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Trade policy substitution: theory and evidence
Abstract
With the help of a political economy model, we show that the extent of ‘trade policy substitution’—namely, substitution of tariffs with non-tariff measures (NTMs)—depends on the cost differential between domestic and foreign firms in complying with product standards. The model suggests the prevalence of trade policy substitution in developed economies, where the costs of compliance are relatively low. We test and validate this prediction using a database on NTMs that identifies actual trade restrictions. We further examine the possible protectionist use of trade policy substitution exploiting information on the end of the Multifibre Arrangement (MFA) and on WTO notifications.
... However, the WB open data 2 shows that the World tariff rate based on the Most Favoured Nation (MFN) declined from 9.7% in 1994 to 4.2% in 2017 and a more significant drop in Sub-Saharan Africa from 45.3% in 1995 to 7.8% in 2017. Despite reductions in average tariff rates by low-and middle-income countries, nontariff measures (NTMs) have become more prevalent, serving purposes such as protection purposes by the government, and public policy measures to secure product safety (Carrère & De Melo, 2011;Beverelli et al., 2019). ...
... (3) The IMF provides financial support to developing countries for trade reform adjustments through the Trade Integration Mechanism (TIM). This intervention in the trade reform of developing countries is 4 Where is growth rate in trade as % of GDP, is percentage of share of aid for trade (AfT) 5 See, https://www.imf.org/ more effective for smaller trading economies (Hoekman & Shingal, 2021). ...
... more effective for smaller trading economies (Hoekman & Shingal, 2021). (4) Another driver that we identify in the literature is economic activity. IMF conditionality drives recipient countries to liberalise trade policies by substituting policies, while developing countries meet macroeconomic targets by reducing trade barriers instead of implementing other reforms (Busse & Vogel, 2023). ...
Recently, world tariff rates based on the Most Favoured Nation have declined with more significant drops observed in Sub-Saharan Africa (SSA) particularly on agricultural products. However, the IMF conditions tied to aid for aid-receiving countries during the economic crisis are criticised for biased decision-making and their ineffectiveness in trade reform policies in relation to the Sustainable Development Goals. The purpose of this study is to investigate how IMF-tariff conditions tied to aid for trade impact agricultural product trade in SSA through Structural Adjustment Programmes (SAPs). Precisely, it seeks to determine whether conditions linked to Aid for Trade (AfT) foster agricultural trade growth in SSA while reducing tariffs. I hypothesised that IMF tariff conditionality impacts SSA agricultural product trade through intricate channels encompassing trade systems, pricing and marketing policies, and tax reforms. The study uses panel data from 2011-2023, covering 26 SSA countries, at the disaggregated HS-6-digit product level, using 832 agricultural products. The panel data fixed effect model estimation results indicate that IMF conditionality and ODA-AfT had a negative association with agricultural product trade growth. This suggests that ODA AfT is potentially counterproductive in promoting agricultural trade growth of SSA countries. The study reveals that IMF tariff conditionality, IMF SAPs pricing and marketing policies, and the interactions between SAPs trade system reforms and ODA-AfT are negatively associated with tariff binding overhang. Conversely, there is a positive relationship between binding overhang and SAPs in tax and trade system reforms.
... Concurrently, we have seen a surge in standard-like non-tariff measures (NTMs). While it may seem that countries are substituting NTMs for tariff protection, such a simple argument ignores the potential consumer or societal benefits that NTMs can entail, such as reducing information asymmetry, mitigating consumption risks and enhancing sustainability (Orefice, 2017;Beverelli et al., 2019). However, NTMs can also be protectionist, or their associated costs may keep non-compliant countries out of global value chains. ...
... Furthermore, policy-makers may have little incentive to notify their own SPS measures but all kinds of incentives to notify the unjustified barriers of their partners (Grant and Arita, 2017). This nature of STCs makes them de facto restrictive and thus appropriate to study the standards-trade effect if the focus, as in our case, is on the standards-as-barriers angle (see also Fontagné et al., 2015;Grant and Arita, 2017;Orefice, 2017;Beverelli et al., 2019;Curzi et al., 2020). ...
... It seems clear that the rise in SPS measures coincides with a fall in tariffs though whether this relationship is causal remains an empirical question. The evidence thus far confirms both substitutionary and complementary effects (Orefice, 2017;Beverelli et al., 2019;Niu et al., 2020). To account for potential trade policy substitution, we control for applied tariffs and bilateral trade agreements in our empirical analyses. ...
This article uses a theory‐based translog gravity model to investigate the heterogeneous effects of food standards on aggregate agricultural trade. We revisit the ‘standards‐as‐barriers‐to‐trade’ debate with a distinctive twist. In contrast to existing works, we show that standards reduce trade but even more so for countries that trade smaller volumes. Our identification strategy exploits the within‐country variation in specific trade concerns. We confirm that stricter importer standards are indeed trade‐restrictive. However, the estimated trade cost elasticity varies depending on how intensively two countries trade. Specifically, it decreases in magnitude with an increasing import share of the exporter in the importing country's total imports. The reason is simple but intuitive; bigger trading partners find it more profitable to invest in meeting the costs of importer‐specific standards. This work is novel in showing that the standards–trade debate misses out on an important heterogeneity driven by existing import shares. Liberalising non‐tariff measures will favour smaller trading partners more than well‐established ones.
... This period also coincided with a shift from tariff-based to non-tariff measures, which include quotas, subsidies, and technical regulations. These measures are increasingly seen as alternatives to tariff reduction policies and have contributed to a more fragmented global trade structure [4,5] ( Figure 1). Non-tariff measures, especially technical barriers to trade (TBT), have become predominant, reflecting a complex form of trade protectionism that can obscure their impact on trade and the environment [8,9]. ...
