T NG H P Slide

Trade as an Engine of Growth –
From Ricardo to 21 Century

st
Theories of trade: role of trade policy

FTU, Hanoi
Key Learning Objectives
1. Understand the concept of comparative advantage,
and the way in which it can drive mutually beneficial
exchange between countries.
2. Look at trade through the lens of technological
differences (Ricardo) and resource endowments
(Heckscher-Ohlin).
3. Use Diamond Model to explain competitive advantage
of nations.
4. Use these new concepts to better understand the
operation of Global Value Chains, and the potential
economic gains they can offer.
2
Outline
1. Why do countries trade? – traditional views: exploiting advantages
of “single country production”
2. Why does a country can lead and sustain in certain industry? –

modern view: Diamond model
3. Why do countries trade – more modern views: exploiting

advantages of Global Value Chains and Trading in Tasks
3
1. Why do countries trade?
a. Different concepts of “advantage”.
b. Productivity differences as a driver of trade (Ricardo).
c. Resource endowments as a driver of trade (Heckscher-Ohlin).
d. Scale economies as a driver of trade (Krugman/Melitz).
4
a. Different concepts of advantage
• Absolute advantage:
• One country manufactures goods at a lower (absolute) cost than another.
• Swiss watches cost $100, Chinese watches cost $20
• Swiss t-shirts costs $10, Chinese t-shirts costs $1
=> China has an absolute advantage in watch production AND in t-shirt production
• Comparative advantage:
• One country manufactures goods at a lower cost in terms of foregone resources than another.
• Switzerland: production of 1 watch = non-production of 10 t-shirts
• China: production of 1 watch = non-production of 20 t-shirts
=> Switzerland has a comparative advantage in watch production
=> China has a comparative advantage in t-shirt production
• Competitive advantage:
• Firm level: One firm creates and/or maintains a strategic edge over others competing in the same market.
• Nation level: One nation has advantage over other nations in specific industries when competing globally
The popular press often focuses on absolute and competitive advantage in discussing trade relations, but
economists believe comparative advantage is in fact more important as an explanation for trade.
5
b. Productivity differences (Ricardo)
• Basic ideas:
• Comparative advantage is driven by differences in labour productivity
(=“technology”)
• In the absence of trade, these differences can lead to differences in the prices of
inputs as well as outputs and these in turn create incentives to trade.
• Opening to trade leads to:
• Equalisation of world relative prices
• Specialisation by comparative advantage
• Separation of production and consumption possibilities in each country
• Increased consumption possibilities for both countries
6
• Step One: The Production Side
• Each country produces the same two goods (watches and t-

shirts).
• Producing a certain amount of one product implies not

producing a certain amount of another product
(opportunity cost).
• The tradeoff between producing one product rather than

the other provides a simple representation of a country’s
production technology.
7
No. of China
watches
Production Possibility Frontier

Slope =-0.5 (relative price)
x10 no. of
T-shirts
8
No. of China
watches
Given t-shirt production of

10X, a maximum of Y watches
can be made
x10 no. of
X
T-shirts
9
No. of China
watches
infeasible production
maximum feasible
production lies along the
feasible production
x10 no. of
T-shirts
10
b. Productivity differences (Ricardo).
No. of Switzerland
watches

Slope =-1
x10 no. of
T-shirts
11
• Step Two: The Consumption Side
• In this economy, people consume watches and t-shirts.
• Consuming more of either good gives them a higher level of utility, but their
income limits how much they can consume.
• It is possible to identify combinations of t-shirts and watches at each income

level that represent equal utility for consumers (indifference curves).
12
No. of China
watches
Indifference
Curves (Consumption
Bundles with Equal
Utility for Consumers)
x10 no. of
T-shirts
13
No. of China
watches
higher utility
x10 no. of
T-shirts
14
No. of Switzerland
watches
higher utility
x10 no. of
T-shirts
15
• Step Three: Autarky Equilibrium
• Autarky means that there is no trade, so countries are completely self-

sufficient in t-shirts and watches.
• Equilibrium results from combining the production and consumption sides of

the model in each country: producers produce the most they can with the
available labor and technological tradeoff, and consumers consume as much
as they can given their income.
16
No. of China
watches
x10 no. of
T-shirts
17
No. of China
watches
Point of tangency=Equilibrium
Maximum feasible production
Optimal consumption given production
x10 no. of
T-shirts
18
No. of Switzerland
watches
Equilibrium
x10 no. of
T-shirts
19
• AutarkyNo.Equilibrium:
of Switzerland China
watches
x10 no. of
T-shirts
20
• Step Four: Equilibrium With Trade
• Countries open their borders, and so can exchange watches for t-shirts with
the other country.
• There is now one integrated “world market”, with a single production and
consumption tradeoff between watches and t-shirts. The new tradeoff lies
somewhere between the two original points.
• Consumers in both countries are able to consume at a higher level of utility

than under autarky.
21
• Trade Equilibrium:
No. of Switzerland China
watches
production
consumption x10 no. of

T-shirts
22
• Summary of the basic Ricardian model:

• Comparative advantage is driven by differences in labour productivity
(=“technology”)
• Specialisation by comparative advantage
23
c. Resource differences (Heckscher-Ohlin)
• Basic ideas:
• Comparative advantage is driven by differences in relative resource endowments
• In the absence of trade, relative shortage or abundance of some resources (inputs)
can lead to differences in the prices of inputs as well as outputs and these in turn
create incentives to trade [idea of labour-rich country producing labour-intensive
goods at a lesser cost].
• Partial specialisation in each country according to its comparative advantage
• IE, each country specialises in the product that is relatively intensive in the factor in which the
country is relatively abundant
• In this model, trade has effects on factor incomes (labour and capital):
• The relative price of the relatively abundant factor increases, while that of the
relatively scarce factor decreases.
• Explains why there are “winners and losers” from trade within a country:
depends on the pattern of comparative advantage, and industry links. 24
c. Resource differences (Heckscher-Ohlin)
• Basic components:
• 2 factors (labour and capital)
• 2 goods (t-shirts and watches)
• 2 countries (China, Switzerland)
• We need to model:
• The production side (optimal use of inputs to produce outputs)
• The consumption side (optimal consumption balance between watches and t-shirts)
• Market equilibria under autarky and with trade
25
c. Resource differences (Heckscher-Ohlin).
• Step One: The Production Side
• Labor and capital can be combined to produce either watches or t-shirts,

but in different ratios.
• By looking at the amount of labor and capital required to produce one unit
of each product, we can identify one product as relatively labor intensive
and the other as relatively capital intensive.
• The two countries differ in resource endowments: China has relatively

more labor than capital, and the opposite is true in Switzerland.
• As a result of different resource endowments, feasible production bundles

also differ, with efficient combinations defined by a production possibility
frontier. 26
units of T-Shirts
labour
input
combinations of labour and capital
required to produce 1 t-shirt
units of
capital
input
27
units of Watches
labour
input
required to produce 1 watch
units of
capital
input
28
units of
labour T-Shirts & Watches
input
required to produce 1 t-shirt

required to produce 1 watch
units of
capital
input
watch-making is relatively capital intensive

T-shirt making is relatively labor intensive
29
No. of China=relatively labour abundant

watches
infeasible production
Production Possibility Frontier=efficient production
feasible production
x10 no. of
T-shirts
30
No. of Switzerland=relatively capital abundant

watches
x10 no. of
T-shirts
31
• Step Two: The Consumption Side
• As for the Ricardian model, consumers want to consume as much as possible

given their income.
• Indifference curves define combinations of the two products that give equal
utility to consumers.
32
No. of China
watches
x10 no. of
T-shirts
33
No. of Switzerland
watches
x10 no. of
T-shirts
34
• Step Three: Autarky Equilibrium
• As in the Ricardian model, equilibrium is where consumers consume

efficiently and producers produce efficiently.
• The point on the diagram is the tangent between an indifference curve and
the production possibility frontier.
• The differently shaped curves in the two countries give different levels of
autarkic consumption and production.
35
No. of China
watches
relative price
equilibrium
x10 no. of
T-shirts
36
No. of Switzerland
watches
equilibrium
relative price
x10 no. of
T-shirts
37
• Step Four: Equilibrium With Trade.
• As in the Ricardian model, opening to trade results in an integrated “world”

market, with a single relative price.
• At the new relative price, consumers in both countries move to a higher

indifference curve, so they are experiencing greater utility.
• Production continues along the frontier. The difference between consumption

and production is made up by imports and exports.
38
China consumption Switzerland
production
relative price
39
• Summary of the basic Heckscher-Ohlin model:

• Comparative advantage is driven by differences in resource endowments
• Partial specialisation in each country according to its comparative advantage
• IE, each country specialises in the product that is relatively intensive in the factor in which the country is relatively abundant
• Trade has effects on factor incomes (labour and capital) in this model:
• The relative price of the relatively abundant factor increases, while that of the relatively scarce factor
decreases.
• Explains why there are “winners and losers” from trade within a country: depends on the pattern of
comparative advantage, and industry links.
40
d. Scale economies (Krugman/Melitz).
• Ricardo and Heckscher-Ohlin concentrate on modelling two (perfectly) different homogeneous goods.
• What about a single (imperfectly) differentiated good?
• Imagine that consumers “love variety”
• Imagine there is a “fixed cost” for each producer in differentiating her goods from those of other
producers
• The size of the market determines the number of product varieties available, because each producer
has to sell enough to cover her fixed costs
• Hence, increasing the size of the market—e.g., by opening to trade—increases the number of
varieties available in equilibrium…
• Which increases consumption possibilities
• More recent theories emphasize productivity differences across firms:
opening to trade leads to a “shake out” in which the least productive firms
exit the market, and the most productive grow.
• Trade increases sectoral productivity, which can drive growth.
41
• Consolidation:
• The key concept in explaining the gains from trade is comparative advantage
(not absolute advantage or competitive advantage).
• Countries can have different comparative advantages due to technological
differences, or different resource endowments.
• Models like Ricardo and Heckscher-Ohlin use differences as a way of
explaining the gains from trade, i.e. inter-industry trade.
• More recent models like Krugman and Melitz look at similar products within
an industry. Scale economies can drive consumer gains through intra-industry
trade.
42
1. Why do countries trade - Are there any
costs?
• Although trade can bring important economic benefits, the adjustment from a protected economy to a more open one
can be painful for particular groups:
• Unemployment and/or lower incomes as industries contract.
• Higher prices for some goods as distortions are removed.
• In addition, there are concerns about the extent to which vulnerable and historically marginalized groups, including
women, can benefit from the opportunities offered by trade.
• Economists accept that there is a strong case for using complementary policies (i.e., policies in areas other than trade) to
mitigate these losses.
• Examples include adjustment assistance for displaced workers, or anti-discrimination laws.
• From an economic standpoint, the gains of the “winners” from trade liberalization are typically sufficient to more than
compensate the “losers”, but redistribution rarely takes place in reality—which makes it difficult to sustain the political
momentum behind liberalization.
43
2. Competitive Advantage of Nations, by Michael Porter
• Research:
• 4 years
• 10 countries: Denmark,
Germany, Italy, United
States, Switzerland, Sweden,
United Kingdom, Japan,
Singapore, Korea.
• More than 30 researchers
Diamond Model
Firm Strategy,
Government Structure and Rivalry
Demand
Factor
Conditions
Conditions
Related and
Supporting Industries Chance
45
Factor Conditions
Factor Endowment Categories

