Trade as a Tool for an Efficient Recovery

IMF Blog, September 14, 2020

Source details

Authors: Jesus Gonzalez-Garcia, Yuanchen Yang
Publication date: September 14, 2020
Focus: Evidence that policies promoting more open and trade-integrated economies can reduce market power and lower consumer costs in emerging and developing economies, supporting recovery from the COVID-19 crisis.
Dataset: Firm-level dataset covering about 400,000 firms in 83 emerging and developing economies from 2000 to 2017.

Study sample includes 29 nations in sub-Saharan Africa where greater trade integration led to significantly lower markups.
Tariff reductions cause a significant decrease in markups in the manufacturing sector, which typically faces strong competition from abroad.
The information and communication technology (ICT) sector experiences important reductions in markups after tariff cuts, likely due to lower costs for imports in a sector that requires large investments.
Sectors with more import penetration have a stronger response to tariff reductions.
Quantified effects:
- Reducing tariffs lead to significant declines in markups of about 4 percent in the five years after trade barriers are reduced.
- In sub-Saharan Africa, using sector-specific tariff rates, a 10 percent reduction in tariffs is associated with a 1 percent decrease in markups in the region.

Markups measure firms’ ability to charge consumers above costs and are indicators of market power; increased competition reduces markups.
The additional effect of liberalization on ICT firm markups could be related to relatively high capital intensity in this sector; opening markets to more imports of capital goods may contribute to more competition and reduced markups of dominant firms.
Trade liberalization exhibits significant synergies with real sector reforms and appears, compared to other policy actions examined, to be a particularly potent tool for mitigating market power.

Findings support efforts to increase trade integration among emerging and developing economies as a means to boost efficiency and lower consumer costs during recovery.
The African Continental Free Trade Area is highlighted as a historic opportunity to deepen trade and economic integration; it "will go into operation in January" and aligns with the empirical evidence favoring trade policy as a recovery tool.
Policymakers should consider tariff reductions and complementary real sector reforms to strengthen competition and reduce markups across sectors, especially manufacturing and ICT.

From "Trade as a Tool for an Efficient Recovery" (Chart of the Week), Jesus Gonzalez-Garcia and Yuanchen Yang, September 14, 2020.