... The China Industrial Enterprises Database provides information on firms' total assets. Tariffs may be substitutes for non-tariff barriers [4,5,146,147], hence tariffs are related to technical barriers to trade and also affect imports. Therefore, we control tariffs to exclude the impact of tariffs. ...
This study examines the impact of technical barriers to trade (TBT) on air pollution levels within China, utilizing a robust dataset from the Enterprise-Level Pollution Emission Database and the Customs database, covering the period from 2002 to 2013. A two-way fixed effects econometric model is employed to rigorously assess the relationship between TBT and air pollutant emission intensities in Chinese industrial firms. Our findings reveal a definitive correlation between increased TBT and elevated emission levels of key pollutants. Specifically, each 1% increase in TBT correlates with rises in emission intensities: 0.025% for sulfur dioxide (SO2), 0.024% for soot, 0.076% for industrial dust, and 0.012% for nitrogen oxides (NOx). The analysis highlights that restrictions on imported intermediates, as opposed to final goods, are primarily responsible for these increased emissions. This research underlines the critical environmental implications of trade policies and advocates for a balanced approach to promoting environmental health through the strategic importation of eco-friendly products and technologies.
... We add an interaction between the TBT variable and a variable equal to one for intra-national trade observations. Besides giving results on the discrimination occurring in each sector, 5 In their study, Beverelli et al. (2019) show that 88.7% of STCs (among 291 STCs with information on the initiation date and on the hs4 products linked to the TBT) were introduced the year of initiation of the corresponding TBT or the year before. In our own calculation with the updated STC database, it drops to 72.7% out of 578 STCs with information on the initiation date and on the hs4 products. ...
... In our own calculation with the updated STC database, it drops to 72.7% out of 578 STCs with information on the initiation date and on the hs4 products. While it reveals a majority of new STCs, as it is called by Beverelli et al. (2019), it does not consider the in-force date, neither does it dig into the case of "old" STCs (the STCs raised at least two years before or after the in-force or initiation dates). 6 The goods bought and sold in the same country. ...
Specific Trade Concerns (STCs) on Technical Barriers to Trade (TBTs) are expected to be a signal for restrictiveness, increasing trade costs significantly more than TBTs without STCs. Using STCs relies on the assumption that the raised dates at the WTO effectively proxy the trade shock. Our paper examines two potential endogeneity issues when using raised dates. First, a STC can occur a long time before or after the TBT is initiated or in-force. Second, a TBT reducing trade increases the willingness to complain at the WTO and complaints might impact trade in return. To investigate endogeneity, we create a 1:1 match of STCs with respective TBTs using an updated STC database which includes notification and enforcement dates. It enables us to control the timing between a TBT and its respective STC. While there is no significant bias taking all sectors into account, we find a non-negligible bias for the broad agriculture sector and for some specific sectors inside the manufacturing, mining and energy, and services broad sectors. The timing between TBT dates also affect our broad sectors results.
... Starting at relatively high levels due to various import protection policies, low-and middleincome countries reduced average tariff rates significantly from more than 30 per cent to 9.2 per cent in the same period. 2 Whereas tariff rates have come down, non-tariff measures (NTMs) have become more widespread, a dynamic known as trade policy substitution (Carrère and De Melo, 2011;Beverelli et al., 2019). NTMs do not only serve as a public policy measure to secure product safety among other socially desirable outcomes, but governments also use them for protectionist purposes (Aisbett and Pearson, 2012;Gründler and Hillman, 2021). ...
... While solutions for this problem have been proposed (Cruz-Gonzalez et al., 2017), computation is quite challenging for this level of disaggregated data. The use of logistic models would reduce the number of fixed effects that could be included (see, for example, Beverelli et al., 2019). Secondly, the employed instrumentation that addresses possible endogeneity is not straightforward with binary models and the calculation of marginal effects with fixed effects often depends on variable scaling (Wooldridge, 2010). ...
... While solutions for this problem have been proposed (Cruz-Gonzalez et al., 2017), computation is quite challenging for this level of disaggregated data. The use of logistic models would reduce the number of fixed effects that could be included (see, for example, Beverelli et al., 2019). Secondly, the employed instrumentation that addresses possible endogeneity is not straightforward with binary models, and the calculation of marginal effects with fixed effects often depends on variable scaling (Wooldridge, 2010). ...
Substantial tariff reductions and increased usage of non‐tariff measures (NTMs) have been key dynamics of global trade policy in recent decades. We use highly disaggregated data on applied most favored nation tariffs, NTMs, and trade to investigate how International Monetary Fund (IMF) conditionality as a form of external pressure to reduce tariffs contributed to this dynamic in developing countries. Our results show that structural adjustment programs (SAPs) effectively lowered tariffs without increasing the usage of NTMs. A typical three‐year program containing tariff conditionality decreased tariff rates in the range of 2.0 to 3.8 percentage points in total. Furthermore, IMF programs reduced NTM initializations significantly. We also show that tariff conditionality was more effective in initiating tariff cuts for countries without previous greater globalization efforts than being a “catalyst” for ongoing liberalization efforts.
... (3) Y isj =∝ + * (P isj ) + X ij + * ln(GDP j ) + s + isj 8 Tariffs are included as a control variable in our model. This paper does not look at the substitution effect between tariffs and NTMs and refer to the related literature for this (see Beverelli et al 2019). ...
This paper estimates the relation between technical regulations and firms’ export dynamics using country-sector indicators from two firm-level datasets—the novel UN ITC NTM Business Surveys and the World Bank Exporter Dynamics Database—for 18 developing countries over the 2010–2014 period. The results from the analysis indicate that export markets where exporters perceive technical regulations as more burdensome are characterized by a lower number of exporters, a lower value of exports, and a higher concentration rate. These results are in line with the prediction of the heterogeneous firms’ trade theory (Melitz, 2003): additional trade costs are expected to push some firms out of exporting, therefore reducing the total number of exporters and increasing concentration. Also, technical regulations hit small firms’ exports twice as hard as they hit large firms, confirming that smaller firms react more strongly to changes in trade costs.
