model derived from the Vineri an theoretical framework, which is employed in this analysis. The model is utilized in si mulating the four previously outlined trade policy scenarios for the OECS. From such simulation results, answers to the previous questions are sought. Finally, final chapter 5 su mmarizes and concludes this study.
23 CHAPTER 2 ECONOMIC, STRUCTURAL AND TRADE CONTEXT OF THE OECS The members of the Organization of Eastern Caribbean States (OEC S), despite sharing many similarities, coexist with cons iderable diversity. The objective of this section is to provide a brief synopsis of the OECS and its member states, their geographic conditions, economic structure, and socioeconomic context. The co mposition of overall trade, trade in goods, and trading partners is presented for two time periods for each country. These descriptive statistics enhance the evaluation of context and recent econo mic evolution in these islands. The snapshots are intended to provide a background for the subse quent analysis, as this is necessary for an appropriate assessment of alternative trade pol icy options and their likely consequences. Organization of Eastern Caribbean States The Treaty of Basseterre established the Orga nization of Eastern Ca ribbean States in 1981.2 The organization was formed, as a succes sor of the pre-independence West Indies Associated States Council of Ministers (WIS A) and the Eastern Cari bbean Common Market (ECCM), with the prime objective of pursui ng economic integration and coordinating and cooperating in foreign policy. The specific objectives were to: promote regional and international cooperation among members; defe nd sovereignty, territo rial integrity and independence; assist in meeting obligations and responsibilities to the international community; harmonize foreign policy and maintain arrangeme nts for joint overseas representation; and promote economic integration among the member states In effect, this included not only foreign policy coordination but also joint representation in trade agreements negotiations. Provisions for the administration of financial assistance grante d by overseas sources were included as well. 2 The section on the Organization of Eastern Caribbean States draws and summarizes material from various documents posted in its website at www.oecs.org The material is also summarized in OECS (2002).
24 The promotion of cooperation in social, pol itical, economic, and tec hnical affairs among member states was termed the functional c ooperation component. An example of such collaboration was the establishm ent of a monetary union with a single currency, the Eastern Caribbean Dollar (XCD), and the creation of th e Eastern Caribbean Central Bank (ECCB) to coordinate such a union. Add itional successful examples of functional cooperation were the Eastern Caribbean Supreme Court, the Eastern Caribbean Civil Aviation Authority, the Eastern Caribbean Telecommunications Authority, and the OECS Export Development Unit. Beyond the coordination of foreign policy obj ectives and functional cooperation was the pursuit of further economic integration. This objective advanced si gnificantly with the agreement to move toward an Economic Union. Co inciding with the twenty -fifth anniversary of the formation of the OECS, the Treaty of Ba sseterre was to be replaced by a new Economic Union Treaty. It is hoped this move will addre ss shortcomings of the previous arrangements and enhance economic competitiveness and diversification, promote i nvestments, create employment opportunities, as well as address a host of other economic objectives. The OECS is further integrated within the re gion as an important subset of the larger Caribbean Community (CARICOM) that include s 15 members. Besides the OECS member nations CARICOM includes the Bahamas, Barbados Belize, Guyana, Haiti, Jamaica, Suriname, and Trinidad and Tobago. The objectives of the OE CS fit within those of the larger Caribbean Community. Overall regional in tegration arrangements such as CARICOM aimed at: enhancing growth and development and improving the standa rds of living of their populations; achieving full employment of labor and other factors of production; gaining accelerated, coordinated and sustained economic development and convergence; enhancing trade and economic relations with third states; attaining increased levels of in ternational competitiveness; improving organization
25 for increased production and produc tivity; achieving of a greater measure of economic leverage; increased effectiveness of member states in deali ng with third states, groups of states and entities of any description; and the enhanced coordi nation of member states foreign and foreign economic policies and enhan ced functional cooperation.3 Geographic and Economic Charact eristics of OECS Members The OECS member states are located in relatively close proximity to each other and generally share similar geographi c and natural environments. Ge ography therefore tends to be a factor that influences the isla nds production and export structure, one that has been considered limited in diversity and hampered by sm all physical and economic dimension. In terms of physical size, tota l geographic surface area of al l six OECS nation states is 2,806 sq km. The largest country is Dominica, which has a surface ar ea of 754 sq km. The smallest member is St. Kitts and Nevis, wh ich has a surface area of 261 sq km. The total population for the OECS is about 592,100. The mo st populous member is St. Lucia, which in 2005 had a population of about 165,500, while the least populous was St Kitts and Nevis with 48,000. In terms of economic size, the OECS had a combined GDP, in 2005, of $3,177 million and a GDP per capita of $5,886 (Table 2-1). Smallness is reported by the World Bank (2005a) to have resulted in disadvantageous cost structures and diseconomies of scale, not only in production but also in the provision of public goods and an array of other factors. An export st ructure considered to lack diversity has also been attributed to the smallness of the economies. In addition, th ese small islands are considered extremely susceptible to changes in economic e nvironment or any type of external economic 3 These objectives are cited and drawn from various CARICOM documents and also posted in the CARICOM website at www.caricom.org.
26 shocks. These characteristics are considered lim iting factors in the ability of these small economies to fully integrate into the global economy. Geographic Characteristics Antigua and Barbuda : With a total surface area of 442 sq km, Antigua and Barbuda is located in the northernm ost part of the OECS.4 Together they have 153 km of coastline with indented shorelines, natural har bors, and beaches. The islands are not endowed with significant natural resources and the terrain is classified as low-lyi ng limestone and coral islands containing volcanic areas. A tropical maritime climate favor s tourism, which is a major economic activity. Although it gained independence from Great Brita in on November 1981, Antigua and Barbuda remain associated as a member of the Co mmonwealth. The isla nds are considered a constitutional monarchy with a parliament simila r to that of the United Kingdom. Ethnic groups included in the estimated total population of 81,000 are Blacks, British, Portuguese, Syrian, and Lebanese. Dominica : The island of Dominica was originally colonized by the French and was transferred to Great Britain in 1763. It ga ined independence in 1978 and its system of government is a parliamentary democracy. Do minica has a surface area of 754 sq km and a coastline of 148 km. Its climate is tropical, prone to heavy rainfall, and its terrain is classified as rugged and of volcanic orig in. It is considered an interestin g eco-tourism destination due to its significant endowment of natural beauty and dive rse flora and fauna. However, it lacks beaches amenable to more traditional Ca ribbean tourism. The island has an estimated population of nearly 72,000. The general ethnic composition includes black, mixed black and European, European, Syrian and Carib Amerindian. 4 The information provided in this section for all countries was drawn from the CIA The World Factbook https://www.cia.gov/cia/publications /factbook/docs/profileguide.html
27 Grenada : The French first colonized Grenada and transferred the island to British control in 1762. The French had established sugar es tates and imported African slaves to run production. Grenada has a land surface area of 344 sq km, a shoreline of 121 km and a tropical climate that is tempered by northeast trade winds Its terrain is char acterized as volcanic, includes some mountains and its natural resource endowments incl ude timber, tropical fruits and deepwater harbors. In 1974 Grenada gained independence and the government is now a constitutional monarchy with a parliament based on the Westminster system. The country experimented briefly with a Ma rxist government that was overthrown by a US invasion. Although the service sect or is the largest component of GDP, the country has had an important agricultural export sect or. Export production cycles ha ve included sugar, cacao, and nutmeg. The population was estimated at a bout 106,000 and the ethnic composition includes blacks, mixed black and European, European, East Indian, and some Arawak/Carib Amerindian. St. Kitts and Nevis : St. Kitts and Nevis are the youngest of the independent member states in the OECS and they are also the smallest The total surface area for the islands is 261 sq km. and its coastline extends for 135 km. Their c limate is described as tropical but tempered by constant breezes and its terrain is volcanic and mountainous. The se rvice sector is currently the largest component of GDP. However, for a long time sugar was by far the most important activity in the islands. Recently light manufact uring and assembling of electronic components have gained economic importance and practically replaced the sugar industry. The government is a constitutional monarchy with a parliament based on the Westminster system and the islands have a population of over 48,000. The ethnic compos ition consists of mainly black, with some British, Lebanese and Portuguese.
28 St. Lucia : The British and French contested the island of St. Lucia and control of the island changed fourteen times before it finally ended under British rule. St. Lucia gained its independence in 1979 it is a constitutional monarc hy with a Westminster style parliament. St. Lucia has a surface area of 616 sq km a coastline of 158 km. It is physically the largest of the OECS islands. Its climate is characterized as trop ical with northeast trade winds and its terrain is mountainous and of volcanic origin. The isla nd is endowed with sandy beaches, forests and some minerals. Banana exports are an important component of the agricultu ral export sector and recently services such offshore banking and touris m have grown significantly. Its population is estimated at about 165,500 and its ethnic compositi on is mostly black yet includes some mixed, East Indian, and white population. St. Vincent and the Grenadines : St. Vincent and the Grenad ines consist of 32 islands and cays with a total surface area of 389 sq km and a coastline of 84 km. Their climate is described as tropical and its te rrain is characterized as mount ainous and of volcanic origin. These islands were also part of territorial dispute between Britai n and France that ended with the former exercising control until independence in 1979. Its government is a parliamentary democracy and independent sovereign state w ithin the Commonwealth. St. Vincent and the Grenadines is an important banana exporte r yet significant offshore banking activities and tourism industry have been developing. The isla nds have a population of slightly fewer than 119,000 with an ethnic composition that includes mainly blacks, and significant mixed, East Indian, Carib Amerindian, and other minorities. Economic Structure and Characteristics The members of the OECS, although sharing mu ch in common, reveal a range of diversity in terms of their economic char acteristics and performance that make each somewhat unique. In terms of size of GDP the largest economy is Antigua and Barbuda, which in 2005 had a GDP of
29 U$ 905.2 million. Dominica had the smallest economy with a GDP of $271.1 million. The average size of GDP for OECS countries stood at $529.6 million. In terms of GDP per capita the group averaged $5,886. The figures ranged from $11,175 in Antigua and Barbuda to $3,393 in St. Vincent and the Grenadines. The size of GDP and GDP per capita measures illustrate the heterogeneous character of economies within th e OECS where some are up to three times as large as others (Table 2-1). The sectoral composition of OECS economies is presented in Table 2-2 and similarly reflects common features as well as differences. The service sector is, for all OECS members, the most important component of GDP and its sh are averaged 69.3% in 2003. The service sector share ranged from 59.6% in Domini ca to 76.6% in St. Lucia. An tigua and Barbuda saw a small decrease in its service sector from 1985 to 2002 when the share went from 78.5% to 75.7% of GDP. However, all other countries have experi enced increases in the services component of national income. The largest increase for this sector occurred in St. Vincent and the Grenadines where in 1985 services comprised 56.9% of GDP while in 2004 the share was 66.8%. Although the agricultura l sector has traditionally been a very important part of Caribbean economies, a significant shift towa rd industry and services occurred during the past two decades. The sharpest decline in the agricultural sector participation took place in St. Kitts and Nevis where the sectors contribution to GDP fell fr om 9.1% in 1985 to 3.3% in 2003. Antigua and Barbuda had the smallest change in the size of th eir agricultural sector. The sectors decline in its contribution to GDP fell from 4.9% in 1985 to 3.8% in 2003. Despite th e declining trend in the size of the agricultural sect or throughout the OECS, agriculture remains relatively important in Dominica where it contri butes 18.6% to GDP, the highe st among these countries.
30 The industrial sector seems to have accumulate d gains at the expense of the agricultural sector in all OECS members. While industry consisted of an average 19.0% of GDP in 1985 this figure stood at 23.1% in 2003. The la rgest increase in the share of industry took place in St. Kitts and Nevis where the sector grew from 21.7% in 1985 to 29.7% of GDP in 2003. This reflected a 36.6% increase in industrial activity. In St. Luci a, on the other hand, an almost negligible increase in industry share took place between 1985 and 2003. Industry share barely increased from 18.2% to 18.5%. This was clearly th e exception to the tre nd, as shifts to the industrial sector in the other c ountries resembled those of St. K itts, albeit in smaller proportions. Recent Economic Trends The OECS members also exhibit common el ements and characteristics that are unfavorable. One such element that characte rizes these economies is their high level of indebtedness. For the group as a whole, public debt in 2003 in terms of GDP weighted average stood at 113% of GDP. The most highly indebted country was St. Kitts and Nevis with a figure of 171 % while the lowest was St. Lucia with 69%. Government spending for the period between 1998-2003, in terms of GDP, averaged 34 % for all six nations. These countries also maintained a negative fiscal balance, which averaged .4% of GDP. This negative fiscal balance ranged from .5% in St. Lucia to -11.2% in St. Kitts & Nevis (Table 2-3). Although fiscal imbalances and high indebtedne ss have been a challenge for the OECS they were able to maintain price stability a nd the flow of funds from abroad. The average inflation rate between 1998 and 2003 was 1.7% a nd ranged from-0.3% to 2.5%. Foreign direct investment constitutes an important economic el ement for these countries averaging 9.1% of GDP. In addition, overseas development assist ance (ODA) plays an important economic role and represented an average of 3.0% of GDP for the group.
31 The recent economic performance of OECS c ountries relative to past performance has been poor and rates of economic growth have been decreasing thr oughout the last quarter century. For the group of six OECS countries, the rate of growth in GDP during the 1980s averaged 5.9%. However, in the first half of the 1990s growth rates decr eased to an average of 3.4%. Closer examination of the period between 1995 and 2005 reveals that economic performance has been somewhat erratic. During the first five years of the noted period the growth rate averaged 3.5% while this rate fell to 1.4% for the period between 2000 and 2004 (Table 2-4). Higher income countries within the group have been able to maintain higher rates of growth than those with lower income. The rate of growth in GDP in Dominica went from 2.4% to .2% and from 5.6% to 1.0% in Grenada. In St. Kitts and Nevis this figure dropped from 4.4% to 2.2% and in St. Lucia from 2.6% to 0.5%. Antigua and Barbuda, as well as St. Vincent and the Grenadines maintained stable rates of growth at 3.2% a nd 2.8% respectively. For the year 2005 growth performance improved and averaged 3.8% for the OECS. Notably, Dominica again experienced positive growth and St. Lucia achieved a growth rate exceeding the 5% mark. Although rates of growth for 2005 ranged from 5.1% in St. Lucia to 0.9% in Grenada, showing a significant improveme nt over the previous years, the slowdown is nonetheless evident when compared to similar figures from the early 1980s. Another theme that has persisted and remains a source of challenges for the region regards unemployment and poverty.5 The average rate of unemployment for the OECS remains high at 16%. Unemployment was highest in Dominica with 25% while the lowest rate was in St. Kitts and Nevis with 5%. The population living in pover ty averaged 29% for th e six countries yet the 5 Figures for poverty and unemployment are from World Bank (2005a) which cites a UNDP 2002 report and a 2002 national poverty assessment and labor force surveys.
32 range within the group was broad. The highest ra te of poverty was reported in St. Vincent and the Grenadines where 38% of the population lived in poverty. The lowest figure was reported in Antigua and Barbuda where the figure stood at 12%. The overall standard of living for the OECS as reflected by the United Nations Human Development Index (HDI) also indicates divers ity within the OECS. Although all countries within the group were classified as high or me dium development countries, St. Kitts and Nevis ranked highest at 51 and St. Vincent and the Grenadines ranked lowest at 88. Trade and Trade Structure OECS countries are highly integrated into the world economy and international commerce occupies a sizable share of GDP. In fact, the ratio of imports and exports to GDP is above one for all OECS members (Table 2-5). Antigua an d Barbuda had the highest ratio during the 1990s, 1.672. However, this ratio decreased to 1.331 duri ng the present decade. A similar decrease in the ratio of exports and imports to GDP during th is decade relative to the 1990s was observed in all OECS countries with Grenada being the exception. The export of goods and services in the OECS co nsists predominantly of trade in services. While during the 1980s OECS export of services averaged slightly less than 50% of total exports, in the 1990s they constituted about 69% of all exports. For the time period between 2000-2004 exports of services increased to sli ghtly less than 75% of total exports. The trend of increased service sector exports has been consistent fo r all OECS countries. However, it has been remarkable for Dominica and St. Vincent and th e Grenadines. While services accounted for 27.0% and 32.0% of tota l exports respectively during the 1980s, these increased, in the present decade, to 64.5% and 75 .9% of total exports respectively (Table 2-6). In terms of import of services, these have incr eased from 21.5% to 30.2% of total imports during the same time period. Although a relatively sma ll part of total impor ts, it is nonetheless
33 noteworthy that in terms of flows, imports of services have more than tripled in the interval between 1980 and 2004 (Table 2-7). Though trade in services is per tinent, most of th e analysis and discussion that follows addresses trade in goods, given that trade policy effects are more visibl e and data is easily available. The general trend over the past two decades for the OECS reveals a decrease in the importance of export goods relative to total exports, despite the fact that in terms of value export of goods increased. The total value of export of goods for the OECS increased from a yearly average, in the 1980s, of $239.5 to $330.8 in the 1990s and a slight decline to $317.8 million in the first half of the present decade. However, this trend has not been uniform for all OECS countries. The cases of Dominica and St. Lucia are particularly di sconcerting, as exports of goods have actually decreased in the interval from the 1980s to the present decade. St. Lucia, after experiencing export growth during the 1990s, saw a decline of 57% in the export of goods during the period from 2000 to 2004. Dominica saw an increase in e xports during the 1990s and a decline, albeit small, from 2000 to 2004. In terms of the share of total exports, th ere has been a decline of about 50% in goods exported. While during the 1980s goods consiste d of 50.1% of total exports, from 2000 to 2004 these averaged 25.2%. The relativ e decrease of exports was quite severe in St. Lucia and St. Vincent and the Grenadines where the decrea se was in excess of 60%. Also significant decreases of slightly over 50% were experienced in Antigua a nd Barbuda as well as Dominica. Similarly the relative importanc e of export goods in terms of GDP decreased from 29.5% to 12.3% for the time frame included (Table 2-8).
34 The import of goods into the OECS is large rela tive to the size of the economies. While during the 1980s import of goods comprised almo st 65% of GDP, from 2000 to 2004 this figure fell to 46.8% of GDP. In terms of value, imports increased from $563.50 million to $1.33 billion during the noted interval (Table 2-9). Increase s were particularly notab le in Grenada and St. Kitts and Nevis where imports nearly tripled. The evolution of the structur e of trade presented in aggregate terms portrays merely a general representation. A more de tailed description of the struct ure of trade in goods and how it has evolved over the past two decades is better ev aluated at a higher level of disaggregation. The evolution of the structure of trade is described wi th data from the U.N. Comtrade database using the SITC-1 classification at the four -digit level for the years 1980 and 2000.6 Included are OECS export destinations and import sources. Antigua and Barbuda : The export structure for Antigua and Barbuda in 19817 indicates that three categories; printing, clothing and specialized manufact ured goods comprised almost 60% of exports. The top ten e xports made up 81.2% of all go ods exported. The HerfindahlHirshman index (HHI), which measures industr y concentration, was 0.144. Two decades later, the export sector was still dominated by manufactured goods yet there was some export diversification and telecommunicat ions equipment was dominant with almost one third of all exports. The top ten categories comprised 59.1 % of total goods exported while the HHI was reduced to 0.111 (Table 2-10). The major export markets for Antigua and Ba rbuda were other Caribbean Islands, the United States, United Kingdom and France. The top ten export destinations accounted for 6 While the classification system has been modified throughout th e years, SITC-1 classification was used here for consistency, as data was available under this classification for the two periods noted. 7 Data was available for 1981 rather than 1980.
35 88.2% of total goods exports. In the inte rval between 1980 and 2000 there was a marked decrease in the relative importance of the United States as an export market. While in 1980 54.4% of exports were destined to the United States in 2000 this figure declin ed to 19%. During this time interval the United Kingdom ranked fi rst as export destina tion (Table 2-11). The major import categories Antigua and Barbud a in 1980 consisted of different types of transportation equipment and vehicles, which amount ed to nearly 10% of all imports. The top ten import categories, however, accounted for less than a quarter of all imports. In the year 2000 the top ten categories accounted for 35.6% of impor ts and were dominated by fuels, oils and greases, as well as by passenger cars and teleco mmunication equipment (Table 2-12). About half of the imported goods originated in the United States while anot her significant source was the oil producing Caribbean nation of Trinidad and Tobago (Table 2-13). Dominica : Dominica has experienced significant growth in export flows and the structure of trade continues to be dominated by agricu ltural products and agro-i ndustry. While in 1980 soap was the leading export followed by bananas, in 2000 this order was inverted. In addition, the relative importance of both pr oducts diminished as exports were diversified. While banana and soap exports accounted for more than 80% of total goods exported in 1980, they accounted for 50% in 2000. The HHI during this period changed from 0.348 and 0.152 respectively (Table 2-14). Dominicas major export markets were in 1980, and remained in 2000, the United Kingdom and Jamaica where combined exports am ounted to nearly 65% and 50% respectively for those years. The United States, France and other Caribbean islands were other important export markets and the destination of the rema ining 50% of exports. The top ten export destinations accounted for 97.8% of total goods e xports in 1980 and 92.9% in 2000 (Table 2-15).
36 The import structure in 1980 consisted, similar to Antigua and Barbuda of different types of transportation equipment and engines. Othe r important categories we re meal and flour of wheat or muslin, animal oils and fats, and ferti lizer. The top ten import categories accounted for less than on third of all imports in 1980. In the year 2000 the top ten import categories were dominated by fuels, oils and greases, as well as by passenger car s, telecommunication equipment, poultry, and lumber (Table 2-16). The United States and United Kingdom were the main import sources in 1980 and by the year 2000 other important s ources included Japan, Canada, the Netherlands, France and oil produ cing Trinidad and Tobago (Table 2-17). Grenada: The major export categories for Grenad a have undergone a moderate shift. While cocoa, spices, and bananas accounted for more than 85% of total goods exported in 1980, these constituted approximately 20% of export of goods in 2000.8 In the year 2000 electrical equipment and circuits, as well as office machines comprised 54% of exports while spices were relegated to 17.7% (Table 2-18). The principal export markets in 1980 were the United Kingdom, Belgium-Luxembourg, and the Netherlands. Together th ese accounted for more than 66% of Grenadas export market. In 2000, however, the main export destination b ecame the United States followed by Trinidad and Tobago and the United Kingdom. The top te n export destinations accounted for 94.0% of total goods exports in 1980 a nd 88.7% in 2000 (Table 2-19). The major import sources in 1980 were the United States, Trinidad and Tobago, and the United Kingdom. These import sources remained unchanged in the year 2000 (Table 2-20). The major import categories consisted of different manufactured goods, tran sportation equipment, some agricultural products and fuels (Table 2-21). The structure of impor ts did not vary to a 8 The Comtrade data for 2000 is considerably different from 1999 and 2001 where the category 0752 spices is clearly the dominan t export good.
37 great extent between the two decades and the top ten categories accounted for nearly one third of all imports. St. Kitts and Nevis : Once dominated virtually in its entirety by the sugar industry, St. Kitts and Nevis experienced a significant change in export structure as sugar was relegated. While in 1980 sugar accounted for over 60% of exports, by the year 2000 it accounted for less than 18%. Instead, electrical circuitry and othe r electrical machinery an d apparatus substituted sugar as the top export category accounting for more than half the exports. Despite the changes from agricultural based exports to light manufact uring, the concentration for the top ten exports remained relatively unchanged accounting for over 90% of exports (Table 2-22). St. Kitts and Nevis major foreign markets were in 1980, as in 2000, the United States, the United Kingdom and Trinidad and Tobago where combined exports amounted to 86.5% and 89.6% respectively for those two years. The re maining export markets were other Caribbean islands and the top ten export destinations accounted for 96.2% of total goods exported in 1980 and 97.5% in 2000 (Table 2-23). The import structure in 1980, sim ilar to other OECS countries, consisted of different types of transportation equipment, different categor ies of manufactured goods agricultural products, cement, lumber and fuels. The structure of imports did not vary greatly between 1980 and 2000 and the top ten import categories accounted for about one third of all imports (Table 2-24). The primary import sources, nearly 75% of total imports, were the United States, the United Kingdom, Trinidad and Tobago a nd Canada (Table 2-25). St. Lucia : Bananas have been the dominant ex port good in St. Lucia throughout the past two decades. In fact, during this period bana na exports have doubled and in the year 2000 accounted for more than half of the goods expor ted. From the top ten export categories in 1980
38 five have continued to be si gnificant in 2000, although changes in their relative ranking were observed. Hence, beer, non-alcoholic beverages, paper bags, and clothing, together with bananas made up the top five exports. From 1980 through 2000 export concentration increased with an HHI of 0.084 and 0.287 respectively (Table 2-26). The main export markets in 1980 were the United States and the United Kingdom who together accounted for more than half the exports. In 2000 the United Kingdom became the largest market accounting for n early half of St. Lucias e xports while the United States accounted for 18.5%. The Caribbean islands were th e destination for 26% of exports and the top ten export destinations accounted for almost 94% of total goods exported in 1980 and 2000 (Table 2-27). The major sources of imports for St. Lucia throughout these two decades were the United States, Trinidad and Tobago, and the United Kingdom (Table 2-28). The major import categories consisted of fuels, tr ansportation equipment, and different manufactured goods. The top ten categories accounted for about one quarter of all imports and the structure of imports did not change significantly during this time interval (Table 2-29). St. Vincent and the Grenadines: The trade structure for ex port goods in St. Vincent and the Grenadines has been dominated throughout the last two decades by agricultural products. Bananas have traditionally been the major e xport and their share has changed by a mere 3 percentage points during this in terval. Other important exports included were meal and flour of wheat or muslin, vegetable products, and items related to sailing ve ssels and non-alcoholic beverages. The top ten goods constituted a bout 82% of all export for both 1980 and 2000 and the HHI were 0.199 and 0.172 respectively (Table 2-30).
39 St. Vincents major export markets in 1980 and in 2000 were the United Kingdom, Trinidad and Tobago and Barbados where comb ined exports amounted to about 80% and 55% respectively for the noted years. The United Stat es was the fourth larges t destination in 1980 but did not make the top ten in 2000. The top te n export markets accounted for 98.3 % in 1980 and for 88.8% in 2000. (Table 2-31). The import structure in 1980 and 2000 consiste d of different types of transportation equipment and engines. Other important catego ries were agricultural and food products. The top ten import categories accounted for about one thir d of all imports for both years. In the year 2000 major imports consisted of fuels and food pr oducts (Table 2-32). The United States, the United Kingdom and Trinidad and Tobago were th e main import sources for St. Vincent and the Grenadines. (Table 2-33). Discussion and Implications Several broad generalizations emerge from these descriptive data. The economic performance of the OECS has been gradually deteri orating over time. In terms of growth, these countries suffered a setback relative to the 1980s. Despite this less than satisfactory performance McCarthy and Zanalda (1995), in an analysis of economic performance from 1980 to 1992 indicated OECS members have generally performed better relative to their larger counterparts in CARICOM. The OECS members continue to struggle w ith issues such as poverty, high rates of unemployment and high levels of indebtedness. However, on other macroeconomic indicators such as monetary stability the OECS has perf ormed well over time. Escaith (2001) noted that heavy dependence on trade and perceived vulnerabili ty has led small countries to adopt prudent macroeconomic policies. In spite of this, declin ing rates of growth and an expansionary fiscal policy have resulted in weak macroeconomic perf ormance, increased public debt and high fiscal
40 deficits. However, exchange rate stability and an independent monetary policy have been maintained. The export sector has been gr owing yet the structure has be en shifting towards services, which now constitute the largest export sector. Services have experienced considerable growth in the period examined. The export of goods ha s also increased for most countries; however, traditional exports are becoming increasingly less si gnificant. In addition, there is considerable diversity in the OECS members exports as well as a shift to non-tradit ional exports in most countries. Trade partners are also an important issue and it becomes clear that North America is generally the largest export market, as well as the most important source of imports. This pattern has been relatively consistent in the period examined. The concern that the OECS countries have a we ak export base concentrated in few exports hence severe implications are to be borne from trade negotiations. However, Lewis and Webster (2001) find that there is considerab le diversity in the exports of Caribbean countries despite their similarity in resource endowment. Similar conclusions were reached by Berezin, Salehizadeh and Santana (2002), who indicated that there is ex tensive diversity in expo rt specialization when considering product categories fo r most of the Caribbean. The more recent trend that clearly shows a stagnating trend in the rates of economic growth and economic performance for the time pe riod after 1992 is of significant concern. Despite the domestic protective st ructure in place and the prefer ences granted to OECS exports performance was disappointing. In fact, a Wo rld Bank reported that past growth does not appear to have been driven by a strategic agenda for competitiveness. Rather it has been driven by special and preferential trea tment on export trade and the sect oral reallocation of resources from agriculture to tourism, led by inflows of foreign direct investment(World Bank 2005b, p.
41 6). The issue now becomes how performance will progress under a new trading environment and rules. In the overall context it is clear that alt hough OECS members share many similarities, they actually display a consid erable range of diversity. Thei r geographic conditions and social context are similar and they sh are common concerns and similar problems. Yet their economic and trade structures, although exhibiting common elements, are actually distinctive. An understanding of these subtleties pr ovides a contextual background fo r the analysis that follows. Such background is required for an appropriate assessment of alternativ e trade policy options and their likely consequences.
42 Table 2-1. Selected statistics Geographic size (in sq km) Population (in 00s) GDP 2005 (current $ million) GDP/capita 2005 (current $ million) Antigua & Barbuda 442 81.0 905.2 11,175 Dominica 754 72.0 271.1 3,765 Grenada 344 106.5 437.3 4,106 St. Kitts & Nevis 261 48.0 396.9 8,268 St. Lucia 616 165.5 763.2 4,611 St. Vincent & the Grenadines 389 119.1 404.1 3,393 Total OECS 2806 592.1 3177.8 Avg. OECS 467.7 98.7 529.6 5,886.3 Source: WDI Online and CIA The World Factbook Table 2-2. Sectoral com position of OECS economies Agriculture (%) Industry (%) Services (%) 1985 1995 2003 1985 1995 2003 1985 1995 2003 Antigua & Barbuda 4.94 3.88 3.82* 16.57 18.35 21.97* 78.49 76.30 75.66* Dominica 27.95 18.88 18.58 16.62 21.97 21.04 55.44 59.18 59.63 Grenada 17.08 10.13 8.47** 17.47 20.02 23.11** 65.45 69.86 68.42** St. Kitts & Nevis 9.06 5.34 3.28 21.71 25.25 29.66 69.23 69.40 68.69 St. Lucia 15.22 10.19 6.40 18.18 19.48 18.50 66.60 70.33 76.59 St. Vincent & the Grenadines 19.60 14.08 8.88** 23.45 24.97 24.23** 56.95 60.96 66.78** Avg. OECS 15.64 10.42 8.24 19.00 21.67 23.09 65.36 67.67 69.30 Source: WDI Online *=2002 Data, **=2004 Data
43 Table 2-3. Selected public and monetary sector indicators 1998-2003 Government Spending (% of GDP) Fiscal Balance (% of GDP) Public Debt (% of GDP) Inflation (% Rate) Overseas Development Assistance (% of GDP) Foreign Direct Investment (% of GDP) Antigua & Barbuda 29 -7.9 142 1.8 1.6 6.3 Dominica 41 -8.2 122 -0.3 7.2 5.4 Grenada 37 -7.1 113 2.1 2.8 13.6 St. Kitts & Nevis 43 -11.2 171 2.5 3.2 20.3 St. Lucia 29 -2.5 69 2.1 2.8 3.2 St. Vincent & the Grenadines 33 -3.5 73 0.9 3.4 11.9 OECS Average 34 -6.4 113 1.7 3.0 9.1 Source: World Bank (2005) Table 2-4. Selected econo mic performance indicators Growth rate (%) Growth rate (%) Growth rate (%)) Growth rate (%)) Growth rate (%) Poverty (% pop)a Unemployment (% of Labor Force)b HDI Rank c 1980-89 1990-94 1995-99 2000-04 2005 2006 Antigua & Barbuda 6.74 3.43 3.20 3.20 3.81 12 7 59 Dominica 6.28 2.20 2.35 -1.22 3.10 33 25 68 Grenada 5.00 1.46 5.56 1.01 0.90 32 13 85 St. Kitts & N evis 6.06 3.55 4.36 2.15 4.92 31 5 51 St. Lucia 5.27 7.45 2.57 0.54 5.12 25 19 71 St. Vincent 5.77 2.06 2.74 2.75 4.90 38 21 88 OECS Avg. 5.85 3.36 3.46 1.41 3.79 38 16 Sources: WDI Online and World Bank (2005a) Tabl e 1 for a and b. World Bank (2005a) cites these figures as latest availa ble from UNDP 2002 national povert y assessments and labor force surveys. UNDP is source for c.
