Standards Harmonization as Export

Promotion

Marion Dovis

University of Aix-Marseille

Mélise Jaud

The World Bank

Non-Tariff Measures: Economic Analysis and Policy Appraisal, CEPII, PSE

July 1, 2014

Paris, France

Motivation I

• 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.

Motivation II

Morocco — a laboratory for other countries:

–vigorous effort to modernize and harmonize with international standards -

largely mandated under the Association Agreement with the EU and WTO

agreements

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

“[t]he Parties shall cooperate in developing: (a) the use of Community rules in standardisation, 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 standardisation and quality in Morocco.”

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

–Morocco’s regulations prior to harmonization were largely outdated and

unevenly enforced, there is a reasonable presumption that new (harmonized)

regulations were stricter, de jure or de facto, than the old ones they replaced.

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. 4

Existing Literature

This Paper I

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

• 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)

• Measure of import competition at HS6 digit: NTM harmonization

3. Estimation strategy:

• DiD approach: we relate a change in non-tariff protection associated with

NTM 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

This Paper II

• Underlying assumptions:

1. Change in non-tariff measures have important impact on the

competitive pressure faced by domestic firms

- Harmonization translated into implementation of stricter standard relative to

the one previously in place

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

manufacturing firms are active on the domestic market (census data)

2. Some firms are not affected by compliance costs of stricter domestic

standard as they are already compliant.

– Export cost unaffected

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What should we expect

1. 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.

2. Competition effect on the domestic market

• Limit competition from developing non-harmonized countries - Exit of firms from export.

• Increase competition from developed harmonized countries - Entry of firms from export.

3. Quality signaling

• 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.

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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 World Bank

– National inventories of all trade regulations

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

is harmonized with international regulations

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

3. Data cleaning:

– Drop HS 25 to HS 27 products, ZF, trade flows (firm-product) with only 1

observation in the dataset, flows <1000$.

9

NTM Data I

• 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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NTM Data II

• 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

Baseline specifications:

Estimate the effect of product-specific harmonization on firms’ export performance

and dynamics.

Yfdpt = log export quantity in kg or log export UV or a dummy variable coding alternately

(i) firm-product entry taking value 1 if firm f enters the export market with product p in year t,

(ii) product creation taking value 1 if firm f exports a new product p in year t.

Hpt-1 = treatment variable equal 1 one year after and all subsequent years following any NTM

harmonization of product p in year t, 0 otherwise.

Dpt = equal to 1 the year and all subsequent years following any domestic and

non-harmonized NTM of product p in year t, 0 otherwise.

Xfdpt = the number of competing firms exporting product p to destination d in time t, a dummy

variable equal to 1 if the firm both import and export the same product p in year t, 0

otherwise.

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Empirical Strategy I

Y fdpt 0 1H p, t1Dp, t X fdpt fp dt fdpt (1)

Domestic market competition:

with

We set λ at the 75th percentile of the cross-sectoral distribution.

Quality signaling:

with θ a dummy variable equal to one for firm-product flows that are active

throughout the entire period and 0 otherwise.

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Empirical Strategy II

Y fdpt 0 1H p, t12 H p, t1p Dp, t X fdpt fp dt fdpt (2)

p = either pDC

or pOED

p 1 if initial import share from DC (High OECD countries)

0 otherwise

Y fdpt 0 1H p, t12 H p, t1 fp Dp, t X fdpt fp dt fdpt (3)

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Main Result: Standards Harmonization and Firm Export

Promotion

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Standards Harmonization across main sectors

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Standards Harmonization across type of NTM

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Domestic market competition effect : intensive margin

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Domestic market competition effect : extensive margin

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Standards Harmonization and quality signaling:

intensive margin

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Standards Harmonization and quality signaling:

extensive margin

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Standards Harmonization: product or firm effect?

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Robustness Checks I : Standards Harmonization

Effects Persist Over Time

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Robustness Checks II : Cumulated number

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Robustness Checks III : Placebo

• Estimate the within firm-product effect of standard harmonization on

firms’ exports

1. Harmonization of domestic NTM affect the export performance of firms

through changes in the level of competition they face. • In sectors with high import penetration from high income countries, harmonization

strongly raises firms’ probability to export harmonized products.

• The pro-competitive effect dominates.

2. Regulatory harmonization promotes Moroccan firms competitiveness

by reducing informal market failures through quality signaling. • Standard 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.

3. The signaling 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.

Concluding Remarks

• Harmonization of developing countries’ domestic standards with

stricter international regulations may serve as a policy instrument to

promote domestic firms’ exports.

Concluding Remarks

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Thank You