... By strengthening environmental protection in developing countries, high-income countries can reduce trade competition stemming from there. Also, with PTAs stipulating the gradual removal of tariffs, high-income countries are prone to shielding domestic industries which struggle with increasing international competition by turning to regulatory measures (Beverelli et al., 2019). By inserting environmental exceptions in their PTAs that justify (at least) some of these regulatory measures, high-income countries can maintain some protection for their domestic industries. 2 In reaction, developing countries' officials tend to criticize some of the environmental provisions promoted by high-income countries as being merely sophisticated non-tariff barriers to trade (Draper et al., 2017). ...
Preferential trade agreements (PTAs) increasingly include environmental provisions. While the existing literature documents these provisions' environmental impacts, this paper sheds light on their relation with aid flows. Using an event-specification and data on bilateral Official Development Assistance (ODA) commitments for a sample of 147 developing country recipients in the period from 2002 to 2017, we find evidence that the number of environmental provisions in PTAs is positively associated with aid during negotiation phases. With high-income countries typically predetermining the extent of environmental provisions in their upcoming PTAs, this suggests that aid serves as a side-payment for recipients to sweeten the pot and agree upon already formulated PTA content. While both aggregate ODA and its subcomponent environmental aid a priori qualify as candidates for pre-signature side-payments, we find that only the former fulfills this expectation, presumably reflecting more leeway to exploit aid fungibility.
... Nevertheless, these phenomena have been under-researched. This paper contributes to this research agenda and the broader theoretical debate on trade policy substitution between NTMs and tariffs (Beverelli et al., 2019;Niu et al., 2018). The data limitations mentioned in earlier sections have given rise to a pattern of "omitted variable bias" in regression studies, which is "particularly important when analyzing the impact of commercial policy, as governments can substitute between transparent and murkier forms of protectionism" (Evenett, 2019a, p. 13). ...
The main goal of this paper is to situate current trade policy debates in a proper historical context by analyzing the main trade policy milestones of the 21st-century. It does not attempt to offer an extensive historical overview of trade policy, which has been done masterfully by other scholars, but to analyze the events that have led to a stagnation of the multilateral trade system and rising protectionism. This paper begins with the winding road of trade liberalization since World War II, briefly tracing how we arrived from the early stages of the Bretton Wood System to the current moment of stagnation of the multilateral system and rising protectionism. It then turns to four key events to understand the current new reality: China’s accession to the World Trade Organization (WTO) in 2001, the Global Financial Crisis (GFC) of 2008 to 2009, the trade war between the United States and China, and the effects of the COVID-19 pandemic in trade policy dynamics. It concludes with some final comments on the relevance of understanding current trade debates from a historical perspective.
This paper develops an oligopolistic model with consumption externalities to study (i) the policy interaction between tariffs and product standards; (ii) how such interaction may affect the welfare justification of national treatment (NT) in product standards. Absent NT, tariff reductions can lead to more discriminatory standards against foreign firms. Imposing NT eliminates discrimination but can induce higher tariffs which tend to undermine efficiency. As a result, the welfare justification of NT is stronger when tariffs are constrained. These findings suggest that the World Trade Organization's success in tariff liberalization can strengthen the case for its NT‐based approach to product standards.
This article investigates the effect of shocks to the occupational structure of exporting firms induced by the introduction of technical barriers to trade (TBTs) in importing countries. We rely on specific trade concerns data to identify trade‐restrictive TBT measures, combined with matched employer‐employee data for French exporters over the period 1995–2010, and information on the product‐destinations served by each exporter. Controlling for time‐invariant firm/occupation fixed effects and for time‐varying sector/occupation shocks, the 2SLS estimates show that exporting firms adapt to the imposition of TBTs at destination by increasing the share of managers at the expense of blue collars, white collars and other professionals.
This study empirically investigates the effects of ASEAN Trade in Goods Agreement (ATIGA) tariffs on nontariff measures (NTMs) in Vietnam from 2012 to 2018. Our findings reveal the following: First, our gravity estimation demonstrates that although the reduction of ATIGA tariffs increases Vietnam's imports, the introduction of certain NTM types, particularly price control and finance measures, decreases them. Second, the reduction of ATIGA tariffs tends to introduce price control measures in particular. Third, when ATIGA tariffs decrease, the pre‐shipment inspection, nonautomatic licensing, and finance measures are more likely to be eliminated for products in which Vietnam has high export competitiveness. Fourth, both ATIGA tariffs and ASEAN+1 free trade agreement tariffs have significant effects on the introduction of NTMs in Vietnam. Finally, we found that the reduction in ATIGA tariffs also results in decreasing most favored nation tariffs.
This paper shows that Non-Tariff Measures (NTMs) may fully respect the non-discrimination principle of the WTO and still act as a protectionist device. NTMs that raise costs of all firms induce some exit, reallocating market shares towards the most efficient firms. The paper analyses when this mechanism generates protectionism. With political economy motives, trade liberalization increases the use of NTMs in the non-cooperative equilibrium and a trade agreement may be welfare reducing if governments care about the most efficient firms only. Moreover, a Pareto improving agreement may require an income redistribution between countries if firm average productivity differs across countries.
