From Trade Preferences to Trade Facilitation

Abstract: The main theme of the thesis is how to increase trade between the European Union (EU) and developing countries. Two available policy options are assessed: trade preferences and trade facilitation. Chapter 1 offers a broad discussion of these policies, and concludes that while trade preferences, which once dominated North-South trade relations, are at a risk of becoming obsolete, trade facilitation has a strong potential for increasing trade in the years to come. Chapter 2 constructs a detailed database over the complex set of trade preferences that the EU has offered developing countries since the 1960s. Using this database, a gravity model is estimated on a large sample of EU importers and developing country exporters over the period 1960-2002 to evaluate whether preferences have had an effect on developing countries’ exports. It is found that the most generous preference systems – particularly that for African, Caribbean and Pacific (ACP) countries – have had a positive effect on the recipient countries’ trade. Hence, even though these countries’ trade records have been very disappointing, the situation would have been even worse without preferences. However, other developing countries that have only been able to export under the much less generous Generalized System of Preferences have not experienced increased export flows as a result of this system of preferences. Chapter 3 assesses the potential effects of trade facilitation in terms of increased trade flows both on average and specifically for the six regional groups of ACP countries negotiating Economic Partnership Agreements (EPAs) with the EU. Data on the time required to export or import are used as indicators of cross-border transaction costs, and a gravity model on two-way bilateral trade between 22 EU countries and 100 developing countries is estimated using a sample selection approach. The results suggest that time delays significantly decrease trade flows, but also that this effect is not constant, in the sense that the elasticity of trade with respect to border delays declines at higher levels of time requirements. On average, lowering border delays in the exporting country by one day would increase exports by about 1 percent, while the same reduction in the importing country would increase imports by about 0.5 percent. Chapter 4 broadens the analysis of trade facilitation and explores the link between trade transaction costs and the extensive and intensive margins of trade. The main objective is to investigate whether the extensive margin of trade in homogeneous and differentiated goods is affected in the same way by cross-border trade transaction costs. The other objective is to compare the implications for the extensive and intensive margins to ascertain the margin at which these transaction costs matter the most. Very detailed mirror data on imports to EU countries from developing countries in 2005 is utilized to decompose these countries’ exports into extensive and intensive margins. Using the number of days needed to export a good as a proxy for trade transaction costs, there is econometric evidence that developing countries with high transaction costs will export significantly fewer differentiated goods. However, no such negative effect on the extensive margin is found for homogeneous goods. Comparing the effects on the two margins, it is found that, for differentiated goods, the extensive margin is more negatively affected by export transaction costs than the intensive margin.