1. Human Resources: quantity, skills, cost of personnel
2. Physical Resources: abundance, accessibility, quality, location
of physical resources
3. Knowledge Resources: stock of trained people, university and
market knowledge.
4. Capital Resources: amount and cost of capital available to
finance industry.
5. Infrastructure: type, quality and user cost of inf. available
that affects competition (i.e. transportation system, health
care, etc.)
Hierarchies among Factors
Two particular distinctions stand out:

Basic Factors: Advanced Factors:
- Climate, - educated personnel,
- location, - university research,
- debt capital, - advanced technology
- labor skills
Generalized factors: Specialized factors:

- highway system, - narrowly specialized
- supply of debt capital trained personnel
Demand Conditions
Home Demand Composition

Segment Structure of Demand
Sophisticated and Demanding Buyers
Anticipatory Buyer Needs
Demand Size and Pattern of Growth

1. Size of Home Demand
2. Number of independent buyers
3. Rate of Growth of Home Demand
4. Early Home Demand
5. Early Saturation
Internationalization of Domestic Demand

1. Mobile or Multinational Local Buyers
2. Influences on Foreign Needs: by visiting trainees, demonstration
effects, cultural dissemination via media and political alliances/
historical ties
Related and Supporting Industries
Competitive Advantages in Supplier Industries

- provide efficient and cost effective access to inputs
- on-going coordination and the process of innovation and upgrading close
to home
Competitive Advantage in Related Industries

1. Related industries involve industries which can share (computers and
application software) or those in which firms can coordinate activities in the
value chain when competing.
2. National success in an industry is likely if the nation has competitive adv. in
a number of related industries
Firm Strategy, Structure, and Rivalry
Strategy and Structure of Domestic Firms

Nations will succeed in industries where management practices
and modes of organization favored by the national environment
are well suited to the industries' sources of competitive
advantage.
Goals
Nations will succeed in industries where goals and motivations are
aligned with the sources of competitive advantage
Domestic Rivalry
Having strong competition at home drives firms to pursue
upgrading and innovation, enter foreign markets to increase
market of fill capacity, and even creates stronger survivors for the
global market.
The Role of Chance
- Chance events are related to acts of pure invention, technological
discontinuities, discontinued input costs, shifts in financial markets
or exchange rates, surges of regional or world demand, politics,
wars.
- allows for shifts in competitive positions: Can nullify advantages
of previous leaders and open the way for new firms/nations to
take a local or global lead.
- have asymmetric impacts on different nations.
The Role of Government

- influencing the 4 determinants: Its positive or negative influence
can have a significant impact in the success of an industry or a
firm in the nation.
- Government policy can be in turn influenced by the 4
determinants.
3. Global Value Chains and Trading in Tasks
• The concept of comparative advantage is not new; Ricardo first wrote about it in
1817.
• Do these basic ideas about the gains from trade still apply in a new trade
landscape, where Global Value Chains (GVCs) are becoming increasingly
important?
• To examine this question, we first look at what GVCs are and how they work, then
we consider how they fit with standard trade paradigms.
52
• GVCs are complex, interlinked networks of economic activity.

• Trade in goods.
• Trade in services.
• Investment.
• Movement of ideas.
• Movement of people.
• A typical GVC consists of a lead firm, and a potentially large number of suppliers at various levels.
• Trade in intermediate inputs is intense, and goods can travel across borders multiple times during the production
process (more than half of world manufactured imports are intermediate goods, and more than 70% of world
services imports are intermediate services)
• The lead firm is responsible for creating and maintaining the network, and typically also supplies intellectual
property (like designs) and marketing. Suppliers take care of component sourcing and manufacture, as well as
assembly.
53
• The key concept behind GVCs is “trading in tasks”.
• Instead of specializing in production of a complete product like a watch or a t-shirt, firms (and
countries) can specialize in much narrower activities, like production of a particular component,
or assembly, or a service like research and development, design, or marketing.
• Comparative advantage can still drive trade within GVCs, with similar economic gains to the ones
already seen.
• But how do we deal with the fact that GVC logic leads some countries to specialize in high value
added tasks (like design), while others specialize in low value added tasks (like assembly)?
• Value added follows a “smile” pattern in many GVCs: high at the two extremes of the production process,
lowest in the middle.
54
55
• But in fact, specialization with different levels of value addition is already there in
our simple models.
• Under a basic comparative advantage framework, a country can still benefit from
trade even though it is less productive absolutely than another country in all
sectors.
• The reason is that comparative advantage is a relative concept focusing on opportunity costs,
not an absolute one.
• In our models, countries have different productivity levels, and one specializes in a
“high tech” sector (watches), and the other in a “low tech” sector (t-shirts)… but
both still gain from trade.
56
• Concretely, what kinds of economic benefits can low value added tasks supply in a poor
country?
• Employment in the formal sector for a wage, compared with the counterfactual of the informal sector
(lower wages and typically worse conditions) or agriculture (perhaps no wage, but subsistence only).
• Low value added activities like assembly typically require foreign inputs, but there is evidence that
domestic and foreign value added are complements: opening to trade allows faster sectoral growth than
otherwise.
• But of course, moving up to higher value added activities is an important medium term goal.
• Activities like research and development have economic spillovers that can support faster long-run
growth.
• Market-based processes can support moving up when labor markets tighten, assuming that there is a
sufficient human capital base—so education is a more vital investment than ever for developing
countries.
57
A Smaller Slice… 100

Of a Larger Pie.
25000
90
80 20000
70
60 15000
Million USD
Percent
50
40 10000
30
20 5000
10
0 0
1995 2011 1995 2011
Year Year
Domestic Foreign Domestic Foreign

Transport Equipment Industry in Thailand;
Source: Shepherd (Forthcoming) based on OECD-WTO data. 58
3. Global Value Chains and Trading in Tasks - Changing Pattern of
Regional Trade
Source: Yamano, Meng, Fukasaku (2011)
59
Trade in Value Added and Global Value Chains, by country
• https://www.wto.org/english/res_e/statis_e/miwi_e/countryprofiles_e.htm
• https://www.wto.org/english/res_e/statis_e/miwi_e/miwi_e.htm
60
– Sector level
61
• Comparative advantage reasoning is still powerful in explaining the

spread and operation of GVCs.
• Even though the nature of trade is changing, there is still potential for
countries at all income levels to reap significant economic gains.
• GVCs also pose issues of social and environmental sustainability.
62
3. Global Value Chains and Trading in Tasks -Factors
affecting competitiveness in GVCs
• Natural factors
• Country’s geographic location
• Endowment of natural resources
• Size of the economy
• Other factors might be changed by the right policy mix.

• Infrastructure,
• Skills of workforce,
• Trade and investment barriers
• Border procedures
• Macroeconomic stability, access to finance, and the overall ease of doing business.
• Technology absorptive capacity
63
Conclusion on why countries trade:
1. The key concept for understanding why countries trade is comparative
advantage. It can drive mutually beneficial exchange between countries.
2. Traditional trade theory focuses on technological differences (Ricardo)

and resource endowments (Heckscher-Ohlin) as drivers of comparative
advantage.
3. GVCs present the new paradigm of trading in tasks, but comparative

advantage reasoning is still relevant—and suggests why even low value
added activities can have economic benefits for developing countries.
64
World Trade: An Overview
content
1. Who trade with whom?

2. The changing composition of international
trade
3. International trade situation and prospect
1. Who trades with whom?
The key trading partners
Using the gravity model

Merchandise trade volume by region (2014 – Q3/2020)
(source: WTO-UNCTAD)
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2-68

Merchandise trade volume by region (2014 – Q3/2020)
(source: WTO-UNCTAD)

Key trading partners in the world
Biggest merchandise exporters 2020
(Source: WTO - World Trade Statistical Review 2020)
Value Value
Ranking Exporter Ranking Exporter
(in billion $) (in billion $)
1 China 2591 13 Canada 391
2 United States of 1432 14 Singapore 363
America
3 Germany 1380 15 Taiwan 347
4 Russian
Netherlands 674 16 332
Federation
5 Japan 641 17 Switzerland 319
6
Hong Kong, China 549 18 Spain 307
7 United Arab
Republic of Korea 512 19 306
Emirates
8 Italy 496 20 Vietnam 283
9 France 488 21 India 276
10 Belgium 419 22 Poland 271
11 Mexico 418 23 Australia 250
12 United Kingdom 403 24 Malaysia 234
Biggest merchandise importers 2020
(Source: WTO - World Trade Statistical Review 2020)
Value Value
Ranking Importer Ranking Importer
(in billion $) (in billion $)
1 United States of 13
America 2408 Mexico 393
2 China 2056 14 India 372
3 Germany 1171 15 Singapore 330
4 United Kingdom 635 16 Spain 325
5 Japan 635 17 Switzerland 291
6 Netherlands 597 18 Chinese Taipei 288
7 France 582 19 Viet Nam 263
8 20
Hong Kong, China 570 Poland 257
9 21 Russian
Republic of Korea 468 240
Federation
10 22 United Arab
Italy 423 226
Emirates
11 Canada 414 23 Turkey 393
12 Belgium 395 24 Australia 372
Top 10 service exporter in Q3 – 2020
(Source: UNCTAD)
Ranking:1 Ranking: 6
United States of America
Netherlands
Value: $163B
Value: $65B
Ranking: 2 Ranking: 7
United Kingdom United Kingdom
Value: $86B Value: $63B
Germany India
China Singapore
France Japan
Top 10 service importer in Q3 – 2020
(Source: UNCTAD)
Ranking:1 Ranking: 6
United States of America Ireland
Ranking: 2
China Ranking: 7
Value: $98B United Kingdom
Value: $47B
Ranking: 3
Germany Ranking: 8
Value: $74B Japan
Value: $43B
Ranking: 4
Netherlands Ranking: 9
Value: $61B Singapore
Value: $39B
Ranking: 5
France
Ranking: 10
Value: $60B India
Value: $35B
Vietnam’s partners
2-74
Vietnam’s partners
2-75
• First introduced by Jan Tinbergen (1962)