After successive rounds of tariff reductions by GATT/WTO members, non‐tariff measures (NTMs) have increasingly become the focal point of multilateral trade negotiations. It remains an open question whether the liberalization in tariff rates has subsequently been weakened or even erased by increases in NTMs. Using a product‐level global panel of WTO members over the period 1996–2019, this paper systematically examines the empirical link between various tariff measures and the imposition of NTMs. I find that bound or applied tariff reductions do not correlate much on their own with NTM incidence. The relevant trade policy margin for detecting a tariff–NTM nexus is instead tariff overhangs, the difference between WTO members' bound and applied tariff rates. Countries impose more NTMs when their sectoral applied tariffs are close to their respective bound rates, indicating that small tariff overhangs signal limited legal trade policy flexibility. Mesures non tarifaires : quel est le rapport avec les tarifs douaniers? Aprè des rondes successives de réductions des tarifs douaniers par les membres du GATT/OMC, les mesures non tarifaires (MNT) sont de plus en plus devenues le point de mire des négociations commerciales multilatérales. La question à savoir si la libéralisation des taux tarifaires a subséquemment été affaiblie ou même annulée par les hausses des MNT demeure ouverte. À l'aide d'un panel mondial de produits de membres de l'OMC entre 1996 et 2019, l'article examine systématiquement le lien empirique entre diverses mesures tarifaires et l'imposition de MNT. Je constate que les réductions tarifaires consolidées ou appliquées ne sont pas beaucoup corrélées de façon individuelle à l'incidence des MNT. La marge pertinente de la politique commerciale pour détecter un lien entre les tarifs douaniers et les MNT est plutôt une dilution tarifaire, soit la différence entre les taux tarifaires consolidés et appliqués des membres de l'OMC. Les pays imposent davantage de MNT lorsque leurs tarifs douaniers sectoriels appliqués sont près de leurs taux consolidés respectifs, indiquant que de petites dilutions tarifaires signalent une flexibilité limitée de la politique commerciale sur le plan juridique.
This study empirically investigates the relationships between tariffs and non‐tariff measures before and after the global financial crisis (GFC). The panel analysis is based on traded products of 70 countries from 1997 to 2015. For developed countries, we find that tariffs and non‐tariff measures were complementary before the crisis, but they became substitutional afterward. We do not find such shift for developing countries. We also run the analysis by income levels and by types of products and observe differential effects of the GFC on the relationship between the two trade policies.
In several African regions, economic integration has successfully reduced tariff protection by freezing the opportunity to raise applied tariffs against fellow integration partners above those promised. We examine whether these regional tariff commitments have come at the expense of adverse side-effects on the prevalence of non-tariff trade barriers. Comparing the effects of applied tariff overhangs – the difference between MFN bound tariffs and effectively applied tariffs – towards all vis-à-vis African trading partners on SPS and TBT notifications of 35 African WTO members from 2001-2017, we find no general relationship between tariff overhangs and import regulation in our preferred model setting. Larger tariff overhangs specific to intra-African trade relations, however, increase the probability of SPS measures and TBT and thereby contrast with the common assumption of the former functioning as a flexible policy valve. We see the nature of Africa’s formal trade relations as an explanation for these findings. While regional tariff commitments have not only significantly moved African countries away from multilateral commitments, they have also sharply reduced their tariff policy space within Africa, thus seemingly leaving regulatory policy as one of the few legitimate options to level the playing field with the by far closest market competitors.
This study revisits the trade and welfare effects of 19th century bilateralism exploiting the latest developments in structural gravity models, including the consideration of domestic trade. Using bilateral trade data between 1855 and 1875, I show that the Cobden-Chevalier network, i.e. a system of bilateral trade agreements including the Most Favored Nation clause, has large, positive and significant effects on members’ trade. These, however, are heterogeneous at the treaty-level. I then calculate its general equilibrium effects on total trade and welfare. They are considerable, while trade diversion effects are negligible. These results reshape the understanding of the Cobden-Chevalier network, helping in further rationalizing the “free trade epidemic” of the 1860s and 1870s.
This study examines how reforming the rules of origin (RoOs) in one preference regime affects trade under each tariff regime. To do this, we focus on Japan’s imports of apparel products from Cambodia and Myanmar during the 2013–2018 period. In these trade flows, two preference regimes are available in addition to a most favored nation regime. We find that the relaxation of RoOs in one regime in 2015 increased imports under that regime but decreased imports under the other regimes. As a result, total imports increased by approximately 80%.
How should international economic policy address climate change? Does trade cause deforestation and endangered species depletion? How does globalization affect air and water pollution? Do trade and investment create a race to the bottom in environmental policy? How important are environmental impacts of transporting goods? We review theory and empirical work linking international trade and the environment with a focus on recent work and methods. We discuss the literature linking trade to local and global pollutants, the impact of emissions from transportation, the effect of trade on the sustainability of renewable resources, and the interaction between trade and climate policy. To shape our review, we present nine new stylized facts that, together with our review of past work, highlight questions for future research.
Import regulations are globally the most prevalent form of intervention in international trade. The regulations should, under rules of the WTO, protect consumers and the environment but can be used to protect producers. We investigate the ambiguity of intent. We set out a model that when applied empirically suggests, as a benchmark estimate, equal divide between social benefit and producer protection. Inefficiency and distributional effects are consistent with producer-protecting trade policy. Country diversity in use of regulations supplements our estimates in suggesting producer-protecting intent. We look at how WTO procedures have allowed producer protection in the guise of social benefit.
This study examines how free trade agreements (FTAs) and customs unions (CUs) affect multilateral trade agreements when countries endogenously determine the standards as well as tariffs. Raising standards reduces the negative consumption externalities of a traded good but increases firms' costs. We find that a deep FTA with the harmonization of standards may be a stumbling block for multilateral free trade with the international standard that maximizes world welfare, whereas a deep CU with standards is a building block. As extensions, we consider asymmetry in firms' production costs and in the awareness of negative externalities between countries as well as transboundary externalities.
