comparative advantage and trade

274 Pages·2017·5.15 MB·English

COMPARATIVE

ADVANTAGE AND TRADE:

AFGHANISTAN, CENTRAL

ASIA AND SOUTH ASIA

AFGHANISTAN TRADE AND REVENUE (ATAR)

PROJECT

Contract Number: ID-0AA-I-12-00035

Order Number: AID-306-TO-13-00009

Contract Number: AID-OAA-I-12-00035

Order Number: AID-306-TO-13-00009

umber: ID-0AA-I-12-00035

Order Number: AID-306-TO-

April 2014
This publication was produced by Chemonics International for review by United States Agency

for International Development.
Contents

Acknowledgements ......................................................................................................... v
Acronyms ........................................................................................................................ vi
List of Figures, Tables and Boxes ................................................................................. ix
Map of Central and South Asia ..................................................................................... xii
Executive Summary ......................................................................................................... 1
PART I. INTRODUCTION .................................................................................................. 3
I. BACKGROUND AND COVERAGE ...................................................................... 4
A. Introduction ................................................................................................. 4
B. Historical Context ........................................................................................ 5
C. Socio-Economic Profile ............................................................................... 8
D. Coverage .................................................................................................. 10
E. Terminology .............................................................................................. 11
II. REGIONAL TRADE PATTERNS ......................................................................... 12
A. Importance of Trade .................................................................................. 12
B. Regional Trade ......................................................................................... 15
C. Measuring Trade ....................................................................................... 20
III. RANKING OPPORTUNITIES ............................................................................... 24
A. Introduction ............................................................................................... 24
B. Evaluation Method .................................................................................... 24
C. Ranking Methodology ............................................................................... 27
PART II. INDICATORS OF REGIONAL TRADE EXPANSION OPPORTUNITIES ......... 31
IV. EXPORT DIVERSIFICATION ............................................................................... 32
A. Traded Products ....................................................................................... 32
B. Product Concentration .............................................................................. 38
C. Export Survival Rates ............................................................................... 41
D. Ratings ..................................................................................................... 42
V. COMPARATIVE ADVANTAGES ......................................................................... 44
A. Product Sophistication .............................................................................. 44
B. Revealed Comparative Advantages .......................................................... 47
C. Ratings ..................................................................................................... 52
VI. TRADE COMPLEMENTARITIES ......................................................................... 53
ii
A. Overall and Bilateral Trade Complementarities ......................................... 53
B. Matching Top Product Export with Top Regional Imports .......................... 60
C. Matching Product Exports to Dynamic Regional Markets .......................... 61
D. Ratings ..................................................................................................... 67
VII. INTRA-INDUSTRY TRADE .................................................................................. 69
A. Country Similarity and Two-Way Trade ..................................................... 69
B. Bilateral Intra-Industry Disaggregated Trade ............................................. 73
C. Ratings ..................................................................................................... 77
PART III. PRICE, NON-PRICE AND STRUCTURAL FACTORS .................................... 79
VIII. REAL EXCHANGE RATES AND INTERNATIONAL COMPETITIVENESS ......... 80
A. Measuring Inter- and Intra-Regional Competitiveness ............................... 80
B. Modeling Price Competitiveness ............................................................... 85
C. Ratings ..................................................................................................... 90
IX. TRADING COSTS ................................................................................................ 93
A. Why Border and Behind-the-Border Trade Costs Matter ........................... 93
B. Evidence on Intra- and Extra-Regional Trade Costs ................................. 94
C. Trade Facilitation ...................................................................................... 99
D. Ratings ................................................................................................... 101
X. STRUCTURAL FACTORS IN TRADE ............................................................... 103
A. Export Performances .............................................................................. 103
B. Constant-Market Share Analysis ............................................................. 104
C. Ratings ................................................................................................... 110
PART III. MEASURING REGIONAL TRADE AND VALUE CHAIN OPPORTUNITIES 111
XI. REGIONAL TRADE AGREEMENTS AND GRAVITY MODELS ........................ 112
A. Bilateral and Regional Trade Agreements ............................................... 112
B. Modeling Regional Trade ........................................................................ 116
C. Estimating and Forecasting Intra- and Inter-Regional Trade ................... 118
D. Ratings ................................................................................................... 124
XII. REGIONAL TRADE BASED ON COMPARATIVE ADVANTAGES ................... 127
A. Trade Possibilities Approach ................................................................... 127
B. Potential for Regional Trade Patterns ..................................................... 127
C. Ratings ................................................................................................... 133
XIII. REGIONAL VALUE CHAINS ............................................................................. 134
A. Fragmentation of Production ................................................................... 134
B. Classification of RVCs based on Product Sophistication ......................... 137
iii
C. Potential Regional Value Chains ............................................................. 141
D. Ratings ................................................................................................... 153
PART IV. FINDINGS AND IMPLICATIONS .................................................................. 155
XIV. SUMMARY ......................................................................................................... 156
A. Rankings across Countries and Categories ............................................ 156
B. Rankings across Different Interest Groups .............................................. 158
C. Test for Independence of Categories ...................................................... 161
XV. RECOMMENDATIONS ...................................................................................... 162
A. Policy Implications .................................................................................. 162
B. Regional Value Chain Opportunities ....................................................... 165
ANNEX A: ECONOMETRIC MODELING OF TRADE ................................................... 167
ANNEX B: TERMS OF REFERENCE OF STUDY ......................................................... 173
ANNEX C: MAPPING STUDY CHAPTERS WITH TERMS OF REFERNCE ................. 177
STATISTICAL APPENDIX............................................................................................. 178
REFERENCES .............................................................................................................. 256

