18th December 2021, Skopje – Global supply chains and the need to facilitate trade, which will contribute to boosted competitiveness, trade and investments, are one of the key topics the economists debate recently. Such topics are attached great importance with the distortion of these processes at the height of the pandemic. Large actual integration of markets and supply chains, as well as their interdependence, has been recognized, implying the need to intensify efforts to facilitate these processes.
Our country, considering the very setup of the economic development model and the trade dependence, as well as that it is small and open economy, is particularly interested in open and liberalized trade policies. Openness towards large number of markets and countries, coupled with adequate valorization of the comparative advantages of our country, will lead to higher level of FDIs, improved trade balance, higher export, job creation, increased productivity and better standard of living of the citizens.
Driven by these postulates, we adopted the draft Law on Modifications and Amendments to the Customs Tariff Law at the Government session this week. This measure has been designed taking into account both the macroeconomic setting and the timing of our and the global economy. Under the Law, customs rates for total of 258 products, imported in our country, are permanently reduced or abolished. When selecting the proposed tariff numbers for which the customs rates would be reduced, criteria maximizing the economic benefit were applied, at the same time safeguarding the domestic production. Fiscal implication in the amount of Denar 810 million or EUR 13 million of the total collected EUR 17.5 million on the basis of these tariffs implies 74% reduction of the so-far fiscal burden on the basis of these tariffs. This measure accounts for 12% of the total collected import duties in 2020, amounting to around EUR 110 million. It indicates the size and the scope of this step in support of reducing the customs burden on our companies.
I believe such measures, coupled with the already existing multilateral and bilateral free trade agreements, such as the Stabilization and Association Agreement with the EU, EFTA, CEFTA and bilateral agreements with countries such as Turkey and Ukraine, allowing access to a market with more than 650 million consumers, as well as the guarantee and the credit schemes, such as the export supporting credit, customs guarantees, and the Guarantee Fund and the Development Fund of the Development Bank, envisaged in the Growth Acceleration Plan, will contribute to additionally increasing the attractiveness of our country to the end of attracting foreign investors and strengthened export capacities of foreign and domestic companies already operating in the country.
International Trade Plays an Important Role in Economic Growth
Substantial part of the empirical research in the field of international trade is aimed at exploiting the net benefit of free trade. Let me just mention that the “new” (although not that new from today’s perspective) growth theories, through the works of Grossman and Helpman (1991, 1996) and Aghion and Howitt (1992), offer theoretical support to the expectations that trade openness helps economic growth in the long run through various channels. Trade liberalization as well provides for stronger and more diversified network of suppliers of intermediary goods (semi-finished products, materials and raw materials), knowledge diffusion and facilitated transfer of technologies and taking advantage of the economies of scale. Productivity and competitiveness of domestic companies are strengthened through the respective channels. It is especially emphasized by the endogenous models of economic growth, according to which the higher level of international trade integration has favourable effects on economic growth. Latest macroeconomic research presents evidence that economies with larger trade openness also register higher economic growth rates (for instance, Eichengreen, 2018), an argument against protectionism. “Globalizers” or economies with higher level of international trade integration have managed to reduce the poverty rate faster with properly and timely set social safety network to compensate the losers from the globalization. The conclusion is that the relation between trade openness and economic growth in the long run is determined by a lot of factors, above all the ability of local companies and industries to adjust and develop capacities to imitate or absorb knowledge, transferred with the international trade.
Indeed, neither proponents of trade protectionism are absent. Part of the empirical research argues that it is necessary to protect the new industries and not all industries are ready to reap the benefits of the international transfer of technologies and know-how (for instance, Rodrick (1999), Yanikkaya (2003) and Rodriguez (2006)). Openness to trade may impact growth negatively for countries which are specialized in low quality products. Therefore, these authors recommend cautious strategic trade policy orientation.
Below are presented arguments for further, carefully designed, trade liberalization by harmonizing the customs rates with the European Union rates. Thereby, the fiscal effect from reducing the customs rates has not been assessed only in the short term, but also within a long-run dynamics, reflecting the boosted productivity and competitiveness of the domestic production capacities. Moreover, markedly changed structure of the Macedonian economy in the past decade has been taken into account, as well as the broad array of export products, created not only by the foreign companies, but also by the successfully restructured domestic companies. Inter-industry trade (cross-border trade among various sectors, which is usually one-way trade) and intra-industry trade (vertical and horizontal component, in a given industry) have been analyzed, paying special attention to the import dependency of the domestic industries.
Small and Open Economy and EU the Major Trade Partner
During the recent period, our country has made a significant progress in improving the performance in terms of trade. Last year, despite the great impact of the major distortion caused by the pandemic, total import amounted to EUR 5.8 billion, being an increase by 41% compared to 2015, and, if compared to the year before the pandemic (2019), the increase accounted for 57% compared to 2015. Thereby, EU countries are the largest market for our exporters, purchasing around 80% of the total export in the first ten months in 2021.
In addition to the increased export and the improved trade balance, clear trend of qualitative change of the export structure is noticeable. For instance, export of machinery and transport equipment in 2020 accounted for 33% in the value of total export compared to 25% in 2015, i.e. 6% in 2010. Accordingly, resulting increase in import is compensated with added value created, which is recognizable in the continuous increased coverage of import with export. For comparison purposes, coverage of import with export in 2015 accounted for 70%, while in 2020, despite the pandemic, it accounted for 76.1%.