This paper is about how East Asia should respond to the challenges of the external environment. The first challenge is the current slowdown in trade, which has been due to cyclical and structural factors such as the decline in productivity and the maturation of global value chains. The rise in protectionism as measured by rising trade restrictiveness has not impacted on trade, but political and policy uncertainty regarding the direction of trade policy seems to have begun to impact on trade growth. The policy stance of increased protectionism and a retreat from the multilateral rules‐based trading system is linked to the pockets of the population who have not seen their incomes improve and who have blamed their plight and increased inequality on globalization. In fact, the issue is more about the lack of effective responses to manage the costs of trade liberalization. East Asian economies need to respond to these challenges by upholding the multilateral rules‐based trading system, continuing the various pathways to regional economic integration, and ensuring better globalization through effective capacity building and policies to address the negative effects of trade liberalization.
Food safety has become a major concern for consumers in the developed world and Europe in particular. This has been highlighted by the recent spate of food scares ranging from the BSE (mad cow) crisis to Chinese melamine contamination of baby formula. To ensure food safety throughout Europe, stringent food safety standards have been put in place ‘from farm to fork’. At the same time, poor African countries in the COMESA rely on their food exports to the European market to achieve their development goals yet have difficulty meeting the EU food safety standards. This book examines the impact of EU food safety standards on food imports from COMESA countries. It also critically examines both EU and COMESA food safety standards in light of the WTO SPS Agreement and the jurisprudence of the WTO panels and Appellate Body. The book makes ground-breaking proposals on how the standards divide between the EU and the COMESA can be bridged and discusses the impact of EU food safety standards on food imports from poor African countries.
We extend the trade restrictiveness index approach to the case of market imperfections and domestic regulations addressing them. We focus on standard-like non-tariff measures (NTMs) affecting cost of production and potentially enhancing demand by reducing negative externalities. We apply the framework to the database of Kee et al. () and derive ad valorem equivalents (AVEs) for technical measures. About 39% of the product lines affected by NTMs exhibit negative AVEs, indicating a net trade-facilitating effect of these measures. Accounting for these effects significantly reduces previous measures of countries' trade policy restrictiveness obtained while constraining these NTMs to be trade-reducing.
We use data on exchange rates and consumer price indices and the weighting matrix derived by Bayoumi, Lee and Jaewoo (2006) to calculate consumer price index-based REER. The main novelties of our database are that (1) it includes data for 178 countries –many more than in any other publicly available database– plus an external REER for the euro area, using a consistent methodology; (2) it includes up-to-date REER values, such as data for January 2012; and (3) it is relatively easy to calculate REER against any arbitrary group of countries. The annual
database is complete for 172 countries and the euro area for 1992-2011 and data is available for six other countries for a shorter period. For several countries annual data is available for earlier years as well, eg data is available for 67 countries from 1960. The monthly database is complete for 138 countries for January 1995-January 2012, and data is also available for 15 other countries for a shorter period. The indicators calculated by us are freely downloadable and will be irregularly updated.
As conventional trade barriers fall, nations may increasingly resort to product standards to protect domestic industries. While ostensibly protecting their citizens from the environmental and health side-effects of a particular product, countries could enact standards that are facially-neutral, but impose greater compliance costs on foreign producers. This paper examines the impact of trade liberalization on standard setting by using a two-country Cournot duopoly model in which the Domestic government imposes a standard to mitigate a consumption externality. The standard increases production costs for both Domestic and Foreign firms, especially for the latter. The paper finds that one cannot make an unequivocal connection between falling tariffs and subsidies and rising standards. If the initial tariffs or subsidies are prohibitive, reducing subsidies and tariffs to allow minimal import penetration will generally create incentives for the Domestic government to impose higher standards. If the ex ante tariffs are not prohibitive, however, it is only optimal for the government to raise standards following tariff cuts if (i) tariff revenues are an important component of the welfare calculus and the ex ante tariff rate is high, or (ii) the standard's effect on the per unit externality is large. Likewise, if the initial subsidies are small enough to allow imports the government should only raise standards following subsidy reductions if the per unit externality is substantial, or the standard's impact on the per unit externality is large.
totsuki@worldbank.org The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.
In this paper we develop a heterogeneous firm, intra-industry trade model in which countries are asymmetric in both technology
and size. In the trading equilibrium, the industry productivity levels countries are jointly determined by the technology
gap and trade barriers. We find that the (exogenous) technological gap is a key determinant of the size and direction of the
intra-industry resource reallocation introduced by trade. Most importantly, the effect of trade on the (endogenous) productivity
gap could be non monotonic over time. In the short-run, where the number of incumbents cannot adjust to trade, the effect
of import competition dominates and the productivity gap between countries is closed as domestic firms in the laggard country
face tougher competition from leading country exporters. However, in the long run when entry is possible, the effect of the
increased export opportunities in the leading country dominates and the productivity gap is widened as a consequence of entry
in the technological leader.
KeywordsFirm heterogeneity–Productivity gap–Technological asymmetry
With the reduction in tariff barriers, Non-tariff and behind-the-border measures (NTM and BTB) have increased in importance. This paper surveys the state of knowledge with the view to drawing implications for policy suggestions to reduce those NTM barriers that are welfare reducing. Following a description of data bases and their shortcomings, the paper reviews the state of understanding on the effects of NTMs on trade flows. The more difficult issue of translating these effects into welfare implications are covered next. The paper concludes with different approaches at reducing NTMs.
