Executive summary – Export quality in trade policy
The Internationalisation Monitor describes trends in internationalisation and the consequences thereof for the Dutch economy and society. It is published quarterly as part of the Globalisation programme at Statistics Netherlands (CBS), which is commissioned by the Dutch Ministry of Foreign Affairs. In this edition of the Internationalisation Monitor, we focus on the quality of Dutch goods exports and the instruments in trade policy that can influence exports and their quality.
The current trade conflicts between the United States on the one hand and China and Europe on the other are putting pressure on worldwide economic relations. Existing and new import tariffs have led to considerable uncertainty in the international arena, which potentially affect the Dutch economy. For example, in 2018 the US imposed tariffs on European steel and aluminium imports, which have also affected the Netherlands as the fifth largest steel exporter in the European Union. In response, the EU took countermeasures in the form of tariffs on typically American products such as Bourbon whiskey, Harley Davidson motorcycles and orange juice. Tariffs not only affect trading prices between countries, but also life in general, as these tariffs can be passed on to the consumer. The EU-US trade war may hit the Dutch economy hard (De Nederlandsche Bank, 2018). The Dutch economy may also be affected indirectly by trade wars because the Netherlands is interwoven in global value chains. This means that import tariffs may also have an effect on the prices paid by Dutch importers and consumers for certain (intermediate or end) products.
For many companies, exporting goods is the first step across the border. However, companies may also choose to invest abroad and set up or take over a local branch. Governments can (partially) protect their domestic market from foreign competition through their trade policies, e.g. with tariffs and non-tariff measures (NTMs). Examples of NTMs are import quotas or price controls, or regulatory and technical measures related to health and environmental protection. NTMs may have protectionist or political motives, or they are implemented to guarantee the quality and safety of imported products. Similar to import tariffs, NTMs may therefore drive up the prices of imported products because NTMs impose certain requirements on suppliers with regard to the quality of the export product or production process.
Foreign trade is of great importance to the open Dutch economy. When companies take the decision to become internationally active, they encounter various uncertainties – for example, differences in culture, tastes, prices, local laws and regulations. To reduce these uncertainties, countries engage in mutual trade agreements which allow lowering (or abolition) of tariffs, lifting of NTMs, harmonisation of production standards and so on.
This edition of the Internationalisation Monitor focuses on such trade policy instruments and investigates the impact of these instruments on export prices, quality requirements and the choices made by companies with regard to their process of internationalisation. Listed below are some of the main findings presented in this edition:
Chapter 1: Exploring export prices
- Until now, most CBS research into international goods trade has focused on the gross trade value. Gross trade value consists of a traded quantity multiplied by the unit value, i.e. the price per unit. This unit value provides valuable information on the activities of Dutch traders on export markets. Chapter 1 of this Internationalisation Monitor offers a first look at the dispersion of the unit values in Dutch exports.
- The dispersion in the unit values of narrowly defined export products appears to be considerable. This means that exporters charge different prices for the same product.
- A clear pattern in the distribution of unit values emerges when distinguishing between the level of development of the export destination and the nature of the exported product (homogeneous or differentiated in terms of product quality). The median unit value is higher for exports of differentiated commodities than for exports of homogeneous quality. In addition, the dispersion of unit values is considerably lower among homogeneous products. It is an intuitive result that commodities allowing for quality differentiation display more price dispersion.
- The income level of the importing country is positively linked to the unit value of Dutch exports. A higher income level and (to a lesser extent) a larger country size imply higher prices for the same export product.
- Buyers located in more distant destination countries pay on average higher prices than those in countries closer to the Netherlands.
- Concentrating on the exports to four specific countries – Germany, Nigeria, the US and China – some interesting patterns emerge. In all four countries, Dutch exporters are seen to charge different prices for the same products on the same export market. This is an indication that product quality is a relevant dimension to consider in the analysis of unit values of exports.
Chapter 2: The quality of Dutch exports
- Using the data on export unit values and trade volumes, this chapter provides an estimate of the quality of exported products by Dutch firms. This estimate takes several determinants of export prices into account. Examples include the scope of product differentiation and characteristics of export destinations such as the level of income, exchange rate fluctuations and the overall level of prices.
- Export quality correlates positively with export prices. Products of superior quality are usually sold at higher prices.
- More than half of the Dutch export value in 2017 is generated by exporting products of relatively low quality. This does not mean Dutch exports are of low quality. As a matter of fact, the Netherlands ranks fourth worldwide in export quality according to the estimates of the International Monetary Fund (IMF).