• The model is inspired by Newton's law of gravitation in physics.
• Gravity models have long been used to explain bilateral trade.
• They explain trade flows between countries i and j by their
sizes (GDPs) and a variety of variables capturing the geographic
and historical proximity between the two counties (distance,
culture, border, and other factors that affect trade barriers).
The gravity model’s equation:
Where:
Tij: the value of trade between country i and country j
A: the constant
Yi: the GDP of the country i
Yj: the GDP of the country j
Dij: the distance between country i and j
Using the Gravity model: Size matters
The size of an economy is directly related to the volume

of imports and exports:
 Larger economies produce more goods and services, so
they have more to sell in the export market
 Larger economies generate more income from the
goods and services sold, so people can buy more
imports.
 2 of the top 10 trading partners with
the US in 2019 were also the 2 largest
European economies: Germany and the
United Kingdom
 These countries have the largest gross
domestic product (GDP) in Europe.
 GDP measures the value of goods and
services produced in an economy.
 Why does the US trade most with
these European countries and not other
European countries?
Figure 7: The size of European economies

and the value of their trade with the US
Source: US Department of Commerce,

European Commission
Using the Gravity model: Distance
 Distance between market influences transportation costs =>

cost of imports and exports
 Distance may also influence personal contact and
communication, which may influence trade
 Estimates of the effect of distance of the gravity model predict
that a 1% increase in the distance between countries is
associated with a decrease in the volume of trade of 0.7% to 1%
The United States
does markedly
more trade with its
neighbors than it
does with
European
economies of the
same size
Figure 5: Economic Size and Trade with the US
Source: US Department of Commerce, European Commission
Using the Gravity model: Other matter
 Cultural affinity: if two countries have cultural ties, it is

likely that they also have strong economic ties.
 Geography: ocean harbors and a lack of mountain
barriers make transportation and trade easier.
 Multinational corporations: corporations spread across
different nations import and export many goods
between their divisions.
 Borders: crossing borders involves formalities that take
time and perhaps monetary costs like tariffs.
2-82
Using gravity model: Cultural affinity
Vietnam Top 5 Merchandise Export Partners in 2019
Market Trade (US$ Million) Partner share (%)
United Stated 61404 23.2
China 41434 15.7
Japan 20427 7.7
Korea 19729 7.5

Hong Kong 7162 2.7
Vietnam Top 5 Merchandise Import Partners in 2019

Market Trade (US$ million) Partner share (%)
China 75586 29.8
Korea 46941 18.5
Japan 19532 7.7
Taipei, Chinese 15180 6.0
United States of America 14376 5.7
Source: UNCTAD
Using gravity model: Geography
• Geography: ocean harbors and a
lack of mountain barriers make
transportation and trade easier
• For example, Netherlands and
Belgium have traditionally been
the point of entry to much of
northwestern Europe;
 Rotterdam in the Netherlands is
the most important port in
Europe, as measured by the
tonnage handled
 Antwerp in Belgium ranks
second. Belgium and Germany are all big
Netherlands,
trading partners of the US
Using gravity model: MNCs
• Multinational corporations (MNCs) spread across different nations import

and export many goods between their divisions
• Foreign affiliates of MNCs account for over one-third of the world exports
• More than 40% of total exports of China is done by MNCs (UNCTAD 2017)
• Surprisingly, Ireland plays a special role as host to many U.S.-based
corporations
Over a
third of
the world
trade
happens
inside
MNCs
Using gravity model: Borders
• Borders: borders increase the cost and time needed to

trade.
Trade agreements between countries are intended to
reduce the formalities and tariffs needed to cross
borders, and therefore to increase trade.
The gravity model can assess the effect of trade
agreements on trade: does a trade agreement lead to
significantly more trade among its partners than one
would otherwise predict given their GDPs and
distances from one another?
2-86
• The US has signed a free trade agreement with
Mexico and Canada in 1994, the North American
Free Trade Agreement (NAFTA).
• Because of NAFTA and because Mexico
and Canada are close to the US, the
amount of trade between the US and its northern
and southern neighbors as a fraction of GDP is larger
than between the US and European countries.
2-87
2-88
• Yet even with a free trade agreement between the US
and Canada, which use a common language, the border
between these countries still seems to be associated
with a reduction in trade.
2-89
2-90
2. Changing composition of trade
Volume and growth rate of international

trade
What do we trade: changes in trade structure

Changing Composition of
Trade
World trade is expected to fall by between 13% and 32% in 2020 as the
COVID 19 pandemic disrupts normal economic activity and life around the
world 2-92
Changing Composition of
Trade
2-93
Changing Composition of Trade
• What kinds of products do nations currently trade,

and how does this composition compare to trade in the
past?
• Today, most of the volume of trade is in manufactured
products such as automobiles, computers, clothing and
machinery.
¨ Services such as shipping, insurance, legal fees and spending by
tourists account for 20% of the volume of trade.
¨ Mineral products (e.g., petroleum, coal, copper) and
agricultural products are a relatively small part of trade.

Changing Composition of Trade
• In the past, a large fraction of the volume of trade came

from agricultural and mineral products.
¨ In 1910, Britain mainly imported agricultural and mineral
products, although manufactured products still represented most
of the volume of exports.
¨ In 1910, the US mainly imported and exported agricultural
products and mineral products.
¨ In 2002, manufactured products made up most of the volume of
imports and exports for both countries.
2-95
Changing Composition of Trade (cont.)
2-96
2-97
• Developing countries, or low and middle-

income countries, have also changed the
composition of their trade.
Ïn 2001, about 65% of exports from developing
countries were manufactured products, and only
10% of exports were agricultural products.
Ïn 1960, about 58% of exports from developing
countries were agricultural products and only
12% of exports were manufactured products.
2-98
2-99
3. International trade situation and prospects
• Some tendencies of the world development
 Multicultural corporations
 Outsourcing
• Impacts of those tendencies on the world trade
Multinational Corporations and Outsourcing
 Before 1945, multinational corporations played a

small role world trade.
 But today about one third of all US exports and 42%
of all US imports are sales from one division of a
multinational corporation to another.
2-101
Multinational Corporations
and Outsourcing (cont.)
• Outsourcing occurs when a firm moves business operations out of the
domestic country.
¨The operations could be run by a subsidiary of a multinational corporation.
Ör they could be subcontracted to a foreign firm.
• Outsourcing of either type increases the amount of trade.
2-102
outstanding international trade issues in 2020
• Important FTAs with Vietnam as a member have been

• signed and come into effect
 European Union & Vietnam (EVFTA)
signed: 30/6/2019
• in force: 1/8/2020
 United Kingdom – Vietnam (UKVFTA)
signed: 29/12/2020
• in force: 1/1/2021
 Regional Comprehensive Economic Partnership (RCEP)
• signed: 15/11/2020
• 15 members: Australia, Brunei, Cambodia, China, Indonesia, Japan,
• South Korea, Laos, Malaysia, Myanmar, New Zealand, Philippines,
• Singapore, Thailand, Vietnam
2-103
 On 31 December 2020, United Kingdom

completed its separation from the
European Union
 On 1 February 2021, the UK government

formally applied to join CPTPP, a trade
pact between 11 countries (including
Vietnam)
* CPTPP: Comprehensive and Progressive Agreement for Trans-

Pacific Partnership
2-104
A trade dispute ramped up between China and Australia

 The relationship between the two countries has
deteriorated since Australia supported a call for an
international inquiry into China’s handling of the coronavirus
 China has taken several measures this year that impede
Australian imports, ranging from levying tariffs to imposing
bans and restrictions.
Several Australian export sectors being affected
 barley (anti-dumping and anti-subsidy duties of 80.5%)
 wine (preliminary anti-dumping duties ranging from around
107% to 212%)
2-105
Summary
1. Key trading partners

2. The gravity model predicts that the volume of
trade is directly related to the GDP of each trading partner
and is inversely related to the distance between them
3. Besides size and distance; culture, geography, multinational
corporations and the existence of borders influence trade
4. Modern transportation and communication have increased
trade, but political factors have influenced trade more in
history
5. Today, most trade is in manufactured goods, while
historically agricultural and mineral products made up most
of trade.
2-106
WORLD TRADE ORGANIZATION
CONTENT
1. History
2. Principles
3. Structure
4. Agreement
1. History of WTO
• Created only on 1 January, 1995 by the
Marrakesh Declaration
• The youngest international organization
• Successor to the General Agreement on Tariffs
and Trade
• At end of World War II, internationalism was
pursued to support peace
• To avoid conflicts based on nationalism
• Succeeded in creating:
• United Nations
• Bretton Woods Institutions
• International Monetary Fund (IMF)
• World Bank
Background Cont
• Third institution was to be International Trade
Organization (ITO)
• Objective: avoid conflicts over trade and
protectionism
• Havana Charter to create ITO concluded in
March,1948
• Was never ratified because of US Congress
Background Cont
• While negotiations underway, 23 participants
negotiated to reduce and bind tariffs starting in
1946
• To give early boost to liberalizing trade and end
protectionism of the 1930’s
• Was agreed to liberalize one fifth (1/5th) of world
trade and adopt some trade rules in draft ITO
Charter
Background Cont
• Package called the General Agreement on Tariffs
and Trade (GATT)
• Entered into effect “provisionally” on 1 January,
1948
• “Provisionally” because Havana Charter was still
being negotiated. Those applying GATT became
known as Contracting Parties
• Remained in force until WTO created
Background Cont
• When Havana Charter failed, GATT became only
multilateral instrument governing international
trade
• Numerous negotiations were conducted under
GATT to liberalize trade
• Eight in total up to Uruguay Round which
created WTO
Background Cont
• GATT continues to exist today as a part of the
WTO
• Basic principles of GATT also form basis for WTO
The General Agreement on Tariffs and Trade (GATT)
• Multilateral trading system created under GATT is

over 50 years old
• GATT’s basic pursuit of trade liberalization
achieved through “rounds” of trade negotiations
• Early “rounds” dealt mainly with tariff reductions
• Later rounds added areas such as non-tariff
measures, antidumping, etc
Results of GATT
• Exceptional growth of world trade