We find that prior to World Trade Organization membership, countries set import tariffs 9 percentage points higher on inelastically supplied imports relative to those supplied elastically. The magnitude of this effect is similar to the size of average tariffs in these countries, and market power explains more of the tariff variation than a commonly used political economy variable. Moreover, US trade restrictions not covered by the WTO are significantly higher on goods where the United States has more market power. We find strong evidence that these importers have market power and use it in setting noncooperative trade policy. (JEL F12, F13)
Standards and technical regulations exist to protect consumer safety or to achieve other goals, such as ensuring the interoperability of telecommunications systems, for example. Standards and technical regulations can, however, raise substantially both start-up and production costs for firms. Maskus, Otsuki, and Wilson develop econometric models to provide the first estimates of the incremental production costs for firms in developing nations in conforming to standards imposed by major importing countries. They use firm-level data generated from 16 developing countries in the World Bank Technical Barriers to Trade (TBT) Survey Database. Their findings indicate that standards do increase short-run production costs by requiring additional inputs of labor and capital. A 1 percent increase in investment to meet compliance costs in importing countries raises variable production costs by between 0.06 and 0.13 percent, a statistically significant increase. The authors also find that the fixed costs of compliance are nontrivial-approximately $425,000 per firm, or about 4.7 percent of value added on average. The results may be interpreted as one indication of the extent to which standards and technical regulations might constitute barriers to trade. While the relative impact on costs of compliance is relatively small, these costs can be decisive factors driving export success for companies. In this context, there is scope for considering that the costs associated with more limited exports to countries with import regulations may not conform to World Trade Organization rules encouraging harmonization of regulations to international standards, for example. Policy solutions then might be sought by identifying the extent to which subsidies or public support programs are needed to offset the cost disadvantage that arises from nonharmonized technical regulations.
The authors develop a model in which special-interest groups make political contributions in order to influence an incumbent government's choice of trade policy. The interest groups bid for protection with their campaign support. Politicians maximize their own welfare, which depends on total contributions collected and on the welfare of voters. The authors study the structure of protection that emerges in the political equilibrium and the contributions by different lobbies that support the policy outcome. They also discuss why the lobbies may in some cases prefer to have the government use trade policy to transfer income, rather than more efficient means. Copyright 1994 by American Economic Association.
Formal analysis of the political economy of trade policy was substantially redirected by the appearance of Gene Grossman and Elhanan Helpman's 1994 paper, 'Protection for Sale'. Before that article a fairly wide range of approaches were favoured by various authors on various issues, but afterwards, the vast majority of theoretical tracts on endogenous trade policy have used the Protection for Sale framework (PFS for short) as their main vehicle. The reason, of course, is that the framework is both respectable - because its microfoundations are distinctly firmer than were those of the earlier lobbying approaches - and it is very easy to work with. Despite the popularity of the PFS framework, it appears that no one has presented a simple diagram that illustrates how the PFS frameworks and explains why it is so easy. This short note aims to remedy that omission.
Can the enforcement of product standards be protectionism in disguise? This paper estimates the costs of non-compliance with U.S. product standards, using a new database on U.S. import refusals from 2002 to 2014. We find that import refusals decrease exports to the United States. This trade reducing effect is driven by developing countries and by refusals without any product sample analysis, in particular during the Subprime Crisis and its aftermath. We also provide evidence that given product standards were enforced more strictly during the crisis while the quality of imported products did not deteriorate. These results are consistent with the existence of counter-cyclical, hidden protectionism due to non-tariff barriers to trade in the United States.
International political economy (IPE) is a highly complex discipline, drawing not only from the fields of politics and economics, but also those as varied as philosophy, history and anthropology. Now widely accepted as a key dimension to contemporary world affairs, it is no longer possible to talk about international relations without talking about production and distribution, financeand investment, as well as consumption and trade. To ensure that our understanding of these topics is relevant to today’s world, there is a constant need to revisit and challenge what is known aboutthese topics. Besides being a comprehensive account of international political economy for academicstudy, this extensive collection also highlights salient issues that scholars, analysts and state leaders are most concerned with in today’s world. Amongst these are issues concerning the rise of China and India as new economic superpowers, stability in the EU’s political economy, the viability of the existing multilateral system of global trade, recent financial crises, as well as the impact of globalisation and marketisation on the world’s workers and our physical environment. With contributions from prominent academics such as Susan K Sell (George Washington University, D.C.) and Geoffrey Blainey (Professor Emeritus, University of Melbourne), this volume makes for both a stimulating and thought-provoking read. © 2012 by World Scientific Publishing Co. Pte. Ltd. All rights reserved.
This paper explores whether and to what extent evident trade reform, falling average tariffs and rising exports in recent decades overstate the extent to which protectionism has declined in developing countries, especially low-income developing countries. It identifies remaining significant protection, especially of final manufactured goods; this being associated with the presence of peak tariffs, escalating tariff structures by stage of production and replacement of old forms of non-tariff protection with new instruments of non-tariff protection. It also identifies significant protection arising from high international trade costs induced by inefficiencies in transportation, ports and customs, and from the growth of exports to preference-receiving, export markets.
This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political–economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991–1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000–2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.