44 Table 2-5. Export, imports and trade share Exports (% of GDP) Imports (% of GDP) X+M (%GDP) Exports (% of GDP) Imports (% of GDP) X+M (% of GDP) 1990-99 1990-99 1990-99 2000-04 2000-04 2000-04 Antigua & Barbuda 82.61 85.25 167.9 63.70 71.36 135.1 Dominica 52.92 67.88 120.8 47.25 61.32 108.6 Grenada 45.73 64.40 110.1 46.74 71.99 118.7 St. Kitts & Nevis 53.69 73.39 127.1 45.65 70.45 116.1 St. Lucia 63.34 71.01 125.0 54.22 65.59 119.8 St Vincent & the Grenadines 52.82 72.19 134.3 48.35 61.75 110.1 Source: ECLAC Table 2-6. Exports of services 1980-2004 Export of services (current million) Export of services (%of total exports) Export of services (%of GDP) 1980-89 1990-99 2000-04 1980-89 1990-99 2000-04 1980-89 1990-99 2000-04 Antigua & Barbuda 136.82 371.15 418.34 78.47 88.62 89.96 63.76 73.22 57.31 Dominica 12.35 61.54 82.26 27.00 53.18 64.49 12.33 28.15 30.47 Grenada 32.93 97.63 141.60 57.81 74.80 72.35 25.04 34.21 33.82 St. Kitts & N evis 25.63 84.50 106.40 51.80 70.06 65.07 30.35 37.62 29.71 St. Lucia 74.55 240.50 306.60 52.26 70.61 81.09 21.62 29.86 36.68 St Vincent 24.71 77.91 135.20 31.95 56.52 75.85 36.84 44.72 43.97 OECS Total 306.99 933.21 1190.36 OECS Avg. 51.17 155.54 198.39 49.88 68.97 74.80 31.66 41.29 38.66 Source: ECLAC and WDI Online
45 Table 2-7. Imports of services 1980-2004 Imports of services (current million U$) Imports of services (% of imports) Imports of services (% of GDP) 1980-89 1990-99 2000-04 1980-89 1990-99 2000-4 1980-89 1990-99 2000-04 Antigua & Barbuda 47.97 141.95 174.68 22.25 32.85 33.53 22.36 28.00 23.93 Dominica 13.15 42.60 49.32 18.96 28.70 29.79 13.13 19.48 18.27 Grenada 20.54 47.77 88.62 22.69 25.99 29.40 15.62 16.74 21.17 St. Kitts & Nevis 14.86 53.08 78.78 20.91 32.20 31.22 17.60 23.63 21.99 St. Lucia 40.05 108.15 138.16 22.45 28.32 30.21 19.79 20.11 19.82 St Vincent 20.56 54.54 61.62 21.50 28.95 27.07 17.99 20.90 16.72 OECS Total 157.13 448.09 591.18 OECS Avg. 26.19 74.68 98.53 21.46 29.50 30.20 17.75 21.48 20.31 Source: ECLAC and WDI Online Table 2-8. Average export of goods 1980-2004 Export of goods (current million U$) Export of goods (%of exports) Export of goods (% of GDP) 1980-89 1990-99 2000-04 1980-89 1990-99 2000-04 1980-89 1990-99 2000-04 Antigua & Barbuda 37.53 47.65 46.70 21.53 11.38 10.04 17.49 9.40 6.40 Dominica 33.39 54.17 45.30 73.00 46.82 35.51 33.35 24.77 16.78 Grenada 24.03 32.90 54.12 42.19 25.20 27.65 18.27 11.53 12.93 St. Kitts & Nevis 23.85 36.11 57.12 48.20 29.94 34.93 28.24 16.08 15.95 St. Lucia 68.09 100.09 43.04 47.74 29.39 18.91 33.65 18.61 10.25 St Vincent 52.63 59.93 71.50 68.05 43.48 24.15 46.04 22.97 11.68 Total OECS 239.50 330.85 317.78 OECS Avg. 39.92 55.14 52.96 50.12 31.03 25.20 29.51 17.23 12.33 Source: ECLAC and WDI Online and calcu lations on the basis of the sources.
46 Table 2-9. Imports of goods 1980-2004 Imports of goods (current U$million) Imports of goods (% of Imports) Imports of goods (% of GDP) 1980-89 1990-99 2000-04 1980-89 1990-99 2000-04 1980-89 1990-99 2000-04 Antigua & Barbuda 167.7 290.22 346.26 77.75 67.15 66.47 78.14 57.25 47.73 Dominica 56.20 105.81 116.22 81.04 71.30 70.21 56.13 48.39 43.05 Grenada 69.97 136.03 212.78 77.31 74.01 70.60 53.21 47.66 50.82 St. Kitts & Nevis 56.21 111.77 173.58 79.09 67.80 68.78 66.56 49.76 48.46 St. Lucia 138.38 273.69 319.14 77.55 71.68 69.79 68.38 50.90 45.77 St Vincent 75.07 133.84 166.00 78.50 71.05 72.93 65.67 51.29 45.03 OECS Total 563.50 1051.36 1333.98 OECS Avg. 93.92 175.23 222.33 78.54 70.50 69.80 64.68 50.88 46.76 Source: ECLAC and WDI Online
47 Table 2-10. Top ten export categories for Antigua and Barbuda 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Printed matter, nes 9,841,693 28.81 Telecommunications equipment nes 7,202,746 31.99 2 Parts of aircraft,balloons airships 7,067,661 20.69 Construction and mining machinery, nes 1,075,079 4.77 3 Clothing of text fabric, not knitted crocheted 3,534,899 10.35 Prepared paints, enamels, lacquers, etc. 944,412 4.19 4 Domestic stoves, boilers, cookers, etc. 1,445,175 4.23 Tarpaulins, tents, awnings, sails, etc. 737,763 3.28 5 Clothing accessories of text.,not knitted/croch 1,344,458 3.94 Oth. Coated iron or steel plates etc under 3 mm 702,363 3.12 6 Furniture 1,308,246 3.83 Lighting fixtures and fittings and parts 637,132 2.83 7 Pumps and centrifuges 1,218,209 3.57 Statistical machines cards or tapes 582,678 2.59 8 Domestic electrical equipment 824,529 2.41 Phonographs, tape & other sound recorders etc. 476,435 2.12 9 Clothing and accessories,knitted or crocheted 572,062 1.67 Lorries and trucks, including ambulances, 475,557 2.11 10 Distilled alcoholic beverages 569,989 1.67 Internal combustion engines, not for aircraft 473,046 2.10 Total Exports 34,159,496 81.17 Total Exports 22,518,130 59.10 HHI 0.14 HHI 0.11 Source: Comtrade database Table 2-11. Top ten export part ners for Antigua and Barbuda 1980 2000 No Partner Value in US Share Partner Value in US$ Share 1 USA 18,585,408 54.41 U.K. 4,431,357 19.68 2 U.K. 4,219,323 12.35 USA 4,285,835 19.03 3 Trinidad &Tobago 4,121,765 12.07 Saint Vincent 3,131,305 13.91 4 Barbados 2,129,021 6.23 Neth. Antilles 1,715,059 7.62 5 Jamaica 942,318 2.76 St Kitts 1,576,270 7.00 6 Saint Lucia 803,111 2.35 Montserrat 1,511,579 6.71 7 Saint Kitts 660,018 1.93 Barbados 1,123,316 4.99 8 Canada 591,247 1.73 Saint Lucia 785,037 3.49 9 Dominica 503,290 1.47 Dominica 654,811 2.91 10 Montserrat 477,034 1.40 France 636,641 2.83 World 34,159,496 96.70 World 22,518,130 88.16 Source: Comtrade database
48 Table 2-12. Top ten import categories for Antigua and Barbuda 1981 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Internal combustion engines, not for aircraft 4,508,656 4.07 Motor spirit, gasolene and other light oils 23,704,726 7.01 2 Passenger motor cars, other than buses 3,282,988 2.96 Lamp oil and white spirit 17,913,335 5.30 3 Parts of aircraft,balloons airships 2,902,347 2.62 Telecommunications equipment nes 15,612,531 4.62 4 Parts and accessories of machinery, nes 2,542,288 2.29 Passenger motor cars, other than buses 13,544,477 4.01 5 Lumber, sawn, planed, etc. Conifer 2,495,685 2.25 Lubricating oils and greases 11,309,630 3.34 6 Cement 2,344,099 2.12 Statistical machines cards 9,443,228 2.79 7 Poultry, incl. offals ex.liver fresh, chilled, frozen 2,221,386 2.00 Food preparations,n.e.s. 8,888,851 2.63 8 Mechanical handling equipment 2,046,034 1.85 Furniture 6,908,666 2.04 9 Electric lamps 1,814,712 1.64 Non alcoholic beverages,n.e.s. 6,905,172 2.04 10 Aircraft incl jet propulsion eng. 1,654,162 1.49 Articles of artif.plastic materials,n.e.s. 6,095,044 1.80 Total Imports 110,823,296 23.29 Total Imports 338,180,424 35.58 HHI 0.006 HHI 0.0152 Source: Comtrade database Table 2-13. Top ten import part ners for Antigua and Barbuda 1981 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 53,408,632. 48.19 USA 166,642,723 49.28 2 U.K. 22,600,768 20.39 Neth Antilles 40,410,306 11.95 3 Canada 7,102,305 6.41 U.K 25,003,251 7.39 4 Japan 6,313,484 5.69 Trinidad 21,629,038 6.40 5 Trinidad 3,512,315 3.17 Canada 12,516,855 3.70 6 Jamaica 1,888,384 1.70 Venezuela 11,315,813 3.35 7 Barbados 1,738,832 1.57 Japan 10,509,584 3.11 8 Guyana 1,291,036 1.16 Barbados 5,465,650 1.62 9 Honduras 1,140,589 1.03 Saint Vincent 3,210,880 0.95 10 Saint Vincent 1,105,266 0.99 France 3,194,118 0.94 World 110,823,296 90.33 World 338,180,424 88.68 Source: Comtrade database
49 Table 2-14. Top ten export categories for Dominica 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Soaps 4,855,892 49.85 Bananas including plantains, fresh 13,522,695 25.24 2 Bananas including plantains, fresh 3,033,085 31.14 Soaps 13,481,115 25.16 3 Coconut copra oil 373,188 3.83 Perfumery & cosmetics,dentifrices 7,423,795 13.86 4 Food preparations,n.e.s. 120, 660 1.24 Surface acting agents and washing preparations 2,049,827 3.83 5 Construction and mining machinery, nes 111,924 1.15 Insecticides, fungicides, disinfectants 1,873,305 3.50 6 Vegetable products,chiefly for human food nes 110,285 1.13 Prepared paints, enamels, lacquers, etc. 1,693,200 3.16 7 Essential oils and resinoids 99,079 1.02 Vegetable products,chiefly for human food nes 1,553,919 2.90 8 Lorries and trucks, including ambulances, etc. 97,221 1.00 Food Preparations 1,309,228 2.44 9 Mats,matting,screens of vegetable plaiting mat 79,938 0.82 Sand excluding metal bearing sand 1,152,873 2.15 10 Other fresh vegetables 45,901 0.47 Essential oils and resinoids 1,071,457 2.00 Total Exports 9,741,258 91.64 Total Exports 53,581,980 84.23 HHI 0.35 HHI 0.15 Source: Comtrade database Table 2-15. Top ten export partners for Dominica 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 U.K. 3,375,169 34.65 U.K. 12,849,820 23.98 2 Jamaica 3,004,933 30.85 Jamaica 12,819,347 23.92 3 Saint Lucia 615,885 6.32 France 3,994,511 7.45 4 Barbados 526,343 5.40 USA 3,973,478 7.42 5 Trinidad & Tobago 446,673 4.59 Antigua & Barbuda 3,943,468 7.36 6 Saint Vincent 420,235 4.31 Guyana 3,351,847 6.26 7 Grenada 394,267 4.05 Trinidad & Tobago 2,782,717 5.19 8 Antigua & Barbuda 319,199 3.28 Barbados 2,491,700 4.65 9 Guadeloupe 219,256 2.25 Saint Kitts 2,029,330 3.79 10 Saint Kitts & Nevis 205,127 2.11 Saint Lucia 1,541,308 2.88 World 9,741,258 97.80 World 53,581,980 92.90 Source: Comtrade database
50 Table 2-16. Top ten import categories for Dominica 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Lorries and trucks, including ambulances, etc. 2,550,055 5.35 Distillate fuels 5,634,548 3.80 2 Motor spirit, gasolene and other light oils 1,899,995 3.99 Motor spirit, gasolene and other light oils 5,470,479 3.69 3 Meal and flour of wheat or of meslin 1,698,536 3.56 Lorries and trucks, including ambulances, 5,248,942 3.54 4 Lumber, sawn, planed, etc. Conifer 1,469,914 3.08 Articles of artif.plastic materials, 4,810,409 3.25 5 Animal oils, fats and greases, excl. lard 1,464,963 3.07 Telecom equipment 4,498,186 3.04 6 Passenger motor cars, other than buses 1,183,647 2.48 Passenger motor cars, other than buses 4,144,618 2.80 7 Nitrogenous fertilizers and materials 1,145,474 2.40 Poultry,incl.offals ex.liver fresh,chilled,froz 3,326,068 2.24 8 Paper bags, paperboard boxes & other containers 1,073,078 2.25 Statistical machines cards or tapes 2,723,694 1.84 9 Distillate fuels 1,072,648 2.25 Electric power machinery 2,648,025 1.79 10 Universals etc. Of iron steel,over 4.75 mm 988,997 2.07 Lumber, sawn, planed, etc. Conifer 2,581,214 1.74 Total Imports 47,676,048 30.51 Total Imports 148,162,112 27.73 HHI 0.10 HHI 0.01 Source: Comtrade database Table 2-17. Top ten import partners for Dominica 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 12,669,831 26.57 USA 55,272,472 37.31 2 U.K. 11,000,445 23.07 Trinidad 24,221,086 16.35 3 Trinidad & Tobago 3,945,720 8.28 U.K. 11,408,160 7.70 4 Japan 2,642,576 5.54 Japan 9,261,288 6.25 5 Canada 1,967,431 4.13 Canada 6,232,378 4.21 6 Barbados 1,918,926 4.02 Barbados 4,701,299 3.17 7 Saint Lucia 1,698,289 3.56 Netherlands 3,196,610 2.16 8 Antigua & Barbuda 1,695,272 3.56 France 2,849,656 1.92 9 Saint Vincent & the Grenadines 1,325,137 2.78 Venezuela 2,730,249 1.84 10 Guyana 966,872 2.03 Saint Lucia 2,431,185 1.64 World 47,676,048 83.54 World 148,162,112 82.55 Source: Comtrade database
51 Table 2-18. Top ten exports categories for Grenada 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Cocoa beans,raw or roasted 6,755,209 38.85 Office machines, nes 13,716,717 18.09 2 Bananas including plantains, fresh 4,109,714 23.64 Ap paratus for electrical circuits 13,705,099 18.07 3 Spices, exc. Pepper & pimento ground or not 3,951,729 22.73 Electrical insulating equipment 13,703,688 18.07 4 Clothing of text fabric, not knitted crocheted 878,262 5.05 Spices, exc. Pepper & pimento ground or not 13,421,138 17.70 5 Furniture 298,669 1.72 Meal and flour of wheat or of meslin 4,573,002 6.03 6 Fresh fruit,nes 280,030 1.61 Fish, fresh, chilled or frozen 3,388,503 4.47 7 Meal and flour of wheat or of meslin 214,543 1.23 Art. Of paper pulp,paper or paperboard 1,845,927 2.43 8 Domestic stoves, boilers, cookers, etc. Nes 101,840 0.59 Cocoa beans,raw or roasted 1,590,848 2.10 9 Food wastes & prepared animal feed,nes 100,557 0.58 Food wastes & prepared animal feed 1,210,462 1.60 10 Passenger motor cars, other than buses 84,591 0.49 Machinery and mechanical appliances, 885,726 1.17 Total Exports 17,387,300 96.48 Total Exports 75,843,520 89.71 HHI 0.26 HHI 0.14 Source: Comtrade database Table 2-19. Top ten export partners for Grenada 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 U.K. 7,427,658 42.72 USA 35,995,324 47.46 2 Belgium-Luxembourg 2,419,534 13.92 Ireland 12,409,088 16.36 3 Netherlands 1,758,410 10.11 Germany 3,798,912 5.01 4 Germany 1,370,512 7.88 Netherlands 3,145,957 4.15 5 Trinidad 1,355,843 7.80 Saint Lucia 2,600,232 3.43 6 USA 598,350 3.44 France 2,366,800 3.12 7 Canada 563,140 3.24 Dominica 1,904,572 2.51 8 Barbados 324,131 1.86 Barbados 1,763,848 2.33 9 Argentina 304,227 1.75 Antigua 1,745,069 2.30 10 Spain 215,529 1.24 Saint Kitts 1,527,901 2.01 World 17,387,300 93.96 World 75,843,520 88.68 Source: Comtrade database
52 Table 2-20. Top ten import categories for Grenada 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Distillate fuels 2,716,059 5.41 Apparatus for electrical circuits 19,405,356 8.13 2 Motor spirit, gasolene & other light oils 2,561,791 5.10 Distillate fuels 10,444,317 4.37 3 Passenger motor cars, other than buses 1,570,958 3.13 Ar ticles of artif.plastic materials,n.e.s. 8,410,481 3.52 4 Lumber, sawn, planed, etc. Conifer 1,546,678 3.08 Passenger motor cars, other than buses 7,254,193 3.04 5 Wheat and meslin,unmilled 1,400,035 2.79 Motor spirit, gasolene & other light oils 6,799,321 2.85 6 Poultry,incl.offals ex.liver fresh,chilled,froz 1,277,445 2.54 Telecommunications equipment nes 5,734,471 2.40 7 Clothing of text fabric, not knitted crocheted 1,271,830 2.53 Electric power machinery 5,348,241 2.24 8 Lorries and trucks, including ambulances, etc. 1,235,221 2.46 Statistical machines cards or tapes 5,334,817 2.23 9 Raw sugar,beet & cane 1,143,786 2.28 Poultry,incl.offals ex.liver fresh,chilled,froz 5,042,315 2.11 10 Paper bags, paperboard boxes & other containers 1,142,275 2.27 Furniture 4,999,068 2.09 Total Imports 50,210,848 31.60 Total Imports 238,771,872 32.99 HHI 0.01 HHI 0.01 Source: Comtrade database Table 2-21. Top ten import partners for Grenada 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 9,997,731 19.84 USA 107,509,784 45.03 2 Trinidad 9,960,460 17.81 Trinidad 44,472,784 18.63 3 United Kingdom 8,941,190 5.65 United Kingdom 21,035,236 8.81 4 Canada 2,837,417 5.25 Japan 9,981,254 4.18 5 Japan 2,634,613 3.78 Canada 6,275,646 2.63 6 Barbados 1,897,820 2.96 Barbados 5,405,305 2.26 7 Areas, nes 1,487,784 2.50 Germany 5,081,622 2.13 8 Guyana 1,256,523 2.22 Venezuela 2,702,051 1.13 9 Jamaica 1,113,453 2.02 Honduras 2,594,068 1.09 10 Cuba 1,014,029 1.97 Guyana 2,322,095 0.97 World 50,210,848 64.00 World 238,771,872 86.85 Source: Comtrade database
53 Table 2-22. Top ten export cate gories for St. Kitts and Nevis 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Raw sugar,beet & cane 14,728,307 60.71 Apparatus for electrical circuits 17,197,300 52.79 2 Footwear 2,383,668 9.83 Raw sugar,beet & cane 5,853,810 17.97 3 Clothing of text fabric, not knitted crocheted 1,522,639 6.28 Electrical machinery and apparatus, nes 1,529,457 4.69 4 Electric power machinery 747,779 3.08 Non-alcoholic beverages 1,039,501 3.19 5 Mechanical handling equipment 666,819 2.75 Electric power machinery 984,289 3.02 6 Uppers,legs & other prepared parts of footwear 526,188 2.17 Articles of artif plastic materials 907,047 2.78 7 Television broadcast receivers 411,133 1.69 Ships and boats, other than warships 878,631 2.70 8 Electrical machinery and apparatus, nes 330,287 1.36 Clothing of text fabric, not knitted crocheted 661,099 2.03 9 Molasses 325,912 1.34 Food preparations nes 404,922 1.24 10 Beer including ale,stout,porter 286,579 1.18 Telecommunications equipment nes 294,642 0.90 Total Exports 24,261,152 90.39 Total Exports 32,579,584 91.32 HHI 0.39 HHI 0.32 Source: Comtrade database Table 2-23 Top ten export part ners for St. Kitts and Nevis 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 11,830,032 48.76 USA 21,556,126 66.16 2 United Kingdom 7,132,415 29.40 United Kingdom 6,779,476 20.81 3 Trinidad and Tobago 2,019,082 8.32 Trinidad and Tobago 854,585 2.62 4 Barbados 441,166 1.82 Saint Lucia 661,159 2.03 5 Antigua & Barbuda 384,003 1.58 Br. Virgin Isds 481,727 1.48 6 Jamaica 381,097 1.57 Dominica 473,788 1.45 7 Montserrat 336,266 1.39 Neth. Antilles 370,034 1.14 8 Netherlands 330,113 1.36 Barbados 254,372 0.78 9 Guadeloupe 267,745 1.10 Antigua and Barbuda 164,127 0.50 10 Anguilla 228,079 0.94 Anguilla 159,287 0.49 World 24,261,152 96.24 World 32,579,584 97.47 Source: Comtrade database
54 Table 2-24. Top ten import cate gories for St. Kitts and Nevis 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Distillate fuels 2,642,346 5.54 Articles of artif.plastic materials,n.e.s 10,462,298 5.35 2 Clothing of text fabric, not knitted crocheted 2,486,273 5.21 Distillate fuels 8,527,153 4.36 3 Motor spirit, gasolene and other light oils 1,490,743 3.13 Passenger motor cars, other than buses 6,938,988 3.55 4 Passenger motor cars, other than buses 1,435,285 3.01 Apparatus for electrical circuits 6,037,513 3.08 5 Poultry,incl.offals ex.liver fresh,chilled,froz 1,223,958 2.57 Telecommunications equipment nes 5,902,019 3.02 6 Clothing accessories of text.,not knitted/croch 1,063,063 2.23 Furniture 5,377,826 2.75 7 Milk & cream evaporated or condensed 1,018,011 2.13 Electrical machinery and apparatus, nes 4,400,457 2.25 8 Meal and flour of wheat or of meslin 929,968 1.95 Motor spirit, gasolene and other light oils 4,334,538 2.21 9 Cement 882,500 1.85 Food preparations,n.e.s. 4,296,866 2.20 10 Uppers,legs & other prepared parts of footwear 684,956 1.44 Lumber, sawn, planed, etc. Conifer 3,772,388 1.93 Total Imports 47,690,840 29.06 Total Imports 195,726,736 30.68 HHI 0.01 HHI 0.01 Source: Comtrade database Table 2-25. Top ten import part ners for St. Kitts and Nevis 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 18,211,402 38.19 USA 111,390,600 56.91 2 U.K. 8,218,385 17.23 Trinidad 24,973,912 12.76 3 Trinidad 5,653,257 11.85 Canada 14,904,888 7.62 4 Canada 3,128,364 6.56 U.K. 11,864,909 6.06 5 Japan 1,727,167 3.62 Japan 7,279,639 3.72 6 Barbados 1,339,499 2.81 Barbados 4,938,508 2.52 7 Dominican Rep. 1,207,310 2.53 Jamaica 1,852,395 0.95 8 Saint Vincent 929,544 1.95 Neth. Antilles 1,549,007 0.79 9 Neth. Antilles and Aruba 856,306 1.80 France 1,463,036 0.75 10 Jamaica 720,781 1.51 Grenada 1,359,791 0.69 World 47,690,840 88.05 World 195,726,736 92.77 Source: Comtrade database
55 Table 2-26. Top ten export categories for St. Lucia 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1Code description Value in US$ Share 1 Bananas including plantains, fresh 10,549,141 22.93 Bananas including plantains, fresh 21,835,884 50.35 2 Construction and mining machinery, nes 4,402,992 9.57 Beer including ale,stout,porter 6,645,011 15.32 3 Universals etc. Of iron or steel, over 4.75 mm 4,253,179 9.25 Apparatus for electrical circuits 2,606,230 6.01 4 Apparatus for electrical circuits 3,930,205 8.54 Clothing and accessories,knitted or crocheted 2,595,521 5.99 5 Coconut copra oil 2,943,961 6.40 Non alcoholic beverages 1,486,601 3.43 6 Childrens toys, indoor games, etc. 2,936,568 6.38 Paper bags, paperboard boxes & other containers 1,136,401 2.62 7 Paper bags, paperboard boxes & other containers 2,597,229 5.65 Passenger motor cars, other than buses 833,155 1.92 8 Clothing and accessories,knitted or crocheted 2,033,184 4.42 Measuring,controlling & scientific instruments 761,663 1.76 9 Beer including ale,stout,porter 1,523,197 3.31 Fresh fruit,nes 611,154 1.41 10 Non alcoholic beverages 1,106,359 2.41 Thermionic valves and tubes, transistors, etc. 422,248 0.97 Total Exports 45,995,899 78.87 Total Exports 43,365,940 89.78 HHI 0.09 HHI 0.29 Source: Comtrade Database Table 2-27. Top ten export partners for St. Lucia 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 12,704,015 27.62 U.K 22,092,980 50.95 2 U.K 11,552,527 25.12 USA 8,032,507 18.52 3 US Virgin Isds 4,901,576 10.66 Barbados 4,771,217 11.00 4 Jamaica 4,209,312 9.15 Antigua 1,917,419 4.42 5 Trinidad 2,823,393 6.14 Grenada 1,266,026 2.92 6 Barbados 2,016,432 4.38 Dominica 1,160,456 2.68 7 Dominica 1,763,122 3.83 Trinidad 713,520 1.65 8 Grenada 1,223,977 2.66 Saint Vincent 419,962 0.97 9 Saint Vincent 1,105,584 2.40 Saint Kitts 415,858 0.96 10 Guyana 954,089 2.07 Guyana 343,556 0.79 World 45,995,899 94.04 World 43,365,940 94.85 Source: Comtrade database
56 Table 2-28. Top ten import categories for St. Lucia 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Distillate fuels 6,467,143 5.23 Distillate fuels 15,541,155 4.38 2 Apparatus for electrical circuits 5,385,403 4.35 Motor spirit, gasolene and other light oils 12,348,192 3.48 3 Motor spirit, gasolene and other light oils 4,331,396 3.50 Passenger motor cars, other than buses 9,865,513 2.78 4 Articles of artif.plastic materials,n.e.s 3,968,587 3.21 Telecommunications equipment nes 9,222,663 2.60 5 Lumber, sawn, planed, etc. Conifer 2,908,290 2.35 Articles of artif.plastic materials,n.e.s 8,801,031 2.48 6 Poultry,incl.offals ex.liver fresh,chilled,froz 2,599,776 2.10 Electric power machinery 8,136,605 2.29 7 Passenger motor cars, other than buses 2,500,016 2.02 Furniture 8,026,679 2.26 8 Kraft paper and kraft paperboard 2,382,807 1.93 Poultry,incl.offals ex.liver fresh,chilled,froz 7,664,315 2.16 9 Lorries and trucks, including ambulances, etc. 2,299,469 1.86 Statistical machines cards or tapes 6,966,812 1.96 10 Builders woodwork & prefab. Buildings of wood 2,229,493 1.80 Lumber, sawn, planed, etc. Conifer 6,505,689 1.83 Total Imports 123,757,309 28.34 Total Imports 355,045,920 26.22 HHI 0.01 0.01 Source: Comtrade database Table 2-29. Top ten import partners for St. Lucia 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 39,385,617 31.82 USA 146,406,432 41.24 2 U.K. 19,312,693 15.61 Trinidad & Tobago 51,177,552 14.41 3 Trinidad & Tobago 15,176,403 12.26 U.K. 30,066,484 8.47 4 Japan 7,007,962 5.66 Japan 15,963,361 4.50 5 Canada 5,141,559 4.15 Canada 13,589,188 3.83 6 Venezuela 4,591,932 3.71 Barbados 10,071,553 2.84 7 Barbados 3,975,435 3.21 France 9,097,107 2.56 8 Netherlands 2,914,549 2.36 China 8,054,802 2.27 9 Guyana 2,527,605 2.04 Finland 6,524,266 1.84 10 Jamaica 2,281,156 1.84 Germany 4,780,844 1.35 World 123,757,309 82.67 World 355,045,920 83.29 Source: Comtrade database
57 Table 2-30. Top ten export categories for St. Vincent and the Grenadines 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Bananas including plantains fresh 6,485,892 41.20 Bananas including plantains, fresh 19,055,994 37.67 2 Vegetable products,chiefly for human food nes 1,972,195 12.53 Meal and flour of wheat or of meslin 5,464,601 10.80 3 Meal and flour of wheat or of meslin 1,295,213 8.23 Ships and boats, other than warships 4,170,354 8.24 4 Flour & flakes of potatoes,fruits,vegetables 874,388 5.55 Vegetable products,chiefly for human food nes 3,481,811 6.88 5 Edible nuts,fresh or dried 555 ,258 3.53 Rice, glazed or polished,not further prepared 3,224,260 6.37 6 Coconut copra oil 419,815 2.67 Rice in the husk or not,not further prepared 1,353,086 2.67 7 Spices, exc. Pepper & pimento ground or not 371,359 2.36 Oth. Coated iron steel plates under 3 mm 1,303,930 2.58 8 Watches, watch movements and cases 359,096 2.28 Non alcoholic beverages,n.e.s. 1,251,974 2.47 9 Clothing of text fabric, not knitted crocheted 341,063 2.17 Food wastes & prepared animal feed 1,206,842 2.39 10 Tobacco, unmanufactured & scrap 252,439 1.60 Special purpose ships and boats 894,421 1.77 Total Exports 15,743,036 82.11 Total Exports 50,589,504 81.85 HHI 0.20 HHI 0.17 Source: Comtrade database Table 2-31. Top ten export partners for St. Vincent and the Grenadines 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 U.K. 7,926,237 50.35 U.K. 18,901,144 37.36 2 Trinidad 4,152,558 26.38 Trinidad 4,823,552 9.53 3 Barbados 942,876 5.99 Barbados 4,146,644 8.20 4 USA 655,400 4.16 Saint Lucia 3,940,301 7.79 5 Saint Lucia 557,408 3.54 Spain 3,375,684 6.67 6 Saint Kitts 365,965 2.32 Antigua 2,778,757 5.49 7 Dominica 331,447 2.11 Saint Kitts 2,332,210 4.61 8 Grenada 227,045 1.44 Dominica 1,768,745 3.50 9 Antigua 220,016 1.40 Jamaica 1,457,327 2.88 10 Canada 90,893 0.58 Grenada 1,415,510 2.80 World 15,743,036 98.26 World 50,589,504 88.83 Source: Comtrade database
58 Table 2-32. Top ten import categorie s for St. Vincent and the Grenadines 1980 2000 No. SITC-1 Code description Value in US$ Share SITC-1 Code description Value in US$ Share 1 Wheat and meslin,unmilled 6,090,263 10.67 Distillate fuels 7,672,662 4.75 2 Distillate fuels 2,184,927 3.83 Poultry,incl.offals ex.liver fresh,chilled,froz 4,985,089 3.09 3 Motor spirit, gasolene and other light oils 1,629,246 2.85 Rice in the husk or not,not further prepared 4,846,715 3.00 4 Lumber, sawn, planed, etc. Conifer 1,511,434 2.65 Wheat and meslin,unmilled 4,683,411 2.90 5 Raw sugar,beet & cane 1,305,713 2.29 Motor spirit, gasolene and other light oils 4,597,485 2.85 6 Poultry,incl.offals ex.liver fresh,chilled,froz 1,270,482 2.23 Passenger motor cars, other than buses 4,558,422 2.82 7 Paper and paperboard in rolls or sheets nes 1,208,170 2.12 Telecommunications equipment nes 4,249,998 2.63 8 Passenger motor cars, other than buses 1,181,912 2.07 Cement 3,927,421 2.43 9 Distilled alcoholic beverages 1,085,451 1.90 Food preparations,nes 3,850,877 2.38 10 Nitrogenous fertilizers and materials nes 1,076,482 1.89 Articles of artif.plastic materials,n.e.s. 3,547,544 2.20 Total Imports 57,098,796 32.48 Total Imports 161,571,872 29.04 HHI 0.02 HHI 0.01 Source: Comtrade database Table 2-33. Top ten import partners for St. Vincent and the Grenadines 1980 2000 No. Partner Value in US$ Share Partner Value in US$ Share 1 USA 15,071,727 26.40 USA 61,675,612 38.17 2 U.K. 10,476,007 18.35 Trinidad 34,117,848 21.12 3 Trinidad 8,755,139 15.33 U.K. 13,825,765 8.56 4 Canada 4,446,771 7.79 Barbados 7,251,996 4.49 5 Barbados 2,993,189 5.24 Japan 5,953,051 3.68 6 Guyana 2,042,204 3.58 Canada 4,708,675 2.91 7 Japan 1,871,260 3.28 Guyana 3,644,585 2.26 8 Saint Lucia 1,119,457 1.96 France 2,932,641 1.82 9 Dominican Republic 1,082,389 1.90 Italy 2,835,933 1.76 10 Germany 1,013,066 1.77 Netherlands 1,957,188 1.21 World 57,098,796 85.59 World 161,571,872 85.97 Source: Comtrade database
59 CHAPTER 3 TRADE LIBERALIZATION AN D EMPIRICAL METHODS FOR THE ANALYSIS OF TRADE POLICY The issue of trade liberalization and its c onsequent impacts has been the subject of extensive study leading to a larg e body of theoretical and empiri cal research. Trade theory suggests that benefits accrue fr om trade liberalization. Trade po licy and trade orientation have a variety of economic effects that are prominen t in determining economic outcomes. Economies of scale and terms of trade effects are likely as result of larger markets and changes in relative import and export prices. Dynamic effects deri ved from capital inflows, technology transfers and increased competition can also be expected. However, the most prominent and most often quantified are trade and fi scal revenue effects. A significant amount of research on trade liberalization has focused on developing countries, particularly as relate d to economic growth and developm ent. In this context, trade policy orientation has been the center of a rath er acrimonious debate between those who favor trade liberalization and those w ho favor protectionism. Alternat ive policies implemented and the consequent results have provide d ample material for theoretical and empirical study. Following, a brief discussion of influentia l literature on trade liberaliz ation as related to economic performance is presented. Subsequently the th eoretical framework for th e analysis of economic integration agreements and the consequent trade effects is offered. Finally, a discussion on the literature related to trade liberaliza tion and fiscal effects is provided. Trade Liberalization and Economic Performance During the past century policies favoring protectionism, as well as those favoring liberalization, have been implemen ted throughout the developing world.9 A prominent 9 Excellent reviews on this material are provided by Edwards (1993, 1997), Santos-Paulino (2005), Baldwin (2000), Winters (2004) Krueger (1997, 2003). This section draws from these reviews.