• Merchandize exports grew on average 6%
annually.
• Total trade in 1997 was 14 times that of 1950.
• Last round (Uruguay Round) added new areas of
services and intellectual property and created
the WTO.
Results Of GATT Cont
• Tariffs were reduced to such low levels that in
recessions, countries turned to other forms of
protectionism.
• Market-sharing agreements (voluntary export
restraint agreements) were used.
• Subsidies were used to encourage exports
(particularly with agriculture exports).
• Technical barriers were used for trade
protection.
Results of GATT Cont
• Realities of world trade also were changing.
• Trade was more complex and important.
• Services trade and international investment had
expanded greatly.
• Vastly increased membership with new and
different interest.
• Led to agreement to create a new expanded
agreement to encompass all these matters.
Result of GATT Cont
• Uruguay Round concluded at Marrakesh brought
WTO into existence
• Also created General Agreement on Trade in
Services (GATS)
• Created Trade Related Intellectual Property
Agreement (TRIPs)
• And much more
Multilateral and Regional Approaches
• In recent years a variety of bilateral and regional trading
arrangements have emerged in addition to multilateral efforts at
trade liberalization.
• The GATT provides specific rules regarding such arrangements. Similar
rules exist for services.
• But in practice these have not constrained the growth of preferential
arrangements.
Functions of the WTO
• Administers trade agreements
• Acts as a forum for negotiations
• Works to settle trade disputes
• Reviews national trade policies
• Assists developing countries with trade policy
• Cooperates on subjects of mutual interest with
other organizations
Membership and Decision-making
in the WTO
• Some 150 member countries, accounting for over

97% of world trade
• Some 30 other countries are negotiating
membership.
• Decisions are made by entire membership.
• While a majority vote is possible, decisions are
usually by consensus.
WTO Mission Statement
• The World Trade Organization is the only
international organization dealing with the global
rules of trade between nations. Its main function
is to ensure that trade flows as smoothly,
predictably and freely as possible.
2. WTO’s Fundamental
Principles
• Complicated legal agreement guiding the
international trading system
• Based on five, easy to understand, principles:
• Trade without discrimination
• Freer trade, gradually, through negotiation
• Predictability, through binding and
transparency
• Promoting fair competition
• Encouraging development and economic
reform
Trade without discrimination
• This means treating all member countries
equally.
• It is formally known as the Most-Favoured-
nation (MFN) Principle.
• For example, if a WTO member lowers its
customs duty for a product imported from one
country, it must also give the same concession
to all other members.
Trade without discrimination
• Members must also not discriminate between domestic and foreign

goods, services or nationals once they have entered the market.
• This is known as National Treatment.
Trade without Discrimination
• A few exceptions are permitted:

• For partners in a free trade agreement
• For extending better access to developing countries
• General waivers
• To protect morals, human and animal health and
National Security
• To counteract unfairly traded products
Vietnam’s anti-dumping tax on Chinese steel
• After an anti-dumping investigation that started in September

2019, Vietnam’s ministry of industry and trade (MOIT) concluded
that Chinese steel producers are dumping their products
• Consequently, an anti-dumping tax ranging from 4.43% to
25.22% has been imposed on some coil or sheet cold-rolled steel
products from China for five years, starting Dec. 28
Freer Trade Gradually,
through negotiation
• The WTO encourages fair trade by disciplining

barriers related to:
• Tariffs
• Import bans or quotas
• Other issues
• Now into 9th round of liberalizing negotiations (8
under GATT)
Predictability through Binding
and Transparency
• “Binding” means setting a fixed upper limit on

tariffs and other commitments
• Provides stability and predictability
• Can be changed only after negotiations with trading
partners
• NOTE: 100% of agriculture products of developed
countries have bound tariff rates.
Binding and Transparency
• The WTO discourages the use of less visible and

less predictable barriers (e.g. Quotas)
• It encourages transparency through
requirements to disclose policies and practices
and notify WTO of changes.
• Conducts trade policy reviews
Promoting Fair Competition
• Rules to establish what is considered fair and
unfair competition (e.g. Dumping and subsidies
are considered unfair competition.)
• Rules to establish how governments can
respond to trade disputes.
• Specific agreements, such as that on agriculture,
aim to support fair competition.
Encourage Development
and Economic Reform
• Fully three quarters of WTO members are

developing or transition economies.
• WTO rules and mechanisms provide
• more time for developing countries to implement
undertakings.
• special assistance (training, legal advice).
• trade concessions (generalized system of
tariff preferences).
• extend Special and Differential Treatment.
More readings on WTO principles:
https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm
Case: Spain – Tariff treatment of unroasted coffee –
BISD 28S/102 (1982)
Prior to 1975, imports of unroasted coffee to Spain were

subject to a customs duty of 22.5%. In 1975, Spain
exempted import of, inter alia, unroasted coffee under its
state-trading system from customs duties. In 1979, Spanish
authorities enacted Royal Decree No.1764/79 which
subdivided imports of unroasted coffee into the categories
“Columbian mild” and “other mild” on which no tariff was
levied, and the categories “unwashed Arabica”, “Robusta”
and “other” which were liable to a 7% of tariff
3. Structure of the WTO
• A Ministerial Conference meets every two years.
• General Council meets regularly at level of Ambassadors.
• Goods Council administers GATT (including agriculture).
• Services Council administers GATS.
• Intellectual Property Council administers TRIPS.
Organs of the WTO
MINISTERIAL CONFERENCE
• TNC
DSB
General Council • Trade &
TPRM Environment
Committee
• Trade &
Council for Council for •Council for Development
Trade in Goods •TRIPS Committee
Trade in Services
• BOP
Goods Committees Services Committee
Annex 1A, Committee • Budget,
WTO Agreement s Finance &
Administration
Committee
Secretariat of the WTO
• Director General and Deputy positions selected
by members (usually political and term limited)
• Staff of over 500; all in Geneva
• Secretariat has no decision-making powers.
• Provides technical and legal support to councils,
committees, working parties and to developing
countries
(Secretariat of the WTO)
General Director of WTO
• Ngozi Okonjo-Iweala
• A Nigerian-American
economist and international
development expert
• The seventh Director-
General of the WTO
• Her term starts on 1 March
2021
The first woman and the first
African to hold the office
4. WTO Agreements
• Cover goods, services and intellectual property
• Include individual countries’ commitments to
lower customs tariffs and other trade barriers,
and to open and keep open services markets
• Set procedures for settling disputes
• prescribe special treatment for developing
countries
• Require governments to make their trade policies
transparent by notifying the WTO
WTO Agreements
• General Agreement on Trade and tariff (GATT)
• General Agreement on Trade in Services (GATS)
• Trade Related Intellectual Property Agreement (TRIPs)
• Agreement on Trade related investment measures (TRIMs)
• Agreement on Subsidy and countervailing measures (SCM)
• Agreement on Agriculture (AoA)
• Agreement on Textiles and Clothing (ATC)
• Agreement on Anti-dumping (AAD)
• Agreement on Technical Barriers to Trade (TBT)
• Agreement on Sanitary and Phytosanitary Measures (SPS)
• Agreement on Custom Valuation (ACV)
• Agreement on Rules of Origin (ROO)
• More readings:
https://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm
http://trungtamwto.vn/chuyen-de/192-van-kien-co-ban-cua-wto
Lecture 5-6: Tariff
Content
1. Concept of tariff
2. Types and Calculation of tariff
3. Discuss the welfare and efficiency effects of
tariffs
1. Concept
o Tariff – tax levied on a good when it crosses a national

border
• import tariff/tax – much more common
• export tariff/tax – less common
Types of customs tariffs under the WTO
Bound Tariffs Applied Tariffs
 Maximum level of customs tariffs to Tariff actually imposed by a
which a WTO Member is committed country on goods imported into
toward other Members. their markets.
 Bound tariffs are set on a product-by- Published and administered by
product basis and classified based on national customs authorities.
Harmonized System (HS). Sometimes lower than the Bound
tariffs.
 Bound tariffs are not partner-specific
(same commitment toward all WTO
Cannot be raised above the bound
members) rates without compensation
(among WTO countries).
Include:
 Most Favoured Nation (MFN)
tariffs
 Non-MFN tariffs
 Preferential tariffs
Types of customs tariffs under the WTO
Applied tariffs in Market Access Map
MFN Tariff
Non-MFN Tariff
Preferential
Tariffs
2. Types of customs tariffs
Tariffs
Ad Tariff
valorem
Non-ad valorem tariffs rate
tariffs quotas
Outside rate
Specific Compound Mixed ______
Technical Contingent
tariffs tariffs tariffs tariffs ______
Inside rate
Examples:
20% of the $314/ton
value of certain $2 per kg 20% + $2 per 30% or £2 8.3% + ______
per kg, agricultural 326 tons
product kg
whatever is component ________
the highest MAX 18.7% $0/ton
Ad Valorem Tariff
Australia applies MFN tariff of 5%
on imported wine (2204.21.20)
French wine New Zealand
wine
Price without tariff
Price without tariff
AUD 8
AUD 6
Tariff paid = Price × Rate
Tariff paid Tariff paid

AUD 0.40 AUD 0.30
Price including Price including

tariff: AUD tariff: AUD
8.40 6.30
Types of customs tariffs
Tariffs
Ad Tariff
valorem
Non-ad valorem tariffs rate
tariffs quotas
Outside rate
Specific Compound Mixed ______
Technical Contingent
tariffs tariffs tariffs tariffs ______
Inside rate
Examples:
20% of the $314.0/ton
value of certain $2 per kg 20% + $2 per 30% or £2 8.3% + ________
per kg, agricultural 326 tons
product kg
whatever is component ________
the highest MAX 18.7% $0.0/ton
Specific Tariffs and their Effects on Price
Switzerland imports beef (0201.30.99) from Argentina
Tariff = CHF 2,212 100 kg gross
Before Border CHF 22 / kg After Border

tariff
CHF 22 /
kg CHF 62 / kg
CHF 32 / kg CHF 22 /
CHF40 / kg kg CHF40 / kg
CHF 10 / kg CHF 10 / kg
Low quality Prime quality Low quality Prime quality
beef beef beef beef
The prime beef is The prime beef is now