The drastic reductions in bound tariffs agreed by WTO members over the past half century have been accompanied by a substantial rise in non-tariff barriers to trade. Many commentators have drawn a causal link between these two phenomena, but there have been few attempts to empirically test this claim. This lack is particularly apparent with regard to Sanitary and Phytosanitary (SPS) measures, despite their increasing prevalence both in the media and in WTO disputes. SPS measures, like other health and environment regulations, ostensibly serve legitimate national policy objectives and cannot be labeled as “green” protectionism merely by considering posterior trade impacts. The determinants of these regulations matter. This paper uses members’ SPS notifications to the WTO at the product level to test the importance of negotiated tariff reductions as a driver for additional SPS regulations. By exploiting time-series, cross-country and cross-product variation in the data we confirm that decreases in bound tariff rates increase the probability of new SPS measures. The policy implications of this result are, however, tempered by our other major finding, namely, that the impact of tariff constraint on SPS notifications is minor compared to that of demographic, governance and environmental variables
The present paper modifies the "Protection for Sale" model of Grossman and Help- man (1994) to account for intra-industry trade and heterogeneous firms lobbying for non-tari barriers to trade. Some non-tari barriers to trade, such as technical standards, raise the fixed costs of market access for both domestic producers and foreign exporters, force the least ecient firms to exit, and increase the profits of the most ecient firms. Technical barriers to trade also shift profits across countries, but not necessarily to the country in which firms are more productive on average. They are inecient from a social welfare perspective, but may nevertheless be im- plemented in the political equilibrium if only the largest domestic firms lobby the government. The implementation of technical barriers to trade is the more likely, the less ecient the foreign competitors. Other non-tari barriers to trade, such as customs procedures, raise the fixed costs of foreign exporters only, and thus benefit all domestic firms. Yet, as they reduce variety and raise consumer prices, they are inecient from a social welfare perspective, and may not even be implemented if the largest domestic firms impose political pressure. In case they are implemented, however, the government chooses the most deterring level of customs procedures to prevent foreign firms from market entry. The paper also analyzes the case of bi- lateral trade negotiations, and it addresses the issue of endogenous lobby formation.
In this paper, we argue that market access issues associated with the question of the optimal mandate of the World Trade Organization should be separated from nonmarket access issues. We identify race-to-the-bottom and regulatory-chill concerns as market access issues and suggest that the WTO should address these concerns. We then describe ways that WTO principles and procedures might be augmented to do so. As for nonmarket access issues, we argue that as a general matter these are best handled outside the WTO, and that, while implicit links might be encouraged, explicit links between the WTO and other labor and environmental organizations should not as a general matter be forged. We view this as a measured approach to labor and the environment within the WTO.
Quota restrictions on United States imports of apparel and textiles under the multifiber arrangement (MFA) ended abruptly in January 2005. This change in policy was large, predetermined, and fully anticipated, making it an ideal natural experiment for testing the theory of trade policy. Prices of quota-constrained categories from China fell by 38% in 2005, with smaller declines from other exporters. Prices in unconstrained categories from all countries changed little. We also find substantial quality downgrading in imports from China in previously constrained categories. The annual cost of the MFAto U.S. consumers was $63 per household. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Worker industry affiliation plays a crucial role in how trade policy affects wages in many trade models. Yet, most research has focused on how trade policy affects wages by altering the economy-wide returns to a specific worker characteristic (i.e., skill or education) rather than through worker industry affiliation. This paper exploits drastic trade liberalizations in Colombia in the 1980s and 1990s to investigate the relationship between protection and industry wage premiums. We relate wage premiums to trade policy in an empirical framework that accounts for the political economy of trade protection. Accounting for time-invariant political economy factors is critical. When we do not control for unobserved time-invariant industry characteristics, we find that workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors. Allowing for industry fixed effects reverses the result: trade protection increases relative wages. This positive relationship persists when we instrument for tariff changes. Our results are in line with short- and medium-run models of trade where labor is immobile across sectors or, alternatively, with the existence of industry rents that are reduced by trade liberalization. In the context of the current debate on the rising income inequality in developing countries, our findings point to a source of disparity beyond the well-documented rise in the economy-wide skill premium: because tariff reductions were proportionately larger in sectors employing a high fraction of less-skilled workers, the decrease in the wage premiums in these sectors affected such workers disproportionately.
The magnitude of the interaction effect in nonlinear models does not equal the marginal effect of the interaction term, can be of opposite sign, and its statistical significance is not calculated by standard software. We present the correct way to estimate the magnitude and standard errors of the interaction effect in nonlinear models.
Why do governments employ inefficient policies to redistribute income towards special interest groups (SIGs) when more efficient ones are available? To address this puzzle we derive and test predictions for a set of policies where detailed data is available and an efficiency ranking is feasible: tariffs vs. non-tariff barriers (NTBs). In our policy choice model a government bargaining with domestic SIGs can gain by constraining tariffs through international agreements even if this leads to the use of the less efficient NTBs. This generates two key testable predictions (i) there is imperfect policy substitution, i.e. tighter tariff constraints are not fully offset by the higher NTBs they generate and (ii) the decision to commit to constraints depends on the government's bargaining power relative to SIGs. Using detailed data, we confirm that tariff constraints in trade agreements increase the likelihood and restrictiveness of NTBs. We also provide a structural estimate that indicates NTBs are less efficient than the tariffs they imperfectly replace. Moreover, we find parametric and non-parametric evidence that the higher the government bargaining power relative to a SIG the more relaxed the tariff constraint it chooses. This result is stronger for organized industries, which further supports the theory. The main theoretical insights and empirical approach can be applied to other policies to provide additional evidence on inefficient redistribution.
Migration flows are shaped by a complex combination of self-selection and out-selection mechanisms. In this paper, the authors analyze how existing diasporas (the stock of people born in a country and living in another one) affect the size and human-capital structure of current migration flows. The analysis exploits a bilateral data set on international migration by educational attainment from 195 countries to 30 developed countries in 1990 and 2000. Based on simple micro-foundations and controlling for various determinants of migration, the analysis finds that diasporas increase migration flows, lower the average educational level and lead to higher concentration of low-skill migrants. Interestingly, diasporas explain the majority of the variability of migration flows and selection. This suggests that, without changing the generosity of family reunion programs, education-based selection rules are likely to have a moderate impact. The results are highly robust to the econometric techniques, accounting for the large proportion of zeros and endogeneity problems.