Substantial portion of these products intended to be exported are used as raw materials and intermediary goods processed in our country. Hence, import policies, trade agreements and customs duties are crucial and of particular importance for our country. Such importance can be seen in the very fact of share of trade to GDP in our country, amounting to around 130% in 2020 according to the data of the World Bank. Such share is higher in relation to all other countries in the region, in Serbia amounting to 105%, in Bulgaria to 110%, in Croatia to 91%, in Bosnia and Herzegovina to 83% and in Albania to 61%. It implies openness of our economy and the need for a stronger engagement in support of creating new possibilities for the export companies.
Supporting the Export – an Important Component of the Economic Policies
One way to contribute to these objectives is the multilateral and bilateral trade agreements. Republic of North Macedonia has concluded free trade agreements, such as the Stabilization and Association Agreement with the EU, EFTA, CEFTA, bilateral agreements with Turkey and Ukraine, and it is a member of the World Trade Organization since 2003. These agreements provide for access to a market with more than 650 million consumers. The sole fact that more than 90% of the country’s trade is made with these countries in particular speaks of the significance of these agreements in terms of promoting the trade. It can be concluded that opening the channels of cooperation and trade liberalization with certain regions and countries alone provide for stronger economic cooperation with them. Hence, I believe it is important to put efforts in enlarging the markets in future, especially to the end of enriching the offer for the foreign direct investors, mainly those export-oriented. This, coupled with the already established strategies and plans for accelerated growth and mobilizing domestic and foreign capital to improve the physical infrastructure, green transition, digitalization and human capital, will help in achieving the set goals.
Another very important aspect, for which we are undertaking specific steps at this moment, is reducing the customs duties and easing the procedures for import of semi-finished goods, intermediary goods and raw material and import of higher added-value products. In fact, last week, the Government adopted the draft Law on Modifications and Amendments to the Customs Tariff Law, reducing or abolishing customs duties for 258 products. In an inclusive process, consulting all interested parties, in particular the Chambers as the most interested stakeholder, Ministry of Finance, in cooperation with the Ministry of Economy, Ministry of Agriculture, Forestry and Water Economy, Deputy Prime Minister in charge of Economic Affairs and the Customs Administration, has comprised a list of products for which the customs duties are abolished or reduced. This Law is a step further towards harmonizing the customs duties with the ones applied in the EU, of which we aspire to become a member state.
Most of the reduced customs rates pertain to industrial goods, such as raw materials and intermediary goods, used in technologically advanced production, as well as in automotive industry, metal processing industry, metallurgy, textile industry and leather industry, which faced serious difficulties in 2020 and the beginning of 2021. Moreover, in times of energy crisis and enormous energy price pressure, this draft Law proposes abolishment of the customs rate on natural gas. By abolishing the customs rate on natural gas, domestic companies and the industry are provided substantial support by reducing the production costs. At the same time, support is provided in terms of greater price stability of this energy source, thus encouraging use of less polluting energy sources. Total support provided under this draft Law to the business sector amounts to Denar 810 million, i.e. EUR 13 million annually.
Harmonizing the customs rates for part of the customs tariff numbers is expected to have a highly positive effect on the business climate in which our business sector operates. This is of exceptional importance in times when both the global economy and our economy are coping with the pandemic consequences. Harmonizing the customs rates, coupled with the implementation of the revised PEM Convention, which entered into force on 2nd November 2021, will contribute to gradual adjustment to the conditions existing on the EU market. Such gradual adjustment is aimed at preparing the Macedonian companies to highly competitive European market.
In addition, encouraging and supporting export-oriented companies in an economy like ours is crucial for further sustainable development. Intensified export activity and boosted competitiveness of these companies in the global economy will contribute to expansion of the existing capacities, enhanced productivity, increased employment and higher wages, as well as attracting additional accompanying capacities to support these industries and companies. It is important to mention that added value these companies bring in the economic operations of the country through know-how is well known, which as a positive side effect also reflects in the operations of the other economic operators.
Global Value Chains and Smart Specialization
International trade amid globalization and technological development, as Krugman explains in his theory for which he was awarded the Nobel Prize, is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another. This creates so called global value chains, implying specialization of certain countries in specific stages of the global production process depending on the area in which they are more competitive. Such theory has already become basis of the official development policies, i.e. smart specialization strategies of the OECD countries, EU and other international organizations. It is the concept included in the Smart Specialization Strategy for our economy, all to the end of identifying the areas with available resources and potential, through investments in research and innovations, so as to become competitive. This will provide for greater inclusion of our companies in the global value chains, as well as attracting investments in areas in which we will be more competitive on the global market.
Globalization, Challenges and Prospects
Concept of neoliberalizam for both foreign trade and globalization indicates the positive impact on economic growth, economic cooperation, enhanced competition, reduced prices, better quality of goods, at the same time contributing to scaling up investments, employment growth, as well as more investments in research and development, innovations leading to higher technological development and new prospects for growth and development. Policies of IFIs, above all the International Monetary Fund and the World Bank, are based on these neoclassical assumptions. But, debate about the large challenges arising from this process, such as different dynamics of development and distribution of income, accordingly the rising social and geographic inequality, becomes ever more prevalent. I refer above all to the “discontent” of Stiglitz from the globalization, that it does not deliver the growth as described by the neoliberal economists, in particular due to the growing gap between the developed and the developing countries, as well as among different social layers in the society. He calls upon the need to compensate the losers from the globalization process through social measures and support to the developing countries, indicating the need to reform the international organizations to the end of more efficient addressing of the global issues, which is a joint challenge, such as the climate changes. Hence, I believe we can be optimistic about the positive global trends, considering the fact that climate changes and green development are becoming ever more significant topics in the agenda of the international organizations and at the forums. We have joined these trends timely and have become part of these initiatives with the adopted strategies and measures, including the Green Deal and the commitments to achieving the UN Sustainable Development Goals, digital transformation, support to innovations and human capital development.
Fatmir Besimi, Minister of Finance
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