4 times the price of the only ≈ 2 times the price
low-quality beef of the low-quality beef
Compound Tariffs
• Roasted coffee substitutes (NTLC 2101.30.19.00)
• imported from Sri Lanka into Germany
Price w/o tariff = 80 EUR MFN Tariff

(package of 10 kg) 5.1% + 12.7 EUR/100 kg
0.127 EUR/1
kg
Tariff = 5.1% × 80 EUR + 0.127 EUR/kg × 10 kg
= 5.35 EUR
Price with tariff = 85.35 EUR

(package of 10 kg)
Mixed Tariffs
Leather shoes MFN Tariff =
30% or 4,300 yen/pair, whichever
(6405.10.119) is the greater
imported from Viet Nam to
Japan
Branded shoes Option 1
JPY 1,000/ 30% × 1,000 yen/pair
pair = 300 yen/pair Tariff =
4,300 yen/pair
Final Price: Option 2
5,300 yen / 4,300 yen/pair
pair
Option 1
Unbranded 30% × 300 yen/pair
shoes = 90 yen/pair
JPY 300 / pair Tariff =
Option 2 4,300 yen/pair
Final Price: 4,300 yen/pair
4,600 yen /
pair
Technical Tariffs
Tariffs that include product-specific technicalities.
Examples:
Importing NTLC Product Customs duty as reported

country Description
Motor cars and other motor
vehicles principally designed for
Russian the transport of persons (other 2.2 euro per cm³ of engine
Federation 8703.32.90.93 than those of heading 8702),
including station wagons and volume
racing cars: Other vehicles, with
compression-ignite
Roundabouts, swings, shooting

galleries and other fairground
amusements; travelling circuses The rates applicable to the
New Zealand 9508.10.00 and travelling menageries;
travelling theatres: Travelling separate components
circuses and travelling
menageries
Alarm clock movements,

3.9% on the movement +
United States 9109.10.10 complete and assembled,
electrically operated, with opto-
5.3% on the battery
electronic display only
Non-Ad Valorem Tariffs
• The share of national tariff lines (NTL) with non-ad valorem tariffs varies
depending on the importing country.
• Examples:
Switzerland 80.8% of tariff lines
Russia 14.6% of tariff lines
EU 11.1% of tariff lines
USA 8.5% of tariff lines
Thailand 7.5% of tariff lines
South Africa 3.8% of tariff lines
Tariff Rate Quota (TRQ)
A two-tiered tariff:
 The first level of tariff, inside-quota tariff rate (IQTR), applies up to a specified quantity
of import (contingent).
 A higher customs tariff, outside-quota tariff (OQTR), is levied on the imported goods
outside of the contingent .
Quantity
imported
OQTR
Contingent
IQTR
0
The United States applies TRQ on imports of (5201.00.18) Cotton originating from
Burkina Faso
Quantity
imported
OQTR
$314 / Ton
Contingent
326 metric tons IQTR
$0 / Ton
0
Inside-quota NTLC:
• National Tariff Line Code (NTLC) used to define the product for claiming
the inside-quota tariff.
• Generally the same as the outside-quota NTLC
• Some countries apply different NTLCs for the same product depending
on whether it is imported inside the contingent or outside of it.
Product coverage: The list of products covered by the

TRQ.
Country coverage: The list of countries that can claim
an allocation or a portion of the TRQ.
Administration method: The method used to manage

the TRQ allocation.
Categories of principal TRQ administration methods
Applied tariffs: No shares are allocated to importers. Imports of the products concerned are
allowed into the territory of the Member in unlimited quantities at the in-quota tariff rate or below.
Auctioning: Importers' shares are allocated, or licenses issued, largely on the basis of an
auctioning or competitive bid system.
First-come, first-served (at the border): No shares are allocated to importers. Imports are
permitted entry at the in-quota tariff rates until such a time as the tariff quota is filled; then the
higher tariff automatically applies. The physical importation of the good determines the order and
hence the applicable tariff.
Licenses on demand: Importers' shares are generally allocated, or licenses issued, in relation to
quantities demanded and often prior to the commencement of the period during which the physical
importation is to take place. This includes methods involving licenses issued on a first-come, first-
served basis and those systems where license requests are reduced pro rata where they exceed
available quantities.
Historical importers: Importers' shares are allocated, or licenses issued, principally in relation to
past imports of the product concerned.
Imports undertaken by state trading entities: Import shares are allocated entirely or mainly to
a state trading entity which imports (or has direct control of imports undertaken by intermediaries)
the product concerned.
Producer groups or associations: Import shares are allocated entirely or mainly to a producer
group or association which imports (or has direct control of imports undertaken by the relevant
Member) the product concerned.
Other: Administration methods which do not clearly fall within any of the above categories.
Mixed allocation methods: Administration methods involving a combination of the methods as
set out above with no one method being dominant.
Ad valorem equivalents (AVEs)
• Non-ad valorem tariff presented as a % of the value of goods

cleared through customs
o Measure the effect of different types of tariff
on product prices, as if they were ad valorem
o Allow for comparison of tariffs across different countries and products
o Measure the effect of different types of tariff
on product prices, as if they were ad valorem
o Allows calculation of average tariffs for a
product group, e.g. agricultural products
Ad valorem equivalents (AVEs): calculation
• AVEs express specific tariffs in percentages
• AVE depends on the unit value, i.e. value of 1 unit of the product
Specific tariff ($)

AVE (%) = X 100
Unit value ($)*
Value imported
Quantity imported
(need to use same measurement unit)

Exercise: Ad valorem equivalents (AVEs)
For a particular specific tariff, the lower is the unit value,
the higher will be the ad valorem equivalent. Let’s check.
Imagine Switzerland applies a

tariff of $50 per ton to imported
fish fillets
1. If one ton of South Africa’s exported fish fillets

cost $200, what is the equivalent ad valorem tariff?
2. If one ton of Ghana’s exported fish fillets

cost $100, what is the equivalent ad valorem tariff?
3. Welfare effects
Consumer & Producer Surplus
1) consumer surplus – additional benefit
obtained by the buyer of a good
• difference between the maximum that the
buyer is willing to pay and the actual price
• area below demand and above price
2) producer surplus – additional benefit obtained
by the seller of a good
• difference between the minimum that the
seller is willing to accept and the actual price
• area above supply and below price
Consumer & Producer Surplus (cont.)
When combined, the areas of consumer surplus and

producer surplus represent the total welfare to the nation
resulting from the sale of this good.
Tariff Welfare Effects – Small Nation
Before Trade:
consumer surplus
is area in red.
producer surplus is
area in green.
With Free Trade:

Consumer surplus
increases by areas
a,b,c,d,e,f and g.
Producer surplus
decreases by
areas a and e.
The overall
increase in welfare
is b,c,d and f.
With Tariff:
c = revenue effect =
lost consumer surplus
now government rev.
a = redistributive effect
= shift from consumer
to producer surplus
b + d = deadweight loss
= benefits lost to all
parties
b = protective effect
d = consumption effect
Tariff Welfare Effects – Large Nation
Before Trade:
U.S. consumer
surplus is area in
red
U.S. producer
surplus is area in
green.
With Free Trade:

Consumer surplus
increases
substantially.
Producer surplus
decreases but to a
lesser degree.
The overall
increase in welfare
is b,c,d and the
triangle above.
With Tariff:
c + e = revenue effect
= consumer surplus
now government rev.
a = redistributive
effect = shift from
consumer to producer
surplus
b + d = deadweight
loss = benefits lost to
all parties
b = protective effect
d = consumption
effect above.
Revenue Effect:
In this case there are
two separate portions:
c = domestic revenue
effect = prior U.S.
consumer surplus
e = terms-of-trade
effect = redistribution
of income from foreign
nation
area e > (b+d) leads
to more domestic
welfare
Effective versus Nominal Rates of Protection
The amount of protection given to any one product

depends not only on the tariff rate but also on tariffs on the
inputs used to produce the good
Nominal rate of protection: tariff rate levied on a
given product
Effective rate of protection: nominal rate + tariffs on intermediate
inputs
Value added: price of a good minus the costs of intermediate
goods used to produce it (the contributions of labour and capital
at a given stage of production)
6-175
Effective versus Nominal Rates of Protection
(cont.)
• In sum, effective rate of protection = (VA* -

VA) / VA
• VA = amount of domestic value added under free
trade; VA* = domestic value added after taking into
account all tariffs (on both final goods and
intermediate inputs)
6-176
05/31/2023 177
Effective versus Nominal Rates of
Protection (cont.)
Copyright © 2005 Pearson Addison-Wesley. All rights

6-178
reserved.
Reminder: Market access
Market access for goods refers to the conditions,

customs tariffs and non-tariff measures, applied by
countries to goods imported into their markets.
Market access: Non-tariff measures (NTMs)
Overview
• Definition of NTMs
• Key concepts related to NTMs
• Role of NTMs in international trade
• International classification of NTMs
• Data sources; Market Access Map
• Business experiences with NTMs

NTM
Classification
• Logic linked to WTO
agreements
• Correspondence
with the EU
Helpdesk taxonomy
181
QUIZ: Which of these NTMs are real?
1. A country bans imports of a popular chocolate egg-shaped candy.

Importers who violate the ban are fined $2500 per chocolate egg.
2. A country requires imported skis to adhere to rigorous product

design standards, because of the “unique” snow in that specific
country.
3. Imported oranges are allowed to be green, but only if the

green does not cover more than 1/5th of the fruit’s surface area.
4. A country only clears imported lobsters if the lobsters are

alive. The country begins inspecting all lobsters, which causes
them to die while waiting for inspection. The lobsters do not
clear customs.
Why do governments impose NTMs?
• NTMs can be introduced for legitimate reasons, for example protection of human,
animal and plant health
• But can also be misused as an instrument of protection
Why do countries use NTMs? • Why do countries use NTMs?
Importing Country • Exporting Country

• Health and safety of consumers • Ensure adequate supply for the
• domestic market
Environmental factors
• Infant industry protection • Maintain quality
• Achieve political goals • Ensure best value for their exports
 NTMs are not necessarily a trade barrier

They play an important role in enabling trade
How do exporters and importers
experience non-tariff measures?
Exporters of agricultural products report more problems
than those in manufacturing
Share of exporters who encounter burdensome NTMs, by sector
Source: ITC (2015);The Invisible Barriers to Trade – How Businesses Experience

Non-Tariff Measures; www.intracen.org/publications/ntm
The trade-hampering measures lie much closer to home
than one might expect
Distribution of reported NTM cases, by country applying the measure
Home (exporting) OECD countries

country
28% 26%
31%
39%
13% Agriculture 13% Manufacturing

Other developing
countries 20% 30%
Regional trade
agreeement partners
Source: ITC business surveys on NTMs; www.ntmsurvey.org

Discussion question: What are non-tariff
measures?
1) Definition?
2) Any examples?
3) Who applies them?

