CASE-BY-CASE IMPACT ASSESSMENT

METHODS FOR INTERNATIONAL TRADE

NEGOTIATIONS

Antonio Bonet
Chairman. ACE Asesores de Comercio Exterior S.L.

March 19, 2002

Serrano, 20 – 4º I. Madrid
28001.SPAIN
Tel: (34) 91 435 15 67.
Fax: (34) 91 435 01 84
E – mail: acecomex@acecomex.com
 CONTENTS

I. INTRODUCTION
II. PRIOR CONSIDERATIONS. INTERNATIONAL TRADE
NEGOTIATIONS, IMPACT ASSESSMENT AND WORKING
HYPOTHESIS  
III. ALTERNATIVE IMPACT ASSESSMENT MODELS
IV. PHOTOGRAPH
V. IDENTIFICATION OF PRIORITY AND SENSITIVE PRODUCTS
VI. CALCULATION OF TENDENCIES  
VII. CASE-BY-CASE MODELS: DEFINING THE TRADE NEGOTIATION
STRATEGY
VIII. SECTOR SUPPORT POLICIES
IX. SUMMARY AND CONCLUSIONS

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I. INTRODUCTION

Trade negotiation methodologies attempt to predict the

consequences these negotiations will exert on a country.

Case-by-case Impact Assessment Method  very practical,

useful and easy to use. The arsenal of theoretic and quantitative
instruments it requires is minimal.

Based on:
 Negotiators’ experience
 Know-how
 Common sense

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II. PRIOR CONSIDERATIONS

However complex the trade integration model pursued is, the greater
the changes produced in the country will be.

 Political considerations:
• Yield in sovereignty
• Need for political consensus
 
 Economic considerations:
• Alteration of quantities and relative prices of final goods and
services and production factors (labor, materials, capital,
business capacity)
• Market access

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 Fiscal considerations:
• Loss of customs revenue
• Increase in administration expenditures (national and
supranational)
•  Mid-term GDP   fiscal revenue

In international trade negotiation processes there are 2 negotiations:

 Internal Negotiation (i.e. With other social, political and economic
agents in the country)
 External Negotiation; that is, with the trade partner

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 WORKING HYPOTESIS

• Negotiation between 2 countries to create a free trade area: Country A and

Country B.
• The analysis will center on defining strategies in reference to specific products
and productive sectors.
• Political decisions (i.e. Convenience of the negotiation) have been previously
adopted.
• The negotiation consists of agreeing on:
 Trade Liberalization Schedule.
 The tariff phase-out system
 Exceptions to liberalization
 Rules and Procedures to regulate the relations between the trade partners
(i.e. dispute settlement mechanisms, system to determine the origin of the
goods, used of trade remedies, etc.)

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III. ALTERNATIVE IMPACT ASSESSMENT MODELS

PARTIAL EQUILIBRIUM MODELS

Isolate effects for a specific sector.
Quantify secondary effects (creation of trade, jobs, etc.)
Drawbacks:
Difficult to manage
Lack of flexibility

INTRA-INDUSTRY AND INTER-INDUSTRY TRADE STUDIES

Analyzes Comparative Advantages
Drawbacks:
Complexity
Time of execution
GENERAL EQUILIBRIUM MODELS
Effects of trade liberalization on the countries economy as a whole.
Drawbacks:
Complexity

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CASE-BY-BASE METHOD
Easy to use
Quantifies impacts on sectors/products
Internal and external negotiation tool

Drawbacks:
Does not provide general vision

The method’s phases

1º Photography
2º Identification of Sensitive and Priority Products
3º Tendency Analysis
4º Case-by-case Analysis
5º Determination of the Negotiation Strategy

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IV. PHOTOGRAPH

OBJECTIVE: to understand the starting situation

Through:

 Import & export goods and services statistical study (Temporary evolution; Main
products; Geographical distribution, ...) Country A & B
 Bilateral trade relations Country A with B (Historic evolution; Main products and
sectors)

Key issues:

 Level of aggregation of the data (e.g. 99 chapters, tariff, sections, ...)

- Negotiation methodology

- Available resources for the impact assessment

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 - availability of statistical information

- Degree of homogeneity of the data Country A with

Country B

 Asymmetrical photograph: greater detail towards the product or

sector

 Level and system of tariff and non-tariff protection

 Statistical analysis using trade partner data

Usefulness:

 Identify priority and sensitive products

 Prepare internal and external negotiation

 Prepare impact assessment

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V. IDENTIFICATION OF PRIORITY AND SENSITIVE
PRODUCTS

The negotiating effort should concentrate on a few products.