60 protectionist policy has been th e model of import substitution i ndustrialization (ISI). Although popular as policy throughout the fi fties and sixties, it fizzled during the eighties. Import substitution industrialization was re garded as a very persuasive and coherent policy position at the time of its implementation. However, m ounting evidence seemed to indicate that the premises on which ISI was built were incorrect (Winters 2000). Part of the evidence that questioned the wis dom of protectionism and ISI was gathered during the seventies, as economists and policymak ers alike were noticing that less protectionist outward-oriented trade policies generated higher ra tes of economic growth. Empirical research aimed at evaluating these dissimilar paradigms st arted to question not only the performance of import substitution relative to outward orientatio n, but also its unquestioned policy adoption. In fact, it was suggested that in embracing IS I, economists abandoned fundamental economic premises such as the principle of comparativ e advantage. This was done on the basis of questionable premises and stylized facts charac terized as touristic impressions and half truths (Krueger 1997). Baldwi n (2000) added that protect ionist economic thinking was distorted by the acceptance, free fr om criticism, of the infant indus try argument and the failure to consider macroeconomic effects of the a pplication of protectiv e policies across all manufacturing. The early work on the supremacy of outward orie ntation and trade liberal ization relative to ISI was conducted by Little, Scitovsky and Scott. (1970), Balassa (1971), Krueger (1978), and Bhagwati (1978). These and other studies on the s ubject have been extens ively reviewed, their results questioned, and weaknesses revealed.10 Despite the criticism leveled at these works, 10 Edwards (1993) cites and reviews these classic works and notes that these furt her led to an extensive literature.
61 Edwards (1997) noted they were decisive in altering thinking on trad e and development among scholars, researchers and policymakers, and also in shaping policy at multilateral institutions. While early empirical studies re lated to the role of exports and growth, more recent studies on trade policy and economic performance have searched for alternative measures of openness and their relationship to economic outcomes. Se veral cross-country econo metric studies became influential works in the fiel d (Dollar 1992; Sach s and Warner 1995; Harrison 1996; Edwards 1998; Frankel and Romer 1999). Results generall y suggested a positive relationship between trade policies that encour aged openness and measures of economic performance. Rodriguez and Rodrik (2001), in a critical revi ew of the noted work challenged the validity of the evidence presented. They observed that, i f there is an inverse re lationship between trade barriers and economic growth, it is not one that immediately stands out in the data (Rodriguez and Rodrik 2001, p. 262). In building their critique th ey tested the validity and robustness of the studies results. They used the original data sets to replicat e and analyze the measures of openness used, disaggregated these into tariff and non-tariff components to test statistical significance, extended and modified the empirical m odels to obtain additional results. They observed that under alternativ e specifications, conclusions about the trade and growth relationship were not as strong as suggested by th e original studies. In addition, it was noted these studies were unable to provide a pe rsuasive theoretical framework linking trade orientat ion to growth. Winters (2004) suggested that a major shortcoming of the case studies wa s that results obtained could not be confidently generalized. Bhagwati and Srivanasan (1999) further added that the major issues making cross-country econometric studies unreliable related to poor data, inappr opriate methodology and a weak theoretical framework lacking the ability to esta blish clear relationships between variables.
62 Hallak and Levinsohn (2004) imply that the issues of data unreliability, weak theory, and methodological problems went further than posi ng technical difficulties and they suggest these elements actually drove the results. Additional research has focused on the role in stitutions have in fostering, embracing and successfully adopting trade liberaliz ation. Institutions, defined by North (1990) as rules of the game or humanly devised constraints that shape human interaction, have a significant economic role. The evolution of diverse institutio ns and the quality of such institutions can be traced to factors as diverse as colonial heritage and legal origins. These elements, as well as the basic rule of the game, can be useful in ex plaining cross-country differences in economic performance (Acemoglu, Johnson and Robinson. 2004). The relationship between institutions, trade, and growth was also investigated by Dollar and Kraay (2002). The objective of their work was to examine the relative importance of both trade and institutions in explaini ng cross-country variation in grow th. They concluded that both have an impact on growth in the long run, but trad e might have a slightly larger role in the shortrun. In this sense, the proce ss of trade liberalization can be perceived as influential in encouraging domestic economic policy reforms that generate positive spillovers and foster solid institutions. Hence, the interaction between tr ade liberalization and other reforms have led to literature that explored additional venues throug h which trade liberalization affects domestic economic performance. This literature has viewed trade liberalization as a precondition, a complement and promoter of successful general reforms. Trade imposes rigorous competition on domestic producers enhancing competitiveness, fosters fore ign direct investment, alters the political economy by reducing rent seeki ng behavior, constrains governments ability to manipulate
63 macroeconomic policies and subjects and binds econom ic actors to the discip line of international markets and the international environment (S achs and Warner 1995). Furthermore, openness generates feedback channels to evaluate the performance and effects of policies (Berg and Krueger 2003). The literature suggests that th ese elements promote the development of more stable rules of the game, effectively fostering institutional development. The relationship between trad e policy and economic performa nce has generated a large body of scholarly literature that has failed to yield conclusive and unambiguous results. However, critics of the recent work on this area acknowledged that they know of no credible evidence-at least for the post-1945 pe riodthat suggest that trade re strictions are systematically associated with higher growth rates (Rodri guez and Rodrik 2001, p. 317). An interpretation of the absence of such evidence makes the inconc lusiveness perhaps innocuous and supports the notion that protectionism does not lead to positive outcomes. The Theory of Preferential Trade Agreements The process of trade liberalization at a mu ltilateral level has proven to be lengthy and difficult. Often the challenges posed by multilatera lism have been avoided by the formation of smaller economic integration agreements. In th e recent past the regionalization of trade has taken place in two stages. These were termed the old regionalism of the fifties and the new regionalism of the nineties by Bhagwati and Panagari ya (1996). The first stage was a reaction to the international economic order that emerged in the post WWII era and pursued a multilateral trade system. Multilateralism was undertaken u nder the direction of the General Agreement on Trade and Tariffs (GATT), later transformed into the World Trade Organization (WTO). It soon became clear that achieving multilateral free trade was not simple. Hence, alternative trade liberalization approaches were pursued either unilaterally or through the formation of regional trade agreements (RTAs).
64 The WTO/GATT has, since 1958, registered 211 RTA notifications. While 27 RTAs were notified and registered between 1958 and 1989, 184 notifications were made between 1990 and September 2006. In fact, it was noted that by 1997 42% of trade took place within the confines of preferential trade agreemen ts (Grether and Olarreaga 1998). The proliferation of these agreements revived the theoretical study of RT As as well as associated empirical work. Theoretical work on RTAs was introduced by Viner (1950), Meade (1955), Lipsey (1957, 1960), Johnson (1960) and others. Much of the empirica l work that followed attempted to estimate the trade effects generated by RTAs. The new regionalism renewed attention to the theoretical and empirical aspects of economic integration. Advocates of multilateralis m and those favoring regionalism have debated the question of whether or not RTAs constituted means for enhanced world welfare. Some have questioned whether they are simply protectio nist tools or are gr adual steps toward comprehensive trade liberalization (Krueger 1999 ). Bhagwati and Panagariya (1996) have framed this debate as one where RTAs are view ed as either stumbling blocks or building blocks for trade liberalization. The growing number of RTAs also renewed inte rest in the measurement of trade effects on member and non-member countries. Much of th e empirical work has followed the theoretical framework laid out by Viner and others and conc entrated on the measurement of trade creation and trade diversion effects. Computable genera l equilibrium (CGE) and partial equilibrium (PE) models in the case of ex-ante analysis and the grav ity model, in the case of ex-post analysis have been utilized for the empirical analysis of cu stoms unions and trade policy in general. The analysis of RTAs and the formation of customs unions owes to the theoretical contributions made by Viner (1950). The ideas a dvanced by his work initiat ed a rich literature
65 and continue to be influential almost sixty year s later. Viners significa nt contribution to the theory of customs unions (CU), or other fo rms of integration, was his observation that ambiguous welfare effects could be e xpected from economic integration. At the core of the theoretical framework in troduced by Viner were th e concepts of trade creation and trade diversion. These concepts were the basis for the quantification and analysis of welfare effects likely to result as the outcome of economic integr ation. If the customs union is a movement in the direction of free trade, it must be predominantly a movement in the direction of goods being supplied from lower mo ney-cost sources than before. If the customs union has the effect of diverting purchases to higher money-co st sources, it is then a device for making tariff protection more effective (Viner 1950, p. 42). He nce, trade creation refers to the change, as consequence of the formation of the union, from consumption of more costly domestic products to less costly products fro m a partner country. Trade creation consists of two effects.11 First, a production eff ect reflecting savings from the reduction of domestically produced goods an d second, a consumption effect reflecting the gains in consumer surplus as high cost consump tion goods were substituted for lower cost goods. In similar fashion, trade diversion refers to a change in the source of imported goods from a nonunion low cost producer to a higher cost union partne r. The two effects ar e an increase in the cost of previously imported goods as consequence of the shift in suppliers as well a consumer surplus loss from the substitution of high cost goo ds from a partner country, for low cost goods from a non-member country (Robson 1980). The Vinerian framework and subsequent theore tical refinements provided the stage for the analysis of trade and welfare effects rising from the formation of prefer ential agreements. The 11 Although Viner described production effects subsequent refinements of the definitions included consumption effects. These definitions were extracted from Robson (1980).
66 outcome of the formation of a union is thus eval uated empirically by estimating the relative sizes of trade creation and tr ade diversion. If trad e creation exceeds trad e diversion a union is considered to be advantageous and welfare enhancing. The theoretical framework developed allows for the evaluation of trade flows and production and consumption effects in a three-count ry setting. Economic integration would have foreseeable impacts on the allocation of resources, economies of scale, terms of trade, factor productivity, economic growth and stability, an d the distribution of income (Robson 1980). However, the comparative static analysis is based on a series of restrictive assumptions12 shared with trade theory that facilita te the analysis of re source allocation, welfare and the trends in specialization. The assumptions are Perfectly elastic supply for imports Perfect competition for factor and product markets Factor mobility within countri es but not among countries Zero transportation costs Tariffs as the only av ailable policy tool Prices accurately refl ect opportunity costs Balanced trade Full employment of resources Although Viner was aware that economies of scale, imperfect competition, and terms of trade issues would arise, he left them unattend ed. Subsequent literature dealt with these and other topics more formally. Meade (1955)13 was credited with havi ng provided the first theoretical analysis of customs unions using a general equilibrium model. Meade included a critique and extension of Viners model, which he interpreted as one with infinite supply 12 This list of assumptions was summarized and provided by Robson (1980) and drawn from that source. 13 This brief discussion draws on the careful review of Meade (1955) provided by Panagariya (1997).
67 elasticities and demand elasticities of zero.14 The model allowed many commodities produced in all countries. A major contribution of the analysis was its focus on world welfare a nd the likely changes that could occur upon the forma tion of preferential trading arrangements (Panagariya 1997). Meades work provided a general st atic framework of analysis fo r integration agreements that admitted substitution of goods both in demand and supply and allowed for simultaneous adjustments in related factor and goods markets in trading countries. He also admitted likely terms of trade effects on the welf are of trading countries and th e rest of the world (De Rosa 1998). Lipsey (1960) further refined the concepts of trade creation and trade diversion suggesting that the inclusion of consumption effects would invalidate Viners charact erization of assigning a positive connotation to trade creation and a negativ e implication to trade diversion. He argued that it is possible to increase welf are despite having trade diversion. The insights provided by Viner and others on the formation of customs unions led to questioning the rationale for their formation. The second-best option they represented led to the theory of second-best. From this perspectiv e, Johnson (1960) suggested that customs unions were formed in response to political rather than economic motivations. Furthermore, he advocated that the measurement of trade creati on and trade diversion s hould include production and consumption effects as changes in import dema nds were a consequence of the formation of a customs union and the tariff reduction or elimination. Cooper and Massell (1965a) argu ed that custom unions welfar e effects had to account for a tariff reduction component and a pure trad e diversion component. The tariff reduction 14 Panagariya (1997), as well as Pomfret (1988), include footnotes where they call attention to the dispute surrounding the interpretation of what Vine r really meant regarding this issue.
68 component impinged directly on consumer surplus ga ins. If it were larger than the pure trade diversion component, the formati on of a customs union would be beneficial. However, they suggested that this r esult implies that a customs union is necessarily inferior to an appropriate policy of nonpreferenti al protection (Cooper and Massell 1965a, p. 746). The formation of a customs union, as s uggested by Cooper and Massell (1965a) and by Johnson (1960) responded to motivations other th an the improvement of resource allocation and could not be superior to unilatera l liberalization. It was clear to them that second-best policies had an inherent bias toward protection that ultimately motivated them. The general arguments made by Cooper and Massell (1965a) were extended to the case of deve loping countries. Cooper and Massell, (1965b) attempted to understand and to consider how membership in a CU may enable a less developed country to achieve more economically the ends served by protection (p. 462). Although Viner knew that the formation of a customs union allowed for gains derived from changes in terms of trade and economies of scale, formal treatment and discussion of these issues were addressed by M undell (1964) and Corden (1972). Mundell was aware of the considerable void in the literature regarding the issue of terms of trade and how these were likely to impact gains or losses among countries fo rming customs unions. Mundell addressed the changes and determination of relative prices in the three-country model when tariffs were reduced and hence their likely e ffects on the terms of trade. Consistent with the previous literature that so ught to refine the measures of trade creation and trade diversion, Corden (1972) analyzed whet her, in the presence of economies of scale, these concepts were still valid. He suggested that the considerat ion of two additional effects was necessary and demonstrated the existence of co st reduction and trade s uppression effects related
69 to scale economies. The former effect was percei ved as being the more important of the two and one he argued had to be taken into considera tion. Although he included further issues for consideration, trade creation and tr ade diversion remained relevant. The purpose and contribution of th e literature initiated by Viner, and substantially enriched by others also addressed the basic effects of cu stoms unions. The idea that the formation of a customs union, as a form of trade liberalization, could lead to losses in world welfare was powerful. This notion and the likelihood that the results could also depend on other economic factors gave ample space for theoretical discussi on and for empirical i nvestigation. In fact, Pomfret (1988) noted that: During the decad e following Viners book emphasis was largely on clarifying the concepts of trad e creation and trade diversion a nd identifying situations under which each would be more likely(p.109). The issue of adequate measurement of these two concepts is still a work in progress with so me criticizing actual methods and providing for refined methods of measurement (Dayal and Dayal 1973). Empirical Methods in Trade Policy Analysis The empirical analyses of RTAs and trade polic y have usually dealt with the quantification of trade creation and tr ade diversion. The sele ction of appropriate methodology must consider the specific circumstances of the required analys is due to significant tradeoffs that exist when such selection is made. The three methods co mmonly used in empirical studies of RTAs are gravity models, computable general equilibrium (CGE) models, and partial equilibrium models. These alternative methodologies are often ch aracterized by the time dimension employed. Ex-ante analysis addresses the problem of estimating the likel y outcome of an integration process prior to its implementation and simulates the likely outcomes of post-integration scenarios. Ex-post analysis is performed after the formation of an inte gration arrangement and uses historical data. The usual objective is to estimate trade flows of a hypothetical condition,
70 termed the anti-monde, based on the absence of a trade agreement and compare them to conditions prevalent after an RTA is formed. Robson (1980) suggested a six-fo ld classification system for empirical studies where the ex-ante or ex-post distinction is combined with three methodologi es. The first is the direct method, which estimates integration effects while relying on some basic analytical model whose parameters are actually estimated. The proce ss includes the observation of tariff changes and their impact on the domestic prices of the im ported goods. The evaluation of the impacts on tariffs and trade changes are carried out with the help of import demand elasticities and elasticities of substitution, whose values are derived from regression studies. A second methodological approach to the evaluation of eff ects derived from integration consists of survey methods. These can be survey s of the views held by experts, by producers, or other economic actors on how they expect chan ges of trade structures will affect their performance on the domestic market and in the part ner market. Surveys of price and cost data and their analysis are also included in this methodology. Finally, the effects of an integration arrang ement can be evaluated by indirect methods. These are primarily employed in ex-post studies a nd refer to the residual imputation of projected pre-integration trade flow estimates that are subtr acted from actual trade flows. This comprises the construction of an ap propriate anti monde. The methodology used most often in trade polic y analysis is the grav ity model which best fits Robsons classification with in the category of ex-post resi dual imputation methods. Other commonly used methodologies are partial and genera l equilibrium models that fit into Robsons classification scheme as ex-ante indirect methods. A significant part of the empirical literature, particularly early literature, dealt with the estim ation of trade effects in Europe motivated by the
71 formation of the European Community (EC). Another favorite subject of empirical study has been the Generalized System of Preferences (GSP) Together these constitute the most heavily studied cases of preferen tial trade (Pomfret 1988). Gravity Models Gravity models were introduced by Tinbergen (1962)15 and have been commonly used in the empirical analysis of international trade.16 Economists have used gr avity models to analyze a host of trade issues such as economic unions, free trade agreements, and the relationship between trade and growth. The model has, in most of its empirical applica tions, performed well and demonstrated its usefulness as a method of analysis. The name and the basic idea behind the model de rive from concepts of Newtonian physics, in particular from the Law of Universal Grav itation. This law sugge sts that the force of gravity is a positive function of mass and an inve rse function of the distance between two bodies. Economists have borrowed from this concept a nd developed an analogous relationship for the analysis of trade flows. Bilateral flows are vi ewed as a positive function of the size of the countries economies and an inverse function of the distance between them (Head 2003). Economic size enhances a countrys ability to engage in trade as trade flows between countries can be explained by supply conditions in the country of origin, demand conditions in the country of destination, and by fo rces that may either stimulate or restrain the bilateral flow (Nielsen 2003, p. 42). Distance capt ures trade costs and other burdens that might act as barriers to trade. Hence, the prediction that bilateral trade volumes will be positively related to the 15 Although Piermartini and Teh attribute this pioneering work to Tinbergen, Sandberg notes that Poyhonen (1963) was working on this type of model simultaneously. 16 This section draws on Sandberg (2003), Piermartini a nd Teh (2005), and Nielsen (2003) all of which provide excellent reviews.
72 economic size of the trading partners and negativel y to distance, inclusive of other trade costs (Nielsen 2003). In its most basic form the gravity model can be specified as: TMMDijijijij123 (3-1) where Tij = bilateral trade flow between country i and country j, Mi = economic mass interpreted as GDP of country i, Mj = economic mass of country j, Dij = distance between countries i and j ij = the standard error term. It is common to employ a log transformation as estimated coefficients can be interpreted as elasticities. Taking logs of e quation (3-1) results in a linear form represented by: lnlnlnTMMDijijijij 0123 (3-2) Population size, GDP size, or GDP per capita ca n all be used to represent economic mass. However, questions exist with regards to whic h best represents country size for purposes of determining bilateral trad e flows. Countries with large popula tions often have large markets and diversified production structures with economies of scale. This may result in less relative trade but leads to extensive trade potential in absolute terms (Head 2003). Economic size measured by GDP is often used in gravity models where it is suggested that productive and export capacity are positively related to GDP size. It is often the case, however, that GDP per capita is used instead and interp reted in similar manner. Using size of GDP economic mass, because larger countries trade more in absolute terms, may overstate R2. In addition, it must also be noted that exports and imports are already accoun ted as part of GDP, which might lead to problems of multicollinearity (Head 2003).
73 Distance is a negative function of bilateral trade and captures a series of other costs. First, distance is a proxy for transpor tation costs that makes trade more burdensome and costly. Second, distance implies shipping costs as well as transport time, both of which add costs and risks particularly as th ey relate to perishable goods. Thir d, there are synchronization costs that can be significant when deali ng with inputs of production as s ourcing inputs from locations nearby reduce these costs. Fourth, communicati on costs exist. Although information technology reduced costs dramatically, cost of personal contact between ma nagers and other actors that enhance the transmission of sub tle and less formal information remain. Fifth, transaction costs related to search costs are also significant. Finally, elements of cultural distance or cultural differences can prove burdensome and costly as traditions and rules of exchange vary (Head 2003). The size of the economy and distance are helpfu l in explaining bilateral trade flows. However, there is a significant amount of vari ation not explained by mass and distance. Binary variables believed to either posi tively or negatively affect trade flows could be included in the specification of the gravity model. These variab les may include whether trading countries share a common language, colonial links, a common border, whether a country is landlocked or not, or is an island, and whether a country has participati on in trade agreements. Other likely relevant factors such as price level, exch ange rates, indices of trade rest rictiveness or measures of trade policy can be included as well (Piermartini and Teh 2005). Gravity models have proven effective in pr edicting trade flows and have exhibited good explanatory power. The model has also proven to be easy to work with, as it is clear, simple and intuitive. In addition, data requ irements are fairly limited and th ese data are usually available. However, some features of gravity models have ra ised questions as to the methodology. The
74 primary critique leveled has been that they lack a theoretical founda tion based on traditional international trade theory (Nielsen 2003). A lthough the notion that tr ade between countries located in close proximity and with incomes that allow for exchange is intuitively apparent, it does not fit traditional trade mode ls. Hence, the Ricardian model, which explains trade flows on the basis of technological differences, or the H eckscher-Olin model which bases its explanation on factor endowments, are absent in the basic sp ecification of the gravity model (Piermartini and Teh 2005). Various researchers have made a considerable effort in search of theoretical support for the observed trade effects given by economic size and relative costs. Anderson (1979) after considering the gravity model the most successf ul empirical trade device attempted to provide such a theoretical basis of the gravity equation w ith an application to commodities. To achieve this Anderson used microeconomic foundations found in the properties of expenditure systems.17 Anderson derived the gravity equatio n from the expenditure system and attempted to explain that where these expenditure systems were similar co untry size mattered. Bergstrand (1985) derived the gravity equation from a general equilibrium model and suggested the gravity equation is a reduced form from a partial equilibrium subsystem of a general equilibrium model with nationally differentiated products (p.475). Bergstrand (1989 ) extended on the previous work to include the Hecksher-Olin factor en dowment theoretical framework. Further theoretical refinements made by Anderson and Wincoop (2003) provided theoretical derivations of the gravity model that included elem ents of monopolistic competition. These derivations showed that bilateral trade flows depend on relative trade costs. The key implication of the theoretical gravity equation is that trade between regions is determined by 17 Piermartini and Teh consider it the first important attempt to provide such theoretical basis for the gravity model.
75 relative trade barriers. Trade betwee n two regions depends on the bi lateral barrier between them relative to average trade barriers that both regions face with all their trading partners (Anderson and Wincoop 2003, p.176). Overall, it is now generall y accepted that the gravity model can be derived from a partial general equilibrium framew ork or an international expenditure system and that the model has a basis in both traditional Heck sher-Ohlin trade models as well as models of increasing returns (Sandberg 2003, p. 11). Estimation and econometric issues have also prom pted criticism of the gravity model. The proper specification of the gravity equation has been a subject of considerable debate and equation (3-2) has been considered mispecifie d. The proper specification, when pooling time series and cross section data, was suggested by Matyas (1997) to be lnlnln...EXPYYDISTuijtijtitjtijijt 123 (3-3) where EXPijt = volume of trade or exports from country i to country j at time t Yit = GDP in country i at time t and Yjt is GDP in country j at time t DISTij = distance between countries i and j i = local country effect j = target country effect t = the time effect ujit = the disturbance term Piermartini and Teh (2005) have summari zed some weaknesses inherent in the methodology. First, the high explan atory value yielded by the grav ity model may tempt some to add explanatory variables in a ra ther arbitrary fashion without st rong theoretical support for such inclusion. Just as the omission of an important de terminant of trade can lead to bias, inclusion of irrelevant variables can lead to misspecification. Second, studie s often fail to consider relative trade costs and distance while cons idering only their absolute va lues. Third, problems arise in the study of bilateral tr ade when countries do not trade with each other and the observations
76 include a zero. This can lead to biased and in consistent estimates if these observations are omitted. On this point, Nielsen (2003) noted that alternative techniques in non-linear estimation allow for including zero observations hence, these make use of valuable information contained in such observations. Fourth, endogeneity bias arises as institutional quality, country infrastructure and other issues affect GDP and GDP per capita. Gravity models and RTAs: Gravity models have also been modified to allow for the estimation of trade diversion and trade creati on and in assessing trad e effects in economic integration agreements. To capture these effect s two dummies are introduced as proxies for each effect. These generally capture the changes in the volumes of trade among countries that are members of a trade agreement. A dummy variable captures the increase in exports from member countries that result from the formation of th e RTA and can be interp reted as gross trade creation. The second dummy captures trade vol umes between a member country and a nonmember. If there would be a d ecrease in exports from the non-memb er country as a result of the formation of an RTA then it could be in terpreted as trade di version (Cernat 2001). Although, gravity models are specialized case s of ex-post regression analysis, ex-post analyses of regional integration have a long history. Early empiri cal studies addressed the case of the European Community (EC) and these types of studies have been carried out using several methodologies. Europe provided a fertile ground for such researc h, as it was the first union of the post war period. Balassas work on the subject was critical in the esti mation of trade creation and trade diversion although it di d not specifically use gravit y models (Nielsen 2003). More recent ex-post studies employing gravity m odels have been carried out as the world witnessed a resurgence of RTAs. These have con centrated in evaluating and often predicting, as ex-ante analysis can also do, the effects of r ecent integration agreements. Prominent recent
77 studies in a global context are by Oguledo and MacPhee (1994), Frankel, Stein and Wei (1995), and Soloaga and Winters (2001). Th e first of these studies uses a gravity model derived from a linear expenditure system in an attempt to simultaneously address empirics and criticism on the weak theoretical foundations in gravity models The model is estimated using dummies for RTAs and also included variables for preferential tariff rates for eleven major customs areas and their major trading partners, namely the US and the EU. Both noted dummies are significant. Frankel, Stein and Wei (1995) used the gravity model to evaluate trade patterns in several trading blocs. They question whether there is increased regionalization as consequence of the formation of trade blocs. The objective was to ev aluate the extent to wh ich regionalization takes place after adjusting, with the use of the gravity equation, for the natural determinants of trade: economic mass and distance. The conclusion was that some regional blocs such as MERCOSUR and the Andean Pact trade more amongst each other yet most other blocs do not. Soloaga and Winters (2001) considered nine RT As to quantify trade effects. Their work presented a modified gravity equation that intro duced three dummies to capture intra-bloc trade effects, the total exports of member countries, and the total imports of member countries. Analysis and comparison were performed for pre and post-bloc formation. Evidence of trade diversion was present only in two of the nine RTAs and positive effects for most all other regions. Issues unrelated to trade policy, however were believed to drive results in the case of MERCOSUR. Important regional studies, other than those concerned with European integration, were conducted as well. The case of NAFTA is particul arly relevant. Kruege r (1999) used a gravity model to analyze trade effects be tween the United States and Me xico yet also employed shiftand-share analysis. Krueger concluded that with data available at the time of her writing, the
78 impact of NAFTA on the United States was rather small and Mexican exports to the U.S. were relatively more prominent. Relevant gravity modeling studi es particular to the Caribb ean region and its relation to Europe were conducted by Finger, Ng and Solo aga (1998); Nilsson (2002); and Sandberg et al. (2006). Finger, Ng and Soloaga (1998) used a gravity model to evaluate the impact of CARICOM, NAFTA and MERCOSUR on the countries of the Caribbean Group for Cooperation on Economic Development (CGCED), among which the countries of the OECS are included. The findings suggested effects from CARICO M were significant and increased trade among members. The impact from the formation of NAFTA has not affected exports of CGCED countries to members of NAFTA. Exports to MERCOSUR countries were negative and statistically significant. Nilsson (2002) examines the effect the Lo m Convention and the European GSP have on developing country exports. The results suggest that the export effects of the Lom Convention were significant and larger than the effects of GSP. Exports of beneficiary count ries increased relative to non-beneficiary third countries. The analysis also includes the effects of cultural and linguistic ties and trade between former colonies and colonial powers. Hi storic ties are found to be significant in explaining trade between select ed European countries and former colonies. Similarly, evidence of trade linkages due to colo nial heritage between Caribbean countries and the UK were demonstrated by Sandberg et al. (2006). Computable General Equilibrium Models (CGE) Computable General Equilibrium (CGE) models are constructed on the basis of general equilibrium theory and offer a framework of anal ysis that is rigorous as well as theoretically
79 consistent.18 The workings of an economy and the changes that would fo llow specific policy implementation can be simulated, as CGE models act to emulate the functions of laboratory experiments. In this function, CGEs have had a significant role in ex-ante modeling of international trade (Pie rmartini and Teh 2005). Although most CGE applications are static a nd termed first generation models, Nielsen (2003) notes that second generati on models extend their analytical power to the inclusion of increasing returns and imperfect competition in re levant sectors. Third generation models can also perform dynamic analysis, inclusive of capita l accumulation and technical progress effects. These possibilities have made CG E models popular for modeling s ophisticated relationships and can provide policymakers with comprehensive scenarios. CGE simulations can be used to evaluate tr ade policy options and in modeling trade and welfare effects of economic integration agreemen ts. Overall aggregate trade, terms of trade effects, factor prices, trade creation and trade diversion within an economy-wide model can be estimated. Inter-sectoral linkages, estimates of prices, wages, and exchange rates that lead to equilibrium in product and factor markets, as well as balance of trade figures, can be obtained and are considered in the estimation of parameters. Hence, differences in values in the preand post-implementation situations allow the evaluation of alternative scenarios and gains, losses and distributional effects from policy actions can thus be iden tified (Nielsen 2003). In order to carry out simula tions a social accounting matrix must be constructed. The matrix should consider the links between sector s in the economy, therefore data requirements tend to be considerable. Re quired information would include input-output tables showing intersectoral linkages and contributions made by each production sector. Government fiscal and 18 This section draws on the excellent reviews on the subject provided by De Rosa (1998), Nielsen (2003) and Piermartini and Teh, (2005).
