It’s a message that the World Trade Organization (WTO) has been pushing for years – that more open and trade-integrated economies could significantly benefit domestic competition and ultimately help lower costs for consumers in emerging and developing economies.
And the International Monetary Fund (IMF) has added its voice to the call.
A recent working paper authored by Jesus Gonzalez-Garcia and Yuanchen Yang and published by the IMF this week, examines the effect of trade liberalisation using a large firm-level dataset covering about 400 000 firms in 83 emerging and developing economies from 2000 to 2017.
The study also focuses on 29 nations in sub-Saharan Africa where greater trade integration has led to significantly lower mark-ups. Mark-ups show the ability of firms to charge consumers above their costs and are indicators of market power. The more the competition, the less the market power and the lower the mark-ups.
“Tariff reductions cause a significant decrease in mark-ups in the manufacturing sector as it typically faces strong competition from abroad,” say the authors. “The information and communication technology (ICT) sector also experience important reductions in mark-ups after tariff cuts, most likely due to lower costs for imports in a sector that requires large investments. This additional effect of liberalisation on mark-ups among ICT firms could be related to the relatively high capital intensity in this sector, as opening markets to more imports of capital goods may contribute to more competition in this sector and the reduction of mark-ups of dominant firms. Overall, sectors with more import penetration have a stronger response to tariff reductions.”
The study also found that when compared to other policy actions, trade liberalisation appeared to be a particularly potent tool for mitigating market power and had significant synergies with real sector reforms.