Trade has become a very contentious issue over the past few years. Many of the main Brexit supporters cite Free Trade as the Holy Grail. Freed from the protectionist barriers of the EU, the UK can apparently once again achieve its true position in the world.
Trade is however notoriously complex. There are tariff and non-tariff barriers and other barriers to business. The UK economy also relies most heavily on services. Services exports, are far more difficult to understand and explain than goods and are often overlooked in the various pro and anti-EU arguments.
Fortunately, there are a number of Trade experts on Twitter to help make sense of it all. For example, David Henig (@DavidHenigUK), Dmitri Grozoubinski (@DmitryOpines), Anna Jerzewska (@AnnaJerzewska) and Peter Ungphakorn (@CoppetainPU). If you are interested in trade and on Twitter, all are worth following.
David also often publishes in the national press, such as The Guardian and the Irish Times. Dmitri, runs the ExplainTrade blog and there is, for example, an excellent post on the Johnson Deal. Anna runs a very informative FreeTradeAgreement site. Peter runs the very informative Trade β blog.
As mentioned trade is complex. A new tool, the Trade Barrier Index has been published last week. It examines 86 countries (representing 83% of the world’s population, responsible for 91% of all traded goods and services, and 94% of world GDP) on a variety of criteria and it allows easy comparison between countries. It ranks countries in terms of ease of trade.
What criteria are used and are they robust? Is it a useful tool? What countries fare well and how is the UK placed?
The Trade Barrier Index (TBI)
The trade barrier index has been compiled by an American think tank, Property Rights Alliance. This seems part of the right-wing think tank network funded by big tobacco amongst others. As funding can hide a hidden agenda, it is important that the methodology is reasonable, open and transparent.
David Henig has tweeted:
Now I’ve only had a chance to have a quick glance at the methodology applied to the Trade Barrier Index (https://t.co/CBgVvt8laV) but it seems relatively robust – covering tariffs, non-tariff barriers, facilitation through trade agreements and more.— David Henig (@DavidHenigUK) November 7, 2019
Given David’s recommendation, the TBI tool is worth examining and is available here. It allows up to five countries to be compared with an easy to use interface.
The lower the TBI the more open the economy is and the easier it is to do trade.
Countries are ranked in terms of trade friendliness. These results (Fig. 1) look much as might be expected, with Singapore and Hong Kong topping the table. New Zealand is in third place, another economy with a reputation for being very open.
What is more interesting perhaps is that the next six places are all occupied by countries in the EU, including both Ireland and the UK. Interestingly Poland makes the top 10, but not Germany. The Netherlands, in 4th place, has a score only marginally behind NZ and HK. The only other country to make the top 10 is Canada.
In the bottom half of the table is the US in 54th place and the two counties in bottom place are China and India. India and China are no surprise as they have a reputation of being notoriously protectionist. The US possibly more of a surprise.
How is the index compiled and what measures are used?
Measures Used to Generate the Index
The overall structure is shown in Fig.2. This shows the four measures used in creating the TBI: non-tariff measures (NTMs), Tariffs, Services and Facilitation. Each will be discussed in turn with examples.
Because the various measures use different scaling methodologies a min-max method to normalise the data for each criterion. This is undefined in the main report, but is probably similar to this description of min-max in R, here.
In all cases a simple average is applied, all the measurements are given equal rating.
Five countries have been chosen as an example in this blog: New Zealand (a possible model), the Netherlands (best country in Europe), the UK, Singapore (another model and No. 1) and the US (why is it so poor?)
Non Tariff Measures
Non-tariff measures (NTMs), also called regulatory barriers, impose additional import requirements that result in longer shipping times, extra financial burdens, and other bureaucratic obstacles.
The TBI uses the NTMs database developed by the UN Conference on Trade and Development (UNCTAD) Trade Analysis Information System. The taxonomy classifies NTMs into eight parent categories: sanitary and phytosanitary (SPS), technical barriers to trade (TBT), pre-shipment inspection, contingent trade protective measures, quantity control measures, price control measures, export-related, and lastly a category for other measures.
The TBI-NTM score separates the total number of these measures applied bilaterally and those applied to all trade partners. The scores are shown in Fig. 3.
On this measure, three countries, NZ, NL and the UK are virtually identical, with Singapore (SG) being a bit better but the US is far worse. It is interesting that NL and the UK, bilateral barriers are higher than those applied on all partners. This is presumably because bilateral deals apply to countries outside the Single Market.
Tariffs barriers are calculated in three separate ways. The Most Favoured Nation (MFN) rate, the number of tariff lines and the number of duty-free tariff lines. These are defined below.