80 budget accounts, disaggregated into consumption, investment, government expenditures, balance of payments, as well as data on exports their compositi on, destination and origin and volumes of imports are necessary as well. Data matrices, arranged into receipts and expenditures, must be balanced and standardiz ed (Nielsen 2003; Piermartini and Teh 2005). Once a social accounting matrix is completed th e CGE model must also include values for the exogenous or behavioral parameters. Thes e measures characterize the behavior and the response of producers and consumers to changes in incomes and relative prices. The parameters most often needed are: elastici ties of substitution related to the responsiveness of producers to changes in relative prices of factors of pr oduction; consumer demand and income elasticities; and Armington elasticities, which determine the substitutability between domestic and imported products. These elasticities are usually derive d from previous econometric work and adapted into the model. CGE models have generally proven useful in understanding complex interactions and tend to discipline thinking on the inte rnal workings of an economy. They can provide policymakers and analysts with a means to understand how a policy works its eff ects through the economy from a local, regional or global pe rspective. Hence, CGE models can provide policymakers with a means of assessing possible policy outcomes as these provide a view on sectoral effects as input-output relationships change, prices and quan tities are modified, and fa ctor market relations are altered. This is possible because of a framework based on strong microeconomic and trade theory (Nielsen 2003). Although highly sophisticated and complex, CG E models have some inadequacies and have drawn some criticism. Taking a general equilibrium approach and considering an economy wide model clearly make for inte nse data requirements. As note previously, CGE models require
81 a full account of trade flows, tariff rates, macroe conomic data as well as a wealth of additional government data on various variables. These da ta are often missing or of dubious quality thus posing some difficulties. As a result of such burdensome and problematic data requirements, researchers move toward the use of alternat ive methodologies (Nielsen 2003; Piermartini and Teh 2005). Further criticism is based on CGE models rela tively high degree of data aggregation that comes at the expense of even greater detail. This aggregation takes place to a point that fundamental relationships can be concealed. Complex simulation models where large amounts of data inputs produce precise outputs can be dece iving as precise sources of certain results are not clearly identifiable. In addition, when dealing with pref erential trading arrangements analysts must take into account that CGE models, by virtue of generally being static, cannot adequately adjust when different phases of RTAs enter into effect (Nielsen 2003). CGE models are also often questioned for drawing values for critical behavioral parameters from outdated econometric work. It is usually the cas e that the Armington, substitution and other elasticiti es and parameter values are c hosen arbitrarily. Additional criticism deals with the existing uncertainty on th e appropriateness of the technical relationships and functional forms (De Rosa 1998). From such assessment, some have suggested that systematic validation of CGE simu lations through ex-post evaluati on is necessary to enhance the confidence and the predictive pote ntial of the analytical results (Piermartini and Teh 2005). Empirical CGE studies and RTAs: The general equilibrium nature of CGE models allows for distinguishing trade creation and trade diversion by sector and provides useful information on welfare changes and effects on bilateral trade flow s in alternative policy scenarios. CGE models have been used extensively to simulate not only RTAs but also global trade and multilateral
82 negotiations. Piermartini and Te h (2005) cite the work of Deardorff and Stern (1986) as the one of the first global CGE models, commonly referred to as the Michigan model. Another wellknown and used model is the Global Trade Analys is Project (GTAP) at Purdue University. Various global simulations have addressed mult ilateral trade negotiations such as the Uruguay and the Doha rounds. Kerkala, Niemi, and Vaittinen. (2000) used a multiregional general equilibrium model to examine the consequences for African ACP countries of a post-Lom world. The analysis simulates the effects of free trade compatible w ith WTO requirements and compares the results with the GSP system. Simulations were carried out with the GTAP model and results suggested negative welfare effects for Afri can countries. While trade volu me increased with an FTA, it decreased with the GSP system. In both cases wo rld welfare increased, however, positive effects were limited to the EU while they were absent in ACP countries. Using a CGE model Wolf (2000) evaluated the effects of tariff reduc tions, consequence of reciprocity under WTO rules, and estimated thes e effects for alternative trade liberalization scenarios between the EU and the West African Economic and Monetary Union (UEMOA). The main objective of the study was to quantify the ga ins of trade liberalizatio n and compare them to the losses in tariff revenue that would likely follow. Results demonstrated that the UEMOA countries would experience a significan t loss in terms of tariff revenue. Harrison et al. (2002) and Harri son et al. (2003) employed CGE models to evaluate policy scenarios for Chile and Brazil respectively. Alte rnative trade policy options for Chile using a CGE model included insertion in MERCOSU R, a free trade agreement with NAFTA, multilateral and unilateral li beralization. The conclusions suggested that as a result of an already liberal trade policy, overall gains for Chile would be small yet positive. Clear gains from joining
83 NAFTA were shown. In the case of ME RCOSUR and unilateral reductions, it was recommended that Chile establish external tariffs of 6-8 percent. The evaluation for Brazil was performed in the context of MERCOSUR and trade policy options included joining the Free Trade Agreemen t of the Americas (FTAA), the establishment of a EU-MERCOSUR trade agreement. In addition, estimates of pursuing multilateral liberalization were examined. Be yond the trade effects, this study spent considerable effort in evaluating trade policy effects on the poor. For th is purpose rural and urban household level data were analyzed. A strategy of pursuing the FTAA, the EU-MERCOSUR agreement, and multilateral liberalization would lead to benef its. Essentially all liberalization options demonstrated that gains would accrue for Brazil. At the household level the poorest households would see a large increas e in relative income. Partial Equilibrium Models Static partial equilibrium ex-ante models are used to predict or simulate the effects of trade policy changes when tariff rates are expected to be modified, as is the case in the formation of RTAs or other trade liberalization schemes. Par tial equilibrium models us ed in discriminatory trade analysis have followed the pioneering work by Verdoorn (1960) and are derived from Viners theoretical formulation. Their basic objective is to es timate trade creation and trade diversion. Verdoorn developed this methodology in order to quantify the effects of the formation of a customs union between Europ ean countries as the European Economic Community was being formed. In its original version Verdoorn used hi s model to quantify the trade effects of the Benelux customs union. Severa l variants of this mode l have been developed following Verdoorns contribution. Two basic types of partial equilib rium models used in the anal ysis of discriminatory trade arrangements are often discussed in the lite rature. The first model assumes trade in a
84 homogeneous commodity. Under this assumption, a reduction in tariff rates would lead to an expansion of trade flows. However, the expansion is limited by the corresponding supply elasticities. If the suppl y elasticities of the beneficiary c ountry are high, export expansion would be substantial. If they would be low expor t expansion would be minimal (Clague 1972). The second type of partial e quilibrium models used assume s product differentiation and infinite elasticities of supply. In this type of model, a nd upon a tariff reduction, the factors limiting trade flows are the degree of substi tutability among goods. A high elasticity of substitution leads to a substantial increase in trade flows and likewise a low elasticity of substitution to a small increase in trade flows. Models assuming product differentiation result in more modest trade effect estimates (Clague 1972). The Verdoorn model Measures on the impact of the formation of a preferential trade agreement are obtained through the assessment of the two static effects discussed previ ously, namely, trade creation and trade diversion. In developing the partial equ ilibrium differentiated good model, constructed by Verdoorn it was later genera lized by Clague (1971), it is assumed that trade flow changes do not affect incomes or exchange rates, infinite supp ly elasticities are presen t and there are and isoelastic import demand functions.19 The model requires knowledge of import demand elasticities and the elasticities of substitution between pref erred and non-preferred imports. Hence, trade creation is expressed as TC=MP t t1 (3-4) 19 This section only contains a brief discussion of partial equilibrium models. A full discussion and derivation of the Verdoorn-Clague model is presented in chapter 4.
85 Where TC= Trade Creation MP=Imports from preferences beneficiary = Import demand elasticity t= tariff The relationship indicates that in an impor ting country the additional imports from a country that enjoys trade prefer ences is the product of initial imports, th e elasticity of import demand and the change in tariff structure. The model is based on the assumption that the substitutability between imports from preferred sources and dome stic production is equal to the substitutability of all imports and domestic production. Trade diversion is expressed as TD=MP 2 ( ) t t1 (3-5) Where TD= Trade Diversion MP=Imports from preferences beneficiary 2=Share of imports from non-preference beneficiary =Elasticity of substitution = Import demand elasticity t= tariff The Verdoorn model assumes that total imports (M1+M2) are equally substituted for domestic production hence, the cross-price elastic ity for preferred and no n-preferred imports is determined by the share of non-pr eferred imports times the differe nce between the elasticity of substitution between imports and th e import demand elasticity, namely 2 ( ). The Baldwin-Murray model Baldwin and Murray (1977) provided a varia tion of Verdoorns methodology that has also been used often in partial equilibrium analysis. Trade creation is identic al in both methods yet trade diversion differs. The Baldwin-Murray method requires knowle dge of import demand
86 elasticities and data not only on imports from non-preferred sour ces, but for domestic production as well. The Baldwin-Murray model avoided the use of elasticities of substitution and interpreted trade diversion as trade creation weighted by the ratio of imports from non-preferred countries and domestic production of a good. Hence, Baldwin and Murray assumed that the substitutability between imports from a preferred source and impor ts from a non-preferred source was equal to the substitutability between imports from a preferred source and domestic production. (Sawyer and Sprinkle 1989). Trade Diversion in the Baldwin-Murray is expressed as TD=MP t t M MN D1 (3-6) Where TD= Trade Diversion MP=Imports from Preferences Beneficiary MN=Imports form Non-Preferred country MD=Domestic Production = Import Demand Elasticity t= Tariff The differences between the Verdoorn and the Baldwin-Murray model are due to assumptions made on the substitu tability between imports from preference beneficiaries, nonbeneficiary imports and domestic production. These differences or iginate in the different views of consumer behavior that they represent. In the Baldwin-Murray model a change in the price of imports from a preferred country, due to a decline in tariffs, leads to a substitution effect between preferred imports and non-preferre d imports and a substitution e ffect between preferred imports and domestic production separately. In the Verd oorn model a change in the price of imports from a preferred country, due to a decline in tariffs, leads to a substitution effect between
87 preferred and non-preferred imports and a joint s ubstitution effect between all imports from both sources and domestic production (Sawyer and Sprinkle 1989). Partial equilibrium models have been subject to criticism due to th eir limitations. This issue of the choice of elasticities is at the core of criticism leveled at partial equilibrium trade models. The values for the elasticities used ar e chosen arbitrarily on th e basis estimates often considered unreliable. Nielsen summarizes this si tuation stating this rich ness in detail cannot be followed through to the parameters of the models, such as the elasticities because estimates are simply not available at that level of detail (Nielsen 2003, p. 62). A further weakness attributed to partial equilibrium models is their inability to consider economy wide changes brought about as consequen ce of tariff changes. Intersectoral linkages and factor markets are ignored a nd assumed to be unaffected. Clear ly the models are limited in that they only consider those markets in which policy or tariff changes take place. Despite these basic limitations, partial equilibrium models have some distinct advantages. They allow for estimates to be performed at hi ghly disaggregated levels therefore allowing for detailed analysis even by tariff line. In fact, such minute level of detail allows for precision in identifying specific products and trading partners that are aff ected by alternative trade policy conditions (Laird and Yeats 1986). Partial equilibrium models and RTAs: Empirical studies on trade integration using partial equilibrium models are numerous and cover vari ous agreements. The early empirical studies including Verdoorns original contribution addr essed European integration and demonstrated that although modest, there were gains to such union. The Baldwin and Murray (1977) application of partial equilibrium simulations estimated and compared developing countrys trade bene fits from preferential trade under GSP and
88 multilateral MFN reductions. Baldwin and Murray simulated the effects of alternative scenarios where GSP of the U.S., the E.E.C. and Japan were considered. Estimates were made in the absence of MFN tariff reductions and in the pres ence of a 50% MFN reduction. The conclusions suggested that GSP benefits ar e outweighed by MFN liberalizati on. Pomfret (1986), however, argued that the estimates and methodology intr oduced by Baldwin and Murray underestimated trade diversion and generate doubtful conclusions. Following Baldwin and Murrays analysis Karsteny and Laird (1986) employed a variation of the basic partial equi librium model to evaluate the e ffects of twelve GSP schemes. The benefits of preference to beneficiaries and their effects on donor and other trading partners were also evaluated. Furthermor e, industry specific effects of the GSP and MFN options were considered, thus allowing for identifying industrie s benefiting most as well as the major country beneficiaries. The conclusions of this st udy suggested that donors imports from GSP beneficiaries were two percent higher than woul d have been the case in the absence of the preferences. The overall conclusions reached were that, although GSP was globally welfare improving, it was less so th an MFN liberalization. MacPhee and Oguledo (1991) a ddressed the issue preferences by reviewing some prior studies and questioning why different studies have considerably di fferent quantitative results. They used a variant of the Ver doorn-Clague model to estimate ex -post rather than ex-ante the trade benefits granted by the GSP scheme in th e U.S. They employed the changes from market growth and improved competitiveness and subtracted them from total growth. The residual was attributed to GSP and with this method the need of for elasticities was ab sent. Results suggested that imports from beneficiary countries gr ew faster than from non-beneficiaries.
89 Dealing within a North American context, Karemera and Koo (1994) employed a partial equilibrium framework to study trade effects in the context of the U.S.Canadian free trade agreement. Drawing on quarterly trade data from 1970-1987, estimates were performed at commodity or industry level. Re sults indicated that significant increases in trade volumes would be present for both countries. Beyond analyzi ng trade effects for the two trading countries, Wainio and Gibson (2003) employed a model with infinite elasticity of supply and used 8 digit level U.S. import data to evaluate the significa nce of US non-reciprocal trade preferences for developing countries. Estimates on the proportion of imports at preferential ra tes versus MFN tariffs were performed as well as simulations fo r different tariff cuts a nd MFN rates. Results indicated that under MFN tariff liberalization, US imports from non-reciprocal preference beneficiaries would have a relatively small impact and increase by 3.1%. Countries highly dependent on preferences would be affected negatively by MFN liberaliz ation while countries less dependent would increase exports to the US. Sawyer (1984) used the Baldwin-Murray model to address the issue of trade effects as consequence of the enlargement of an existing customs union, the admission of Greece, Spain and Portugal into the EC. The main objectives we re to quantify the effects of the exclusion of U.S. products from the newly admitted countries. Specific U.S. products subject to likely trade diversion due to the EC enlargement were identified. Results suggested modest losses yet most of these were concentrated in ten product categories. Busse and Koopman (2001), Busse and Shams (2003), and Busse, Borrmann, and Grossman (2004) used the Verdoorn model to ev aluate trade effects in the formation of alternative trading arra ngements. Busse and Koopman (2001) addressed the possible effects of a free trade agreement between Mexico and the EU and estimated trade effects using 3 digit-level
90 SITC trade data. In addition, they surveyed which countries and commo dities would be most affected by the FTA. Results indi cated that total trade effects we re positive with EU gains much larger than those of Mexico and concentrated on a reduced range of produc ts. In the case of trade diversion the US would be most affected by a Mexico-EU free trade area. Following a similar pattern Busse and Sham s (2003) analyzed the trade effects and identified the commodities most affected fr om the formation of a customs union, the East African Community (EAC). Trade and tariff data for the three countries were used at the twodigit level. In similar fashion, yet in mo re detail Busse, Borrmann, and Grossman (2004) analyzed the likely trade and revenue impacts fr om the formation of an Economic Partnership Agreements between the Economic Community of West African States (ECOWAS) and the EU. Trade effects were estimated at the four-digit leve l using elasticities drawn from the literature. At this level of aggregation elasticity estimates were unavailable and a llowance for elasticity three scenarios were made. Results indicated tota l trade effects for all West African countries to be positive. Greenway and Milner (2003) also addressed the formation of EPA's w ithin the context of countries of CARICOM. They used a variant of the Verdoorn model to evaluate reciprocal preferences granted among cust oms unions. Data at the twodigit level was employed to estimate trade and welfare effects of an EPA with the EU. These results were compared to one situation where extended reciprocity is granted to both the US and the EU and one with full multilateral liberalization. Trade and welfare eff ects on the formation of the EPA with the EU are not welfare improving yet the two alternative policy options, with full multilateral liberalization being the be st, are welfare improving.
91 Fiscal Impacts of Trade Liberalization Tariffs in small underdeveloped countries ofte n are a major, if not the most important, instrument to obtain revenues give n that tax collection within na tional borders is difficult and costly. Hence, developing countries often fear trade liberalization for its impact on domestic industries and government revenue. Trade liberalization thus raises concerns that the elimination of tariffs might lead to severe fi scal impacts. It is feared that the loss of revenue could hamper the ability of small countries to grow and develop and concerns exis t that the elimination of tariff barriers would lead severe short -run adjustment costs. These would include, in addition to the losses in government revenue, increased une mployment, reduction in national output, elimination of certain domestic industries a nd possible macroeconomic instability. A recent survey study, however, concluded that relative to th e gains brought about by trade liberalization, these adjustment costs are small (Matusz and Tarr 1999). Furthermore, significant efforts have been expended at organizations such as the International Monetary Fund (IMF), the Un ited Nations Economic Commission for Latin America and the Caribbean (ECLAC), and the Inter-American Development Bank (IADB), to have a more comprehensive understanding of th e fiscal aspects of trade liberalization. Discussions on topics within this literature are broadly organized ar ound two general themes. The first deals with the evaluation of the relative importance of tariff revenues as a source of total government revenue and their quantification. The second theme deals with fiscal reforms and alternative tax systems that coul d offset tariff revenue losses. Reports by the IADB (2004), work by Baunsg aard and Keen (2005) and Ebrill, Stotsky and Gropp (1999), Greenaway and Milner (1991) have demonstrated that the relative importance of trade tax revenue has been d ecreasing for the last two decades. In general, and despite the trend, tariff revenue represents one quarter to one thir d of total tax revenu es collected for many
92 developing countries. Trade taxes as a shar e of total government revenues among low and middle-income countries remains high. The impact of trade policy actions, such as reduction in tariffs can have varied consequences. The IADB (2004) classifies effects of such policy actions into five categories. First, direct effects or losses due to the reduction of a given tariff line. Second, indirect effects or revenue decline from taxes imposed on CIF plus ta riffs that are forgone due to the tariff rate decline. Third, elasticity effects which affect the revenues depending on whether they cause an increase or decrease in the volume of trade of certain products. F ourth, substitution effects which result in trade diversion from the displaceme nt of imports from partners not facing tariffs. Finally, induced effects that are changes in to tal tax revenues resultant from consumption and production patterns borne of economic structures post liberalization. Ebrill, Stotsky and Gropp (1999) focused on the theme of how trade liberalization affects trade tax revenues. Initial conditions such as tariff structures and domestic tax reforms are viewed as major factors affecting trade tax re venues as liberalization proceeds. Initially, liberalization does not necessarily lead to lost reve nue. However, at later stages it might lead to lost revenues. The likely outcomes depend on in itial restrictiveness to trade, reforms to quantitative restrictions, and re duction in the number of tariff le vels. Escaith and Inoue (2001) included the importance of exchange rates and ex change rate regimes as important additional variables in the determination of trade policy e ffects on trade tax revenues. The net impact of policy changes could therefore actually lead to increases in revenue, de pending on the strategies employed in policy implementation. The work by Ebrill, Stotsky and Gropp review ed revenue trends in six countries to evaluate the consequences of liber alization. From this analysis it was concluded that a series of
93 factors determine trade tax revenues. These ar e the nature and degree of tariff liberalization, existence of non-tariff barriers, changes in the ex change rate and the regime governing it. In addition, structural characteris tics such as the level of de velopment, tax and customs administrative capacity, macroeconomic environmen t, and domestic taxation systems, all have effects. Policy implications of the analysis indi cate that further liberaliz ation is possible without compromising revenues as the gains from trade c ould lead to increased revenue. However, it was suggested that for the liberalization processe s to avoid negative effects, domestic tax reforms must follow. The question of offsetting tariff revenues has been another area of significant empirical research. There are several studies that have addressed the issue from slightly different perspectives. Khattry and Rao (2002) evaluate d the effects of trad e liberalization on tax revenues and considered the question of whether trade tax revenue losses are somehow recovered. In pursuing this objective they expl ored the relationship between the established trade tax rates and the revenues obtained, as well as the changes in tax structure when levels of country development vary. They argued that st ructural limitations ch aracterizing low-income countries make the gradual substitution of trad e taxes by domestic sources of revenue very difficult. Their estimations are based on pane l data on 80 countries for the time period 1970-98 and results are drawn for low-income, lower-middle income, upper-middle income countries. Results confirmed that an inverse relation betwee n level of development and dependence of tariff revenue exists. In addition, findings indicated that reductions in protection levels reduce total tax revenue as well as trade tax reve nue. Also the degree of urbaniza tion had a positive influence on the tax revenue/ GDP ratio and is negatively related to trade taxes. The size of the economy had
94 a positive relation with trade tax revenues and the total tax revenue/GDP ratio. Furthermore results noted that as domestic taxes increased trade taxes decreased. However, Khattry and Rao also noted that stru ctural factors such as ; whether a country is rural, contains large subsiste nce sectors, depends on primar y commodity exports, actually influence the trade/GDP ratio and the total tax revenue/GDP ratio. Thes e explained variations for low-income countries but not for the higher income ones. The implications drawn by the authors suggested that low-inco me countries have little potentia l to offset trade taxes with domestic tax sources. Baunsgaard and Keen (2005) also addressed the question of whether governments were able to offset trade taxes with alternative dom estic sources. They consider the issue by asking how much alternative sour ces provide for every dollar of tariff revenue lost. The empirical work examines the relationship between total tariff re venues and total domestic tax revenues. Panel data for 125 countries over the period from 19752000 were used for estimation. Results showed that higher income countries were able to substi tute tariff revenues with domestic tax sources and recovery was higher for countries with a value ad ded tax. This is noted to reflect the lesser consideration given to revenue in the design of policy, which in the case of high-income countries is implemented for protection rather th an for revenue. Middle-income countries were noted to have been able to recover between 45 and 65 cents for every tariff dollar lost. On the other hand, low-income countries were unsucce ssful in offsetting tariff reduction. They received. on average, 30 cents revenue from alte rnative domestic sources for every tariff revenue dollar lost. These findings concur with the gene ral experience in low-income countries of an inability to replace trade taxes (IMF 2005). In the case of the OECS Stotsky, Suss and Tokarick (2000) suggested that it is imperative for Caribb ean countries to embrace tax reform. Given the
95 general results and experiences with trade libera lization and trade reform it is understandable that governments in smaller countries would prefer a more deliberate movement, if any, to further trade liberalization.
96 CHAPTER 4 TRADE AND TARIFF REVENUE EFFECTS OF ALTERNATIVE TRADE SCENARIOS Simulations designed to assess the likely impact and potential effects of alternative trade scenarios can assist in the ev aluation of several trade polic y options. Alternative policy scenarios can be broadly seen as encompassing regional or multilateral liberalization options. These evaluations provide insights to questions su ch as: what are the advantages of an EPA with EU? What are the potential gain s of further and more comprehe nsive regional liberalization? What are the potential gains of joining the FTAA? This section develops the part ial equilibrium empirical model employed in the analysis. Simulation results of alternative trade scen arios using the Harmonized Commodity Coding System (HS) eight-digit level trade data follow the presentation of the empirical model. A discussion of trade effects and fi scal impacts, as well as of produc ts most affected by alternative liberalization schemes, is presented subsequently. The Empirical Model The empirical model applied in this analysis is based on a partial equilibrium model developed by Verdoorn and initially introduced in chapter 3. The model is employed to estimate trade flows and tariff revenue chan ges contingent on the specificat ion of alternative trade policy scenarios.20 The Verdoorn model uses the Armington assumption of product differentiation, hence it assumes that the source of imports for any given product induce imperfect substitution. The model also makes additional assumptions: trade flow changes do not affect incomes or exchange rates, infinite supply elasticities, and iso-elastic import demand functions. These assumptions, although restrictive, are not unreas onable for the case of small countries. 20 This section draws from Busse, Borrmann, and Grossmann. (2004). The model is presented in a way similar to these authors presentation. However, nomenclature here has been modified.
97 The analysis of trade effects and the estima tion of trade creation a nd trade diversion are driven by the specification of consumer behavior. One might consider, in this specification, the behavior relative to some categor y of goods (M). The utility f unction the consumer is assumed to maximize is given by U=f[ fP( MP, MN), MD] (4-1) Where fP = is a homogeneous separable branch of the utility function MP= Imports of M from a preference beneficiary MN= Imports of M from a non-preference beneficiary MD= Domestic production of the product category M The assumption of homogeneity in the fP branch of the utility function was implied by Verdoorn (1960) and formalized by Clague (1971). This critical assumption implies that the total imports ( MP+ MN) are substituted equally for domes tic production. More formally, the utility function is assumed to be separable and th e implication of separable utility is that the Verdoorn model differentiates betw een the sources of the imports. These can be categorized as originating in a preference bene ficiary or non-beneficiary country henceforth, labeled preferred ( P ) and non-preferred ( N ). The model has two additional crucial assump tions. First, the demand function for the preference donor, which in this case refers to OE CS members, for any particular good takes the form MMPPPNPNPN (4-2) Where PP=Price of imports of M from preference beneficiary PN= Price of imports of M from non-preference beneficiary =Elasticity of import demand P P PNM MM = Share coefficient of preferred imports
98 N N PNM MM =Share coefficient of non-preferred imports PN1 The second crucial assumption in the model defines the elasticity of substitution () of preferred and non-pref erred imports as M M P PP N P N (4-3) The elimination of a tariff ( t ) on the basis of preferences only reduces prices for preferred imports PP. In this case we know PN does not change therefore PN =0. When differentiating (Eq. 4-3) and dividing by (Eq. 4-3) we obtain M M M M M M M M P PP N P N P P N N P P (4-4) Next, by differentiating (Eq. 42) and dividing we obtain MM MM P P PPPN PN P P P PNP loglog (4-5) By using P and N as defined following (Eq. 4-2) we get P P P P N N P P P PM M M M P P P 1log (4-6) Taking (Eq. 4-6) and rearranging us ing (Eq. 4-4), the derivative of P may be expressed as PPP P PP P1 (4-7) Following, M MN N1 is eliminated from (4-4 ) when multiplying with (1P ) rearranging we get
99 M M M M P PP P P N N P P P P111 (4-8) M M M M P PN N P P P P P P11 (4-9) When inserting (Eq. 4-9) to (Eq. 4-6) and substituting P by using (Eq. 4-7) we obtain M M P P PP P PPPPP P P 11 1 log (4-10) If PP12 and log P0 (Eq. 4-10) can be expressed as M M P PP P PP P P 1 (4-11) Preferred import prices may be written as PPtPtPXX 1 (4-12) where PX is export price. The total derivative of (Eq. 4-12) yields PPtPtPXX () 1 (4-13) Dividing (Eq. 4-13) by (Eq. 4-12), considering PX =0 and assuming infinite elasticities of supply, the changes in preferred pr ices can be expressed as P P t tP P 1 (4-14) The total expansion in imports from the pr eferred country that would follow as a consequence of the preferences grante d is expressed, using (Eq. 4-14) as M M t tP P PP 1 1 (4-15) A change in imports from the pref erred country occurs in two phases. First, the tariff is reduced only for preferred goods MP hence only the price for this good PP falls. Second, as consequence
100 of the decrease in the price of the preferred good, consumers in the importing country substitute their consumption of MN for the now less costly MP. Rearranging equation (Eq. 15) and substituting N for P we have M M t tP P N 1 (4-16) The total change of preferred country imports portrayed in eq uation 4-16 consists of a trade creation and trade diversion component. Both of the components included in the equation can be separated into individual component s. The first of these effects is the change in imports from the beneficiary country that is s ubstituting for domestic production and consists of a consumption effect, as the price of such import has decrea sed. The effect from the preferred country perspective is defined as TC= MP t t1 (4-17) Trade creation will carry a positive sign as the elasticity of import demand multiplied by the reduction in tariff rates yields a positive number, as will equation 4-18 referring to the second component. The second component of equation 4-16, the trade diversion effect, refers to the substitution of imports from non-preferred countri es by preferred country imports that benefit from tariff reductions and is expressed as TD= MP N ( ) t t1 (4-18) The formation of preferential agreements clearly influences tariff revenues. The change in revenue is equivalent to the sum of preferred imports times the preferential tariff rate and the
101 amount of non-preferred imports times the tariff rate for non-ben eficiary countries and can be expressed as ID= MP tP+TD tN (4-19) where ID= import duties tP= tariff rate for preference beneficiary tN= tariff rate for non-preference beneficiary The use of a utility function under the assumption of homogene ity suggests that imports are equally substituted for domestic production. The use of import demand elasticities permits the use of import data without the need for domestic production da ta. However, from equations (Eq. 4-17) and (Eq. 4-18), which ar e used to calculate trade flows, it is clear that knowledge of import demand elasticities and the elasticities of substitution between preferred and nonpreferred imports is necessary. However, these va lues are not readily available particularly at such a level of disaggregation. Values for the elasticities used in this analysis are based on Busse, Borrmann and Grossmann (2004), who presented el asticities at the four-digit le vel and provided three general scenarios that establishe d a range of values: low, mid and hi gh. The analysis considering three different elasticity values allows for upper and lower bounds to be established. This provides a broad scope for assessing how responsive and se nsitive the results are to changes is these elasticity values. In addition, th ree distinct categories of impor ts: agricultural products, raw materials and manufactured goods were identified. The elasticities used by these authors to anal yze the trade effects of an EPA between the EU and ECOWAS were drawn from the literatur e and they note these are consistent with elasticities from other devel oping countries. ECOWAS are pa rt of the ACP and, although a
102 much larger bloc than the OECS, it is likely that their import structures would not differ greatly from the OECS. Hence, the elasticity valu es provided by Busse, Borrmann and Grossmann (2004) were used as a basis for a ssumed elasticities in this study. As products are categorized into increasingly disaggregated categories elasticity values can be expected to increase, as mo re competition exists among more similar products. Kee, Nicita, and Olarreaga (2004) estimated elasticities for diffe rent countries at the th ree and six digit level and found that on average, the latter estimates we re 39% higher than the former. Hence, the values of assumed elasticities in this study are adjusted to be 39% higher than those provided by Busse, Borrmann and Grossmann (2004) a nd they are presented in Table 4-1.21 Scenarios Considered and Available Data Trade negotiations concerning tr ade liberalization are often le ngthy and incremental. The Economic Partnership Agreements, as any type of trade negotiation, will likely contain provisions for gradual phased reductions in tari ffs. Although phased liberalization processes are usually the norm, simulations conducted in this study assume the complete and immediate elimination of all import tariffs. This assumpti on allows the calculation of static effects under the most radical type of liberalization and trad e and fiscal impacts would reflect long term and perhaps future end scenarios. In reality, likely effects of liberalization are actually lessened by the lengthy negotiations a nd implementation phases. The analysis and simulations of the empirical model were carried out for each individual OECS member. Four alternativ e possible trade libera lization scenarios were simulated using three different elasticity values Analysis was conducted using da ta available for three different 21 Although Kee, Nicita, and Olarreaga (2004) estimated elasticities at the three and six digit level, the 39% difference noted was used in the case of changing the four digit level values presented by Busse, Borrmann and Grossmann (2004). This choice was arbitrary but does not deter from the usefulness of the analysis as a range of upper and lower bounds were established.