iv
Acknowledgements
This report was prepared for the Economic Integration Forum, Inc. in support of the United
States Agency for International Development (USAID) Afghanistan Trade and Revenue Project.
The author is grateful to Wisakha Khaothamma for preparing the analytical tables in this report,
and to Victoria Doroshenko for preparing the trade data used throughout this study. This report
was supervised by Farhat Youwakim Farhat. The views expressed in this study are those of the
author and do not necessarily reflect the views and policies of USAID or any other institution
associated with the USAID Afghanistan Trade and Revenue Project

v
Acronyms

ACD Afghan Customs Department
AD Anno Domini
ADB Asian Development Bank
API Active Pharmaceutical Ingredient
ARD Afghan Revenue Department
ATF Agreement on Trade Facilitation
BC Before Christ
BEZ Border Economic Zone
BTA Bilateral Trade Agreement
CADGAT Central Asia Data-Gathering and Analysis Team
CAREC Central Asia Regional Economic Cooperation
CARs Central Asian Republics
CASA Central Asia South Asia
CBTA Cross-Border Trade Agreement
CC Cubic Centimeter
CGE Computable General Equilibrium
CIF Cost Insurance Freight
CISFTA Commonwealth of Independent States Free Trade Agreement
COMTRADE Commodity Trade Statistics Database
CPI Consumer Price Indices
CU Customs Union
DOF Degrees of Freedom
DOT Direction of Trade
DRC Domestic Resource Cost
DW Durbin-Watson
EAEC Eurasian Economic Community
ECM Equilibrium-correcting mechanism
ECOTA Economic Cooperation Organization Trade Agreement
FAO Food and Agriculture Organization
FOB Free on Board
FTA Free Trade Agreement
GDP Gross Domestic Product
GIROA Government of the Islamic Republic of Afghanistan
GMP Good Manufacturing Practice
GNI Gross National Income
GNP Gross National Product
GVC Global Value Chain
HDI Human Development Index
vi
HS Harmonized System
HT High Tech
IIT Intra-Industry Trade
IMF International Monetary Fund
ISIC International Standard Industrial Classification
kVA Kilo Volt Ampere
kW Kilo Watt
LDC Least Developed Countries
LSCI Linear Shipping Connectivity Index
MT Medium Tech
MW Megawatt
NGO Non-Government Organization
NTB Non-Tariff Barrier
NTMs Non-Tariff Measures
NUPI Norwegian Institute of International Affairs
OECD Organisation for Economic Cooperation and Development
PP Primary Products
PPI Producer Price Indices
PPP Purchasing Power Parity
QR Quick Response
RB Resource-Based
RCA Revealed Comparative Advantage
REER Real Effective Exchange Rate
RER Real Exchange Rate
RTA Regional Trade Arrangement
RVC Regional Value Chain
SAFTA South Asia Free Trade Area
SAPTA South Asian Preferential Trade Agreement
SI Similarity Index
SME Small and Medium-Sized Enterprise
SPS Sanitary and Phytosanitary
TAFA Trade and Accession Facilitation for Afghanistan
TAP (TAPI) Turkmenistan–Afghanistan–Pakistan–India Pipeline
TIVA Trade in Value Added
TLP Trade Liberalization Program
TTA Transit Trade Agreement
TTF Transport and Trade Facilitation
UAE United Arab Emirates
UN United Nations
UNCTAD United Nations Conference on Trade and Development
UNESCAP United Nations Economic and Social Commission for Asia and the Pacific
USAID United States Agency for International Development
vii
VA Value Added
VAT Value Added Tax (VAT)
WIOD World Input Output Database
WPI Wholesale Price Indices
WTO World Trade Organization

