Effect of the utilization of non-reciprocal trade preferences offered by the QUAD countries on beneficiary countries' economic complexity

Abstract

This article aims to contribute to the nascent literature on the effect of non-reciprocal trade preferences (NRTPs) on economic complexity in beneficiary countries. It investigates the effect of NRTPs (Generalized Systems of Preferences - GSP - and other trade preferences) offered by the QUAD countries (Canada, the European Union, Japan, and the United States) on the beneficiary countries' levels of economic complexity. The analysis has used a panel dataset of 110 beneficiary countries over the period of 2002-2018, and the two-step system Generalized Method of Moments estimator. Results show that the utilization of NRTPs (either GSP programs or other trade preferences) influences positively economic complexity when beneficiary-countries' shares of exports under the relevant NRTP in total merchandise exports is very high. In addition, GSP programs and other trade preferences jointly promote economic complexity, if the utilization of either NRTP reaches high levels. The utilization of NRTPs also enhances economic complexity in countries that receive high shares of foreign direct investment flows in GDP. Finally, development aid flows are strongly complementary with the utilization of NRTPs in fostering economic complexity, especially when they reach very high amounts. One message conveyed by this analysis is that preference-granting countries (including QUAD countries) should offer both generous NRTPs and high amounts of development aid if NRTPs were to be effective in expanding the manufacturing base in the beneficiary countries, and in particular, in improving their economic complexity.