103 years and the average for those three year s is presented in the results section.22 In the spirit of the EPA currently being negotiated, the first scen ario considers the complete elimination of existing import tariffs on all 27 members of the Eu ropean Union while tariff barriers for all other countries are left intact. The liberalization scenarios that follow build on the first case. Consequently, the second scenario contemplates, in addition to the remova l of tariffs on the EU, the removal of all tariff barriers and existing exemptions for all member s, including candidates for membership and associate members, of CARICOM and the OECS. The third scenario includes the removal of barriers to the EU, the major Ca ribbean states, the three members of NAFTA and Puerto Rico. The final scenario contemplates the OECS members joining the FT AA. This last case, however, would also include the EU, allowing for a rath er comprehensive liberalization scheme. The empirical model used obtains values for trade creation, trade diversion and changes in import duties. Simulations and analysis prov ide a means of comparing and understanding the implications of alternative policy scenarios for the OECS. The data utilized in the application is based on the Harmonized Commodity Coding Syst em (HS) at the eight-digit trade level.23 At this level of aggregation, the EU has identified 14,758 tariff lines.24 The number of tariff lines at this level of aggregation far ex ceeds the number of tariff lines imported into the OECS. The data available contained an average of 3638 tariff lin es and ranged from 4162 in Antigua and Barbuda to 2843 in St. Vincent and the Grenadines. 22 Data for 2002, 2003 and 2004 were utilized for Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines. However, data was available for 2004 only in th e case of Antigua and Barbuda. 23 The data was provided by Resources International in Antigua. 24 Stevens and Kennan (2005) explain that at the two-digit level there exist 96 categories, at the four-digit level 1,251 categories, at the six-digit level 5,705. They also indicate that the up to the si x-digit level the classification system is common to all countries. At the eight-digit level variations exist as countries refine their national tariff lines. The United States Internationa l Trade Commission website indicates that 6330 tariff lines at the eight-digit level of aggregation exist in the U.S.
104 Calculations at the eight-dig it level avoid the aggregation of tariff rates and allow for individual tariff line analysis. The information calculations at this le vel of aggregation can convey is of value as product categories most affected by tariff elimination can be closely identified. This information ca n be very useful for trade nego tiators and policymakers alike as they negotiate the reduction phases in actual trade agreement negotiations. The Pre-Simulation Tariff and Trade Structure Trade related taxes in the OECS include a broad assortment of taxes applied. In this context, each country has its ow n series of taxes levied, of which import duties are only one component. The assortment of border taxes incl udes consumption taxes, customs service taxes, environmental levies, solid waste levies, compulso ry standard fees, excise taxes and others. Amid all these, consumption taxes and import ta riffs respectively were the most significant in generating government revenues. The relative importance of trade-related taxes is summarized in Table 4-2. These taxes represent an average of 31.2% of total government revenues for th e OECS. Nearly half of total government revenues in Antigua and Barbuda, Dominica, Grenada and St. Lucia are trade related. However, St. Kitts and Nevis and St. Vi ncent and the Grenadines rely on trade related taxes for 32.1% and 18.6% of their government revenue. Import duties are clearly an important component in the array of trad e taxes established by OECS members and they correspond to an average of 23.7% of the total trade taxes. Dominica has, at 23.1%, the lowest rate for import duties as percentage of total trade taxes while St. Vincent has the highest at 32.0%. Import duties, in terms of total government revenue, average in excess of 8.7% for all OECS members and ra nge between 6.0% and 15.6% in St. Vincent and the Grenadines and St. Lucia, respectively.
105 The average tariff structure in place between 2002 and 2004 is presented in Table 4-3. Total trade taxes and tariff rates were calcula ted, for each individual OECS member, from the available data for each element in the broad array of taxes and represent th e actual levied charges and tariffs drawn for the time period noted. Tariff rates for EU; EU and Caribbean; EU, Caribbean and NAFTA; and EU plus FTAA scenar ios were provided in columns 2 through 6. The trade taxes and tariff rates were aggregated at the two-digit level and classified into three categories: agricultural products, raw materi al and manufactured goods. Additionally, an aggregate rate is provided and corresponds to the ra tes prior to the three-tier classification. Average total trade taxes represent the sum of the broad assortment of trade charges levied by each individual country. The average total trade taxes levied indicated that these were highest in St. Vincent at 43.7% and lowe st in St. Lucia at 25.3%. When considering the three-tier classification it is clear that raw materials had th e lowest levels of protection while agricultural products tended to have the highe st in all OECS countries. Similar to average total trade taxes, tariff rate s indicated that the lowe st level of protection was afforded to raw materials. Higher levels of protection were gran ted to manufactured goods and even higher ones for agricultu ral products. Grenada had the lo west tariffs for raw materials while Dominica had the highest. In terms of manufactured goods import duty rates were highest in St. Vincent at a rate of 13.3% and were lowest in Grenada at a rate of 8.4%. Tariff rates for agricultural products aver aged 15.6 % for all OECS members. Aggregated average tariff rates ranged from 8.6 % to 14.6% in St. Lu cia and St. Vincent respectively. Tariff rates aggregated on the basis of each simulation scenario follow the same pattern. Tariffs on agricultural products ar e highest while raw materials ha ve the least protection. In aggregate terms the tariff rates for the European Union and FTAA scenario are highest, as they
106 are closely related to average tariffs. The lowe st existing tariffs corre spond to the scenario including the EU and Caribbean. This clearly reflects the alrea dy lower barriers existing within the Caribbean. Utilizing the 8-digit data available for the most recent year, 2004, it is clear that the most important sources of imports for all OECS were the United States and other Caribbean countries. This is consistent with data from 1980 and 2000 presented in Chapter 2. The total CIF value of imports in 2004 ranged from Eastern Caribbean Dollars (XC$) 135.5 million to XC$1.183 billion in St. Vincent and the Grenadines a nd Antigua and Barbuda, respectively. Table 4-4 presents the 2004 share of imports for the top ten sources. In terms of the most significant products imported, fuels, construction material, some foodstuffs and transportation and telecommunica tion equipment, all ranked in the top ten imports. The top ten imports for each OECS memb er for 2004 is presented in Table 4-5. In all cases except St. Vincent and the Grenadines the t op imports were fuels. Construction material such as cements and plywood were also signific ant, as were other intermediate products like switches, electronic components and vehicles. Simulation Results Trade Effects Trade effects from the simulations of the al ternative trade liberalization scenarios are presented in Tables 4-6 to 4-10. Values for tr ade creation, trade diversion, net trade creation, total trade effects and trade effects relative to total imports are presented. The simulation results of a possible EPA with the EU are presented in Table 4-6. Trade diversion exceeds trade creation for all OECS memb ers for all elasticity values. In all OECS cases the difference between trade creation and tr ade diversion increases negatively as elasticity
107 values increase. This first scenario simulati ng an EPA clearly suggests that in general terms trade liberalization with the EU alone l eads to significant trade diversion. Total trade effects, as a percent of baseline imports, are relatively small for all three elasticities in the EU trade liberalization scenar io. At the low elasticity value trade effects represented between 0.9% and 3.1% of baseline im ports in St. Kitts and Nevis and St. Vincent and the Grenadines, respectively. Using the mid elasticity scenario to tal trade effects ranged from 1.4% to 4.9% while in the high elasticity scenario the figures st ood at 1.9% and 6.7%. St. Kitts and Nevis showed the smallest total trade effects while St. Vincent and the Grenadines had the highest in these cases as well. In terms of monetary value, the total trade effects were largest in St. Lucia while the lowest were in Dominica. Total trade effects for the three elasticity values ranged from XC$49.7 to XC$110.9 million for the OE CS as a group. The trade effects as a percent of the baseline imports considering the OECS average, were rather small and ranged from 1.4% in the low elasticity case to 3.1% in the high elasticity scenario. The trade effects from the second scenario, where all import duties and exemptions from CARICOM and OECS are lifted in addition to ta riff elimination on EU imports, are presented in Table 4-7. The results from this scenario were quite similar to the previous analysis. For all OECS members and for all elas ticity values trade diversion exceeds trade diversion. The difference between trade diversion and trad e creation, however, was lessened as trade liberalization was broadened with the inclusion of complete free trade with the Caribbean. In general, trade diversion is smaller in this scenar io yet results continue to show negative net trade creation. The total trade effects as a percentage of baselin e imports are, as in the first scenario, also rather small. In the case of the low elasticity values, total trade effects as a percentage of
108 baseline imports range from 1.1% in Antigua and Barbuda to 3.7% in St. Vincent and the Grenadines. In the mid and high elasticity s cenarios the figures range from 1.7% to 5.8% and 2.3% to 7.9% respectively. For the group of OE CS members, trade effects as a percent of baseline imports under EU and Caribbean liberali zation, range from 1.7% in the low elasticity case to 3.6% in the high elasticity case While total trade effects as a percent of total imports are not greatly dissimilar among most OECS members, it is markedly different for St Vincent, whose values are virtually twice the average of the other countries. Hence, the most affected country in this scenario is St. Vincent and the Grenadines while the least affected is An tigua and Barbuda. In terms of absolute trade effect values, again St. Lucia had the highest impacts while Do minica had the lowest. This second liberalization scenario is not very different than that invol ving the EU alone. This effect is perhaps related to generally low tariffs on Caribbean imports despite occasional exemptions. The impacts of trade liberalization under scenar io three, where liberalization is extended to members of NAFTA and Puerto Rico in addition to the removal of tariffs on EU imports and the elimination of exemptions from the larger CARI COM, are shown in Table 4-8. In this case, trade creation far exceeds trade diversion for all three elasticity scenarios. In terms of trade flow values trade creation increases significantly whil e the increases in trade diversion are rather small. This is not unexpected as members of NAFTA are very important OECS trading partners, the United States being the single largest s ource of imports for OECS members. When compared with the second trade scenario the incl usion of NAFTA leads to virtually an eight-fold increase in trade creation in Antigua and Bar buda. The other members of the OECS follow a similar trend although increases in trade creation are not as high.
109 In terms of the value of total trade effects these also increase in proportions similar to those of trade creation. However, the total trade effects as a percentage of baseline imports change from being relatively small to relatively modest, ranging from 3.4% to 15.0% under all three elasticity scenarios. In the case of the low elasticity scenario al one, values range from a low of 3.4% in Dominica to 7.4% in St. Vincent and the Grenadines. In the mid and high elasticity scenarios, trade effects as a pe rcentage of total imports rang e from 5.2% to 11.3% and 6.9% to 15.0% respectively for the same countries. In re lative terms, under this liberalization scenario, the most affected country was St. Vincent while the least affected was Dominica. In terms of absolute trade effect values, again St. Lucia had the highest impact while St. Vincent and the Grenadines had the lowest. For the OECS as a group, total trade effects range from XC$164.1 million in the low elasticity case to XC$331.3 milli on in the high elasticity scenario and trade effects as a percent of total imports lie betw een 4.4% and 8.8%, depe nding on the elasticity value. The trade effects obtained in simulations where trade liberalization is consistent with an FTAA plus the EU are presented in Table 4-9. The results in this case virtually mimic the previous scenario. The differences in values ar e minimal and perhaps reflect the fact that trade between the OECS and Latin American countri es is very small and would not increase significantly regardless of tariff elimination. The total trade effects as a percentage of total imports remain virtually unchanged ranging from 3.4% to 17.9%. The average values for the OECS ranged from 4.6% to 9.2%. As was the case earlier, values of relative trade effects are quite similar for all OECS members with the exception of St. Vincent and the Grenadines where they are higher. In terms of absolute trade
110 effect values, St. Lucia had the highest impact while St. Vincent and the Grenadines had the lowest. Results for the OECS as a group indicate that to tal trade effects for a ll trade liberalization scenarios simulated, in terms of total trade effect s as a percentage of to tal imports, are rather small. In the case of a likely EPA with the EU to tal trade effects as a percentage of total imports for the three elasticity scenarios range from 1.4% to 3.1%. Trade liberalization th at encompasses the EU plus the Caribbean in th e second scenario indi cate that these values range from 1.7% to 3.6%. When considering the scenario inclusive of NAFTA the values ra nge from 4.4% to 8.8%. Finally, in the EU plus FTAA scenario total trade effects as a percentage of total imports range between 4.6% and 9.1% (Table 4-10). Tariff Revenue Effects The removal of import duties from the assortme nt of trade taxes levied by OECS members certainly impacts government revenues. Equatio n 4-19 allows the quantif ication of the total change in import duties following the elimination of tariff barriers. Al though it is clear that revenues derived from tariffs will be eliminated, the effect on total trade taxes is not unambiguously defined given that the other trade taxes are left intact. In fact, an increase in the revenues generated by these other trade taxes is possi ble if trade liberalization leads to significant increases in the value of trade cr eation. Trade created is subject to levies imposed by the entire array of other border taxes. Revenue effects evaluated in this analysis focus on the primary and direct effects that result from the loss of tariff revenue. Additional simulations were performed to calculate the counterbalancing effects that resu lt from increased volumes of trad e subject to the broader array of trade taxes. The results obtained indicate th at counterbalancing effect s under the low, mid and
111 high scenarios are rather small. The discussi on that follows takes into account the average values obtained for all three elasticities. The revenue effects from the elimination of tariffs in a possible EPA with the EU are summarized in Table 4-11. The reduction in reve nue generated by import duties, as a percentage of total baseline import duties co llected, averaged -10.0% in Anti gua and Barbuda and -21.1% in St Lucia. For the OECS as a group this average value was -15.3%. In terms of tariff revenue as a percentage of total trade taxes, for the OECS this figure stood at -4.4%. For individual OECS members, the reduction ranged from a low of -3.12% in Antigua and Barbuda to a high of -6.7% in St. Lucia. The change in import duties cons equence of tariff elimination in terms of total government revenue, represent a decrease ranging between .1% in St. Kitts and Nevis to -3.28% in St. Lucia. For the OECS as a grouping this figure was -1.7%. The reduction in import duties as a percentage of GDP av eraged -0.5% for the group. In general the revenue effects from the elim ination of tariffs on European imports are rather small. However, it is also clear that there is a difference in how much each of these countries is affected by EU trade liberalization. The country whose revenues are least affected is St. Kitts and Nevis. The country most affected, in relative as well as in ab solute value of flows, is St. Lucia. Counterbalancing effects on total tariff revenue losses can be attained when trade creation exceeds trade diversion and net trade creation is s ubject to levies from the broad assortment of other border charges. The net total revenue effect s, considering these counterbalancing taxes, in the EU liberalization scenario is pr esented in Table 4-12. It is clea r that the elimination of tariffs on EU imports has a further negative effect on most OECS countries. The change in other border taxes due to net trade creation, which in th is scenario is negative, suggests that for the
112 OECS trade liberalization with the EU leads to losses beyond those incurred from the elimination of import duties alone. While the impact of the change in import duties in terms of GDP is -0.46% without the inclusion of c ounterbalancing effects, this figur e is increased to -0.58% as consequence of negative net trade creation and the further loss of tariff revenues. The impact on revenue that derives from of the elimination of duties and exemptions on imports from CARICOM and intra OECS trade, as well as EU libera lization in the second scenario, is presented in Table 4-13. The reduction in revenue as a percentage of total import duties collected, range between 13.2% in Antigua and Barbuda a nd -23.3% in St. Vincent and the Grenadines. In terms of the effects of tari ff elimination on total trade taxes, the reduction in revenues range from -4.1% to -7.5% in Antigua and Barbuda and St. Vincent and the Grenadines respectively. The revenue effects in terms of total government revenues show losses ranging between -1.9% in St. Kitts and Nevis and -3.6% in St. Lucia. Finall y, in terms of GDP the reduction in tariff revenues repres ents about -0.6% for all countries with th e exception of St. Lucia, where case the figure stands at -0.9%. Th e country most affected, as consequence of the removal of tariffs, in terms of net values is St Lucia while the least impacted is Dominica. For the OECS as a group, the elimination of tariffs on EU and Caribbean imports represents a reduction of -19.6% in revenues relative to total baseli ne import duties. In terms of the percentage of total trade taxes, there is a -5.7% reduction in revenu e. The loss of tariff revenues, in terms of total government revenue fo r the OECS, is rather small. In this case revenue losses correspond to -2.2% while in terms of GDP these represent a decrease of -0.6% The counterbalancing trade tax effects from tariff liberalization in this scenario are, as in the previous scenario, negative. Again large nega tive net trade creation values lead to a further decrease in the collectio n of import duties. The change in import duties, in terms of government
113 revenue, amounted to -2.2% without considering counterbalancing effects. When the negative counterbalancing effects were included the change in import duties, as a percent of government revenues, grew to -2.4%. For the group this represented an additional loss of XC$5.9 million as consequence of this liberaliza tion scheme (Table 4-14). Trade liberalization in the third scenari o, which includes tariff elimination on EU, Caribbean and NAFTA imports, has much larger consequence on revenues than the previous two case scenarios. Revenue effects are presented in Table 4-15. Overall, reve nue shortfalls increase four to sevenfold and the declin e in tariff revenues as a percent of total import duties collected ranges from .9% in Dominica to -85.1% in Anti gua and Barbuda. This large change relative the prior cases are indica tive of the important role the United States and Cana da have on OECS imports. The significance of import tariff revenue reduc tions in terms of total trade tax revenue represents an average of -23.6%. With the excep tion of Dominica and Grenada, where this figure stands at less than -20%, all other countries see a decrease in reve nues in excess of -25%. In terms of total government revenues collected, the decline ranges from about -5% in St. Vincent and the Grenadines to about -13% in Antigua and Barbuda. The decline in revenues relative to GDP ranges from -2% to -3% in Dominica and St Vincent and the Grenadines, respectively. The inclusion of the members of NAFTA in th e liberalization scenario clearly raises the scope for trade creation. In this case trad e creation far outweighs trade diversion. Counterbalancing effects from other trade taxes are quite significant yet they do not nearly compensate for tariff revenue losses. Inclusive of counterbalancing taxes the reduction in tariff revenues in terms of total government revenues range from -4.4% in St. Vincent to -11.6% in St.
114 Lucia. For the OECS, net of counterbalancing taxes, tariff revenue lo sses represent -8.2% of GDP. The estimated revenue effects from the elimin ation of tariffs on imports from a FTAA and the EU are summarized in Table 417 and virtually mirror the third liberalization scenario. It is noticeable, as in the trade effects case, that the inclusion of FTAA members only causes a marginal change. The reduction in import duties, as a percentage of total import duties collected, is within the range of -78.6% in Dominica and 91.9% in St Vincent. The inclusion of FTAA members has a larger effect on revenues for St. Vincent than for any of the other OECS members. When tariff elimination is considered in terms of its effects on total trade taxes, this reduction ranges from an average of -18.1% in Do minica to -27.0% in St. Lucia. In terms of total government revenue, tariff elimination rang es between -7.5% in Dominica to -13.1% in Antigua. When the reduction in tariff revenues is considered in terms of size of GDP, these are at about -3%. The introduction of counterbalancing effects is very similar to the previous scenario. These do not nearly compensate for losses in import duties yet they average XC$28.4 million for the OECS (Table 4-18). Imports Most Affected by Tariff Elimination Using the Verdoorn based model, with high ly disaggregated eight-digit import data, permits the identification of products that have the largest trade effects and those that most affect revenues derived from import duties and other border taxes. This information can be useful to policymakers and trade negotiators when in th e process of negotiati ng trade liberalization agreements, especially within the context of sp ecial and differential tr eatment. Tables A-1 through A-24 in appendix A present the ten most affected products for each individual OECS member according to each liberaliz ation scenario. Due to the sim ilarity in results obtained, only
115 the mid elasticity scenario for year 2004 is presented. The sensitive products are sorted and ranked by trade effects as well as by their impact on tariff revenue. In Antigua and Barbuda the top ten most affected products from EU liberalization accounted for 25.3% of the total trad e effect. Medications, alcoholic beverages, tires, cigarettes and some foodstuffs were among these products. In terms of which products most affected revenues, the top ten products accounted for 26.7% of the total change in tariff revenue. For the case of EU and Cari bbean liberalization the top ten most affected products comprised 27.8% of total trade eff ects. Under this scenario, tr ansmission apparatus, rice, and cigarettes accounted for variations and additions to the previous lis t. In terms of the change in import duties the top ten products accounted for 28.9% of total tariff revenues. The inclusion of NAFTA to the trade liberal ization scenario increased the divers ity of products included in the top ten most affected products. In terms of trade effects the top ten products comprised 14.5% of the total trade effects while they accounted for 13.3% of the change in total tariff revenues. Other foodstuffs and motor vehicle parts were included into the mix of top ten products under these scenarios. The inclusion of FTAA left these conditions virtually unchanged. Total trade effects in the EU trade libera lization scenario for Dominica amounted to XC$6.6 million. The top ten most affected cate gories accounted for 29.1% and 42.6% of total trade effects and total tariff re venue effects respectively. Th e top category affecting import duties consisted of frozen fowl wings while other items that made the list were various alcoholic beverages, cigarettes, medicaments and cheese. The inclusion of the la rger Caribbean in the liberalization scenario modified the top ten most affected products li st by the inclusion of transmission equipment and wooden furniture. The top ten categories accounted for 34.3% of
116 total trade effects and 39.5% of total tariff revenue effects. Th e total trade effect under this scenario amounted to XC$8.6 million while th e total tariff effect was XC$4.6 million. The third trade liberalization scenarios that in cluded NAFTA and the fourth scenario of an FTAA were almost identical in the manner they affected the top ten import categories. These accounted for 24.7% and 25.1% of to tal trade effects in the form er and the latter scenarios respectively. They also accounted for 26.6% of total tariff in the NAFTA scenario and for 26.8% of total tariff effects in the FTAA scenario. New inclusions into the top ten lists were other cuts of frozen foul, plywood, and vehicle parts. Trade liberalization with the EU led to trad e effects in the amount of XC$15.4 million and tariff revenue effects of XC$6.5 million in Grenada. The top ten categories of most affected products comprised 30.3% and 30.7 % of total trade effects and total tariff revenue effects, respectively. Vehicles, medicaments, alcoholic beverages and some food products were in these top categories. When liberalization is further extended to include other Caribbean countries the categories do not vary widely. However, gasoline suddenly becomes the top category accounting for 10.6% of the total tariff revenue eff ect. Total trade effect s under this scenario were XC$18.3 million while total tari ff effects amounted to XC$9.1 million. The scenarios inclusive of NAFTA and the FTAA are again virtually identical. Total trade effect amount to XC$44.4 million in the former a nd XC$46.3 million in the la tter. In terms of total tariff revenue effects, these account fo r XC$33.5 million and XC$35. 3 million respectively. The most significant changes over the previous s cenarios, were the inclusion of transmission apparatuswhich become the top most affected categoryand of plyw ood, other foods, stoves, and automatic machines for domestic use.
117 In St. Kitts and Nevis the top ten most aff ected products in the EU trade liberalization scenarios accounted for 34.8% of to tal trade effects. Vehicles, medication, alcoholic beverages, aerated beverages, tires, and some foodstuffs were among these products. In terms of which products most affected import revenues, the t op ten products accounted for 37.5% of the total change in tariff revenue. Total trade effect s amounted to XC$6.7 million while total tariff revenue effects were XC$3.1 million. For the case of EU and Cari bbean liberalization the top ten most affected products comprised 42.6% of total trade effects. Unde r this scenario a noticeable change was the inclusion of other gas oils and gasoline into the top three categories. These two categories accounted for 27.3% of the total tariff revenue eff ects. The inclusion of NAFTA increased the diversity of products included in th e top ten most affected products. In terms of trade effects the top ten products accounted for 23.2% % of the to tal trade effects while they accounted for 22.6% of the change in total tariff revenues. The in clusion of transmission ap paratus in the top ten categories was the most noticeable change. In fa ct this category was the second most affected product. The inclusion of FTAA left these conditions vi rtually unchanged. Total trade effects under the EU trade liberal ization scenario for St. Lucia amounted to XC$25.5 million while total tariff revenue effect s were XC$13.5 million. The top ten most affected categories accounted for 36.4% and 45.7% of total trade effects a nd total tariff revenue effects respectively. The top category included ve hicles, alcoholic beverages, aerated waters, medicaments, and transmission apparatus. Th e inclusion of the larg er Caribbean in the liberalization scenario modified the ranking of the top ten most affected products but not the content. The top ten categories accounted for 42.8% of total trade eff ects and 47.4% of total
118 tariff revenue effects. The total trade eff ect under this scenario amounted to XC$28.5 million while the total tariff effect was XC$16 million. The third and fourth scenarios inclusive of NAFTA and the FTAA scenario were again virtually identical. Total trade effect am ount to XC$65.1 million in the former and XC$66.8 million in the latter. In terms of total tari ff revenue effects, these account for XC$52.5 million and XC$55.2 million respectively. The most aff ected category was transmission apparatus and additional inclusions into the t op ten categories incorporated pl ywood, detergents, and footwear. The top ten most affected categor ies under these scenarios accounted for about 20% of total trade and tariff revenue effects. Trade liberalization with the EU resulted in total trade e ffects of XC$6.5 million and tariff revenue effects of XC$3.5 million in St Vincent and the Grenadines. The top ten categories of most affected products comprised 31.9% and 39.1% of total trade effects and total tariff revenue effects, respectively. Included in the top ten most affected products were refrigerators, different types of foods medicaments and stoves. When liberalization includes ot her Caribbean countries the product list remains virtually unchanged. Total trade effects under this scenario were XC$7.9 million while total tariff e ffects amounted to XC$4.2 million. The EU, Caribbean and NAFTA scenario and th e EU plus FTAA scenario were again very similar. Total trade effect amount to XC$ 18.9 million in the former and XC$19.1 million in the latter. In terms of total tariff revenue effects, these account for XC$15.3 million and XC$16.8 million respectively. The most significant changes over the previous scenarios were the inclusion of several c onstruction materials and household goo ds. Under both of these scenarios plywood is most affected product by trade effects as well as th e one that most affects tariff
119 revenue. Other additions to the list are wood, fr ozen cuts and offal of foul, footwear, and automatic machines for domestic use. Some very broad generalizations can be ma de on the basis of the rankings of most sensitive products. Products that have the largest trade and tariff revenue effects include electrical equipment, parts for vehicles and ve hicles, medicines and liquors. In some cases gasoline and other oil products were also rank ed high. In terms of products that have a significant effect on the collection of tariff revenues these included food products, alcoholic beverages, aerated beverages, transmission appa ratus and petroleum products. The inclusion of the FTAA virtually has no effect and hence sens itive products in the EU Caribbean plus NAFTA scenario and the EU plus FTAA scen ario are virtually identical. Policy Implications A highly stylized model like the one employed in this analysis contains various limitations imposed by rather restrictive assumptions. When addressing policy issues, other broader considerations must be taken into account. Howeve r, certain implications derived from this type of analysis can serve as guideline s in policy decisions. The usefulne ss of this type of analysis, at a highly disaggregated level, can be extended to real, practical a pplication when in the realm of trade negotiations. The identificat ion or pinpointing of products th at most affect tariff revenue, or have the largest trade effects, can be very useful in setting timetables and liberalization phases. However, beyond usefulness in many setti ngs, the analysis performed can be viewed in the broader issue of trade liber alization as policy direction. Prevailing conventional wisdom, primarily de rived from political rather than economic considerations, suggests that the effects of trade liberalization would be very damaging to the OECS in light of their small size and vulnerabilitie s. The implications ar e that exceptions and special considerations should be given to small countries when d ealing with trade liberalization
120 issues. Furthermore, there are those who have argued against broader lib eralization and for the deepening of regional inte gration processes (Ocampo 2002; Egoum-Bossogo and Mendis 2002). The findings from this dissertation provide empirical support to a different narrative and insights from this analysis should help in assess ing the more appropriate courses of action for the OECS. These results coincide with the broade r theoretical arguments and policy suggestions made by Vamvakidis (1999), Schiff (2002), Mc Coy (2000), and Schiff and Winters (2003). These suggest that for small countries such as th e OECS broader trade liberalization is superior to limited regional trade agreements. Schiff (2002) has argued that broad multilateral trade liberalization would best suit these smaller nations particularly if agreements coul d be reached with more developed nations. His work also suggested that liberalization with the EU alone in the form of a regional trade agreement would likely lead to a reduction in welf are for the small countries of the Caribbean. These, he argues, would be better off by join ing an FTAA and by signing free trade agreements with members of the Organization of Economic Cooperation and Development (OECD), rather than committing to an EPA with the EU. Similar arguments are made by Schiff and Wint ers (2003) who suggest that small countries would be better off by moving toward broader nort h-south trade liberalization rather than southsouth regional integration. Mc Coy (2000) has also argued that despite the long tradition of regionalism in the Caribbean, broader integration in to the global economy is preferable to deeper regional integration. In a broade r context, Vamvakidis (1999) has shown that the preferable path for economies embarking on liberalization is non discriminatory openness rather than regional trade agreements.
