Limitations of the Study
There are several challenges related to the Harmonized Commodity Coding and Description (HS) system makes it tricky to:
• Isolate 'climate-friendly' products from others for easier trade liberalization. 'Dual-use' categories include environmental and non-environmental products. E.g. Efficient supercritical and ultra-supercritical boilers (and turbines) cannot be easily tracked because there is no suitable HS code differentiation for boilers (and turbines) by temperature and pressure.
• Deal with intrinsically 'dual-use' products such as pipes and valves.
• it is difficult to distinguish between traditional coal and "clean" coal technologies at the HS 6-digit level, a fair amount of the trade analyzed here may in fact still be traditional "dirty" coal technologies. Further examination at a more disaggregated HS level and of regional industry trade trends is needed for a more accurate evaluation.
It will be interesting to find the intensity of carbon emissions of the specialized products of Ecuador at both 2 digits and at 6 digit level of disaggregation. They are probably lower than the EU27, US, China, India and Brazil. Also, emission intensity indices of exports and imports can also be worked out. The values of these indices range from 0 to infinite but the important benchmark is a value equal to 1. For example, if the emission intensity index of imports is larger than 1, emissions embodied in goods produced overseas and transported to a destination are larger than the emissions that would have been caused by local production in that destination of the same amount of goods. In other words, from a climate change perspective, it would have been less damaging to produce these goods locally than to import them. In the opposite case, when the index is less than 1, the environment is less damaged by trade than when no trade takes place. The index value of 1 indicates that emissions associated with imports of goods are the same as those associated with local production replacing trade.
Summary and Policy Conclusions
According to the International Panel on Climate Change (IPCC) there is compelling evidence that GHG emissions cause climate change and that most GHG emissions are due to anthropogenic factors. The changes in climate foreseen towards the end of this century involve a gradual warming of the planet, with a temperature increase ranging from 1.1°C to 6.4°C above pre-industrial levels during the twenty-first century. Therefore, there appears to be a certain urgency to initiate actions to curb global GHG emissions and drastically reduce the unsustainable use of so-called carbon sinks, such as the world's forests and oceans, in order to prevent global temperatures from rising by more than 2°C, which is the rate at which climate change can still be managed. This study details various policies including trade and investment policies in Climate Smart Goods(CSGs) to limit climate change.
Climate Smart Goods are defined as broadly as products, components and technologies that tend to have less adverse impact on climate change (greenhouse gas emissions10) and environment in general. The study considers a 64 goods list of CSG floated by the UNESCAP- APTIR (2011), basically constituting low carbon emanating industries. Access to CSG is very important for implementation of various strategies of technological transformation deemed necessary to mitigate climate change. For example, CSGs consists of articles of iron and steel and aluminum, machinery and mechanical appliances, electrical machinery equipment, ships, boats and floating structures, glass and glass ware articles, among others. One of the subcategories of CSG clean coal technology aims to improve energy efficiency and reduce environmental impacts, including technologies of coal extraction, coal preparation and coal utilization. Wind technology another sub category of CGS focuses on wind energy generation and is composed of three integral components: the gear box, coupling and wind turbine. Wind power and turbine production has experienced stupendous growth over recent years and is now one of the most widespread forms of climate smart technologies. As the region will have to come to terms with the expected effects of climate change, there is a collective need to increase trade and investment in these goods, which would benefit companies in different parts of the supply chain, and, hence all countries, no matter what their stage of development.