Definition
Non-tariff measures (NTMs)

Official policy measures on export and import, other than ordinary
customs tariffs, than can potentially have an effect on international trade
in goods, changing quantities traded, or prices or both.
Mandatory requirements, rules or regulations legally set by the

government of the exporting, importing or transit country (in contrast to
private standards which are not legally set)
Can affect both export and import

The challenge?
SPS & TBT measures for agriculture, rules of origin for manufacturing
Technical requirements 11%

22% Regulations on product characteristics, quality,
poduction process. etc.
23%
Conformity assessment
Technical inspections, testing, certification etc to
prove compliance with technical regulations
Inspections and other entry formalities 13%

48% Customs clearance and border control
Charges and taxes

9%
Service charges, customs surcharges, etc. 4%
Quantity control measures
Quotas, licences, prohibitions
5%
5% Rules of origin and related certificate 35%
Criteria & related certificate to determine the country of
5% origin of a product.
11% Other import-related measures

Finance measures, anti-competitive measures, trade remedies, etc.
4% 5%
Agriculture Manufacturing
Source: ITC (2015),The Invisible Barriers to Trade – How Businesses Experience

Most regulations pose a problem because of procedural obstacles
Share of NTM cases, by type of difficulty

100%
90%
80% 40% The regulation is difficult only
70% 58% because of procedural obstacles
60%
50% 25% The NTM is too strict + there are
procedural obstacles
40%
30% 19%
20% The regulation itself is too
35% strict/difficult
10% 23%
0%
Agriculture Manufacturing
Source: ITC (2015);The Invisible Barriers to Trade – How Businesses Experience

What types of home country procedural obstacles are reported?
High cost
24%
Exporti
Admin ng
burden
Delays
15% Exporting
42%
country
Lack of
facilities Other
7% 12%
Source: ITC (2015);The Invisible Barriers to Trade – How Businesses Experience Non-Tariff Measures; www.intracen.org/publications/ntm
Where should we look to find the solutions?
Distribution of procedural obstacles, by agency
Discriminatory behaviour of officials

Informal or unusually high payment
Administrative burdens related to
Information/ transparency issues
Lack of recognition/ accreditation

Lack of sector-specific facilities
Time constraints
regulation
Type of
Other

Location of the

Customs authority

Ministry in charge of international trade

Ministry in charge of agriculture

Ministry in charge of public health

Public/private organization for standard and quality

Chamber of commerce and trade support institution

Public/private organizations for certification

Ministry in charge of environmental affairs

Public/private organizations for inspection

Products testing and analysis laboratory

Port authority
Airport Source: ITC (2015);The Invisible Barriers to Trade – How

Businesses
Experience
Ministry in charge of finance Non-Tariff Measures; www.intracen.org/publications/ntm

Other ministries/agencies
How do we know this? ITC’s business surveys
... document the experiences of companies that are involved in international trade
and identify at product, sector and partner country level the predominant
regulatory and procedural trade obstacles.
• NTMs imposed by importing countries
• NTMs imposed by exporting countries

• Identification of existing national procedures and
facilities that could use strengthening
• Coverage of gaps in understanding of specific
measures resulting form a lack of access to
relevant information
NTM series of more than 40 publications &

survey results available at www.ntmsurvey.org
Key concept: SPS and TBT measures
Technical (SPS/ TBT) versus non-technical NTMs
o What is a technical regulation?
“A document which lays
• Refer to product-specific properties.
down product characteristics
• Product characteristics, technical specifications, and the or their related processes
production process. and production methods,
• They also include conformity assessment methods including administrative
which confirm that products fulfill the requirements laid provisions, with which
down in regulations compliance is mandatory.”
(Annex 1, WTO TBT Agreement)
include measures that are applied in order to protect food
safety and animal and plant health (Sanitary and Phytosanitary
Measures – SPS)
as well as other technical measures for national security
reasons, consumer safety reasons (also known as “Technical
Barriers to Trade – TBT”)
o Non-technical requirements:
• do not refer to product specific properties but to trade requirements
• shipping requirements, customs formalities, trade rules, taxation policies, etc.
• all other NTM measures, which are not technical requirements
Who prepares technical regulations and SPS measures?
•Technical regulations SPS measures

- Ministry of Trade - Ministry of Health
- Ministry of Industry - Food and Drug Administration
- Ministry of Agriculture
- Plant Protection Authorities
- Ministry of Health
- Veterinary Services
- Consumer Protection Unit
- Ministry of Fisheries and Livestock
- Environment Protection Unit
- …
- …
Examples of products subject to TR
• Machinery and equipment which could endanger human life, e.g.

boilers, electricity-driven tools, metal and wood – working equipment
• Potentially dangerous consumer articles, e.g. synthetic detergents and

cleaning agents, household electrical appliances, video and TV sets,
motor vehicles
• Hazardous raw materials and agricultural inputs, e.g., fertilizers,

pesticides, and specified chemicals.
Technical regulations compared to standards
Technical Regulations Standards

• Compliance is MANDATORY and • Compliance is VOLUNTARY
form part of legislation
• Can be developed by a variety of
• Responsibility of the government bodies in the public or private sector
• Developed by consensus
• Consensus not necessary
• Encompass product characteristics • Contain only product

and administrative provisions characteristics, or technical
requirements
• Goods cannot enter the country
• Goods can enter the country
TBT in international trade Technical regulations
Standards
Testing, Calibration
C Inspection
Certification
Packaging
U Labelling
Other requirements
Country B
S
T
Country
Technical regulations A
Standards O
Testing, Calibration
Inspection
Certification M
Packaging
Labelling
Other requirements S
Example of a TBT measure
Product characteristics requirements on oranges
Oranges with light green colour are

allowed,
Size provided
is determined the maximum
by the colour does not of
diameter
exceed theone fifth ofsection
equatorial the total surface
of the fruit. of
Oranges: 53 mm
the fruit
Example: Canada labeling requirement on a box
of fish product
Labels on fish products exported to Canada

must include:
A. Brand name H. Common Name

B. Nutrient Content Claim I. Nutrition Facts Table
C. Storage Instructions J. "Contains" Statement
D. Country of Origin K. List of Ingredients
E. Composition Claim L. Identity and Principal Place of Business
F. Net Quantity
G. Canada Inspected Logo
203
Main challenges reported by businesses for SPS / TBT
 Lack of information on foreign market standards
 High certification cost
 Burdensome certification and inspection procedures
 Duplication of control among different regulatory bodies

 Lack of testing facilities
 Lack of recognition in destination market of local labs
 Stringent requirements (difficult to comply with)
Source: ITC Businesses Surveys on NTMs in 66 countries, www.ntmsurvey.org

204
Main challenges reported by businesses for SPS / TBT

Example: Inefficient testing and certification procedures
 Lengthy procedures
 Frequent renewal The problem? It’s the

quantity of papers to
 Excessive paperwork and numerous submit! There are too
administrative windows many documents
needed to prepare the
 Inaccessible or absent infrastructure dossier. More than 20
different documents
are required for the
conformity assessment
The testing process takes 1 - 2 months
process.
while the validity of the product itself is
just a year. Another issue is that it is very
expensive to undertake this test which
hinders us from exporting.
Source: ITC Businesses Surveys on NTMs in 66 countries, www.ntmsurvey.org

Technical Regulations and WTO TBT Agreement rules
• Technical regulations should not create unnecessary obstacles to trade,

therefore, should
− Not be more trade-restrictive than necessary
− Serve legitimate objective
− Take into account risks that non-fulfilment would create
− Be based on scientific and technical information
• Foreign and domestic products treated equally
• Be based on international standards (except when not appropriate / not
sufficient to fulfil legitimate interests)
Objective
Prevent creation of unnecessary technical barriers to
trade
• Establish rules for development, adoption and
application of Technical Requirements (technical
regulations, standards, and conformity assessment)
• Technical requirements for trade to be based on
international standards, guides or recommendations as
far as possible
• Transparency of requirements
206
Rights
Agreement acknowledges countries’ rights to regulate for legitimate
purposes:
Protection of animal or
Quality of their Protection of human life or
plant life or health
exports health
Protection of
Protection of Prevention of
security interests
environment deceptive practices
Salient features
• Base technical requirements for
trade on international standards,
• Make requirements transparent guidelines or recommendations as
far astechnical
 Publish notifications of the proposed possibleregulations
and conformity assessment procedures
 Provide reasonable opportunity to other interested parties
to comment on the proposed technical regulations and
conformity assessment procedures
 Take into account these comments in finalizing the drafts
 Justify the requirements of the technical regulations, should
they be requested to do so
Salient features
Technical regulations, standards, conformity assessment procedures
should be
• Not more trade restrictive than necessary (based on performance

requirements than product descriptors)
• Not applied arbitrarily, or
• Not discriminatory against imports (national treatment)
• Not maintained if no longer necessary, (changed circumstances or can be
addressed in a less trade restrictive manner)
209
TBT - Main principles
Non-
discriminati
on
Mutual Harmonizat
recognitio ion
n
Avoidance
of
Transparen Equivalen
cy unnecessar
ce
y obstacles
to trade
Sanitary and phytosanitary measures
PROTECTING HUMAN, ANIMAL, PLANTS, ENVIRONMENT
What is a sanitary or phytosanitaryvmeasure?
To protect
…
Additives, contaminants, toxins or
Human or animal
from disease –causing organisms in
life or health
foods, drink, feedstuffs
Diseases carried by animals,

Human life or health from plants or their products, or from
pests
Animal or plant Entry, establishment or spread of

from pests, diseases, disease-causing
life or health
organisms, etc.
from Other damage caused by entry,

A country establishment or spread of pests
(Annex A WTO Agreement on SPS)