121 This study seems to support the th eoretical postures noted above The implications derived from this research, and those from the Greenwa y and Milner (2003) and Gasiorek et al. (2006), provide empirical support to broa der theoretical arguments that are consistent with the notion that small countries like the OECS would be be tter served by moving aw ay from regionalism and move closer to multilateral liberalization. While this study addresses the trade and fiscal impacts of trade liberaliz ation using a static framework of analysis, dynamic e ffects are not even considered. It is likely that dynamic considerations would be relevant and imp act these economies positively, therefore lending additional support for the arguments in favor of broa der liberalization. In fa ct, even if the issue of trade liberalization is solely framed as a fisc al impact problem, results from this study suggest the impact on government revenues is modest. When addressing fiscal revenues alternative tax policies might be considered to e xpand the tax base rather than re lying on the more distortionary trade taxes. Although it is generally assumed that dynamic e ffects introduced by trad e liberalization are positive, considerations on the likely dynamics within an economy can be a venue for speculation. While trade liberaliz ation is often feared by policym akers and interest groups likely to be affected, it is perhaps a mechanism thr ough which incentives, entrep reneurship and other dynamics are affected. An illustrative example of what may happen is provided by St. Kitts and Nevis, which until recently considered the idea of existing without its sugar industry unfathomable. This industry was virtually shut down and replaced by other ventures, of which th e electronic component assembly industry is one example. One could extrapolate this example to the setting where the fears of liberalization an d its consequences are portrayed as dr amatic. If the example provided is
122 and indication, it is more likely that the benefits brought about by the dyna mics of liberalization will more than outweigh the costs. Discussion and Implications The trade liberalization scenar ios simulated and discussed ab ove provide surprising insight into the effects of tariff elimin ation. Although it is clear that si mulations performed were limited to the removal of import duties while a broad a rray of other border charges remained, results were nevertheless noteworthy. Trade and tariff re venue effects in all sc enarios simulated were either small or modest. In terms of net trade crea tion and total trade effects it is clear that there is an ordering of results. Broader liberalization leads to higher total trade effects and higher net trade creation. Trade liberalization with the EU in the form of an EPA lead to net negative trade creation, particularly in the mid and high elasticity scen arios. For the OECS, trade liberalization with Europe, in the form of an EPA, not only leads to trade diversion but also lowers government revenue due to negative net trade creation. The liberalization scenar io of the EU plus the larger Caribbean resulted in positive net trade creati on for the OECS. Tariff revenue effects remain small and both these results are perhaps relate d to the OECS already having low barriers on Caribbean imports despite occasional exemptions. The inclusion of NAFTA to the EU and Caribbe an in the third scenario lead to large changes in net trade creation. This was expected as the United States a nd Canada are important trade partners for the OECS. Despite significant increases in trade creation, total trade effects remain modest. Tariff revenues in this broader liberalization scenario, ho wever, are larger yet modest. The EU plus FTAA scenario is virtuall y identical to the EU plus NAFTA scenario. This is perhaps due to limited trade between these countries and the OECS and suggests that the FTAA would not increase trade sign ificantly. It remains clear fr om the results obtained from
123 these simulations that the elimination of import duties in the OECS would lead to small changes in trade and tariff effects. The broader the trad e liberalization regime, the higher are the welfare gains. The identification of products most affected by trade liberalization in terms of trade effects, and those that have the largest effect in ta riff revenue collection for all OECS members are primarily those which have no domestic production. However, there are a few items one could speculate could be produced domestically. Su ch products include oil derivatives, aerated beverages, sweet biscuits, sausages, fowl, ch eeses, beer, spirits and some other foods among agricultural and raw materials. However, the most significant products in the lists of most affected goods are manufactured goods such as ve hicles, vehicles parts, electrical apparatus, medicines, and household durable goods. The iden tification of these pro ducts can prove useful in the process of trade nego tiations and the phasing in of liberalization schedules. The overall picture that emerge s from the above analysis is that the elimination of import duties in the OECS would lead to small changes in trade and tari ff effects. The products most affected by liberalization suggest that consumers would gain fr om liberalization and the fear inspired by trade liberalization has very little merit in light of the results ob tained. In fact, these results tend to support theoretical work of advoc ates for broader trade liberalization who have argued against further regionalizati on. In light of the findings in this study, the more appropriate courses of action for the OECS would follow th e recommendations of those favoring broader liberalization.
124 Table 4-1. Assumed elasticity values Product Category Elasticity of Import Demand Elasticity of Substitution Low Mid High Low Mid High Agricultural Prod. ( 01-24 ) -0.56 -0.97 -1.39 1.39 2.78 4.17 Raw Materials ( 25-27 ) -0.83 -1.25 -1.67 2.78 4.86 8.34 Manufactured Goods ( 28-97 ) -1.11 -1.53 -1.95 2.50 4.17 4.17 Table 4-2. Pre-simulation values for total imports and government revenues CIF Import value in XC$ Total govt revenues1 in XC$ Total trade taxes in XC$ Total import duties in XC$ Total trade taxes as % govt rev Total import duty as % of trade taxes Total import duty as % of govt rev Antigua & Barbuda 1,182,452,054 468,200,000 230,909,615 71,842,256 49.3 31.1 15.3 Dominica 369,459,384 210,600,000 87,215,790 20,126,588 41.4 23.1 9.6 Grenada 678,030,877 328,600,000 151,462,678 36,027,116 46.1 23.8 11.0 St. Kitts & Nevis 550,522,989 305,633,333 98,128,478 30,888,597 32.1 31.5 10.1 St. Lucia 1,251,803,345 483,666,667 236,905,241 75,248,170 49.0 31.8 15.6 St. Vincent 137,049,582 310,733,333 57,827,157 18,521,100 18.6 32.0 6.0 OECS Avg. 497,811,030 273,205,556 10 5,256,557 30,135,262 31.2 23.7 8.7 1 ECCB data
125 Table 4-3. Trade tax and tariff structure for OECS members Average total trade taxes Average tariff rates Tariff rate for EU imports Tariff rate for EU & Caribbean scenario Tariff rate for EU & NAFTA scenario Tariff rate for EU & FTAA scenario Antigua Ag. Prod 01-24 31.94 14.66 16.66 9.69 14.10 13.98 Raw Mat.25-27 21.84 5.73 7.89 4.67 5.20 5.10 Mfg Prod 28-97 36.90 9.71 7.86 7.12 8.10 8.57 Aggregate Rate 35.89 10.54 13.14 7.65 9.20 9.54 Dominica Ag. Prod 01-24 40.92 17.08 18.60 8.84 14.85 14.87 Raw Mat.25-27 29.20 8.92 9.77 4.94 5.16 5.78 Mfg Prod 28-97 26.89 9.37 6.80 5.77 7.81 8.27 Aggregate Rate 28.84 10.43 8.16 6.23 8.90 9.26 Grenada Ag. Prod 01-24 36.06 14.25 16.09 9.48 14.29 14.36 Raw Mat.25-27 23.09 4.67 5.73 3.30 4.29 4.37 Mfg Prod 28-97 30.76 8.42 7.12 6.03 7.04 7.50 Aggregate Rate 31.31 9.08 8.14 6.46 8.09 8.47 St. Kitts Ag. Prod 01-24 36.47 12.83 16.30 8.46 12.50 12.58 Raw Mat.25-27 20.23 5.27 11.24 3.39 5.09 5.09 Mfg Prod 28-97 31.47 10.27 7.86 7.16 8.38 8.94 Aggregate Rate 32.12 10.61 8.78 7.33 9.06 9.52 St. Lucia Ag. Prod 01-24 32.54 14.44 18.33 10.99 14.26 13.83 Raw Mat.25-27 14.57 4.83 7.38 3.57 4.02 4.18 Mfg Prod 28-97 24.36 7.82 6.18 5.28 6.35 6.88 Aggregate Rate 25.27 8.61 7.46 6.02 7.49 7.94 St. Vincent Ag. Prod 01-24 47.13 20.57 20.69 19.91 20.51 20.47 Raw Mat.25-27 28.65 8.53 9.34 9.10 8.32 8.28 Mfg Prod 28-97 43.12 13.34 12.08 12.53 12.25 12.70 Aggregate Rate 43.70 14.56 14.10 14.20 13.98 14.20
126 Table 4-3 Continued Average total trade taxes Average tariff rates Tariff rate for EU imports Tariff rate for EU & Caribbean scenario Tariff rate for EU & NAFTA scenario Tariff rate for EU & FTAA scenario OECS Average Ag. Prod 01-24 37.51 15.64 17.78 11.23 15.09 15.02 Raw Mat.25-27 22.93 6.33 8.56 4.83 5.35 5.47 Mfg Prod 28-97 32.25 9.82 7.98 7.32 8.32 8.81 Aggregate Rate 32.86 10.64 9.96 7.98 9.45 9.82
127 Table 4-4. Ten major trading pa rtners for OECS members in 2004 Share 2004 Share 2004 Share 2004 Antigua & Barbuda Dominica Grenada United States 41.59 United Stat es 34.23 United States 30.65 Puerto Rico 8.81 Trinidad & Tobago 17.75 Trinidad & Tobago 27.88 United Kingdom 8.30 Japan 6.65 Japan 7.89 Curacao 6.87 United Kingdom 6.52 United Kingdom 6.39 Trinidad &Tobago 6.09 France 3.35 Barbados 2.28 Japan 5.05 Barbados 3.30 Canada 2.16 New Zealand 1.90 St Lucia 2.75 Brazil 1.91 Italy 1.72 Canada 2.65 Germany 1.83 Canada 1.62 Jamaica 1.58 China 1.68 Barbados 1.56 China 1.36 France 1.51 St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines United States 53.23 United States 35.98 United States 52.18 Trinidad & Tobago 14.12 Trinidad And Tobago 13.85 United Kingdom 8.98 United Kingdom 7.71 Us Virgin Islands 10.30 Canada 5.64 Puerto Rico 4.26 United Kingdom 6.77 Brazil 4.49 Canada 3.58 Japan 3.26 China 4.39 Japan 3.19 Barbados 2.90 Panama 2.27 Barbados 2.72 Finland 2.45 Puerto Rico 1.82 Germany 1.00 China 2.27 Honduras 1.56 (Dutch) St. Maarten 0.98 Canada 2.17 Trinidad and Tobago 1.48 Jamaica 0.83 France 1.51 Netherlands 1.33
128 Table 4-5. Top ten imports pre-simula tion imports in 2004 for OECS members25 Antigua Dominica No. Commodity code description CIF value in XC$ Commodity code description CIF value in XC$ 1 Other Kerosene And Other Medium Oils (No Gas Oils) 85,705,428 Other Gas Oils 19,034,790 2 Yachts & Other Vessels: Sailboats With/Without Motor 70,121,673 Other Motor Spirit (Gasoline) 18,219,115 3 Other Gas Oils 51,188,107 Tallow 7,852,112 4 Motor Spirit (Gasoline) 46,578,316 Transmissi on. Reception Appara.: Portable Radio-Telep 7,084,185 5 Other Bunker "C" Grade Fuel Oil 38,871,884 Building Cement (Grey) 5,692,023 6 Completely Knocked Down 1500cc1800cc, 16,924,623 Parts 5,685,097 7 Other Spark Ignition Vehicles, New 16,136,479 Cartons, Boxes & Cases, Of Corrugated Paper Paperboards 5,361,816 8 Articles Jewellery of Gold 10,792,738 Of A Cylinder Capacity Exceeding 1500cc1800cc 5,203,405 9 Of A Cylinder Capacity Exceeding 1500cc But Not Exceeding 1800cc 10,724,219 Other Cuts And Offals Of Fouls Frozen 4,982,344 10 Other Cuts And Offals Of Fouls Frozen 9,964,686 G.V.W. Not Exceed ing 5 Tonnes: 4,884,145 25 HS commodity code descriptions in Chapter 4 and Appendix A were drawn from eight-digit data provided by Resources International in Antigua.
129 Table 4-5. Continued Grenada St. Kitts No. Commodity code description CIF value in XC$ Commodity code description CIF value in XC$ 1 Other Gas Oils 32,279,708 Other Gas Oils 18,888,744 2 Other Motor Spirit (Gasoline) 31,424,294 Other Motor Spirit (Gasoline) 17,149,345 3 Of A Cylinder Capacity Exceeding 1500cc But Not Exceeding 1800cc 11,210,513 Bank And Currency Notes 7,376,960 4 Other Liquefied 9,120,883 Building Cement (Grey) 7,083,552 5 Building Cement (Grey) 7,655,636 Other Articles Of Iron Or Steel 6,974,002 6 Transmission Reception Appara.: Portable Radio-Teleph 6,956,883 Other Switches 6,927,291 7 G.V.W. Not Exceeding 5 Tonnes: Other 5,976,799 Other Food Preparations Not Elsewhere Specified 6,824,252 8 Other Printed Books, Leaflets Similar Printed Matter 5,598,968 Other Printed Books, Brochures, Leaflets Similar Printed Matter 6,501,445 9 Of A Cylinder Capacity Exceeding 2000cc to 3000cc 5,445,792 Other Articles Of Plastics/Articles Of Other Materials Heading 39.01 5,493,583 10 Other Coaches, Buses And MiniBuses Of A Seating Cap <= 21 Per 5,270,755 Other Plywood 5,194,474
130 Table 4-5. Continued St. Lucia St. Vincent and the Grenadines No. Commodity code description CIF value in XC$ Commodity code description CIF value in XC$ 1 Other Gas Oils 113,216,686 Other Cuts And Offal Of Fouls Frozen 6,365,472 2 Other Motor Spirit (Gasoline) 49,975,865 Other Plywood 5,633,354 3 Articles Of Jewellery Of Gold 30,078,050 Other Coniferous Wood 4,185,28 4 Transmission Reception Appara.: Portable Radio-Telephone 15,577,437 Tiles Cubes & Similar Articles 2,847,862 5 Gas Oils Exported Under The Processing Agreement 12,136,761 Other, Coniferous 2,656,595 6 Other Plywood 11,948,633 Other Sugar 1,826,682 7 Other Cuts And Offals Of Fouls Frozen 11,674,222 Processed Cheese, Not Grated Or Powdered 1,688,842 8 Other Printed Books, Brochures, Leaflets And Similar Printed Matter 11,443,127 Canned Corned Beef Of Bovine Animals 1,672,717 9 Building Cement (Grey) 10,887,528 Other Milk And Cream Not Containing Added Sugar Or Sweetening Matter 1,559,506 10 Other Compression-Ignition Internal Combustion Piston Engines 10,391,584 Sandals And Slippers 1,488,232
131 Table 4-6. Trade effects from tariff elimination on EU imports Trade creation (TC) in XC$ Trade diversion (TD) in XC$ TC-TD in XC$ Total trade effects in XC$ Trade effects as percent of total imports Antigua & Barbuda Low 3,078,595 7,234,316 -4,155,721 10,312,911 0.87 Mid 4,732,945 12,484,483 -7,751,538 17,217,428 1.46 High 6,411,978 17,430,220 -11,018,242 23,842,198 2.02 Dominica Low 1,364,632 2,379,888 -1,015,256 3,744,520 1.01 Mid 2,093,178 3,991,977 -1,898,799 6,085,155 1.65 High 2,832,378 5,491,880 -2,659,502 8,324,258 2.25 Grenada Low 2,780,180 5,759,972 -2,979,792 8,540,152 1.24 Mid 4,115,824 9,561,609 -5,445,785 13,677,433 1.98 High 5,465,681 13,040,578 -7,574,897 18,506,259 2.68 St. Kitts & Nevis Low 1,385,319 3,230,576 -1,845,257 4,615,895 0.87 Mid 2,054,907 5,375,838 -3,320,931 7,430,745 1.40 High 2,731,823 7,339,908 -4,608,085 10,071,731 1.90 St. Lucia Low 6,075,248 12,195,437 -6,120,189 18,270,685 1.46 Mid 9,209,535 20,715,533 -11,505,998 29,925,068 2.39 High 12,385,871 28,673,694 -16,287,823 41,059,565 3.28 St. Vincent & Grenadines Low 1,598,293 2,618,217 -1,019,924 4,216,510 3.08 Mid 2,386,600 4,363,981 -1,977,381 6,750,581 4.93 High 3,184,157 5,964,901 -2,780,744 9,149,058 6.68 OECS Total Low 16,282,267 33,418,406 -17,136,139 49,700,673 Mid 24,592,989 56,493,421 -31,900,432 81,086,410 High 33,011,888 77,941,181 -44,929,293 110,953,069 OECS Average Low 2,713,711 5,569,734 -2,856,023 8,283,446 1.42 Mid 4,098,832 9,415,570 -5,316,739 13,514,402 2.30 High 5,501,981 12,990,197 -7,488,216 18,492,178 3.13
132 Table 4-7. Trade effects from tariff e limination on EU and Caribbean imports Trade creation (TC) in XC$ Trade diversion (TD) in XC$ TC-TD in XC$ Total trade effects in XC$ Trade effects as percent of total imports Antigua & Barbuda Low 4,306,823 8,108,934 -3,802,111 12,415,757 1.05 Mid 6,490,436 13,705,948 -7,215,512 20,196,384 1.71 High 8,701,957 18,892,628 -10,190,671 27,594,585 2.33 Dominica Low 1,848,053 2,663,399 -815,346 4,511,452 1.22 Mid 2,784,120 4,382,660 -1,598,540 7,166,780 1.94 High 3,731,906 5,948,189 -2,216,283 9,680,095 2.62 Grenada Low 3,906,168 5,796,601 -1,890,433 9,702,769 1.41 Mid 5,777,947 9,526,465 -3,748,518 15,304,412 2.22 High 7,665,225 13,027,007 -5,361,782 20,692,232 3.00 St. Kitts & Nevis Low 2,856,095 3,820,050 -963,955 6,676,145 1.26 Mid 4,247,565 6,323,414 -2,075,849 10,570,979 1.99 High 5,648,168 8,656,347 -3,008,179 14,304,515 2.70 St. Lucia Low 7,004,405 11,513,678 -4,509,273 18,518,083 1.48 Mid 10,516,491 19,160,671 -8,644,180 29,677,162 2.37 High 14,071,922 26,160,711 -12,088,789 40,232,633 3.21 St. Vincent & Grenadines Low 1,948,186 3,083,686 -1,135,500 5,031,872 3.67 Mid 2,902,366 5,103,736 -2,201,370 8,006,102 5.84 High 3,867,475 6,945,949 -3,078,474 10,813,424 7.89 OECS Total Low 21,869,730 34,986,348 -13,116,618 56,856,078 Mid 32,718,925 58,202,894 -25,483,969 90,921,819 High 43,686,653 79,630,831 -35,944,178 123,317,484 OECS Average Low 3,644,955 5,831,058 -2,186,103 9,476,013 1.68 Mid 5,453,154 9,700,482 -4,247,328 15,153,637 2.68 High 7,281,109 13,271,805 -5,990,696 20,552,914 3.63
133 Table 4-8. Trade effects from tariff elim ination on EU, Caribbean and NAFTA imports Trade creation (TC) in XC$ Trade diversion (TD) in XC$ TC-TD in XC$ Total trade effects in XC$ Trade effects as percent of total imports Antigua & Barbuda Low 34,494,905 11,077,924 23,416,981 45,572,829 3.85 Mid 51,615,149 18,009,669 33,605,480 69,624,818 5.89 High 68,938,725 24,213,728 44,724,997 93,152,453 7.88 Dominica Low 8,877,337 3,833,801 5,043,536 12,711,138 3.44 Mid 13,000,776 6,164,933 6,835,843 19,165,709 5.19 High 17,161,905 8,240,110 8,921,795 25,402,015 6.88 Grenada Low 17,862,102 7,814,051 10,048,051 25,676,153 3.72 Mid 26,067,437 12,630,729 13,436,708 38,698,166 5.61 High 34,340,291 16,918,389 17,421,902 51,258,680 7.43 St. Kitts & Nevis Low 15,598,288 4,219,043 11,379,245 19,817,331 3.74 Mid 22,833,737 6,926,946 15,906,791 29,760,683 5.61 High 30,129,000 9,978,383 20,150,617 40,107,383 7.56 St. Lucia Low 33,704,409 16,474,309 17,230,100 50,178,718 4.01 Mid 49,520,886 26,512,840 23,008,046 76,033,726 6.07 High 65,490,204 35,397,593 30,092,611 100,887,797 8.06 St. Vincent & Grenadines Low 6,605,892 3,560,052 3,045,840 10,165,944 7.42 Mid 9,686,443 5,769,457 3,916,986 15,455,900 11.28 High 12,796,060 7,743,627 5,052,433 20,539,687 14.99 OECS Total Low 117,142,933 46,979,180 70,163,753 164,122,113 Mid 172,724,428 76,014,574 96,709,854 248,739,002 High 228,856,185 102,491,830 126,364,355 331,348,015 OECS Average Low 19,523,822 7,829,863 11,693,959 27,353,686 4.36 Mid 28,787,405 12,669,096 16,118,309 41,456,500 6.61 High 38,142,698 17,081,972 21,060,726 55,224,669 8.80
134 Table 4-9. Trade effects from tariff elimination on EU plus FTAA imports Trade creation (TC) in XC$ Trade diversion (TD) in XC$ TC-TD in XC$ Total trade effects in XC$ Trade effects as percent of total imports Antigua & Barbuda Low 36,161,956 8,000,766 28,161,190 44,162,722 3.73 Mid 53,995,383 12,983,086 41,012,297 66,978,469 5.66 High 72,036,049 17,983,086 54,052,963 90,019,135 7.61 Dominica Low 9,615,325 3,137,234 6,478,091 12,752,559 3.45 Mid 14,070,248 5,026,595 9,043,653 19,096,843 5.17 High 18,564,165 6,695,614 11,868,551 25,259,779 6.84 Grenada Low 19,021,129 7,034,696 11,986,433 26,055,825 3.77 Mid 27,760,724 11,337,491 16,423,233 39,098,215 5.66 High 36,572,670 15,155,696 21,416,974 51,728,366 7.49 St. Kitts & Nevis Low 16,137,950 3,537,935 12,600,015 19,675,885 3.71 Mid 23,601,736 5,651,849 17,949,887 29,253,585 5.52 High 31,126,555 7,507,563 23,618,992 38,634,118 7.29 St. Lucia Low 36,357,031 13,410,297 22,946,734 49,767,328 3.98 Mid 53,354,654 21,409,318 31,945,336 74,763,972 5.97 High 70,514,075 28,427,537 42,086,538 98,941,612 7.90 St. Vincent & Grenadines Low 10,040,486 2,434,352 7,606,134 12,474,838 9.10 Mid 14,638,712 3,907,615 10,731,097 18,546,327 13.53 High 19,276,817 5,212,313 14,064,504 24,489,130 17.87 OECS Total Low 127,333,877 37,555,280 89,778,597 164,889,157 Mid 187,421,457 60,315,954 127,105,503 247,737,411 High 248,090,331 80,981,809 167,108,522 329,072,140 OECS Average Low 21,222,313 6,259,213 14,963,100 27,481,526 4.62 Mid 31,236,910 10,052,659 21,184,251 41,289,569 6.92 High 41,348,389 13,496,968 27,851,420 54,845,357 9.17
135 Table 4-10. Summary of trade e ffects as percent of total impor ts according to liberalization scenario EU Scenario EU+ Caribbean scenario EU+Caribbean +NAFTA scenario EU plus FTAA scenario Antigua & Barbuda Low 0.87 1.05 3.85 3.73 Mid 1.46 1.71 5.89 5.66 High 2.02 2.33 7.88 7.61 Dominica Low 1.01 1.22 3.44 3.45 Mid 1.65 1.94 5.19 5.17 High 2.25 2.62 6.88 6.84 Grenada Low 1.24 1.41 3.72 3.77 Mid 1.98 2.22 5.61 5.66 High 2.68 3.00 7.43 7.49 St. Kitts & Nevis Low 0.87 1.26 3.74 3.71 Mid 1.40 1.99 5.61 5.52 High 1.90 2.70 7.56 7.29 St. Lucia Low 1.46 1.48 4.01 3.98 Mid 2.39 2.37 6.07 5.97 High 3.28 3.21 8.06 7.90 St. Vincent & Grenadines Low 3.08 3.67 7.42 9.10 Mid 4.93 5.84 11.28 13.53 High 6.68 7.89 14.99 17.87 OECS Average Low 1.42 1.68 4.36 4.62 Mid 2.30 2.68 6.61 6.92 High 3.13 3.63 8.80 9.17
136 Table 4-11. Tariff revenue effects from tariff elimination on EU imports Change in import duties in XC$ Change in import duties as percent of total baseline import duties Change in import duties as percent of total trade taxes Change in import duties as percent of total govt revenue Change as percent of GDP Antigua & Barbuda Low -6,512,842 -9.07 -2.82 -1.39 -0.30 Mid -7,223,546 -10.05 -3.13 -1.54 -0.33 High -7,894,973 -10.99 -3.42 -1.69 -0.36 Avg. -7,210,454 -10.04 -3.12 -1.54 -0.33 Dominica Low -2,871,187 -14.27 -3.29 -1.36 -0.40 Mid -3,111,239 -15.46 -3.57 -1.48 -0.43 High -3,337,761 -16.58 -3.83 -1.58 -0.46 Avg. -3,106,729 -15.44 -3.56 -1.48 -0.43 Grenada Low -5,158,358 -14.32 -3.37 -1.57 -0.44 Mid -5,630,696 -15.63 -3.68 -1.71 -0.49 High -6,065,978 -16.84 -3.96 -1.85 -0.52 Avg. -5,618,344 -15.60 -3.67 -1.71 -0.48 St. Kitts & Nevis Low -2,955,884 -9.35 -2.97 -0.97 -0.29 Mid -3,306,706 -10.46 -3.32 -1.08 -0.33 High -3,626,601 -11.47 -3.64 -1.19 -0.36 Avg. -3,296,397 -10.43 -3.31 -1.08 -0.33 St. Lucia Low -14,412,825 -19.15 -6.08 -2.98 -0.75 Mid -15,877,030 -21.10 -6.70 -3.28 -0.82 High -17,251,815 -22.93 -7.28 -3.57 -0.89 Avg. -15,847,223 -21.06 -6.69 -3.28 -0.82 St. Vincent & Grenadines Low -3,260,861 -17.61 -5.64 -1.05 -0.32 Mid -3,600,408 -19.44 -6.23 -1.16 -0.35 High -3,912,004 -21.12 -6.76 -1.26 -0.38 Avg. -3,591,091 -19.39 -6.21 -1.16 -0.35 OECS Average Low -5,861,993 -13.96 -4.03 -1.55 -0.42 Mid -6,458,271 -15.36 -4.44 -1.71 -0.46 High -7,014,855 -16.66 -4.82 -1.85 -0.50 Avg. -6,445,040 -15.32 -4.43 -1.71 -0.46 OECS Total Low -35,171,957 Mid -38,749,625 High -42,089,132 Avg. -38,670,238
137 Table 4-12. Total trade tax revenues inclusive of total trade counterbala nce effects from tariff elimination on EU imports Change in import duties in XC$ Counterbalancing change in other border taxes Total revenue effect Change as percent of total trade tax Change as percent of total govt revenue Antigua & Barbuda Low -6,512,842 -972,612 -7,485,454 -3.24 -1.60 Mid -7,223,546 -1,764,223 -8,987,769 -3.89 -1.92 High -7,894,973 -2,461,275 -10,356,248 -4.48 -2.21 Avg. -7,210,454 -1,732,703 -8,943,157 -3.87 -1.91 Dominica Low -2,871,187 -235,3 80 -3,106,567 -3.56 -1.48 Mid -3,111,239 -412,4 09 -3,523,648 -4.04 -1.67 High -3,337,761 -564,100 -3,901,861 -4.47 -1.85 Avg. -3,106,729 -403 ,963 -3,510,692 -4.03 -1.67 Grenada Low -5,158,358 -683,3 78 -5,841,736 -3.81 -1.78 Mid -5,630,696 -1,241,388 -6,872,084 -4.49 -2.09 High -6,065,978 -1,719,276 -7,785,254 -5.08 -2.37 Avg. -5,618,344 -1,214,681 -6,833,025 -4.46 -2.08 St. Kitts & Nevis Low -2,955,884 -480,7 06 -3,436,590 -3.45 -1.12 Mid -3,306,706 -812,7 15 -4,119,421 -4.14 -1.35 High -3,626,601 -1,105,034 -4,731,635 -4.75 -1.55 Avg. -3,296,397 -799 ,485 -4,095,882 -4.11 -1.34 St. Lucia Low -14,412,825 -1,032,587 -15,445,412 -6.52 -3.19 Mid -15,877,030 -1,920,986 -17,798,016 -7.51 -3.68 High -17,251,815 -2,697,157 -19,948,972 -8.42 -4.12 Avg. -15,847,223 -1,883,577 -17,730,800 -7.48 -3.67 St. Vincent & Grenadines Low -3,260,861 -295,9 52 -3,556,813 -6.15 -1.14 Mid -3,600,408 -571,0 54 -4,171,462 -7.21 -1.34 High -3,912,004 -800,607 -4,712,611 -8.15 -1.52 Avg. -3,591,091 -555 ,871 -4,146,962 -7.17 -1.33 OECS Average Low -5,861,993 -616,7 69 -6,478,762 -4.46 -1.72 Mid -6,458,271 -1,120,463 -7,578,733 -5.21 -2.01 High -7,014,855 -1,557,908 -8,572,764 -5.89 -2.27 Avg. -6,445,040 -1,098,380 -7,543,420 -5.19 -2.00 OECS Total Low -35,171,957 -3,700,615 -38,872,572 Mid -38,749,625 -6,722,775 -45,472,400 High -42,089,132 -9,347,449 -51,436,581 Avg. -38,670,238 -6,590,280 -45,260,518
138 Table 4-13. Tariff revenue effects from tari ff elimination on EU and Caribbean imports Change in import duties in XC$ Change in import duties as percent of total baseline import duties Change in import duties as percent of total trade taxes Change in import duties as percent of total govt revenue Change as percent of GDP Antigua & Barbuda Low -8,637,243 -12.02 -3.74 -1.84 -0.39 Mid -9,530,418 -13.27 -4.13 -2.04 -0.43 High -10,364,356 -14.43 -4.49 -2.21 -0.47 Avg. -9,510,672 -13.24 -4.12 -2.03 -0.43 Dominica Low -3,650,679 -18.14 -4.19 -1.73 -0.51 Mid -3,930,487 -19.53 -4.51 -1.87 -0.55 High -4,188,856 -20.81 -4.80 -1.99 -0.58 Avg. -3,923,341 -19.49 -4.50 -1.86 -0.55 Grenada Low -6,902,295 -19.16 -4.51 -2.10 -0.60 Mid -7,378,435 -20.48 -4.82 -2.25 -0.64 High -7,810,288 -21.68 -5.10 -2.38 -0.67 Avg. -7,363,673 -20.44 -4.81 -2.24 -0.64 St. Kitts & Nevis Low -5,292,549 -16.74 -5.32 -1.73 -0.53 Mid -5,752,403 -18.20 -5.78 -1.88 -0.57 High -6,179,320 -19.55 -6.21 -2.02 -0.61 Avg. -5,741,424 -18.16 -5.77 -1.88 -0.57 St. Lucia Low -15,877,403 -21.10 -6.70 -3.28 -0.82 Mid -17,414,091 -23.14 -7.35 -3.60 -0.90 High -18,834,142 -25.03 -7.95 -3.89 -0.98 Avg. -17,375,212 -23.09 -7.33 -3.59 -0.90 St. Vincent & Grenadines Low -3,927,314 -21.20 -6.79 -1.26 -0.38 Mid -4,317,819 -23.31 -7.47 -1.39 -0.42 High -4,674,682 -25.24 -8.08 -1.50 -0.45 Avg. -4,306,605 -23.25 -7.45 -1.39 -0.42 OECS Average Low -7,381,247 -18.06 -5.21 -1.99 -0.54 Mid -8,053,942 -19.65 -5.67 -2.17 -0.58 High -8,675,274 -21.12 -6.11 -2.33 -0.63 Avg. -8,036,821 -19.61 -5.66 -2.17 -0.58 OECS Total Low -44,287,483 Mid -48,323,653 High -52,051,644 Avg. -48,220,927
139 Table 4-14. Total trade tax revenues inclusive of total trade counterbala nce effects from tariff elimination on EU and Caribbean imports Change in import duties in XC$ Counterbalancing change in other border taxes Total revenue effect Change as percent of total trade tax Change as percent of total govt revenue Antigua & Barbuda Low -8,637,243 -1,053,199 -9,690,442 -4.20 -2.07 Mid 9,530,418 -1,973,908 -11,504,326 -4.98 -2.46 High -10,364,356 -2,764,999 -13,129,355 -5.69 -2.80 Avg. -9,510,672 -1,930,702 -11,441,374 -4.95 -2.44 Dominica Low -3,650,679 -155,4 87 -3,806,166 -4.36 -1.81 Mid -3,930,487 -319,5 09 -4,249,996 -4.87 -2.02 High -4,188,856 -447,874 -4,636,730 -5.32 -2.20 Avg. -3,923,341 -307 ,623 -4,230,964 -4.85 -2.01 Grenada Low -6,902,295 -488,5 96 -7,390,891 -4.82 -2.25 Mid -7,378,435 -960,0 27 -8,338,462 -5.44 -2.54 High -7,810,288 -1,365,016 -9,175,304 -5.99 -2.79 Avg. -7,363,673 -937 ,880 -8,301,552 -5.42 -2.53 St. Kitts & Nevis Low -5,292,549 -120,0 98 -5,412,647 -5.44 -1.77 Mid -5,752,403 -521,4 47 -6,273,850 -6.30 -2.05 High -6,179,320 -656,384 -6,835,704 -6.87 -2.24 Avg. -5,741,424 -432 ,643 -6,174,067 -6.20 -2.02 St. Lucia Low -15,877,403 -870,692 -16,748,095 -7.07 -3.46 Mid -17,414,091 -1,680,234 -19,094,325 -8.06 -3.95 High -18,834,142 -2,356,621 -21,190,763 -8.94 -4.38 Avg. -17,375,212 -1,635,849 -19,011,061 -8.02 -3.93 St. Vincent & Grenadines Low -3,927,314 -332,7 48 -4,260,062 -7.37 -1.37 Mid -4,317,819 -642,5 63 -4,960,382 -8.58 -1.60 High -4,674,682 -896,587 -5,571,269 -9.63 -1.79 Avg. -4,306,605 -623 ,966 -4,930,571 -8.53 -1.59 OECS Average Low -7,381,247 -503,4 70 -7,884,717 -5.54 -2.12 Mid -8,053,942 -1,016,281 -9,070,224 -6.37 -2.43 High -8,675,274 -1,414,580 -10,089,854 -7.07 -2.70 Avg. -8,036,821 -978 ,111 -9,014,932 -6.33 -2.42 OECS Total Low -44,287,483 -3,020,820 -47,308,303 Mid -48,323,653 -6,097,688 -54,421,341 High -52,051,644 -8,487,481 -60,539,125 Avg. -48,220,927 -5,868,663 -54,089,590