The interest in the subject of Trade in Climate Smart Goods was fuelled by Ecuador's positive trade balance with the rest of the Andean Community and MERCOSUR region in 2010. This may be a reflection of Ecuador's maturity in dealing with environmental issues since the early 1980s. It may be also due to preferential trade policies followed upon by member nations of the ANDEAN region. Or, the above trend can be just a consequence of their fast export growth. One, however, would like to establish with more certainty the association of various policies that have been put in place to help mitigate climate change and trade pattern changes. The study looks closely at the trade indices, worked out for Ecuador's total trade, CSG trade and specialized products and uses gravity analysis which helps in finding the export potential for trade in CSG and other products. As Ecuador in the Latin American region probably continues to design policies more conducive to fostering climate smart development, their domestic capacity to meet the increased domestic demand for climate smart goods and services, and then foreign demand through exports, is likely to increase. Depending on the relative strengths of the incentives between those in the region and outside, trade flows and patterns of the region is being affected possibly by reorienting the Ecuadorian trade more towards the intra-regional focus and hence the positive trade balance with the ANDEAN and MERCOSUR region. Whatever may be the exact reason, one thing which surely comes out of the study (SMART analysis) is that for Ecuador it will be better to liberalize CSG trade with the leading suppliers of the CSG goods, the China, Japan and the US.
In particular, Ecuador had a comparative advantage in the production of two Industry codes out of 64 goods list (based on RCA analysis). These industries are
Solar driven stoves, ranges, grates, cookers (including those with subsidiary boilers for central heating), barbecues, braziers, gas-rings, plate warmers and similar non-electric domestic appliances, and parts thereof, of iron or steel.
Stoves, ranges, grates, cookers (including those with subsidiary boilers for central heating), barbecues, braziers, gas-rings, plate warmers and similar non-electric domestic appliances, and parts thereof, of iron or steel.
These industries have potential for greater trade and inward foreign direct investment. The study identifies the markets for the same using the Export Specialization Index. These are Chile, Columbia and Peru. Gravity analysis helps us to work out the export potential of Ecuador for 64 goods list of CSG. The export potential of Ecuador to four Latin American -Bolivia, Chile, Columbia and Peru is 34.79 million US$. However, the greater potential lies with the other countries marketing the CSG goods in Ecuador. These countries include the most efficient suppliers of CSG goods, the China, Japan and the US.SMART results confirm that Ecuador will gain more( in terms of total trade effect, welfare and consumer surplus effects) by liberalizing its imports of Climate Smart Goods with the China, Japan and the US instead of MERCOSUR or EU27 countries.
Trade in CSG will help Ecuador to promote alternative industries in the face of Global Economic Downturn. Also, it will help country to look for safe, alternative and reliable energy source rather than believing in trade of crude and Petroleum Oil only or investing a great deal in nuclear energy. Nuclear energy was in the brink of being affected in Japan due to recent Earthquake in Japan. Ecuador can direct its social spending in promoting small industries which can provide CSG goods at low cost. Countries can gain in terms of their comparative advantage and establish new industries. Positions keep changing in terms of the advantage of producing goods and services. Based on our analysis and review of studies done on CSG (APTIR, 2011, ICSTD, WTO and World Bank) one may conclude that various national and international policies can be followed by Ecuador and its trading partners to promote trade of CSG goods. Gravity analysis (third objective) reinforces the below points
• Keep focusing on increasing growth rates of GDP of all. Larger size promotes trade of Climate Smart Goods.
• Lower inter country dispersion of income for promoting trade of CSG among countries
• Lower trade costs between countries by having open regionalism policies, reduce transportation costs within and between countries, lower border disputes to have open trade between neighboring countries.
• Increase prices for exporters and lower prices of CSG goods in importers country by focusing on having sound competition policies, effective legislations for sound environmental policy( say increasing paper less trade and single window clearance as a starting point, carbon tax and regional emission trading system), appropriate regulatory framework, financial infrastructure and investment climate for production of CSGs, employ feed in tariffs for promoting CSGs, have appropriate standards and labels, mechanism of technology transfer, mechanisms to promote CSG trade among countries by coordination and cooperation and promoting R&D activities for CSG products among countries
• Lower tariffs by small countries in the American Peninsula for imports of CSG from Ecuador. In particular there is potential to reduce tariffs(Applied duties) by Djibouti(26%), Belize(15%), Costa Rica(10%), Guatemala(11.97%), Honduras(9.87%), Nicaragua(12.49%), Cuba(8.99%) and El Salvador(12%)
Countries including Ecuador need to design sustainable and climate smart growth that entails sharply reduced GHG emissions to a level of 450 ppm( or may be lower) and that limits the global temperature rise to not more than 2 degrees Celsius by the end of the century. The stud lists such policies and is not confined to trade policies alone. Trade policies related to CSG though are the main focus of this study. The entire set of policies which can reduce GHG emissions and limit climate change can be structured into regulatory measures( including regulations, standards and labeling), economic incentives( including taxes, tradable permits and subsidies conforming to WTO laws and provisions), trade and investment policies and financial, energy and enterprise development policies, among others.