 Idiosyncrasy of the negotiations

 Insufficiency of the resources
 Speed-up negotiations

Sensitive Products
 Risk of total or partial disappearance of national
industry.
 There is comparative disadvantage

Priority Products
 Potential for strong growth of exports.
 There is comparative advantage

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SENSITIVE PRODUCTS IDENTIFICATION CRITERIA (Country A)

1st criterion (qualitative type): Expert Opinion

 Economic agents opinion: businesses, unions, consumers
(internal negotiation)
 Experience of officials

2nd criterion (quantitative data): Country A import structure

 Volume of imports
 Level of protection currently covering the product

3rd criterion: Relative to trade partner (country B)

 Volume of exports of Country B and its geographic
distribution
 Expert opinion (i.e. Businesses, consultants, ...)
 Country B position on the negotiation

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 EXAMPLE: HOW TO DETERMINE IF THE COTTON SECTOR IS SENSITIVE TO
COUNTRY A
 
Country A subjective factors
• Businessmen and unions consider cotton yarn to be a sensitive product (this
product is the raw material for making cloth, which is the raw material in clothing
manufacture). The product is produced only in a small very depressed region.
• Officials from the Ministry of Production know that national cotton yarn
production is very small, of bad quality and expensive. They indicate that the
product is politically sensitive because the opposing party leader is a congressman
for the region where it is produced. The national guild chairman owns the largest
yarn factory in the country. 
• Local NGOs from the affected region organize protests against liberalization
that are supported by several city councils.
 
Objective factors: Country A
• It is only produced in one province providing jobs for 2,000 people of a total
of 200,000 active people. There are 20 manufacturing businesses.
• The volume of imports is 150,000 metric tons. It is considered to be high
taking into account the import quantities of other products in the same sector.
• The level of protection we have is high: 50% tariff, import license.

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Country B capacity of response
 
• Its export volume is 100,000 metric tons, 15% of which goes to Country A.
The rest is sold to 2 countries.
• Country A’s Embassy commercial office in country B is of the opinion that the
cotton yarn industry is technologically behind and the businesses have little export
capacity.
• It has not been possible to find out if the negotiator will consider cotton yarn
as a priority product.

Determining the product’s “sensitivity”

 
If as a consequence of trade liberalization cotton yarn production disappears in Country
A, losses for the national economy will not likely be very high. Therefore, even though
there are subjective factors that indicate the product should be considered sensitive, it
seems inappropriate for Country A negotiators to classify it as such.

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PRIORITY PRODUCTS IDENTIFICATION CRITERIA (Country B)

1st criterion (qualitative type): Expert Opinion

 Opinion of economic agents (i.e. businesses, unions,
consumers)
 Experience of officials

2nd criterion (quantitative data): Country A export structure

 Volume of exports and geographic distribution

3rd criterion: Relative to trade partner

 Country B volume of imports and its geographic
distribution
 Level of protection
 Expert opinion (i.e. businesses, consultants, ...)
 Country B position on the negotiation

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VI. CALCULATION OF TENDENCIES  

Impact Assessment Tendency Models

They project past tendencies to the future and try to determine the
situation produced with these projections.

Methodology:

1. Calculate yearly average growth rate for exports (or imports)

in the past
Base period min. 5 years and max. 10 years.
2. Define 3 scenarios (Import increase %): optimist, pessimist
and neutral
3. Calculate future value of sensitive product imports (or priority
product exports)  proposed scenarios
4. Compare current import costs with those produced at the end
of the period considered

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ADVANTAGES
 Easy to use
 It allows to reconsider the decision to classify a product as
priority o sensitive and justify with quantitative arguments

DRAWBACKS
 Subjectivity in defining the hypothesis.
 Impact assessment is subjective

Perfection of the tendency model could be achieved using the so-

called case-by-case models

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EXAMPLE: APPLYING THE TENDENCY MODEL TO THE SENSITIVE
PRODUCT SUGAR IN COUNTRY A
 
Photograph Data

• Current total imports: US$ 30,000,000.-

• Past growth rate: 4% per year (mean last 5 years).
•   Imports from Country B: US$ 5,000,000.-
• Yearly growth rate: 4% mean last 5 years
• Market quota of Country B in A: 16.7% of total imports 
• Average protection level: 20% tariff; no non-tariff barriers

Definition of Scenarios:

• Optimist: 4% yearly growth of imports from Country B

• Neutral: 8%
• Pessimist: 12%

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Final Total Imports Situation in Country A (in 5 years)
 
Country B Rest of the World Total
Optimist: 6,083,265 30,416,323 US$ 36,499,587
Neutral: 7,346,640 30,416,323 US$ 37,762,963
Optimist: 8,811,708 30,416,323 US$ 39,228,031
 
Increase over Current Situation
 
Optimist: US$ 6,499,587 21.7%
Neutral: US$ 7,762,963 25.9%
Pessimist: US$ 9,228,031 30.8%
 
Evaluation
 
The final increase in imports in 5 years with no liberalization with country B would be
21.7%, consisting of US$ 36.5 million. With liberalization, the increase could reach
30.8%. This difference does not seem significant, because it represents only US$ 2.7
million; that is, 6.9% more than would be imported without creating a free trade area
with Country B.
 
