Page 242 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH
P. 242

International Trade and Finance



                  Notes          "destination" system. For trade within the CIS, exports are taxed but imports are not, the "origin
                                 system." Participation in the customs union will require a value added tax that is harmonized with
                                 the system applicable in the customs union, i.e., the current mixed system. Berglas (1981) has shown
                                 that under certain assumptions (including  flexible exchange rates) the origin or destination systems
                                 are equivalent and do not tax the trade regime if designed properly. Since the VAT rates of most CIS
                                 are approximately equalized, the allocation of real resources and trade flows among the other CIS
                                 countries is not seriously affected, but it is important to harmonize these taxes within a mixed system
                                 to avoid arbitrage and distortions.
                                 What is more likely to be a problem with a mixed VAT system is the allocation of tax revenues. Even
                                 if the VAT rates are harmonized, countries with a trade deficit within the customs union and a trade
                                 surplus outside the customs union will experience an adverse transfer of VAT tax revenues toward
                                 the partners in the customs union with the opposite trade pattern. To illustrate, suppose the trade of
                                 Azerbaijan is balanced overall, but it imports exclusively from, say Russia, and exports exclusively
                                 outside the customs union, and that Russia has the opposite trade balance.
                                 Since the destination system applies on trade outside of the CIS, and the origin principle applies on
                                 trade within the CIS, Azerbaijan would collect no VAT tax revenues (neither on its imports nor its
                                 exports), and Russia would collect all the VAT revenue on trade  (Russia collects VAT on both its
                                 exports to Azerbaijan and its imports from the rest of the world). Thus, even though the mixed VAT
                                 system would not change relative prices and is therefore non-distortionary because there is no impact
                                 on the allocation of resources, in this example it would represent a transfer of VAT revenues from
                                 Azerbaijan to Russia.
                                 Dynamic Effects
                                 In general, there are two basic ways in which the rate of output growth can increase: First through a
                                 faster growth of factor inputs and second through increases in the growth of total factor productivity.
                                 Assuming no changes in population growth and in labor force participation rates, the growth of
                                 factor inputs essentially boils down to the rate of investment in human and physical capital. Total
                                 factor productivity on the other hand is thought to be dependent in the medium and long term on
                                 improvements in technology and knowhow.
                                 More generally, access to a diverse mix of products including modern technology appears to be very
                                 important for the growth process. New and diverse technologies are constantly appearing and these
                                 new technologies allow an increase in the productivity of both capital and labor.
                                 The question that needs to be addressed then is how a customs union among the CIS countries will
                                 affect output growth through its impact on access to technology that enhances productivity and
                                 through its effects on the rate of investment in human and physical capital.
                                 There is some evidence that developing countries total factor productivity is positively related to the
                                 access of technology and knowledge embodied in imports from developed countries. In the case of
                                 CIS and other transition economies, access to diverse and modern intermediate products from world
                                 markets appears especially crucial as these economies attempt to transform themselves from an
                                 industrial structure that was inherited from the era of the former Soviet Union, i.e., that was outdated
                                 and frequently not based on comparative advantage. It is very important that these countries move
                                 away from reliance on technologies that are available only in the countries that were part of the
                                 former Soviet Union, since the most dynamic and modern technologies are found elsewhere. Yet,
                                 tariff protection for products that are produced in the customs union will discourage the introduction
                                 of new products and technologies from outside the customs union and free trade area, technologies
                                 that would boost the growth and development of the CIS members. Thus, on the question of enhancing
                                 growth through improvements in total factor productivity the effect of the customs union (and for
                                 that matter of the exisitng free trade area) on all its members is likely to be very negative.
                                 There are several ways through which a customs union could affect the rate of investment  in member
                                 countries: (a) through a change in tariffs and hence in the cost of imported   capital equipment that
                                 changes the rate of return on investment and the rate of capital accumulation; (b) through affecting


        236                              LOVELY PROFESSIONAL UNIVERSITY
   237   238   239   240   241   242   243   244   245   246   247