140 Table 4-15. Tariff revenue effects from ta riff elimination on EU, Caribbean, and NAFTA imports Change in import duties in XC$ Change in import duties as percent of total baseline import duties Change in import duties as percent of total trade taxes Change in import duties as percent of total govt revenue Change as percent of GDP Antigua & Barbuda Low -60,011,882 -83.53 -25.99 -12.82 -2.73 Mid -61,200,618 -85.19 -26.50 -13.07 -2.78 High -62,265,778 -86.67 -26.97 -13.30 -2.83 Avg. -61,159,426 -85.13 -26.49 -13.06 -2.78 Dominica Low -14,505,735 -72.07 -16.63 -6.89 -2.02 Mid -14,879,855 -73.93 -17.06 -7.07 -2.07 High -15,215,594 -75.60 -17.45 -7.22 -2.12 Avg. -14,867,061 -73.87 -17.05 -7.06 -2.07 Grenada Low -28,629,907 -79.48 -18.69 -8.71 -2.47 Mid -29,369,622 -81.53 -19.17 -8.94 -2.53 High -30,031,452 -83.37 -19.60 -9.14 -2.59 Avg. -29,343,660 -81.46 -19.15 -8.93 -2.53 St. Kitts & Nevis Low -25,472,431 -80.57 -25.59 -8.33 -2.53 Mid -26,192,819 -82.85 -26.31 -8.57 -2.60 High -27,010,657 -85.44 -27.13 -8.84 -2.68 Avg. -26,225,302 -82.96 -26.34 -8.58 -2.60 St. Lucia Low -58,488,086 -77.73 -24.69 -12.09 -3.03 Mid -60,366,765 -80.22 -25.48 -12.48 -3.13 High -62,032,931 -82.44 -26.18 -12.83 -3.22 Avg. -60,295,927 -80.13 -25.45 -12.47 -3.13 St. Vincent & Grenadines Low -15,304,025 -82.63 -26.47 -4.93 -1.48 Mid -15,714,544 -84.85 -27.18 -5.06 -1.52 High -16,077,825 -86.81 -27.80 -5.17 -1.56 Avg. -15,698,798 -84.76 -27.15 -5.05 -1.52 OECS Average Low -33,735,344 -79.34 -23.01 -8.96 -2.38 Mid -34,620,704 -81.43 -23.62 -9.20 -2.44 High -35,439,040 -83.39 -24.19 -9.42 -2.50 Avg. -34,598,363 -81.38 -23.60 -9.19 -2.44 OECS Total Low -202,412,066 Mid -207,724,223 High -212,634,237 Avg. -207,590,175
141 Table 4-16. Total trade tax revenues inclusive of total trade counterbala nce effects from tariff elimination on EU, Caribbean and NAFTA imports Change in import duties in XC$ Counterbalancing change in other border taxes Total revenue effect Change as percent of total trade tax Change as percent of total govt revenue Antigua & Barbuda Low -60,011,882 5,624,472 -54,387,410 -23.55 -11.62 Mid -61,200,618 7,778,971 -53,421,647 -23.14 -11.41 High -62,265,778 10,180,916 -52,084,862 -22.56 -11.12 Avg. -61,159,426 7,861,453 -53,297,973 -23.08 -11.38 Dominica Low -14,505,735 1,092,998 -13,412,737 -15.38 -6.37 Mid -14,879,855 1,524,985 -13,354,870 -15.31 -6.34 High -15,215,594 2,014,801 -13,200,793 -15.14 -6.27 Avg. -14,867,061 1,544,261 -13,322,800 -15.28 -6.33 Grenada Low -28,629,907 2,284,864 -26,345,043 -17.20 -8.02 Mid -29,369,622 3,029,139 -26,340,483 -17.19 -8.02 High -30,031,452 3,913,972 -26,117,480 -17.05 -7.95 Avg. -29,343,660 3,075,992 -26,267,669 -17.15 -7.99 St. Kitts & Nevis Low -25,472,431 2,552,641 -22,919,790 -23.02 -7.50 Mid -26,192,819 3,563,863 -22,628,956 -22.73 -7.40 High -27,010,657 4,556,940 -22,453,717 -22.55 -7.35 Avg. -26,225,302 3,557,815 -22,667,488 -22.77 -7.42 St. Lucia Low -58,488,086 3,102,185 -55,385,901 -23.38 -11.45 Mid -60,366,765 4,146,016 -56,220,749 -23.73 -11.62 High -62,032,931 5,425,804 -56,607,127 -23.89 -11.70 Avg. -60,295,927 4,224,668 -56,071,259 -23.67 -11.59 St. Vincent & Grenadines Low -15,304,025 1,495,461 -13,808,564 -23.88 -4.44 Mid -15,714,544 2,020,932 -13,693,612 -23.68 -4.41 High -16,077,825 2,630,914 -13,446,911 -23.25 -4.33 Avg. -15,698,798 2,049,102 -13,649,696 -23.60 -4.39 OECS Average Low -33,735,344 2,692,104 -31,043,241 -21.07 -8.23 Mid -34,620,704 3,677,318 -30,943,386 -20.96 -8.20 High -35,439,040 4,787,225 -30,651,815 -20.74 -8.12 Avg. -34,598,363 3,718,882 -30,879,481 -20.92 -8.18 OECS Total Low -202,412,066 16,152,621 -186,259,445 Mid -207,724,223 22,063,906 -185,660,317 High -212,634,237 28,723,347 -183,910,890 Avg. -207,590,175 22,313,291 -185,276,884
142 Table 4-17. Tariff revenue effects from ta riff elimination on EU plus FTAA imports Change in import duties in XC$ Change in import duties as percent of total baseline import duties Change in import duties as percent of total trade taxes Change in import duties as percent of total govt revenue Change as percent of GDP Antigua & Barbuda Low -62,067,633 -86.39 -26.88 -13.26 -2.82 Mid -63,018,961 -87.72 -27.29 -13.46 -2.86 High -63,868,937 -88.90 -27.66 -13.64 -2.90 Avg. -62,985,177 -87.67 -27.28 -13.45 -2.86 Dominica Low -15,505,279 -77.04 -17.78 -7.36 -2.16 Mid -15,823,615 -78.62 -18.14 -7.51 -2.20 High -16,107,285 -80.03 -18.47 -7.65 -2.24 Avg. -15,812,060 -78.56 -18.13 -7.51 -2.20 Grenada Low -30,238,334 -83.94 -19.74 -9.20 -2.61 Mid -30,851,265 -85.64 -20.14 -9.39 -2.66 High -31,392,047 -87.14 -20.49 -9.55 -2.71 Avg. -30,827,215 -85.58 -20.12 -9.38 -2.66 St. Kitts & Nevis Low -26,302,954 -83.20 -26.42 -8.61 -2.61 Mid -26,881,371 -85.03 -27.00 -8.80 -2.67 High -27,386,858 -86.63 -27.51 -8.96 -2.72 Avg. -26,857,061 -84.95 -26.98 -8.79 -2.67 St. Lucia Low -62,042,368 -82.45 -26.19 -12.83 -3.22 Mid -63,596,141 -84.52 -26.84 -13.15 -3.30 High -64,957,616 -86.32 -27.42 -13.43 -3.37 Avg. -63,532,042 -84.43 -26.82 -13.14 -3.29 St. Vincent & Grenadines Low -16,730,725 -90.33 -28.93 -5.38 -1.62 Mid -17,029,748 -91.95 -29.45 -5.48 -1.65 High -17,293,995 -93.37 -29.91 -5.57 -1.68 Avg. -17,018,156 -91.89 -29.43 -5.48 -1.65 OECS Average Low -35,481,216 -83.89 -24.32 -9.44 -2.51 Mid -36,200,184 -85.58 -24.81 -9.63 -2.56 High -36,834,456 -87.07 -25.24 -9.80 -2.60 Avg. -36,171,952 -85.51 -24.79 -9.62 -2.55 OECS Total Low -212,887,293 Mid -217,201,101 High -221,006,738 Avg. -217,031,711
143 Table 4-18. Total trade tax revenues inclusive of total trade counterbala nce effects from tariff elimination on EU plus FTAA imports Change in import duties in XC$ Counterbalancing change in other border taxes Total revenue effect Change as percent of total trade tax Change as percent of total govt revenue Antigua & Barbuda Low -62,067,633 6,839,960 -55,227,673 -23.92 -11.80 Mid -63,018,961 9,676,719 -53,342,242 -23.10 -11.39 High -63,868,937 12,702,592 -51,166,345 -22.16 -10.93 Avg. -62,985,177 9,739,757 -53,245,420 -23.06 -11.37 Dominica Low -15,505,279 1,439,423 -14,065,856 -16.13 -6.68 Mid -15,823,615 2,061,930 -13,761,685 -15.78 -6.53 High -16,107,285 2,735,339 -13,371,946 -15.33 -6.35 Avg. -15,812,060 2,078,897 -13,733,162 -15.75 -6.52 Grenada Low -30,238,334 2,696,993 -27,541,341 -17.98 -8.38 Mid -30,851,265 3,673,060 -27,178,205 -17.74 -8.27 High -31,392,047 4,777,827 -26,614,220 -17.37 -8.10 Avg. -30,827,215 3,715,960 -27,111,255 -17.70 -8.25 St. Kitts & Nevis Low -26,302,954 2,783,619 -23,519,335 -23.62 -7.70 Mid -26,881,371 3,967,597 -22,913,774 -23.02 -7.50 High -27,386,858 5,270,725 -22,116,133 -22.21 -7.24 Avg. -26,857,061 4,007,314 -22,849,747 -22.95 -7.48 St. Lucia Low -62,042,368 4,094,855 -57,947,513 -24.46 -11.98 Mid -63,596,141 5,731,988 -57,864,153 -24.43 -11.96 High -64,957,616 7,570,973 -57,386,643 -24.22 -11.86 Avg. -63,532,042 5,799,272 -57,732,770 -24.37 -11.94 St. Vincent & Grenadines Low -16,730,725 2,158,833 -14,571,892 -25.20 -4.69 Mid -17,029,748 3,029,672 -14,000,076 -24.21 -4.51 High -17,293,995 3,960,756 -13,333,239 -23.06 -4.29 Avg. -17,018,156 3,049,754 -13,968,402 -24.16 -4.50 OECS Average Low -35,481,216 3,335,614 -32,145,602 -21.88 -8.54 Mid -36,200,184 4,690,161 -31,510,023 -21.38 -8.36 High -36,834,456 6,169,702 -30,664,754 -20.73 -8.13 Avg. -36,171,952 4,731,826 -31,440,126 -21.33 -8.34 OECS Total Low -212,887,293 20,013,683 -192,873,610 Mid -217,201,101 28,140,966 -189,060,135 High -221,006,738 37,018,212 -183,988,526 Avg. -217,031,711 28,390,954 -188,640,757
144 Table 4-19. Change in tariff reve nue as a percentage of total gove rnment revenue and change in tariff revenue as percentage of to tal government revenue inclusive of counterbalancing effects accordi ng to liberalization scenario EU scenario EU scenario tax offset EU+ Carib. scenario EU + Carib. scenario tax offset EU+ Carib. +NAFTA scenario EU+ Carib. +NAFTA scenario tax offset EU+ FTAA scenario EU+ FTAA scenario tax offset Antigua & Barbuda Low -1.39 -1.60 -1.84 -2.07 -12.82 -11.62 -13.26 -11.80 Mid -1.54 -1.92 -2.04 -2.46 -13.07 -11.41 -13.46 -11.39 High -1.69 -2.21 -2.21 -2.80 -13.30 -11.12 -13.64 -10.93 Avg. -1.54 -1.91 -2.03 -2.44 -13.06 -11.38 -13.45 -11.37 Dominica Low -1.36 -1.48 -1.73 -1.81 -6.89 -6.37 -7.36 -6.68 Mid -1.48 -1.67 -1.87 -2.02 -7.07 -6.34 -7.51 -6.53 High -1.58 -1.85 -1.99 -2.20 -7.22 -6.27 -7.65 -6.35 Avg. -1.48 -1.67 -1.86 -2.01 -7.06 -6.33 -7.51 -6.52 Grenada Low -1.57 -1.78 -2.10 -2.25 -8.71 -8.02 -9.20 -8.38 Mid -1.71 -2.09 -2.25 -2.54 -8.94 -8.02 -9.39 -8.27 High -1.85 -2.37 -2.38 -2.79 -9.14 -7.95 -9.55 -8.10 Avg. -1.71 -2.08 -2.24 -2.53 -8.93 -7.99 -9.38 -8.25 St. Kitts & Nevis Low -0.97 -1.12 -1.73 -1.77 -8.33 -7.50 -8.61 -7.70 Mid -1.08 -1.35 -1.88 -2.05 -8.57 -7.40 -8.80 -7.50 High -1.19 -1.55 -2.02 -2.24 -8.84 -7.35 -8.96 -7.24 Avg. -1.08 -1.34 -1.88 -2.02 -8.58 -7.42 -8.79 -7.48 St. Lucia Low -2.98 -3.19 -3.28 -3.46 -12.09 -11.45 -12.83 -11.98 Mid -3.28 -3.68 -3.60 -3.95 -12.48 -11.62 -13.15 -11.96 High -3.57 -4.12 -3.89 -4.38 -12.83 -11.70 -13.43 -11.86 Avg. -3.28 -3.67 -3.59 -3.93 -12.47 -11.59 -13.14 -11.94 St.Vincent Low -1.05 -1.14 -1.26 -1.37 -4.93 -4.44 -5.38 -4.69 Mid -1.16 -1.34 -1.39 -1.60 -5.06 -4.41 -5.48 -4.51 High -1.26 -1.52 -1.50 -1.79 -5.17 -4.33 -5.57 -4.29 Avg. -1.16 -1.33 -1.39 -1.59 -5.05 -4.39 -5.48 -4.50 OECS Average Low -1.55 -1.72 -1.99 -2.12 -8.96 -8.23 -9.44 -8.54 Mid -1.71 -2.01 -2.17 -2.43 -9.20 -8.20 -9.63 -8.36 High -1.85 -2.27 -2.33 -2.70 -9.42 -8.12 -9.80 -8.13 Avg. -1.71 -2.00 -2.17 -2.42 -9.19 -8.18 -9.62 -8.34
145 CHAPTER 5 SUMMARY AND CONCLUSIONS Summary The primary objective of this study was to estimat e and evaluate the trade and fiscal effects of alternative trade liberalization scenarios for the members of the Organization of Eastern Caribbean States using highly disaggregated trad e data. This evaluation comes at a time when the OECS faces the prospect of joining an Ec onomic Partnership Agreement with the European Union, which is intended to replace the existing n on-reciprocal trade preference regime. This situation poses significant challenge s and concerns for the OECS. In this situation, not only was it timely to eval uate the likely effects of an agreement with the EU, it was also relevant to evaluate alternativ es and their effects. The formation of EPAs and the exclusion of the OECS largest trading pa rtners, namely the United States and other Caribbean nations, can have unwelcome effects as they offer the potential for trade diversion. Hence, joining an EPA with the EU raises important questions. Is it in th e interest of the OECS to enter an EPA? How severe are the expected fi scal impacts? How large is the scope for trade diversion from such agreements? Are there othe r trade liberalization opt ions that would be a better fit with OECS interests? How severe are the fiscal impacts under these alternative options? These questions requi red empirical analysis. To adequately address the quest ions posed, a review of the characteristics and conditions of the OECS was presented. The members of the OECS, although sharing many similarities, are not as homogeneous as one can be led to believ e. The snapshots presen ted of their geographic conditions, economic structure, socioeconomic conditions, as well as their composition and structure of trade, provided the necessary cont ext for the evaluation of alternative trade policy options.
146 Several broad generalizations emerged from such contextual analysis. The economic performance of the OECS has been gradually deteri orating over time. In terms of growth, these countries suffered a setback at the start of the new millennium relative to the 1980s. They also continued to struggle with poverty, high rates of unemployment and high levels of indebtedness. In addition, a recurrent concer n has often focused on their sm allness and the vulnerabilities posed by their openness. Imports have continued to be high relative to GDP while exports, although increasing, have experienced a shift toward services as traditi onal exports that have long benefited from preferences are becoming less significant. To better understand the issue at hand a brief re view of the literature on trade liberalization and economic performance was provided. Trad itional trade theory suggests that trade liberalization can lead to substantial economic gains. Econo mies of scale and terms of trade effects result from larger markets and changes in relative import and export prices. Dynamic effects derived from capital inflows, technol ogy transfers and increased competition, although difficult to quantify, can also be expected and ar e likely to be beneficial However, trade and fiscal impacts are the most visible features of trade liberalization and the focus of this study. The economic effects of trade liberalization have been subject of extensive study. A significant amount of research on the issue has fo cused on developing countries, particularly the relationship between trade liberal ization, economic growth and deve lopment. Despite the large number of studies, unambiguous evidence suggesti ng that trade liberaliz ation will lead to improved economic performance, and hence economic benefits, is not available. However, the literature noted there was unambiguous evidence that closed economies performed poorly. The evaluation of trade policy and economic integration has usually dealt with the quantification of trade creation and trade diversion. Discussi on and an assessment of basic
147 methods used in empirical analysis of trade a nd trade policy were also presented. The three methods commonly used in empirical studie s are gravity models, computable general equilibrium (CGE) models, and partial equilibr ium models. Each of the methods has its limitations and drawbacks. The choice of metho dology must consider the specific circumstances of the required analysis due to si gnificant tradeoffs that exist wh en such selection is made. A major concern from the perspective of sma ll economies such as the OECS regards the fiscal challenges posed by trade liberalization. Trade-related taxes are a major source of government revenue for countries such as OECS members and their reduction poses questions as to the likely fiscal impacts liberalization may create It is feared that the loss of such revenue could compromise their ability grow and develop. Hence the adjustment costs posed by trade liberalization might need to be considered. In situations of this type it is common for compensation schemes to be developed where the preference beneficiary, pa rticularly when it is a developed country, dispenses some aid package de signed to alleviate these adjustment costs. These packages might include payments to s ubstitute for government revenues derived from import duties while other sources of revenues are created. These issues are often considered in trade negotiation processes. Conclusions The partial equilibrium model based on Verdoor n (1960) was used to estimate trade flows and tariff revenue contingent on changes in tariff rates and the specification of alternative trade policy scenarios. The model assumed that: the source of imports for a ny given product induced imperfect substitution; trade flow changes do not affect incomes or exchange rates; infinite supply elasticities; and iso-elas tic import demand functions. Alt hough these are rather restrictive assumptions, they are not unreasonab le for this type of analysis, particularly when related to small economies.
148 The model and variants of it have been used extensively in trade analysis yet, as any model, it has shortcomings. Elasticity values ar e chosen rather arbitrarily and on the basis of estimates that often questionable. Hence, th e choice of elasticities of import demand and substitution lie at the core of cr iticism leveled at partial equili brium trade models. In addition, these models are unable to consider economy-wide changes that result from tariff modifications. Partial equilibrium models, however, allow fo r evaluations to be performed at highly disaggregated levels offering the pos sibility of detailed trade analysis This level of detail offers precision in identifying specific pr oducts and trading partners aff ected by alternative trade policy scenarios. Hence, the data used in this study we re well suited for partial equilibrium analysis. The results obtained in similar studies by Greenway and Milner ( 2003) and by Gasiorek et al. (2006),26 who also employed partial equilibrium models to a ddress the impacts of the formation of EPAs in the context of CARICOM, were comparable to those obtained in this dissertation. The work by the former studied the trade and welfare effects of trade liberalization through the formation of an EPA w ith the EU, liberaliza tion with the EU plus the United States, and full multilateral liberalizati on. However, Greenway and Milner (2003) employed data at the two-digit level in their analysis Their results suggested that among the three alternatives, the formation of the EPA with the EU was the leas t beneficial for those selected members of CARICOM included in their study. The authors concluded that an EPA led to decreased welfare, where welfare was inte rpreted as trade diversion ex ceeding trade creation, and that CARICOM members would be in a worse situation if they entered and EPA. Overall, however, the change in total imports as a result of an EP A would be very small, ra nging from 1.8% in St. Kitts and Nevis to 3.1% in St. Vincent and the Grenadines. 26 This study contains various aspects in the formation of the EPAs with the EU. Part 6 of this work specifically, is a partial equilibrium model.
149 Trade liberalization with the EU plus the Un ited States and full multilateral liberalization were better options, with full multilateral liberalizat ion being best. In both such cases, welfare gains were positive. The Greenway and Milner (2003) study also found that changes in total trade under both of these cases would amount to no more than 14.1%, in the most affected country, under full multilateral liberalization. The study considered full removal of border charges and noted that in such case tariff revenue losses would be quite large. Results from the Gasiorek et al. (2006) study, where six-digit data and alternative liberalization scenarios were employed, reflected comparable results as well. Although results indicated that broadening liberal ization yielded improved welfare e ffects, they actually showed very small but positive trade effects in the forma tion of an EPA. Tariff losses were substantial when taken alone and smaller when viewed in the context of broader consumption taxes. The simulations performed in this dissertati on provided some surprising insights into the effects of trade liberalization in the OECS. Bearing in mind that import duties account for a fraction of border charges, trade effects that resu lted from tariff elimination were not as large as conventional wisdom has suggested. The scenar io simulating an EPA suggested that trade liberalization with the EU alone lead to negative net trade creation for all elasticity values. The trade effects as a percent of the baseline im ports were small and ranged from 1.4% in the low elasticity case to 3.1% in the high elasticity scenario. In terms of tariff revenue losses, these were again quite small. The change in impor t duties due to tariff elimination represented a decrease in total government re venues of -1.71% for the group of OECS members. St. Lucia was the most affected country where tariff elimination represente d -3.3% of government revenue. Under the EU trade liberalization scen ario, however, revenue losses were made worse
150 by negative net trade creation. For the OECS, tr ade liberalization with Europe, inclusive of negative counterbalancing effects, led to -2.0% lower government revenues. The liberalization scenario of the EU plus the larger Cari bbean was not very different from that involving the EU alone. This effect was perhaps rela ted to the OECS already having low trade barriers on Caribbean imports despite occasional exemptions. Trade diversion exceeded trade creation for all members of the OE CS under this scenario. Trade effects as a percent of baseline imports were small, averagin g from 1.7% in the low elasticity case to 3.6% in the high elasticity case. On an i ndividual country basis, trade effect s as a percent of total imports were lowest in Antigua and Ba rbuda and highest in St. Vincent and the Grenadines. Tariff revenue changes were small as well. For the OECS tariff revenue losses averaged -2.2%. The inclusion of NAFTA to the EU and Caribbe an in the third scenario lead to large changes in net trade creation. This was not su rprising as the United States and Canada are important trade partners for the OECS. Despite si gnificant increases in trade creation, total trade effects as a percentage of baseline imports remained modest ranging between 4.4% and 8.8% depending on the elasticity value, for the OECS as a group. Only St. Vincent and the Grenadines had more than modest trade effects, which in the high elasticity s cenario reach 15.0%. The tariff revenue effects in this broader libera lization scenario were more severe than in the previous two but they were, nonetheless, relatively moderate. For the OECS as a group, tariff revenue changes, as a percentage of total government revenue, amounted to -9.2%. When counterbalancing effects were take n into consideration, the figure fell to -8.2%. However, when considering tariff revenue changes in terms of to tal baseline duties and as a percentage of total trade taxes, these changes were significant. These amounted to -81.4% in case of the former and amounted to -23.6% percent in terms of the latter. Due to the broad assortment of border taxes,
151 it was nonetheless relevant to consider change s in import duties as they relate to total government revenues for a more truthful assessment of the effects. The EU plus FTAA scenario had minimal diffe rences with the prev ious situation. This suggested that the inclusion of Latin American countries would not increase trade significantly regardless of tariff elimination. This was perhap s due to limited trade between these countries and the OECS. The importance of NAFTA, particul arly trade with the United States, could be a factor in rendering the addition of FTAA me mbers to almost neg ligible proportions. The identification of most-affected products under the four alternative trade scenarios was also included in the results. In general term s, products that have th e largest trade and tariff revenue effects included electrical and transmissi on equipment, parts for vehicles and vehicles, medicines, spirits, food products, aerated beve rages, transmission a pparatus and petroleum products. The lists perhaps suggest that intermediate and touris t industries are targeted for taxation. In summary, results from the first two scen arios were quite similar. However, when liberalization with the EU alone was considere d, the scope for trade diversion was increased. Trade diversion exceeded trade creation in all ca ses and overall trade effects and fiscal impacts were very small. The inclusion of the larger Ca ribbean also lead to ne gative net trade creation, yet fiscal and trade impacts remained small. Th e last two scenarios, where inclusion of NAFTA and an FTAA broadened the scope of trade libera lization, were very sim ilar and resulted in net trade creation. Trade effects were larger, as were the fiscal impacts. In all scenarios considered in this study, trade effects ranged from very small to modest, as did fiscal impacts. These results were consistent with similar studies previously noted.
152 This dissertation has broadened the analysis pres ented in the previously noted studies. It has analyzed data at a further level of disaggr egation, which allowed for increased precision in the calculations of trade effects. In addition, the assessment of fiscal impacts at the individual tariff line allowed the identification and pinpointing of those lines that are most sensitive to trade effects and those that would have the largest fiscal impacts. A model like the one employed in this analysis is limited by rather restrictive assumptions. Policy issues require considerati on of a broader scope as other so cial and political factors must be part of policymaking calculations. However, this type of analysis can serve as guidelines in policy decisions. Analysis using data at a high ly disaggregated level can be extended to real practical application when in the realm of trade negotiations and can be very useful in helping negotiators set timetables a nd liberalization phases. Prevailing conventional wisdom from political rather th an economic perspectives, suggests negative effects from trade liberali zation for OECS given their small size and vulnerabilities. The implications are that sp ecial considerations should be given to small countries when dealing with trade liberalization issues. The result s from this dissertation provide empirical support to a different pe rspective. These findings shoul d help in assessing the more appropriate course of action for the OECS. They coincide with the theoretical arguments and policy suggestions that broade r trade liberalization is better than limited regional trade agreements, particularly for small countries such as the OECS. While this study addressed the tr ade and fiscal impacts of trade liberalization using a static framework of analysis, dynamic effects were not ev en considered. It is likely that dynamic considerations would be relevant and impact s these economies positively, therefore lending additional support for the arguments in favor of broa der liberalization. In fa ct, even if the issue
153 of trade liberalization is solely framed as a fi scal problem, results from this study suggest the impact on government revenues is modest. When addressing fiscal revenues alternative tax policies might be considered to e xpand the tax base rather than re lying on the more distortionary trade taxes. Considerations for Further Research The use of partial equilibrium modeling is onl y one tool available to study the issue of trade liberalization and its impact on countries such as OECS members. As any type of modeling, it was noted that there exist limitations. Comparisons with partial equilibrium models can be made if the analysis is conducted using the more comprehensive CGE models. This type of research could be pursued w ith relative ease. In addition, i nvestigations to include other effects and dynamic considerations are an area fo r further empirical investigation. However, as suggested previously, a factor th at hampers both partial and genera l equilibrium analysis is the lack of estimates for elasticity values to be used in analysis. Although the task of estimating particular elasticities is massi ve, the undertaking provides fertile ground for future investigations.