It is convenient to stop considering sugar as a sensitive product.

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VII. CASE-BY CASE MODELS: DEFINING THE TRADE
NEGOTIATION STRATEGY

It is necessary to obtain information on the market for each priority and

sensitive product:

- Country A & B national demand: size, import market quota,

import origin, price sensitivity.
- Country A national offer: local production, exports, technological
situation, number of businesses, labor, geographic location, idle
capacity, price difference against foreign production importance to
national economy.
- Country B offer: level of production, exports (volume and
geographic distribution), level of competitiveness, idle capacity,
price differential.

- Level of protection for sensitive and priority products: tariff,

quantitative measures, technical and phytosanitary provisions, rules of
origin, ...

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SENSITIVE PRODUCT DECISION MATRIX (Country A)

It is convenient to reaffirm a certain product’s classification as

sensitive or, to the contrary, if it should no longer be considered as
such.
A product would cease to be sensitive if:
 National production is very small.
 National demand is very limited.
 The trade partner’s offer is small.

Therefore we have the first decision matrix:

National Demand
Small Large
National Small NO NO Foreign Offer
Offer Large NO YES Small Large
NO YES

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Key questions to modify the hypothesis:

 Is the level of protection in Country A high?

 What is Country B’s market quota in Country A?

 Is there idle capacity in Country B producers?

 What is the price differential?

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 COUNTRY A SENSITIVE PRODUCT (Figure 1)

High
Duration
COUNTRY B

Phase-out
IDLE CAPACITY

Calendar
Medium

Low

Low Medium High

LEVEL OF PROTECTION COUNTRY A

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 COUNTRY A SENSITIVE PRODUCT (Figure 2)

Low
Duration
Phase-out
COUNTRY B IN A
MARKET QUOTA

Calendar
Medium

High

Low Medium High

LEVEL OF PROTECTION COUNTRY A

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 COUNTRY A SENSITIVE PRODUCT (Figure 3)

Low
Duration
Phase-out
COUNTRY B IN A

Calendar
MARKET QUOTA

Medium

High

Low Medium High

IDLE CAPACITY COUNTRY B

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DECISION MATRIXES FOR PRIORITY PRODUCTS (Country A)

A product would cease to be priority if:

 The size of the market in Country B is very small and the

possibilities of significantly increasing Country A sales are very
small (there is insufficient demand).

 The industrial size of Country B in the product/sector in

question is large, it will be more difficult for the Country A industry
to significantly displace the former industry.

 If the size of Country A’s national industry is small and great

production increments are not expected in the short term.

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 COUNTRY A PRIORITY PRODUCT (Figure 1)

High
Duration
Phase-out
Calendar
COUNTRY A IN B
MARKET QUOTA

Medium

Low

High Medium Low

IDLE CAPACITY COUNTRY A

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 COUNTRY A PRIORITY PRODUCT (Figure 2)

High
Duration
Phase-out
COUNTRY B IN A

Calendar
MARKET QUOTA

Medium

Low

High Medium Low

LEVEL OF PROTECTION COUNTRY B

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 COUNTRY A PRIORITY PRODUCT (Figure 3)

Low
Duration
Phase-out
COUNTRY A

Calendar
IDLE CAPACITY

Medium

High

High Medium Low

LEVEL OF PROTECTION COUNTRY B

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VIII. SECTORAL SUPPORT POLICIES

Design policies for the promotion of priority products and reconvertion

policies or policies to defend sensible products/sectors.

They strengthen the Administration’s internal negotiating capacity

(within the country)

Measures for priority sectors:

 Credit

 Promotional character
 Informative character
 Fiscal character
 To improve business management
 Directed to production

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Measures for sensitive products or sectors:
 Training the workforce
 Credits to create and/or expand businesses in different
sectors
 Fiscal reductions
 Technical assistance to businesses, etc.

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IX. SUMMARY AND CONCLUSIONS

Trade relations photographs

ECONOMIC
Identification of sensitive AGENTS
- Ministry Specialists

& priority products

- External Advisors

-Employers
-Unions
- Consultants

-Consumers
Liberalization
effects analysis

Tendency Case-by-case
models Models

Negotiation ECONOMIC
AGENTS
strategy
-Employers
-Unions
External Sectorial
-Consumers
negotiation plans

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ADVANTAGES OF THE CASE-BY-CASE METHODOLOGY:

 Easy to use.

 Requires relatively little information.

 The cost of studies is low an can easily be

subcontracted to external advisors.

 Analysis results can be obtained very quickly.

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