SPS measures comprise of
Laws, decrees, End product Processes and

regulations criteria production methods
Testing, inspection, Risk

Quarantine
certification, approval assessment Packaging and labelling related
procedures treatments to food safety
methods
Some examples of SPS measures (1/4)
To protect…
Additives, contaminants,
Human or animal From toxins or disease organisms
life or health in foods, drink, feedstuffs
Residue limits in Aflatoxin limits in

seafood nuts
To protect…
Diseases carried by animals,
Human life or health From plants or their products, or from
pests
Requirement for Avian influenza

rabies vaccination
To protect…
Entry, establishment or spread of
Animal or plant
From pests, diseases, disease-causing
life or health
organisms, etc.
Foot- and mouth Prevent the spread of

disease fruit fly
To protect…
From Other damage caused by entry,
A country
establishment or spread of pests
Prevent entry of Zebra

mussels via
Ballast water
Regulate seeds to
avoid entry of weeds
Rights
• Members have the right to take sanitary and phytosanitary measures necessary for
the protection of human, animal or plant life or health, provided that such measures
are not inconsistent with the provisions of this Agreement.
Obligations
Only to extent necessary Based on scientific principles
Non discriminatory /
national treatment
Not maintained without

sufficient scientific
evidence (unless No disguised protectionism
provisional )
Key Provisions of the SPS Agreement
• Non-discrimination
• Scientific justification
• harmonization
• risk assessment
• consistency
• least trade-restrictiveness
• Equivalence
• Regionalization
• Transparency
• Technical assistance/special treatment
• Control, inspection and approval procedures
Conformity Assessment Procedures
DETERMINING IF REQUIREMENTS ARE FULFILLED
What is conformity assessment
‘Any procedure used, directly or
indirectly, to determine that
relevant requirements in
Technical Regulations or
standards are fulfilled’.
Annex 1 WTO/TBT Agreement

Components of Conformity Assessment
Supplier’s Declaration of
Testing Inspection Conformity (SDoC)
Product
certification System certification
Accreditation
Tackling the transparency challenge: NTM data collection coverage
So back to our information tools….
k
Where do I find all this information for products and markets of my interest?
Market Access Map Let’s focus

on this first
www.macmap.org
Sanitary and Phyto-Sanitary measures (SPS)

and Technical Barriers to Trade (TBT)
notification alert system: www.epingalert.org
Rules of Origin Facilitator

Find and compare rules of origin, related provisions and certification
requirements
http://findrulesoforigin.org/
Data types
Market Access Map

Other market access
Tariffs
conditions
Applied Ad Sanitary
MFN and Tariff Trade and Technical Inspection Other
and valorem agree-
Rules of Trade
preferen Rate Origin Phytosanit Barriers require- Non-tariff
bound equi- ments remedies ary to Trade ments measures
ces Quotas
tariffs valents Measures
Key concept: Rules of Origin
Or: About the “nationality” of fish caught in international
waters
Rules of Origin
What they are
The “economic nationality”
What they are not of goods in international
trade (“customs origin”)
A good source of
information for
consumers
What they will never

do
What they do
- They define one (and only
one) origin to Accept something as “made
each and every product; in the world”
- They make FTAs possible
228
Rules of Origin – Why?
Non-preferential ROOs
- Trade statistics
- Trade policy measures: e.g. anti-dumping / tariff rate quotas
- Government procurement
- Etc.
Preferential ROOs
“Except as otherwise
- Trade agreements: determining provided in this Agreement,
eligibility for preferences each Party shall eliminate its
customs duties on
originating goods of the
Each trade agreement has its other Party”
own sets of rules of origin!
229
Origin in practice
• Toothed-wheels of cast iron and steel (HS code 8483.90.81.90) imported into the EU
http://findrulesoforigin.org/home/compare?reporter=276&partner=410,484,842&product=8483908190
Cost of goods: MFN tariff: 2.7%
$500
$500 + 2.7%
No trade agreement in place =
MFN rate
$500
$500 + 0%
Meet the rule of origin under the EU-
Mexico agreement = preferential rate
$500
$500 + 2.7%
Do not meet the rule of origin under the
EU-South Korea agreement = MFN rate
230
Origin qualifying process
• In order for a product to be traded under preferential origin (tariff), the exporter
needs to answer ‘YES’ to each of the five questions.
IF the answer to any of the questions is ‘NO’, the product has got
to be traded under the MFN rate
• Is there a trade agreement between

1. Agreement the country of export and import?
• Is there a preferential tariff rate for the

2. Product product under the agreement?
• Does the product comply with the rule of

3. Rule origin under the agreement?
• Can the exporter prove the origin of the

4. Proof product?
• Can the exporter comply with other

5. Compliance origin provisions and conditions?
231
Origin criteria: basic principles
Substantial / sufficient transformation of goods

Wholly obtained goods
- Change of tariff heading: all non-originating
materials used in the production of the product
have undergone a change in tariff classification
- Value addition:
HS4 08.05 HS4 20.09
E.g. production in which the value of all non-originating materials used

- does
Technical requirements:
not exceed 50 % of the transaction value of the product.
E.g. pasteurization of milk

14 basic types of rules of origin
Occurrence Rule Definition
6% WO Good is entirely (i.e. wholly) obtained or manufactured in one country without using any non-originating materials.
The non-originating inputs are not required to be classified in a different HS code than the final good to confer originating
5% NC status.
7% CC The originating status is conferred to a good that is classified in a different HS chapter than the non-originating inputs.
43% CTH The originating status is conferred to a good that is classified in a different HS heading than the non-originating inputs.
6% CTSH The originating status is conferred to a good that is classified in a different HS subheading than the non-originating inputs.
0% CTI The originating status is conferred to a good that is classified in a different HS tariff item than the non-originating inputs.
10% ALW The originating status is allowed to be conferred from non-originating inputs of specific HS codes.
10% ECT The originating status cannot be conferred to a good if the non-originating inputs are from HS codes listed under exception.
13% SP A good originates in the country where a defined technical requirement, i.e. a specific working or processing, has taken
place.
61% RVC A good obtains originating status if a defined regional value content percentage has been reached.
0.1% RQC A good obtains originating status if a defined regional quantity content percentage has been reached.
3% RVP A good obtains originating status if a defined regional value content percentage on a part or parts has been reached.
0% RQP A good obtains originating status if a defined regional quantity content percentage on a part or parts has been reached.
2% Other Origin criteria other than related to wholly obtained, CTC, value (quantity) content, or specified process.
Note: “Occurrence” means % of presence of the rule among all 500,000 FTA x HS6 combinations (as of Oct 12, 2018)
233
Example of rules of origin classification
Good: Sports car - HS 8703.24
Trade agreement Rule of origin Criterion (ITC)
A change from any other heading, provided

FTA, China-Peru there is a regional value content of not less CTH and RVC 50%
than 50 percent.
A change to subheading 8703.21 through

8703.90 from any other heading, provided
NAFTA there is a regional value content of not less CTH and RVC 62.5%
than 62.5 percent under the net cost method.

8703.90 from any other heading, provided
EPA, Japan-Mexico there is a regional value content of not less CTH and RVC 65%
than 65 percent.
234
Value added calculations - example
Parts Motor cars and other motor vehicles
Various HS codes HS Heading 87.03
Rule of origin: production in which the value of all non-

originating materials used does not exceed 50 % of the
ex-works price or transaction value of the product.
235
Change in tariff classification – Tomato juice
Good: Tomato juice - HS 2009.50
Process: Tomato juice is made from tomato paste, which in turn is made from
fresh tomatoes.
Tomato juice and tomato paste are classified in the same Ch. 20 (Prepared
fruits,vegs,nuts), but in different headings. Tomatoes are in Ch. 07.
Tomatoes Tomato paste Tomato juice
HS 0702.00 HS 2002.90 HS 2009.50
Change in tariff heading (CTH)
Change in chapter (CC) 236

Example 1: LDC of Switzerland: “The good obtained should be classified under a HS

tariff heading other than that covering each of the non-originating products used ”
Criterion (ITC): CTH
?
HS 0702.00 HS 2002.90 HS 2009.50

Example 2: NAFTA: “A change to subheading 2009.50 through 2009.80 from any

other chapter.”
Criterion (ITC): CC
?
HS 0702.00 HS 2002.90 HS 2009.50

Example 3: EPA, Japan-Mexico: “A change to subheading 2009.50 from any other

chapter, except from heading 07.02. ”
Criterion (ITC): CC + ECT
?
HS 0702.00 HS 2002.90 HS 2009.50

Example 4: AGADIR: “Manufacture from materials of any heading, except that of the
product, and in which the value of all the materials of Chapter 17 used does not exceed
30% of the ex-works price of the product.”
Criterion (ITC): CTH + ECT 30%
?
HS 0702.00 Sugar HS 2002.90 HS 2009.50
30% Change in tariff heading (CTH)

Complicated ROO: Example 1
Preference hs6 rule criterion

3810.90 from any other chapter, except from
chapter 28 through 38; or A change to
EPA, Japan- subheading 3810.10 through 3810.90 from any
381010 CC + ECT or CTSH + RVC 50 %
Mexico other subheading within chapter 28 through 38,
whether or not there is also a change from any
other chapter, provided there is a regional
value content of not less than 50 percent.
So what about me? M
e
Example EU-Algeria agreement My

boat
My
work
My
Anything else?
My
boat?
+
+
So what’s the problem?
Main challenges reported: Rules of Origin
The cost of preferential market access
• Cost of obtaining the certificate of origin

1
• De jure versus de facto preferential treatment

2
• Strict origin requirements / mutually exclusive

3
requirements between agreements
 Sometimes it is more costly to prove product

origin than to pay MFN
Source: ITC business surveys on NTMs in 30 countries, 2010-2016, www.ntmsurvey.org

Preferential market access: the cost
• Getting the certificate of origin
1
2 to 3 months to prepare
the dossier. It’s a waste of 10 different
time. In addition, it’s documents,
Up to two weeks repetitive. every time!
only for issuance
 Inefficiencies in issuing the

certificate of origin
2 weeks to prepare the

3-4 additional days just documents to be submitted,
because I have to come to 5 days to receive the
the capital certificate
3-4 days Source: ITC business surveys on NTMs in 66 countries, 2010-2016,
www.ntmsurvey.org
247
• Exporter testimonies (continued)

2
 Language issues The partner country

doesn't apply both
 De jure versus de facto preferential existing agreements
treatment although the product
satisfies the rules of
origin. The situation
When exporting to any Arab country and forces us to pay tariffs […]
issuing GAFTA certificate of origin, the and for some products it
certificate must be written 100% in Arabic. becomes non-profitable
There are some technical wordings, letters and to export.
numbers that cannot be translated. The
customs officials do not understand this point
and usually reject the certificate.
Source: ITC business surveys on NTMs in 66 countries, 2010-2016, www.ntmsurvey.org