The MFN average applied rate: This represents the country’s average tariff on imported goods before a lower rate from a Regional Trade Agreement (RTA) or a Preferential Trade Agreement (PTA) is applied.
Number of MFN applied tariff lines: The latest Harmonized Commodity Description and Coding Systems (HS) revision has 5,388 six-digit tariff lines. The number of tariff lines in use is a key indicator of how heavily tariffs are used as barriers to trade.
Share of MFN duty-free tariff lines: Not all tariff lines in use are assigned a tariff rate, some are duty-free. Though, the tariff line is still applied to imports in order to apply non-tariff measures or for other administrative purposes. This measure rewards countries with higher shares of duty-free lines.
The scores for the chosen countries are shown in Fig. 4.
The methodology seems a bit strange to a non-expert. The duty-free score, in particular, seems to have too high a weighting.
As the UK and NL are both in a customs union, the tariffs are identical and high. The US does worst on the tariff lines score, interestingly Singapore fares marginally worse on this measure than the UK or NL.
The services economy concerns human roles involved in producing, designing, buying, and selling both physical and intangible products. Data on services trade and especially restrictions on services are beginning to gather more prominence. In July an experimental dataset on trade in services by mode of supply (TISMOS) was published by the WTO. This was used to determine trade barriers in Modes 1, 3 and 4, defined below.
Mode 1 (Restrictions on Cross-Border Supply): refers to restrictions on entry of services such as licensing requirements, commercial presence requirements and rules on providing services through telecommunications or e-mail.
Mode 3 (Restrictions on Commercial Presence): refers to limits on ownership of a business, limits on type of businesses allowed, the number of suppliers in the marketplace, restrictions on operations, and the regulatory regime for foreign businesses.
Mode 4 (Restrictions on Natural Persons): these are chiefly occupational licensing requirements, visa requirements, local staff quotas, and economic needs tests.
Mode 2, which is not used refers largely to tourism.
In terms of Services, NL has the lowest barriers. Followed by NZ, with the Uk in 3rd place. Both Singapore and the US have higher barriers.
Trade barriers are not limited directly to superficial trade. Language, culture, and geography act as barriers in themselves. Basic facilitative measures should be in place such that that: businesses can be formally established, ports operate in a timely and efficient manner, customs rules are clearly stipulated and readily available, market participants can trade property and have access to independent courts to settle disputes. These are a few requirements identified by the TBI.
The Facilitation index is determined using the four criteria below and displayed in Fig. 6.
The International Property Rights Index (IPRI) asses the legal and political environment, physical property rights protection, and protection of intellectual property.
The Logistics Performance Index (LPI) measures essentials necessary to efficiently transport goods across borders: customs management, basic infrastructure, ease of arranging shipments, quality of logistics, ability to track and trace, and timeliness.
The Digital Trade Restrictions Index (DTRI): looks at data flows and e-commerce transactions. Trade is increasingly affected by a digital component, and barriers here are likely to be of increasing importance.
Regional Trade Agreements (RTA): Most trade barriers are negotiated away, or considerably reduced, through trade agreements. The measure chosen was the number of physical RTAs in force and notified to the WTO, and its predecessor the GATT.
On Facilitation NL scored best, followed by the UK. Singapore is in 3rd place with NZ and the US taking up the rear.
The criteria, in general, look sensible and the methodology sound. Not being a trade expert, I can’t say if there are other measures which would have been more informative. Uniform weighting has been used and it is perhaps a value call as to the relative importance of the various measures.
From a Physicist’s perspective, I would have liked to have seen some robustness measures, such as a simple Monte Carlo simulation where the weightings were not kept uniform but varied within sensible limits to assess the relative importance of different criteria. For the three Tariff measurements, for example, this would entail running the weightings not just for 1/3:1/3:1/3 but millions of variants such as 1/2:1/4:1/4 to see if the results changed significantly.
Accepting the methodology, it is clear that the UK is already in the top 10. By adopting best practice in various areas such as in the NL, it could easily be in the top 5 without leaving the EU.
The US fares extremely badly on this index, hence any moves that make the UK closer to the US seem a grave mistake. Canada is often mentioned by Brexiters as an ideal, but while far better than the US it is behind the UK.
Overall the TBI does not give support to those who believe Free Trade is hampered by remaining in the EU. Given that NZ and NL have near-identical scores, only SG and HK fare substantially better. SG and HK, however, have unique features, economic, historical and geographical, which will be difficult or impossible to replicate in the UK.
The TBI does not support the case that the EU hampers Free Trade and reinforces the point that leaving the EU is not an obvious path to trading success.