## Trade as a Tool for an Efficient Recovery

_IMF Blog, September 14, 2020_

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- [Markdown version](/en/blogs/articles/2020/09/14/trade-as-a-tool-for-an-efficient-recovery/index.md)
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## Bibliographic details
- Authors: Jesus Gonzalez-Garcia, Yuanchen Yang
- Published: September 14, 2020

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### Summary
- 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.

### Empirical findings on trade liberalization and markups
- 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.

### Interpretation and mechanisms
- 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.

### Policy implications and recommendations
- 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.*

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## Content in this bundle

- **Chapter 2**
  - [Chapter 2 (Markdown version)](/-/media/files/publications/reo/afr/2019/october/english/ch2.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 2 (PDF)](/-/media/files/publications/reo/afr/2019/october/english/ch2.pdf){rel="external" type="application/pdf"}

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## References

- [Working Paper](https://www.imf.org/en/Publications/WP/Issues/2020/07/17/International-Trade-and-Corporate-Market-Power-49565)
- [IMF Staff Discussion Note](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2020/05/13/The-African-Continental-Free-Trade-Area-Potential-Economic-Impact-and-Challenges-46235)

_Source: https://www.imf.org/en/blogs/articles/2020/09/14/trade-as-a-tool-for-an-efficient-recovery_