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List of Figures, Tables and Boxes
Figures
No.
1.1 Socio-Economic Indicators of Central and South Asia Economies
2.1 Gross National Income (GNI) of Central and South Asia Economies
2.2 Relationship between Gross National Income (GNI) and Economic Growth of Central and South
Asia Economies
2.3 Trade as a percent of GDP in Central and South Asia, in 2013
2.4 Trade as a percent of GDP in Central and South Asia and Other regions, 2013
2.5 Trade as a percent of GDP in Central and South Asia, 1995-2013
2.6 Relationship between Openness and Economic Growth in Central and South Asia
2.7 Intra- and Inter-Regional Trade in Central and South Asia, 2013
2.8 Intra-Regional Trade of Central and South Asian Economies in Each Region, 2013
2.9 Intra-Regional Trade of Central and South Asian Economies in Each Region, 1995-2013
2.10 Intra-Regional Trade Shares of Major Regions
2.11 Inter-Regional Trade of Central and South Asian Economies, 2013
2.12 Trade-Weighted Inter-Regional Trade Share of Central and South Asian Economies, 1995-2013
2.13 Mean Average Inter-Regional Trade Share of Central and South Asian Economies, 1995-2013
3.1 Hypothetical Example of Trade-Related Policies in Central and South Asia Countries
3.2 Summary Statistics of Example of Trade-Related Policies in Central and South Asia Countries
4.1 Survival Rates in Central and South Asian Economies between 2010 and 2013
5.1 Classification of Central and South Asian Exports according to Degree of Sophistication
5.2 Revealed Comparative Advantage by Broad Product Categories
6.1 Trade Complementarity Indices of Central and South Asian Exports
6.2 Matching High-Growth Exports with Dynamic Regional Imports, 2004-2013
7.1 Relation between Intra-Industry Trade and Similarity Index based on Per Capita Income
8.1 International Price Competitiveness of Central and South Asia Economies, 2002-2013
8.2 Inter-Regional Competitiveness of Central and South Asia Economies, 2002-2013
8.3 Bilateral Real Exchange Rate Volatility of Central and South Asia Regions, 2002-2013
8.4 Average Inter-Regional Import Demand Adjustments to One-Time 1% Rise in REER of Central
and South Asia Economies
8.5 Regional Import Demand Adjustments to One-Time 1% Rise in REER of Central and South Asia
Economies
9.1 Trading Costs in Developing Countries
9.2 Inter and Intra-Regional Trade Costs of Central and South Asia Economies
9.3 Non-Tariff Costs of Trade between Central and South Asia Economies, 2010-2013 average
9.4 Inter and Intra-Regional Trade Costs of Central and South Asia Economies
9.5 Non-Tariff Costs of Agricultural and Manufacturing Trade in Central and South Asia, 2010-2013
average
9.6 Bilateral Non-Tariff Costs of Agricultural and Manufacturing Trade, 2010-2013 average
9.7 Factors Explaining Central and South Asia’s Connectivity, 2012-2014
10.1 Intra-Regional Market Shares, 2000-2013
10.2 Inter-Regional Market Shares, 2000-2013
ix
10.3 Measuring Export Performance and Constant-Market Share Analysis
11.1 Regional Trade Agreements in Central and South Asia
12.1 Market Potential in Central and South Asia Regional Exports based on Revealed Comparative
Advantages
13.1 The Smiling Curve for Value Added in Regional and Global Value Chains
13.2 Stages of Cross-Border Value Added Investment by Level of Sophistication
13.3 Comparative Advantage of Mineral Extraction Industry (ISIC 12)
13.4 Comparative Advantage of Products in Textiles and Textile Industry (ISIC 17-18)
14.1 Overall Rankings by Country
14.2 Overall Rankings by Category
14.3 Overall Rankings by Country Category
14.4 Overall Rankings by Category of Countries
14.5 Overall Commercial Rating Relative to Neutral Benchmark
14.6 Overall Socio-Economic Development Rating Relative to Neutral Benchmark
Tables
No.
1.1 Profile of Central and South Asia Countries
2.1 Bilateral, Intra-Regional and Inter-Regional Trade (million US dollars)
2.2 Availability of COMTRADE data in Central and South Asia Countries
2.3 Use of Reporter versus Mirror Trade data in Central and South Asia Countries
4.1 Top 10 Exports of Central and South Asia Countries to World and Region, 2010-13 average
4.2 Number of product exports of over $10,000 value to trading partners, 2010-13 average
4.3 Herfindahl-Hirschman product concentration index, to trading partners, 2010-13 average
5.1 Classification of Central and South Asian Exports according to Degree of Sophistication
5.2 Revealed Comparative Advantage of Central and South Asian countries by HS Section
6.1 Overall Bilateral Trade Complementarity Indices of Central and South Asian Exports
6.2 Trade Complementarity Indices of Central and South Asian Exports, by Size of Exports
6.3 Trade Complementarity Indices, by Size of Exports and Products Examples
6.4 Number of Matches between Top 1000 Import of Central and South Asia Regions and 1000
Top Product Exports of Each Country in the Regions in 2010-2013
6.5 Average Annual Growth Rate of Central and South Asia Imports, by HS Section, 2010-2013
6.6 Summary Assessment of Trade Complementarities
7.1 Similarity Indices of Central and South Asian Exports Based on Size of Gross National Income
7.2 Similarity Indices of Central and South Asian Exports Based on Per Capita Income
7.3 Intra-Industry Trade of Central and South Asia Countries, by Trading Partners (Average 2010-
2-13)
7.4 Percentage Distribution of Total Bilateral Trade (Imports plus Exports) of Central and South
Asia across HS Sections
7.5 Intra-Industry Trade Indices for Bilateral Trade of Central and South Asia Countries (Trade-
weighted averages by country and unweighted averages of IITs for trading partners)
7.6 Summary Assessment of Intra-Industry Trade
8.1 Annual Percentage Change in Bilateral Price Competitiveness of Central and South Asia
Economies, 2010-2013
x