Standards Harmonization as Export

Promotion

Marion Dovis

University of Aix-Marseille

Mélise Jaud

The World Bank

GDN's 16th Annual Global Development Conference

June 11-13, 2015

Casablanca, Morocco

Motivation

• Increasing role of non-tariff measures (NTMs)– as tariffs continue to fall

– Increasing number of Regional Integration Agreements involve NTM harmonization, e.g.

Morocco

• Effect of NTM harmonization on trade is complex– Unlike tariff: not necessarily welfare-reducing or discriminatory

– Affects access to both foreign and domestic markets

• Limited evidence on the impact of NTMs harmonization on firms’ export

performance

We examine the effect of NTM harmonization on developing countries

domestic firms’ export performance.

This Paper

Q: How do NTM harmonizations affect firm’s export performance through

changes in domestic market level of competition?

What’s new?

1. Our focus is on domestic rather than third party (eg the EU) standard

harmonization.

2. Data :

– unique merged NTM-customs dataset for Morocco (2002-2010)

– NTM harmonization exogenous shock to level of domestic competition - HS6

product specific

3. Estimation strategy:

– DiD approach: we relate a change in NTM stringency folowwing harmonization

with change in domestic firms exports• Exploit waves of NTM harmonization - with dates that vary across products and estimate the within

firm-product effect of harmonization

– Identification issues: reverse causality, omitted variable bias

1. NTM Harmonization affect the export performance of firms through:

a) Changes in the level of domestic competition

– Firms are able to exploit economies of scale: harmonization increases existing firms export

volumes and reduces marginal cost of export

– It raises firms’ probability to export harmonized products.

b) Quality signaling – i.e. by reducing informal market failures

– NTM harmonization only confers exporters with a competitive edge in high income

destination markets where demand for harmonized products is high

– Similarly at the extensive margin.

2. The benefits of harmonization extend across a firm’s export portfolio.– Firms are more likely to expand their export portfolio with products when similar products

have been harmonized.

Main Findings

Focus on Morocco

Morocco — a laboratory for other countries:

• Vigorous effort to modernize and harmonize NTMs– mandated under the Association Agreement with the EU and WTO agreements

– First country to get “Advanced Status” (since 2008)

Article 51 of the E.U.-Morocco Association Agreement:

“[t]he Parties shall cooperate in developing: (a) the use of Community rules in standardization, metrology, quality

control and conformity assessment; (b) the updating of Moroccan laboratories, leading eventually to the conclusion

of mutual recognition agreements for conformity assessment; (c) the bodies responsible for intellectual, industrial

and commercial property and for standardization and quality in Morocco.”

• Harmonization is exogenous to firms• Priority was given to sectors that are key to EU

• Harmonization led to stricter regulations de jure or de facto– Morocco’s regulations prior to harmonization were largely outdated and unevenly enforced

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What Should We Expect?

Direct effects

• Market access• NTM harmonization reduces the relative cost of exporting to harmonized

market.

-Positive effect on exporter expansion at the extensive margin and

ambiguous effect at the intensive margin.

• Credibility effects• NTM harmonization reduces information asymmetries between producers and

consumers.

- Positive effect on firm’s ability to expand their export at the intensive

margin and perhaps at the extensive margin.

Indirect effects

• Competition effect on the domestic market • Non-tariff measures raise costs for all firms alike (domestic and foreign),

inducing the exit of the smaller ones and consequently larger market shares

(and exports) for those that stay.

Background paper to recent regional report

Jaud and Freund (2015) “Champions Wanted”

At aggregate level:

Positive effect of standard harmonization on trade flows lack of harmonization of standards and technical regulations is detrimental to trade (Otsuki, Wilson and

Sewadeh, 2001; Gebrehiwet, Ngqangweni and Kirsten, 2007; Fontagné et al., 2005)

Harmonization of domestic food standards on international ones had a positive and significant impact on

exports (Mangelsdorf, Portugal-Perez and Wilson, 2012)

Harmonization and market structure Chen and Mattoo (2004) harmonization on regional standards improves market access for out-of-bloc

exporters from industrial countries, while reducing it if they were from developing countries.

Harmonization of developing countries on developed countries standards as part of regional agreements

reinforce hub-and-spoke trade structures at the expense of South-South trade (Disdier et al., 2012).

At the firm-level Reyes (2012) impact of EU harmonization on US firms export performance:

positive impact on firms’ ability to enter the EU market

crowding out of developing countries’ producers.

