A profile of trade protection in Egypt: an effective rate of protection approach adjusting for energy subsidies and non-tariff barriers

Abstract

This study examines effective rates of protection (ERPs) in Egypt due to tariffs, non-tariff barriers (NTBs), and energy subsidies, and compares them with those of a decade ago. Two sources of cost-share information at different levels of aggregation are used: data on specific industries (four-digit ISIC code, 20 in the private and 17 in the public sector), and data on the inter-industry intermediate input costs from the latest available input–output matrix (2006/2007) with 23 aggregated sectors. Trade liberalization since late-1990s appears to have reduced protection, although some industries remain relatively highly protected due to tariff escalation, NTBs, and energy subsidies. Energy subsidies favor energy intensive sectors, of particular note the electricity sector. Energy subsidies also offset the dis-protection that results from intermediate input tariffs. The cement sector is notable, energy subsidies almost exactly offsetting the negative impacts of tariffs and indirect taxes. The fertilizer sector has zero nominal tariffs (benefiting agriculture) and so has a negative ERP due simply to tariffs on inputs; nevertheless, the sector has a high positive ERP due to energy subsidies. ERPs in the private sector have declined notably, and nominal rates of protection have declined generally. ERP dispersion across industries also fell over the decade, but there remains an unexpectedly high dispersion relative to that suggested by applied tariffs only due to the unequal impact of subsidies. Estimated tariff equivalents of NTBs are also highly dispersed.

Keywords:

• Egypt
• effective rates of protection
• tariffs
• non-tariff barriers
• energy subsidies

Notes

1. See http://www.iea.org/subsidy/index.html.

2. Given the current ISIC version, in some cases the industries reported in Nathan and Al Isakandarani are further disaggregated into more specific industries in the information available from CAPMAS. See the Website http://www.msrintranet.capmas.gov.eg/pls/fdl/bkr2_e?lang=0&lname=ECS.

3. Some industries that were in the earlier 1999 analysis were not found in the latest CAPMAS list of public industries for 2007/2008: household appliances, carpets and rugs, containers and boxes, cutlery and hand tools, agricultural machinery, and pottery. CAPMAS refers to Egypt's Central Agency for Public Mobilization and Statistics. See Ghoneim (2005) for a thorough discussion of the private–public sector dichotomy in the Egyptian economy. Ghoneim notes in 2005, ‘The public sector still accounts for a large share of economic activity, about one third of economic output and employment.’

4. The matrix is available from the authors upon request. In his 2007 report, D. Lederman also uses an I-O matrix from 2005 with 21 sectors, but with more detail in some industries, such as agriculture and food, and less in others.

5. The IDB is compiled from WTO members' annual notifications of tariff and trade information at the level of tariff lines. The IDB maintains most favored nation (MFN) current bound duties and MFN current applied duties, and other information covering preferential duties, if members so report. For more detail, please see the WTO's Tariff Download Facility at http://tariffdata.wto.org/. Tariff lines where preferences and applied tariffs differ by more than 10% are fewer than 7% of all lines for products of any appreciable total import value, and so we make use the updated tariff schedule for 2009, without preference adjustments, considering that such an adjustment in the case of Egypt would be highly unlikely to alter the results.

6. See, for example, Corden (1971), Vousden (1990). The theory of effective protection has been well established in Johnson (1965).

7. Note that tobacco in Egypt has a specific duty applied per weight, rather than a tariff applied against unit value.

8. At this point, one should note that this present study estimates the hypothetical costs as shares of gross revenue from observed cost shares and observed tariffs, a methodological strategy that relies on the assumption that input substitution elasticities are small. (See Sampson [1974], for a critique of this assumption.) Alternatively, one could estimate the hypothetical cost shares from other sources; one strategy in the literature has been to use benchmark cost shares from other countries with similar technologies but much less protection (e.g., Sampson and Yeats, 1979).

9. Glomm and Jung (2012) have simulated a reduction in Egyptian energy subsidies, using a dynamic general equilibrium model. Their results show that the impact on consumer welfare is positive, but the impact on GDP growth depends on the government's use of the funds that would have otherwise gone to energy subsidies. If the freed-up funds are used in infrastructure investments, GDP can increase.

10. Lederman (2007) does not appear to apply energy subsidies per unit of use from a particular source, likely due to lack of appropriate detail in the input-cost-share data. As discussed further on, such source-specific subsidy data are now available from Abouleinein et al. (2009).

11. The sectors considered are based on ISIC codes (rev. 3), but the activities, as used in the Nathan study, are from the US SIC. For this present study correspondences we made between products (and inputs) and the HS six-digit tariff schedule as found in the WTO IDB for Egypt. Also for each industry, we adopted Al Iskandarani's estimates of the (industry specific) shares of total tradable input costs associated with specific inputs.

12. The level of disaggregation is important because the degree of tariff escalation in Egypt emerges clearly on observing how the formal tariff levels increase with the level of processing. The dispersion around the two-digit level averages is much higher than those around the average for a particular four-digit level grouping of products. In fact, Egyptian MFN tariffs tend to be uniform at any particular four-digit level group, and it is very difficult to encounter more than one-line tariffs at the six-digit level.

13. A brief report on NTBs, prepared by Dr. Khaled Hanafy, is available from the authors upon request. The report discusses the details of the NTB tariff equivalent estimation for selected industries for which we have more detailed cost-share estimates from the Nathan study from 1999. It is important to point out that although the price-wedge approach used here gives an estimate of the tariff equivalent of NTBs, it says nothing about the exact policies or policy instruments acting as NTBs, nor does it reflect their respective contributions.

14. The sector ‘textiles’ matches with ISIC #1711 (spinning, weaving, and finishing), the sector ‘fertilizers’ matches with ISIC #2412 (manufacture of fertilizers and pesticides), and the sector iron and steel matches with ISIC #2710 (manufacture of iron and steel basic industries).

15. Interestingly, using the 1998 tariffs, the unprotected value added of the industry would have been negative, and so industry only existed due to the tariff profile at the time. With the 2009 tariff profile, the industry still has a cost of tradable inputs relative to output value that represents 92% at border prices; that is, at border prices there would be apparently very little value added. At current prices, after interventions, CAPMAS reports for 2007 that ‘paper pulps, paperboard carton industry’ has a value added of about 22% of gross value of output. The industry appears to be an assembly of tradable inputs. In fact, raw material represents about 60% of the product's value.

16. Note that by 2009, there were five industries with no public sector involvement that did have involvement in 1998: #1722, 2102, 2893, 2921, and 2930.

17. The number of HS categories used is large. A detailed list of HS lines and tariff levels that correspond to each of the 23 I-O matrix sectors is available from the authors.

18. The reader should note that due to the extremely high tariffs on alcoholic beverages, the sector-level tariff of 25.8% on ‘food and tobacco’ excludes that alcohol from calculating the average. In comparing the results in this study to those of Lederman (2007), an additional source of differences in the ERPs is due to the inclusion of alcoholic beverages in the Lederman results, which raises average tariffs in his beverages sector to over 1600%.

19. Egypt does have uniformity in the pattern of escalation across sectors (2–10–20–30%).