154 APPENDIX A MOST AFFECTED PRODUCTS BY TRADE AND TARIFF REVENUE EFFECTS Table A-1. Antigua and Barbuda top ten imports most affected produc ts by trade and tariff revenue effects under mid elas ticity EU liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 610,611 3.55 Aerated beverages in containers paying levy 274,691 3.80 2 Other medicaments (excl. Goods of heading no.30.02,309.05 or 30.06) 575,363 3.34 Brandy, in bottles of a strength not exceeding 46% volume 259,975 3.60 3 Aerated beverages in containers paying levy 56,0328 3.25 New pneumatic tyres of a kind used on motor car (incld. Station wagons) 197,442 2.73 4 Cigarettes containing tobacco 534,074 3.10 Cigarettes containing tobacco 192,093 2.66 5 New pneumatic tyres of a kind used on motor car (incld. Station wagons 450,388 2.62 Other medicaments (excl. Goods of heading no.30.02,309.05 or 30.06) 182,737 2.53 6 Sweet biscuits 402,603 2.34 Sweet biscuits 178,253 2.47 7 Brandy, in bottles of a strength not exceeding 46% volume 353,836 2.06 Vodka 178,163 2.47 8 Other waters,incl. Mineral/aerated cont. Added sugar in con. Not paying levy 294,999 1.71 Salami sausages 160,931 2.23 9 Other pasta whether or not cooked or stuffed (with meat or other substan.) 288,062 1.67 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 160,435 2.22 10 Liqueurs and cordials 287,744 1.67 Liqueurs and cordials 145,717 2.02 Total share 25.31 Total share 26.72 Total trade effects 17,217,428 Total tariff revenue effects 7,223,546
155 Table A-2. Antigua and Barbuda top ten imports most affected produc ts by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,441,463 7.14 Transmission apparatus incorp. Reception appara.: portable radio-telephone 617,106 6.48 2 New pneumatic tyres of a kind used on motor car (incld. Station wagons 811,844 4.02 New pneumatic tyres of a kind used on motor car (incld. Station wagons 372,305 3.91 3 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 729,407 3.61 Parboiled rice in packages for retail sale 279,494 2.93 4 Other medicaments (excl. Goods of heading no.30.02,309.05 or 30.06) 526,443 2.61 Aerated beverages in containers paying levy 273,146 2.87 5 Parboiled rice in packages for retail sale 422,835 2.09 Brandy, in bottles of a strength not exceeding 46% volume 264,219 2.77 6 Aerated beverages in containers paying levy 380,956 1.89 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 206,747 2.17 7 Brandy, in bottles of a strength not exceeding 46% volume 347,865 1.72 Other medicaments (excl. Goods of heading no.30.02,309.05 or 30.06) 188,273 1.98 8 Sweet biscuits 342,018 1.69 Sweet biscuits 186,955 1.96 9 Other food preparations not elsewhere specified or included 314,761 1.56 Cigarettes containing tobacco 184,737 1.94 10 Cigarettes containing tobacco 288,693 1.43 Vodka 180,823 1.90 Total share 27.76 Total share 28.89 Total trade effects 20,196,384 Total tariff revenue effects 9,530,418
156 Table A-3. Antigua and Barbuda top ten imports most affected produc ts by trade and tariff revenue effects under mid elasticity EU, Caribbean, and NAFTA liberalization 2004 No Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 1,277,846 1.84 Other food preparations not elsewhere specified or included 1,365,521 2.23 2 New pneumatic tyres of a kind used on motor car (incld. Station wagons 1,276,550 1.83 Aerated beverages in containers paying levy 965,179 1.58 3 Other veh. For transport of persons, used, exceeding 4 years 1,225,001 1.76 Transmission apparatus incorp. Reception appara.: portable radio-telephone 947,749 1.55 4 Other food preparations not elsewhere specified or included 1,047,787 1.50 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 939,874 1.54 5 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 995,704 1.43 Fresh grapes 716,569 1.17 6 Transmission apparatus incorp. Reception appara.: portable radio-telephone 967,904 1.39 New pneumatic tyres of a kind used on motor car (incld. Station wagons) 704,641 1.15 7 Other plywood 926,097 1.33 Other boneless meat of bovine animals frozen 699,003 1.14 8 Other spark ignition vehicles, new 878,395 1.26 Other waters,incl. Mineral/aerated cont. Added sugar in con. Not paying levy 621,666 1.02 9 Other foot-ware 847,034 1.22 Other meat of swine fresh, frozen 618,395 1.01 10 Other other articles of plastics/articles of other materials heading 39.01 644,029 0.92 Other veh. For transport of persons, used, exceeding 4 years 557,138 0.91 Total share 14.49 Total share 13.29 Total trade effects 69,624,818 Tota l tariff revenue effects 61,200,618
157 Table A-4. Antigua and Barbuda top ten imports most affected produc ts by trade and tariff revenue effects under mid elasticity EU and FTAA liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 New pneumatic tyres of a kind used on motor car (incld. Station wagons) 1,276,550 1.91 Other food preparations not elsewhere specified or included 1,373,712 2.18 2 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 1,268,342 1.89 Aerated beverages in containers paying levy 965,179 1.53 3 Other veh. For transport of persons, used, exceeding 4 years 1,225,001 1.83 Transmission apparatus incorp. Reception appara.: portable radio-telephone 947,749 1.50 4 Other food preparations not elsewhere specified or included 1,026,003 1.53 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 945,770 1.50 5 Transmission apparatus incorp. Reception appara.: portable radio-telephone 967,904 1.45 Fresh grapes 716,569 1.14 6 Other spark ignition vehicles, new other plywood 875,805 1.31 New pneumatic tyres of a kind used on motor car (incld. Station wagons) 704,641 1.12 7 Other plywood 691,574 1.03 Other boneless meat of bovine animals frozen 699,003 1.11 8 Other foot-ware 672,045 1.00 Other waters,incl. Mineral/aerated cont. Added sugar in con. Not paying levy 629,960 1.00 9 Other other articles of plastics/articles of other materials heading 39.01 629,236 0.94 Other meat of swine fresh, frozen 618,553 0.98 10 Aerated beverages in containers paying levy 625,010 0.93 Other sauces and preparations 559,114 0.89 Total share 13.82 Total share 12.95 Total trade effects 66,978,469 Tota l tariff revenue effects 63,018,961
158 Table A-5. Dominica top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 557,435 8.40 Fowl wings frozen 442,622 12.96 2 Fowl wings frozen 441,328 6.65 Beer 189,228 5.54 3 Beer 202,657 3.05 Other whiskies 182,580 5.35 4 Other electrical compression-type, household type refrigerators 122,347 1.84 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 140,998 4.13 5 New pneumatic tyres of a kind used on buses or lorries 109,208 1.65 Brandy, in bottles of a strength not exceeding 46% volume 135,925 3.98 6 Other whiskies 105,562 1.59 Gin and geneva in bottles of a strength not exceeding 46% volume 94,633 2.77 7 Other electric lamps and lighting fittings 102,082 1.54 Other wine in containers holding 2 litres or less 82,071 2.40 8 Cigarettes containing tobacco 98,537 1.48 Other cane or beet sugar in solid form 64,685 1.89 9 Other cheese 96,262 1.45 Sparkling wine 62,812 1.84 10 Other turkeys cuts and offals frozen 93,925 1.42 Other cheese 59,133 1.73 Total share 29.07 Total share 42.59 Total trade effects 6,637,249 Total tariff revenue effects 3,415,422
159 Table A-6. Dominica top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,005,046 11.67 Fowl wings frozen 442,622 9.66 2 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 538,288 6.25 Transmission apparatus incorp. Reception appara.: portable radio-telephone 399,646 8.72 3 Fowl wings frozen 441,328 5.13 Other whiskies 182,580 3.99 4 New pneumatic tyres of a kind used on buses or lorries 296,312 3.44 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 154,645 3.38 5 Other electrical compression-type, household type refrigerators 122,134 1.42 Brandy, in bottles of a strength not exceeding 46% volume 135,925 2.97 6 Wooden furniture of a kind used in the bedroom 118,077 1.37 Other gas oils 113,791 2.48 7 Other other articles of plastics/articles of other materials heading 39.01 112,603 1.31 Beer 110,808 2.42 8 New pneumatic tyres of a kind used on motor car (incld. Station wagons 111,527 1.30 Gin and geneva in bottles of a strength not exceeding 46% volume 92,463 2.02 9 Other whiskies 105,562 1.23 New pneumatic tyres of a kind used on buses or lorries 91,546 2.00 10 Other electric lamps and lighting fittings 98,862 1.15 Other wine in containers holding 2 litres or less 83,194 1.82 Total share 34.27 Total share 39.45 Total trade effects 8,608,533 Total tariff revenue effects 4,581,402
160 Table A-7. Dominica top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU, Caribb ean and NAFTA liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,390,009 6.35 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,396,073 8.39 2 Other cuts and offals of fouls frozen 777,990 3.55 Other cuts and offals of fouls frozen 996,179 5.99 3 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 582,392 2.66 Fowl wings frozen 461,395 2.77 4 Other plywood 528,701 2.41 Other plywood 263,332 1.58 5 New pneumatic tyres of a kind used on buses or lorries 484,860 2.21 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 259,144 1.56 6 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 434,918 1.99 Other turkeys cuts and offals frozen 254,273 1.53 7 Fowl wings frozen 360,008 1.64 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 238,913 1.44 8 Reception apparatus for television: colour 312,730 1.43 New pneumatic tyres of a kind used on buses or lorries 201,480 1.21 9 Other electrical compression-type, household type refrigerators 311,708 1.42 Other whiskies 183,204 1.10 10 Other other articles of plastics/articles of other materials heading 39.01 229,816 1.05 Lubricating oils 176,705 1.06 Total share 24.72 Total share 26.63 Total trade effects 21,896,304 Total tariff revenue effects 16,637,742
161 Table A-8. Dominica top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU and FTAA liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,389,625 6.21 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,396,111 7.61 2 Other cuts and offals of fouls frozen 777,990 3.48 Other cuts and offals of fouls frozen 996,179 5.43 3 Building cement (grey) 642,938 2.87 Building cement (grey) 605,014 3.30 4 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 581,598 2.60 Fowl wings frozen 461,395 2.51 5 New pneumatic tyres of a kind used on buses or lorries 479,642 2.14 Other plywood 316,458 1.72 6 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 435,852 1.95 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 259,023 1.41 7 Other plywood 395,728 1.77 Other turkeys cuts and offals frozen 254,273 1.39 8 Fowl wings frozen 360,008 1.61 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 239,467 1.30 9 Other electrical compression-type, household type refrigerators 314,663 1.41 New pneumatic tyres of a kind used on buses or lorries 212,880 1.16 10 Other articles of plastics/articles of other materials heading 39.01 229,487 1.03 Other whiskies 183,204 1.00 Total share 25.05 Total share 26.83 Total trade effects 22,386,350 Total tariff revenue effects 18,352,424
162 Table A-9. Grenada top ten impor ts most affected products by trade and tariff revenue effects under mid elasticity EU liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,484,171 9.62 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 472,748 7.32 2 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 693,212 4.49 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 234,996 3.64 3 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 489,205 3.17 Condensed milk 183,269 2.84 4 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 336,535 2.18 Luncheon meat 169,797 2.63 5 Of a cylinder capacity exceeding 3000cc: other 326,598 2.12 Other 162,639 2.52 6 Condensed milk 287,180 1.86 Other whiskies 160,478 2.49 7 Other soy-bean oil and its fractions, whether/not refined, but not chem... 285,713 1.85 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 159,311 2.47 8 Other electric lamps and lighting fittings 280,203 1.82 Salami sausages 154,941 2.40 9 Other furniture 259,545 1.68 Other soy-bean oil and its fractions, whether/not refined, but not chem... 140,256 2.17 10 Other wines 229,573 1.49 Beer 140,083 2.17 Total share 30.28 Total share 30.65 Total trade effects 15,426,787 Total tariff revenue effects 6,455,364
163 Table A-10. Grenada top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,623,112 8.87 Other motor spirit (gasoline) 958,354 10.55 2 Other motor spirit (gasoline) 1,256,266 6.87 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 532,089 5.86 3 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 750,833 4.10 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 264,332 2.91 4 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 524,573 2.87 Condensed milk 206,800 2.28 5 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 351,208 1.92 Luncheon meat 190,943 2.10 6 Of a cylinder capacity exceeding 3000cc: other 350,210 1.91 Other 183,521 2.02 7 Condensed milk 307,942 1.68 Other whiskies 181,166 1.99 8 Other furniture 286,165 1.56 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 179,766 1.98 9 Other electric lamps and lighting fittings 278,270 1.52 Salami sausages 174,284 1.92 10 Other wines 245,759 1.34 Beer 158,038 1.74 Total share 32.66 Total share 33.34 Total trade effects 18,292,421 Total tariff revenue effects 9,085,068
164 Table A-11. Grenada top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU, Caribb ean and NAFTA liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 2,790,054 6.29 Transmission apparatus incorp. Reception appara.: portable radio-telephone 2,317,537 6.92 2 Other cuts and offals of fouls frozen 2,045,557 4.61 Other cuts and offals of fouls frozen 2,046,084 6.11 3 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,795,104 4.05 Other motor spirit (gasoline) 934,715 2.79 4 Other motor spirit (gasoline) 1,048,504 2.36 Other food preparations not elsewhere specified or included 761,339 2.27 5 Other plywood 733,383 1.65 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 737,302 2.20 6 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 722,512 1.63 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 462,761 1.38 7 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 691,718 1.56 Other plywood 451,890 1.35 8 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 682,017 1.54 Fully-automatic machines for domestic use 417,598 1.25 9 Fully-automatic machines for domestic use 625,601 1.41 Other electrical combined refrigerator-freezer 311,341 0.93 10 Other food preparations not elsewhere specified or included 610,509 1.38 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 303,641 0.91 Total share 26.47 Total share 26.11 Total trade effects 44,366,362 Tota l tariff revenue effects 33,484,151
165 Table A-12. Grenada top ten imports most affect ed products by trade and tariff revenue effects under mid elasticity EU and FTAA liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 2,831,449 6.11 Transmission apparatus incorp. Reception appara.: portable radio-telephone 2,303,576 6.52 2 Other cuts and offals of fouls frozen 1,924,386 4.15 Other cuts and offals of fouls frozen 2,253,726 6.38 3 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,834,933 3.96 Other motor spirit (gasoline) 920,051 2.60 4 Other motor spirit (gasoline) 1,071,767 2.31 Other food preparations not elsewhere specified or included 750,778 2.12 5 Other plywood 742,787 1.60 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 725,735 2.05 6 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 738,678 1.59 Other plywood 533,611 1.51 7 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 707,066 1.53 Other parts & accessories of the motor vehicles of headings # 87.01 -87.05 454,592 1.29 8 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 697,150 1.50 Fully-automatic machines for domestic use 411,046 1.16 9 New pneumatic tyres of a kind used on motor car (incld. Station wagons 641,048 1.38 Stoves & ranges 357,546 1.01 10 Fully-automatic machines for domestic use 639,482 1.38 Other electrical combined refrigerator-freezer 336,086 0.95 Total share 25.52 Total share 25.60 Total trade effects 46,350,877 Tota l tariff revenue effects 35,338,865
166 Table A-13. St. Kitts & Nevis t op ten imports most affected pr oducts by trade and tariff revenue effects under mid elasticity EU liberalization 2004 No Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 352,869 5.20 Brandy, in bottles of a strength not exceeding 46% volume 195,145 6.40 2 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 286,582 4.23 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 181,068 5.93 3 Other food preparations not elsewhere specified or included 283,916 4.19 Aerated beverages 128,058 4.20 4 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 276,269 4.07 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 125,428 4.11 5 New pneumatic tyres of a kind used on buses or lorries 270,957 4.00 Other food preparations not elsewhere specified or included 116,355 3.81 6 Brandy, in bottles of a strength not exceeding 46% volume 196,447 2.90 New pneumatic tyres of a kind used on buses or lorries 91,930 3.01 7 Other apparatus 182,525 2.69 New pneumatic tyres of a kind used on motor car (incld. Station wagons 80,273 2.63 8 New pneumatic tyres of a kind used on motor car (incld. Station wagons 180,648 2.66 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 77,783 2.55 9 Aerated beverages 173,829 2.56 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 75,305 2.47 10 Wooden furniture of a kind used in the kitchen 155,486 2.29 Wooden furniture of a kind used in the kitchen 71,216 2.33 Total share 34.80 Total share 37.45 Total trade effects 6,780,429 Total tariff revenue effects 3,051,055
167 Table A-14. St. Kitts & Nevis t op ten imports most affected pr oducts by trade and tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004 No. Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other motor spirit (gasoline) 1,560,107 14.52 Other motor spirit (gasoline) 1,220,445 20.30 2 Aerated beverages 461,371 4.30 Aerated beverages 412,401 6.86 3 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 400,367 3.73 Other gas oils 276,779 4.60 4 Other gas oils 376,876 3.51 Brandy, in bottles of a strength not exceeding 46% volume 195,380 3.25 5 Transmission apparatus incorp. Reception appara.: portable radio-telephone 357,791 3.33 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 181,068 3.01 6 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 352,869 3.29 Beer 150,482 2.50 7 Other food preparations not elsewhere specified or included 293,628 2.73 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 147,716 2.46 8 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 287,694 2.68 Transmission apparatus incorp. Reception appara.: portable radio-telephone 140,239 2.33 9 New pneumatic tyres of a kind used on buses or lorries 273,565 2.55 Other food preparations not elsewhere specified or included 131,676 2.19 10 New pneumatic tyres of a kind used on motor car (incld. Station wagons 211,192 1.97 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 123,915 2.06 Total share 42.60 Total share 49.57 Total trade effects 10,741,659 Total tariff revenue effects 6,012,502
168 Table A-15. St. Kitts & Nevis t op ten imports most affected pr oducts by trade and tariff revenue effects under mid elasticity EU, Cari bbean and NAFTA liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other motor spirit (gasoline) 1,348,646 4.32 Other motor spirit (gasoline) 1,319,192 4.77 2 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 1,067,562 3.42 Transmission apparatus incorp. Reception appara.: portable radio-telephone 963,323 3.48 3 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,031,780 3.31 Aerated beverages 661,726 2.39 4 Transmission apparatus incorp. Reception appara.: portable radio-telephone 930,496 2.98 Other food preparations not elsewhere specified or included 626,957 2.27 5 Other food preparations not elsewhere specified or included 604,111 1.94 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 614,578 2.22 6 Other plywood 530,861 1.70 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 585,377 2.12 7 Other foot-ware 525,865 1.68 Other waters include Min. Waters and aerated waters cont added sugar 461,777 1.67 8 Other furniture 482,388 1.55 Other plywood 403,247 1.46 9 Aerated beverages 388,762 1.25 Other foot-ware 314,397 1.14 10 Other gas oils 338,751 1.09 Herrings, alewives, saithe, pollock, haddock & hake 307,819 1.11 Total share 23.23 Total share 22.62 Total trade effects 31,210,984 Tota l tariff revenue effects 27,661,853
169 Table A-16. St. Kitts & Nevis t op ten imports most affected pr oducts by trade and tariff revenue effects under mid elasticity EU and FTAA liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other motor spirit (gasoline) 1,348,646 4.36 Other motor spirit (gasoline) 1,319,192 4.59 2 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 1,067,562 3.45 Transmission apparatus incorp. Reception appara.: portable radio-telephone 963,457 3.35 3 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,040,254 3.37 Other food preparations not elsewhere specified or included 707,595 2.46 4 Transmission apparatus incorp. Reception appara.: portable radio-telephone 926,989 3.00 Aerated beverages 661,726 2.30 5 Other food preparations not elsewhere specified or included 566,923 1.83 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 619,276 2.16 6 Other foot-ware 512,720 1.66 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 585,377 2.04 7 Other furniture 483,711 1.56 Other waters include Min. Waters and aerated waters cont added sugar 461,828 1.61 8 Other plywood 477,320 1.54 Other plywood 420,573 1.46 9 Aerated beverages 388,762 1.26 Radio-broadcast receivers combined with sound record or repro. Apparatus 338,925 1.18 10 Other gas oils 338,751 1.10 Other foot-ware 325,872 1.13 Total share 23.14 Total share 22.29 Total trade effects 30,908,437 Tota l tariff revenue effects 28,731,716
170 Table A-17. St. Lucia top ten imports most aff ected products by trade an d tariff revenue effects under mid elasticity EU liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,984,893 7.79 Whiskies in bottles of a strength not exceeding 46% volume 1,598,074 11.89 2 Other wine in containers holding 2 litres or less 1,120,252 4.40 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,005,655 7.48 3 Whiskies in bottles of a strength not exceeding 46% volume 1,056,958 4.15 Other wine in containers holding 2 litres or less 890,652 6.63 4 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 1,048,469 4.12 Brandy, in bottles of a strength not exceeding 46% volume 586,932 4.37 5 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 829,442 3.26 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 495,140 3.68 6 Transmission apparatus incorp. Reception appara.: portable radio-telephone 715,591 2.81 Liqueurs and cordials 371,618 2.77 7 Liqueurs and cordials 702,682 2.76 Sparkling wine 343,923 2.56 8 Other waters include Min. Waters and aerated waters cont added sugar 676,798 2.66 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 291,664 2.17 9 Aerated beverages 576,332 2.26 Other waters include Min. Waters and aerated waters cont added sugar 290,153 2.16 10 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 559,847 2.20 Vodka 269,208 2.00 Total share 36.40 Total share 45.72 Total trade effects 25,470,216 Total tariff revenue effects 13,436,768
171 Table A-18. St. Lucia top ten imports most aff ected products by trade an d tariff revenue effects under mid elasticity EU and Caribbean liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 4,037,413 14.18 Transmission apparatus incorp. Reception appara.: portable radio-telephone 1,684,108 10.51 2 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 2,026,053 7.11 Whiskies in bottles of a strength not exceeding 46% volume 1,598,074 9.98 3 Other wine in containers holding 2 litres or less 1,112,975 3.91 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,009,780 6.30 4 Whiskies in bottles of a strength not exceeding 46% volume 1,056,958 3.71 Other wine in containers holding 2 litres or less 908,083 5.67 5 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 1,048,469 3.68 Brandy, in bottles of a strength not exceeding 46% volume 586,932 3.66 6 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 797,741 2.80 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 495,140 3.09 7 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 559,847 1.97 Liqueurs and cordials 357,195 2.23 8 Other detergents 529,141 1.86 Sparkling wine 343,923 2.15 9 Brandy, in bottles of a strength not exceeding 46% volume 506,372 1.78 Other detergents 323,479 2.02 10 Other cheese 500,203 1.76 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 291,664 1.82 Total share 42.75 Total share 47.43 Total trade effects 28,478,006 Tota l tariff revenue effects 16,020,211
172 Table A-19. St. Lucia top ten imports most aff ected products by trade an d tariff revenue effects under mid elasticity EU, Caribb ean and NAFTA liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 3,595,852 5.38 Transmission apparatus incorp. Reception appara.: portable radio-telephone 3,078,844 5.86 2 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 2,161,403 3.24 Whiskies in bottles of a strength not exceeding 46% volume 1,726,983 3.29 3 Other plywood 2,137,425 3.20 Other wine in containers holding 2 litres or less 1,291,917 2.46 4 Other wine in containers holding 2 litres or less 1,219,595 1.83 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,077,685 2.05 5 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 1,207,409 1.81 Other plywood 886,824 1.69 6 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 895,947 1.34 Brandy, in bottles of a strength not exceeding 46% volume 885,322 1.69 7 Sandals and slippers 844,718 1.26 Other waters include Min. Waters and aerated waters cont added sugar 736,327 1.40 8 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 805,845 1.21 Liqueurs and cordials 660,895 1.26 9 Whiskies in bottles of a strength not exceeding 46% volume 779,583 1.17 Other detergents 631,154 1.20 10 Other detergents 748,854 1.12 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 558,352 1.06 Total share 21.55 Total share 21.97 Total trade effects 66,790,312 Tota l tariff revenue effects 52,508,788
173 Table A-20. St. Lucia top ten imports most aff ected products by trade an d tariff revenue effects under mid elasticity EU and FTAA liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Transmission apparatus incorp. Reception appara.: portable radio-telephone 3,492,793 5.37 Transmission apparatus incorp. Reception appara.: portable radio-telephone 3,089,284 5.59 2 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 2,182,842 3.35 Whiskies in bottles of a strength not exceeding 46% volume 1,726,983 3.13 3 Other plywood 1,495,338 2.30 Other wine in containers holding 2 litres or less 1,553,504 2.81 4 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 1,207,409 1.86 Other plywood 1,095,487 1.98 5 Of a cylinder capacity exceeding 1800cc but not exceeding 2000cc 895,947 1.38 Of a cylinder capacity exceeding 1500cc but not exceeding 1800cc 1,063,931 1.93 6 Sandals and slippers 887,438 1.36 Brandy, in bottles of a strength not exceeding 46% volume 885,322 1.60 7 Other wine in containers holding 2 litres or less 863,263 1.33 Other waters include Min. Waters and aerated waters cont added sugar 753,280 1.36 8 Other footwear with outer soles of rubber plastics leath. Or comp. Leather 837,947 1.29 Liqueurs and cordials 660,895 1.20 9 Whiskies in bottles of a strength not exceeding 46% volume 779,583 1.20 Other detergents 647,873 1.17 10 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 769,330 1.18 Of a cylinder capacity exceeding 2000cc but not exceeding 3000cc 558,352 1.01 Total share 20.61 Total share 21.80 Total trade effects 65,067,726 Tota l tariff revenue effects 55,217,166
174 Table A-21. St. Vincent & the Gr enadines top ten imports most affected products by trade and tariff revenue effects under mid el asticity EU lib eralization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other electrical compression-type, household type refrigerators 561,286 8.56 Other electrical compression-type, household type refrigerators 325,233 9.21 2 Other potatoes fresh or chilled 250,859 3.83 Other cane or beet sugar in solid form 182,377 5.17 3 Onions 194,892 2.97 Other potatoes fresh or chilled 172,038 4.87 4 Frost free, electrical, compression-type, household refrigerator 177,087 2.70 Onions 165,736 4.69 5 Stoves & ranges 162,030 2.47 Salami sausages 116,869 3.31 6 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 158,065 2.41 Frost free, electrical, compression-type, household refrigerator 92,670 2.63 7 Tiles cubes & similar articles 156,411 2.39 Stoves & ranges 91,206 2.58 8 Other food preparations not elsewhere specified or included 148,528 2.27 Other sugar confectionery 86,056 2.44 9 Other cane or beet sugar in solid form 142,672 2.18 Other food preparations not elsewhere specified or included 79,837 2.26 10 Other sugar confectionery 141,433 2.16 Processed cheese, not grated or powdered 69,723 1.98 Total share 31.92 Total share 39.14 Total trade effects 6,557,085 Total tariff revenue effects 3,530,253
175 Table A-22. St. Vincent & the Gr enadines top ten imports most affected products by trade and tariff revenue effects under mid elastic ity EU and Caribbean liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other electrical compression-type, household type refrigerators 561,962 7.12 Other electrical compression-type, household type refrigerators 325,766 7.78 2 Other potatoes fresh or chilled 250,504 3.18 Onions 194,148 4.64 3 Tiles cubes & similar articles 213,401 2.71 Other potatoes fresh or chilled 191,375 4.57 4 Onions 201,439 2.55 Other cane or beet sugar in solid form 182,377 4.36 5 Frost free, electrical, compression-type, household refrigerator 177,087 2.25 Salami sausages 116,874 2.79 6 Other medicaments (excl. Goods of heading no. 30.02; 30.05 or 30.06) 171,790 2.18 Stoves & ranges 92,976 2.22 7 Stoves & ranges 164,859 2.09 Frost free, electrical, compression-type, household refrigerator 92,670 2.21 8 Other food preparations not elsewhere specified or included 162,585 2.06 Other food preparations not elsewhere specified or included 90,600 2.16 9 Other sugar confectionery 143,554 1.82 Other sugar confectionery 88,038 2.10 10 Fittings 142,851 1.81 Processed cheese, not grated or powdered 69,732 1.67 Total share 27.77 Total share 34.50 Total trade effects 7,887,537 Total tariff revenue effects 4,187,588
176 Table A-23. St. Vincent & the Gr enadines top ten imports most affected products by trade and tariff revenue effects under mid elasticity EU, Caribbean, and NAFTA liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other plywood 941,123 4.97 Other plywood 479,363 3.13 2 Other electrical compression-type, household type refrigerators 596,189 3.15 Other electrical compression-type, household type refrigerators 462,284 3.02 3 Tiles cubes & similar articles 477,712 2.52 Other cuts and offals of fouls frozen 318,274 2.08 4 Frost free, electrical, compression-type, household refrigerator 450,291 2.38 Frost free, electrical, compression-type, household refrigerator 269,384 1.76 5 Other foot-ware 399,725 2.11 Fully-automatic machines for domestic use 263,730 1.72 6 Other coniferous wood 319,095 1.69 Other potatoes fresh or chilled 241,001 1.57 7 Fully-automatic machines for domestic use 298,061 1.57 Onions 224,307 1.46 8 Sandals and slippers 297,654 1.57 Stoves & ranges 212,646 1.39 9 Pitch-pine 248,474 1.31 Other food preparations not elsewhere specified or included 206,800 1.35 10 Stoves & ranges 231,957 1.23 Other coniferous wood 191,943 1.25 Total share 22.50 Total share 18.73 Total trade effects 18,934,252 Tota l tariff revenue effects 15,321,022
177 Table A-24. St. Vincent & the Gr enadines top ten imports most affected products by trade and tariff revenue effects under mid elasti city EU and FTAA liberalization 2004 Commodity description Trade effect value in XC$ Share Commodity description Change in import duty value in XC$ Share 1 Other plywood 664,098 3.48 Other plywood 562,692 3.33 2 Other electrical compression-type, household type refrigerators 573,322 3.01 Other electrical compression-type, household type refrigerators 466,193 2.76 3 Frost free, electrical, compression-type, household refrigerator 481,087 2.52 Frost free, electrical, compression-type, household refrigerator 318,808 1.89 4 Other foot-ware 427,454 2.24 Other cuts and offals of fouls frozen 318,274 1.89 5 Sandals and slippers 369,461 1.94 Tiles cubes & similar articles 282,913 1.68 6 Tiles cubes & similar articles 359,765 1.89 Fully-automatic machines for domestic use 263,773 1.56 7 Fully-automatic machines for domestic use 297,564 1.56 Other potatoes fresh or chilled 241,001 1.43 8 Other coniferous wood 256,658 1.35 Onions 224,307 1.33 9 Other cuts and offals of fouls frozen 219,734 1.15 Stoves & ranges 213,605 1.27 10 Stoves & ranges 190,398 1.00 Other coniferous wood 209,263 1.24 Total share 20.14 Total share 18.37 Total trade effects 19,065,694 Tota l tariff revenue effects 16,880,515
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187 BIOGRAPHICAL SKETCH Max M. Grunbaum Nagiel was born in Co chabamba, Bolivia on July 24, 1966. He received a Bachelor of Science in Economics from St. Johns University in 1989. He also earned a Master of Arts in Latin American Studies and a Master of Science in Food and Resource Economics at the University of Florida in 1993. He was an adjunct lecturer and businessman in Santa Cruz, Bolivia for a number of years. In 2003 he returned to the Food and Resource Economics Department to pursue a Ph.D. During this time he was a teaching and research assistant in the department. Max completed his degree in 2007.