Augier, Cadot and Dovis (2013) harmonization of Moroccan domestic standards with international ones:

positive impact of firms’ profitability and productivity. 7

Existing Literature

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Data

1. Moroccan customs:

– All annual export transaction flows between 2002-2010

– HS 10-digits level, in a four-dimensions panel: firm-year-product-partner (No data

on firms characteristics)

2. NTM data: New database from UNCTAD/World Bank/AfDB

– National inventories of all trade regulations

– For each HS6 products whether a NTM is in place codes and whether it is

harmonized with EU regulations

=> Merged customs and NTM data at the product HS 6-digit level

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NTM Data

• Harmonization took place in waves

• NTM harmonized with an international standard represent for 14% of

NTMs adopted in the Moroccan economy over the period

Year # NTM

domestic

# NTM

harmonized

Type NTM

A B D E F P

2002 1024 31 537 506 12 2003 154 91 60 91 94 2004 313 0 313

2005 164 25 189 2006 250 147 91 161 69 76

2007 67 5 72

2008 11 15 11 15 2009 38 32 11 30 29

2010 17 2 4 12 3 2011 1024 31 817 241 1 80

2012 154 91 30 14 10 3

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Sectoral Distribution

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Customs-NTM Data

• An average firm exports 4.6 products to 2.6 destinations.

• Over time the number of harmonized products in firms’ portfolio grew

from 0.4 to 8%.

Export

(thousand USD)# destinations # products

# harmonized

products

2002 3 242 60 1588 10 2 031 2.6 4.6 0.02

2003 3 549 64 1663 50 2 160 2.6 4.7 0.10

2004 3 627 63 1709 53 2 319 2.5 4.6 0.11

2005 3 663 66 1729 63 2 439 2.5 4.5 0.14

2006 3 715 66 1820 160 2 682 2.6 4.6 0.29

2007 3 779 72 1908 171 3 099 2.6 4.8 0.32

2008 3 844 70 1953 171 3 733 2.6 4.6 0.32

2009 3 657 71 1898 183 2 894 2.6 4.4 0.35

2010 3 329 73 1805 178 3 832 2.8 4.2 0.35

All years 7 423 88 2 678 225

Average firm

Year # firms # destinations # products# harmonized

products

Difference-in-Difference framework:

Continuous fp flows:

Yfdpt = log export quantity in kg or log export UV

or a dummy variable coding alternately (i) firm-product entry (ii) product creation

Hpt-1 = Harmonization treatment variable (0,1)

Dpt-1 = domestic NTM dummy variable

Xfdpt = firm level time varying controls

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Estimation Framework

0 1 , 1 , 1 (1)fdpt p t p t fdpt fp dt fdptY H D X

0 1 , 1 2 , 1 , 1 (2)fdpt p t p t fp p t fdpt fp dt fdptY H H D X

Underlying assumptions

1. Change in non-tariff measures affect competitive pressure faced by domestic

firms

- Harmonization=> stricter standard relative to previous ones

- Exporters sell on the domestic market: over 60% of exporting manufacturing firms

are active on the domestic market (census data), drop MNC, ZF

2. Firms already exporting to harmonized destinations are not affected by

harmonization:

- They have already paid the compliance costs: export cost in unaffected

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Standards Harmonization and Firm Export Promotion

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Domestic market competition: intensive margin

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Domestic market competition: extensive margin

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Product or firm effect?

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Robustness Checks

1. Timing of the effect

2. Alternative definition of Harmonization dummy

3. Placebo exercise : generate random product-year harmonization events

4. Next Steps: Controlling for firm heterogeneity

1. NTM Harmonization affect the export performance of firms through:

a) Changes in the level of domestic competition

– Firms are able to exploit economies of scale: harmonization increases existing firms export

volumes and reduces marginal cost of export

– It raises firms’ probability to export harmonized products.

b) Quality signaling – i.e. by reducing informal market failures

– NTM harmonization only confers exporters with a competitive edge in high income

destination markets where demand for harmonized products is high

– Similarly at the extensive margin.

2. The benefits of harmonization extend across a firm’s export portfolio.– Firms are more likely to expand their export portfolio with products when similar products

have been harmonized.

Our results uncover a “public-good” dimension of regulatory harmonization

Contribute to the political acceptability of costly harmonization.

Concluding Remarks

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Thank You

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Timing of the effect : intensive margin

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Timing of the effect : extensive margin

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Robustness I : Alternative definition of Harmonization dummy

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Robustness II : Placebo exercise

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Standards Harmonization across main sectors

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Standards Harmonization across type of NTM