Many nations have undergone significant trade liberalization in the last twenty years even as they have increased their use of contingent protection measures. This raises the question of whether some of the trade liberalization efforts, at times accomplished through painful reforms, have been undone through a substitution from tariffs to nontariff barriers. Among the new forms of protection, antidumping is the most relevant, as its use has spread from few developed countries to a large set of developing countries that are now among the most intense users of this instrument. This paper uses a newly developed database to examine to what extent the use of antidumping in a large set of countries is systematically influenced by the reduction of applied sectoral tariffs. The data set includes information on 29 developing and 7 developed countries from 1991 through 2002. After controlling for time-varying sectoral information as well as macroeconomic conditions, we find evidence of a substitution effect only for heavy users of antidumping among developing countries. In particular, a one standard deviation increase in sectoral trade liberalization increases the probability of observing an antidumping initiation by 32 percent. There is no similar statistically significant result for other developing countries or developed countries. We also find robust evidence of retaliation and deflection effects as determinant of antidumping filings across all subsamples.
In this paper, we consider a three-stage game in the context of a competing exporters model to compare and contrast the effects of discriminatory and uniform (Most Favored Nation, MFN) tariffs on countries' choice over environmental standards for varying degrees of pollution spillovers. Because of the presence of punishment effects and stronger own and cross-tariff effects, we find that discrimination yields higher standards than MFN (and free trade) independently of the extent of pollution spillovers. When pollution is local and incentives to free ride on other countries' abatement efforts are weak, we show, however, that welfare is larger under MFN than under discrimination. In a dynamic setting, we consider the impact of symmetric and asymmetric treatments on the sustainability of an international environmental agreement (IEA) and obtain that multilateral cooperation is easier to sustain under discrimination than under MFN (or free trade).
When two policies are available to achieve the same goal why is the relatively inefficient one often observed? We address this question in the context of policies used to redistribute income towards special interest groups (SIGs) where in the first stage the constraints on policy instruments are chosen and in the second the government bargains with SIGs over the level of the available policies. Restrictions on the use of efficient policies and the use of inefficient ones reduce the surplus over which SIGs and governments can bargain but it also improves the government's bargaining position thus increasing its share of the surplus. The positive effect for the government dominates under plausible conditions. Inefficient policies are the equilibrium outcome under alternative policy selection mechanisms, e.g., election of policymakers and bargaining between SIGs and the government. The model also explains the coexistence of transfer policies. Moreover, we show why a weak government is more likely to choose the inefficient transfer and discuss how this result may be tested. Copyright ©2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
This article examines the role of rules of origin as a commercial policy instrument that targets the input composition of imports. Using a three-country, partial equilibrium structure, we demonstrate conditions under which the imposition of a binding rule will be welfare improving for an importer facing competitive export suppliers. We further show that employing rules of origin in this way would be complementary to, rather than a substitute for, conventional optimal tariffs. Copyright Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
Theoretical models and intuition suggest that the amount of non-traditional protection such as anti-dumping duties will increase as more traditional forms such as tariffs are lowered under multilateral trade agreements. This paper is the first empirical study of the role of tariff liberalisation in the spread of anti-dumping. Through both correlations and regression approaches we analyse the relationship between tariff concessions made during the Uruguay Round trade negotiations and the filing of anti-dumping petitions, with particular interest in whether multilateral trade reductions have spurred the recent growth in new users of anti-dumping policies. We find that, at least for developing economies, tariff reductions agreed to under the Uruguay Round not only increased the likelihood of a country using anti-dumping protection but also the total number of anti-dumping petitions filed by countries. Copyright 2007 The Authors
Journal compilation 2007 Blackwell Publishing Ltd .
We analyze the role of National Treatment in the regulation of environmental product standards for an open economy. A social planner uses product standards to control emissions from the consumption of a traded good. We show that whether National Treatment of standards interferes with welfare-maximizing policy depends on the instruments available to the policy maker (consumption or emissions tax) and differences in the cost of complying with the standard. We also highlight the asymmetric incidence of the domestic and import product standard when taxes are suboptimal. This asymmetric incidence can also cause welfare-maximizing policy to violate National Treatment.
On analyse le rôle du principe de traitement identique des entités domestiques ou importées dans la réglementation des normes environnementales dans une économie ouverte. Un gouvernement utilise des normes pour contrôler les émissions découlant de la consommation d'un produit transigé internationalement. On montre que le fait que le traitement identique des normes va ou non interférer avec l'objectif poursuivi qui est de maximiser le niveau de bien-être va dépendre de l'ensemble des instruments disponibles pour l'architecte des politiques (une taxe sur la consommation ou sur les émissions) et des différences dans les coûts à encourir pour se conformer aux normes. On souligne aussi l'incidence asymétrique des normes sur les produits domestiques et importés quand les taxes sont sous optimales. Cette incidence asymétrique peut faire que la politique qui vise la maximisation du bien-être soit en violation du principe de traitement identique.
To what extent must nations cede control over their economic and social policies if global efficiency is to be achieved in an interdependent world? This question is at the center of the debate over the future role of GATT (and its successor, the WTO) in the realm of labor and environmental standards. Current GATT rules reflect the primacy of market access concerns in GATT practice, and this orientation is seen increasingly as unfriendly to labor and environmental causes. Fundamental changes to GATT are being considered as a result, changes that would expand the scope of GATT negotiations to include labor and environmental policies, and would lead to a significant loss of sovereignty for national governments. In this paper we establish that there is no need for the WTO to expand the scope of its negotiations in this way. We show instead that the market access focus of current GATT rules is well-equipped to handle the problems associated with choices over labor and environmental standards, and that with relatively modest changes that grant governments more sovereignty, not less, these rules can in principle deliver globally efficient outcomes.
Product standards and margins of trade: Firm-level evidence
- L Fontagné
- G Orefice
- R Piermartini
- N Rocha