Regional climate-smart value chains could provide new opportunities for many less developed economies in the region to become parts and components suppliers to the leading CSG exporters in Latin American Region and other regions. At the same time, the capacity of domestic SMEs in the area of CSGs should be enhanced so that they can evolve into suppliers of low-carbon products and become effectively integrated with low-carbon value chains.
The study is also able to identify some specialized industries and identify markets for the two digit and 6 digit industries for Ecuador using RCA and Export Specialization index. There are 20 such products at the two digit level and 238 products/ industrial codes at 6 digit level disaggregation in 2010 were in Ecuador has a comparative advantage in production. These industrial sectors are potential for inviting FDI into Ecuador.
Export specialization and HH indices indicate the more concentrated nature of Ecuadorian production and trade structure. Ecuador needs to rethink its trade policy by diversifying its trade into manufactured products and more diversified production structure. Information Technology services, Tourism, Manufacturing of Automobiles, Education and Training Services, Bio combustibles, Housing materials, Pharmaceutical industries, Health Products and Hospital services, Hardware production, Industrial and Textile Goods and Chemicals are some areas where Ecuador can think of developing niche and cater to European markets. Production and Trade in Climate Smart Goods is another area of focus. In particular, study identifies the following industries for further diversifying industrial structure of Ecuador for its gain in future. These are Industrial Codes- 61(Articles of apparel and clothing accessories, knitted or crocheted), 62(Articles of apparel and clothing accessories, not knitted or crocheted),42( Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal), 90(Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof), 84(Electronic appliances), 85(Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles),87 (Vehicles other than railway or tramway rolling stock, and parts and accessories thereof), 83 (Miscellaneous articles of base metal), 73 (Articles of iron or Steel), 69 (Ceramic products), 30 (Pharmaceutical products),29(Organic chemicals), Climate Smart Goods- 840510(Clean Coal Technologies), 850720,853710 and 854140(Solar Photovoltaic systems), 848340 and 848360( Wind Power Technologies), 853931(Energy Efficient Lighting), among others. In services sector, Tourism, IT and ITES, Hospital services, Education and Training Services( training of English), Cultural Services, Knowledge Processing Outsourcing and Financial Analytics, Infrastructure services have lot of potential of bring the necessary foreign exchange and stability into the system .Ecuador need to diversify into the following industries and services for higher and more stable export earnings, job creation and learning effects, and the development of new skills and infrastructure that would facilitate the development of even newer export products.
Gravity Analysis has been used in this study the basis of trade of CSG goods of Ecuador and Trade of 20 specialized products in 2010. Further, the variant of the Baier and Bergstrand (2001) gravity model has been used to work out the export potential of CSG and specialized products to and from Ecuador. The theoretical justification of extending the most simple Gravity model, as used in this study, is done using extensions of work done by Helpman and Krugman (1985). Appendix Table X gives the note linking less dispersion of income with volume of trade.
SMART analysis on trade liberalization shows that it is beneficial to trade in 20(2digit level) and 238 products (at 6 digit level) with the MERCOSUR trading partners while for trade in CSG it is better to liberalize trade with the Japan, the US and the China, the main suppliers (exporters) of CSG products rather than EU 27 and MERCOSUR Countries in 2010.