- Dutch firms export higher quality products to destinations geographically further away and/or to richer countries, i.e. countries with a higher GDP per capita. These findings are largely consistent with scientific literature.
- Firms that export higher quality products tend to have higher productivity and import more expensive/better quality inputs. This is again in line with the findings in the literature.
- Firms with a higher market share in a given export market tend to export goods of lower quality and charge higher prices.
Chapter 3: Trade policy: barriers and treaties
- Since the establishment of the World Trade Organization (WTO) in 1995, import tariffs worldwide have fallen steadily, while non-tariff measures (NTMs) have been on the rise.
- NTMs are generally defined as policy measures other than ordinary customs tariffs, which potentially have economic effects on international trade in goods, i.e. changing the quantities traded, the prices or both.
- The most common NTMs are Sanitary and Phytosanitary (SPS) measures to ensure food safety and quality – and Technical Barriers to Trade (TBTs) – that aim to ensure product quality and protect the environment.
- Approximately 95 percent of Dutch exports are subject to TBTs. Around 37 percent of Dutch exports are subject to SPS measures.
- Roughly 70 percent of Dutch exports are subject to another TBT policy abroad than in the Netherlands. For SPS, this is the case for only 5 percent of all exports.
- Local content requirements are an example of Trade-Related Investment Measures (TRIMs) and require exporters to purchase certain minimum levels or types of domestically produced or sourced intermediate products or labour.
- Over the past decade, nearly 600 local content requirements have been recorded worldwide. Most of them have been announced by India (144), followed by the United Kingdom (65) and Australia (48).
- While the World Trade Organization provides a platform to limit both tariff and non-tariff barriers to trade, various bilateral or multilateral treaties exist outside of the WTO with the same aim of improving international trade.
- Due to the growing complexity of international trade policies, for example due to NTMs, the depth of trade agreements has increased. Aside from being simple tariff agreements, they can also either limit or harmonise the use of NTMs. In addition, they increasingly cover topics such as international investment protection, intellectual property rights, service trade and competition policy.
- Over the past 12 years, the European Union has negotiated ten new treaties with maximised contents. Most recent are the deep bilateral trade agreements with Singapore, Vietnam and Canada.
Chapter 4: Non-tariff measures and export quality
- Amongst other things, non-tariff measures (NTMs) are aimed at improving product quality and safety and/or promoting nature conservation.
- This chapter investigates whether there is any relationship between the presence of NTMs and the perceived export quality, measured by a product’s unit value.
- This chapter shows that three different export products (steel doors and windows, car tyres and inflatable balls for sports) are on average more expensive when they are subject to an NTM than when this is not the case.
- Export products of homogeneous quality are more prone to price changes in the presence of an NTM. Less room for product differentiation means there is also less room to absorb the price effect of an NTM.
- Products exported to the United States subject to an NTM are more expensive than those same products exported to Canada, where they are not subject to an NTM.
- Aside from the presence of an NTM having a significantly positive effect on the unit value of a product, multiple NTMs increase this unit value further. In other words, more NTMs mean an even higher unit value.
- Together, these results suggest that NTMs are related to higher product quality as measured by their unit values.
- It should be noted that unit values are a rough proxy for product quality. The results in this chapter are therefore merely indicative of a potential relationship between NTMs and export quality, with more research being required.
Chapter 5: Export and investment: a stepwise process?
- Internationalisation of companies typically happens step by step. Through indirect and sequential exporting, some companies become continuous exporters, after which a number of them may be able to engage in foreign direct investment.
- The particular stage of the firm in the internationalisation process highly correlates with the firm’s productivity.
- Around 62 percent of new investments by independent SMEs were preceded by exports to that same location.
- Roughly 0.5 percent of new trade relations are preceded by a foreign direct investment in that location.
- In the presence of more regulatory heterogeneity, a growing number of companies serve a foreign market through investments rather than via exports. Operating behind the border through FDI overcomes the border problems of exporting.
- Trade agreements increase the ratio of exporters to investors in a certain country, while investment agreements stimulate the ratio of investors to exporters.
- The depth of a trade agreement is related to the ratio of exporters to investors via an inverted U-shape. Shallow trade agreements that focus solely on the abolition of trade tariffs raise the ratio significantly. Deep trade agreements that also focus on investment protection raise the ratio in favour of investors again.