The majority of difficulties linked to the certificate of origin are encountered at home (in the
exporting country)
Share of procedural obstacles*, by location
Rules of Origin Other types of NTMs
94% 59% 41%

6%
In the partner In the partner

In the home country In the home country
country country
*Note: Only cases reported by exporters

Source: ITC business surveys on NTMs in 30 developing countries, 2010-2016
www.ntmsurvey.org
Quiz Time
• A container of toys is shipped from Kuantan Port (Malaysia) to Port of Los Angeles
(U.S.). Can we say that the origin of these items is Malaysia?
If MFN
No. Porttariff on yourdoes
of departure product isus
not tell 0%, can you
anything stillthe
about need a certificate
origin of
of the items.
origin?
Yes. You might steel need a non-preferential certificate of origin in certain cases.
You might also need a preferential certificate of origin if the buyer keeps insisting,
or to be exempt from certain additional fees (i.e. merchandise processing fee in the
case of some U.S. agreements)
249
k
Market Access Map

www.macmap.org


requirements
251
What does the tool offer?
• Product-specific rules of origin. The tool currently covers nearly 114
agreements (growing by the minute )
• Includes bilateral and multilateral agreements as well as non-preferential
regimes of certain countries (EU, United States, Switzerland)
• Provides comprehensive information on all origin provisions: covers rules
of origin as well as general origin requirements (e.g. certification)
• Allows to access original documentation. Provides links to text of the
agreement, certificate templates and designated local customs authorities
• Includes a range of other supporting materials and articles
• Constantly updated with new agreements, materials and functionality
252
Remember the origin qualifying process
• In order for a product to be traded under preferential origin (tariff), the exporter
needs to answer ‘YES’ to each of the five questions.
IF the answer to any of the questions is ‘NO’, the product has got
to be traded under the MFN rate
• Is there a trade agreement between

1. Agreement the country of export and import?
• Is there a preferential tariff rate for the

2. Product product under the agreement?
• Does the product comply with the rule of

3. Rule origin under the agreement?
• Can the exporter prove the origin of the

4. Proof product?
• Can the exporter comply with other

5. Compliance origin provisions and conditions?
253
Regularly updated ITC database of trade agreements
1. Agreement
http://findrulesoforigin.org/home/agreements
254
2. Product Connection to Market Access Map tariff database
255
http://findrulesoforigin.org/home/compare?reporter=757&partner=170,804,704&product=6109100
3. Rule Key principles and definitions
• Based on the Kyoto Convention, there are two

main methods for determining the origin of a
product:
1. Where only one country is involved, the good is considered wholly obtained
in that country (originating in this country). Examples include live animals born
and raised there, mineral products extracted from the ground, food products
grown and harvested in the territory of the party (e.g. fruits, grains).
2. Where more than one country is involved in the production process, the origin
of the good is determined based on the country where the last substantial
transformation took place. There are three methods for determining
substantial transformation:
1) Change of tariff classification (based on HS code)
2) Value added calculations, or
3) Specified manufacturing or processing operations
Rules of origin can also consist of a combination of the above methods
256
3. Rule
Rules of Origin
Wholly obtained Substantial transformation

(WO) basic standard describing what confers to the good its ‘essential
obtained from the earth or sea, or grown on land character’
Help: What is wholly obtained?

 http://findrulesoforigin.org/glossary/wo
Specified process
Change in tariff classification (SP)
(CTC)
Ch. 01  Ch. 02
Value added content
(RVC)
Help: What is CTC?
 http://findrulesoforigin.org/glossary/ctc
Help: What is RVC?
 http://findrulesoforigin.org/glossary/rvcformula
+ any combination
What to do if I don’t understand the rule?
Example: NAFTA: “A change to subheading 2009.40 through 2009.80 from any
other chapter.”
• 1. Click on “Criterion (ITC)”
2. Click on ‘Find Out More’ and read general (introductory) notes to the rules
In the case of NAFTA, print out the following words in front of the rule:
“All non-originating materials used to produce the good must

undergo…”
258
Exercise: Ketchup from Jordan
Good: Ketchup - HS 2103.20
Task: Using findrulesoforigin.org, find applicable rule of origin for ketchup under
Canada-Jordan FTA and work out whether this ketchup made in Jordan qualifies
for preference.
Bill of Materials* Watch how ketchup is made: https://youtu.be/pzKdUYtlXSQ
Ingredient HS code Origin Cost

Tomato paste 2002.90 China $1
Sugar 17 Turkey ¢30 Final price (EXW):
Salt 2501.00 Pakistan ¢10
$3
Cloves 0907.20 unknown ¢10
Vinegar 2209.00 Turkey ¢10
Onion powder 0712.20 China ¢10
Glass bottle 7010.90 China ¢30
* all other materials not on the list are of Jordanian origin

259
Solution: Ketchup from Jordan qualifies!
Good: Ketchup - HS 2103.20
Key: The ketchup rule of origin under Canada-Jordan FTA is “A change from any
other subheading.” (CTSH). This means every non-originating material has to be
classified in a subheading (6-digit code) other than 2103.20.
http://findrulesoforigin.org/home/compare?reporter=124&partner=400&product=21032010
Bill of Materials* Watch how ketchup is made: https://youtu.be/pzKdUYtlXSQ
Ingredient HS code Origin Cost Passes CTSH shift? Final

Tomato paste 2002.90 China $1 Yes price
Sugar 17 Turkey ¢30 Yes (EXW):
Salt 2501.00 Pakistan ¢10 Yes $3
Cloves 0907.20 unknown ¢10 Yes
Vinegar 2209.00 Turkey ¢10 Yes
Onion powder 0712.20 China ¢10 Yes
Glass bottle 7010.90 China ¢30 Disregarded (see Packaging)
* all other materials not listed are of Jordanian origin

260
5. Compliance
Other origin requirements
• In addition to fulfilling the rule of origin, products
exported under preference need to comply with a
number of other origin requirements and conditions.
These requirements are sometimes referred to as
general origin rules and cover a number of issues.
Exporters and importers often find that these additional requirements
are less transparent, difficult to navigate and comply with than rules of
origin themselves. They can be the reason exporters of goods eligible
for preferential treatment decide to export under the MFN tariffs.
261
Other origin requirements - examples
 Origin calculation and application: How to calculate value added? How to

treat inputs used during the production process originating in partner countries?
How to treat spare parts? (e.g. Cumulation, Value added calculation, Wholly
obtained products, Sets, Accessories, Spare Parts and Tools)
 Flexibility: Are there any rules that allow for additional flexibility? (e.g. De
Minimis)
 Certification and proof of origin: What type of document is required? Can the
exporter self-certify origin or does the proof need to be issued by an authorised
body? How long is the proof valid for? (e.g. Certification, Approved exporter,
Period of validity, Exemption of certification)
 Shipping and handling: Does the good need to be shipped directly from the
country of export to the country of import? Can it be repackaged on the way?
(e.g. Principle of Territoriality, Direct transport)
 Accounting: How long do the documents relating to originating goods need to
be stored? (e.g. Retention period, Supporting documents, Verifications)
262
Let’s go live
Time for exercises
k
Market Access Map

www.macmap.org


requirements
What is e-Ping?
• Les pays modifient leurssystem
Alert réglementations
for SPS et OTC
(prescriptions
SPSrelatives
and TBT auxnotifications
produits) assez
régulièrement.
Enables the private (and public)
• Comment rester àsector
jour? to keep track
of SPS / TBT notifications of interest
1. Published by export markets
2. And also by products
SPS/TBT notifications on the rise
More than 4,000
notifications in 2017!
4500
4000
3500
3000
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SPS
2000
TBT
1500
1000
500
0
95
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Trade as an Engine of Growth –

From Ricardo to 21 Century

Theories of trade: role of trade policy

2. Why does a country can lead and sustain in certain industry? –

3. Why do countries trade – more modern views: exploiting

b. Productivity differences as a driver of trade (Ricardo).

c. Resource endowments as a driver of trade (Heckscher-Ohlin).

d. Scale economies as a driver of trade (Krugman/Melitz).

• Each country produces the same two goods (watches and t-

• Producing a certain amount of one product implies not

• The tradeoff between producing one product rather than

Production Possibility Frontier

Given t-shirt production of

Production Possibility Frontier

• Step Two: The Consumption Side

• In this economy, people consume watches and t-shirts.

• It is possible to identify combinations of t-shirts and watches at each income

• Step Three: Autarky Equilibrium

• Autarky means that there is no trade, so countries are completely self-

• Equilibrium results from combining the production and consumption sides of

• Step Four: Equilibrium With Trade

• Consumers in both countries are able to consume at a higher level of utility

consumption x10 no. of

• Summary of the basic Ricardian model:

• Labor and capital can be combined to produce either watches or t-shirts,

• The two countries differ in resource endowments: China has relatively

• As a result of different resource endowments, feasible production bundles

combinations of labour and capital

watch-making is relatively capital intensive

No. of China=relatively labour abundant

Production Possibility Frontier=efficient production

No. of Switzerland=relatively capital abundant

• Step Two: The Consumption Side

• As for the Ricardian model, consumers want to consume as much as possible

• Step Three: Autarky Equilibrium

• As in the Ricardian model, equilibrium is where consumers consume

• Step Four: Equilibrium With Trade.

• As in the Ricardian model, opening to trade results in an integrated “world”

• At the new relative price, consumers in both countries move to a higher

• Production continues along the frontier. The difference between consumption

China consumption Switzerland

• Summary of the basic Heckscher-Ohlin model:

• Examples include adjustment assistance for displaced workers, or anti-discrimination laws.

Factor Endowment Categories

Two particular distinctions stand out:

Generalized factors: Specialized factors:

Home Demand Composition

Demand Size and Pattern of Growth

Internationalization of Domestic Demand

Competitive Advantages in Supplier Industries

Competitive Advantage in Related Industries

Strategy and Structure of Domestic Firms

The Role of Government

• GVCs are complex, interlinked networks of economic activity.

• The key concept behind GVCs is “trading in tasks”.

A Smaller Slice… 100

Domestic Foreign Domestic Foreign

Source: Yamano, Meng, Fukasaku (2011)

• Comparative advantage reasoning is still powerful in explaining the

• GVCs also pose issues of social and environmental sustainability.

• Other factors might be changed by the right policy mix.

2. Traditional trade theory focuses on technological differences (Ricardo)

3. GVCs present the new paradigm of trading in tasks, but comparative

• Important FTAs with Vietnam as a member have been