Estimating Policy Barriers to Trade

8 May 2019

Brendan Cooley

Ph.D. Candidate

Princeton University

bcooley (at) princeton.edu

Free and Fair?

“We believe that trade must be fair and reciprocal. The United States will not be taken advantage of any longer.”
\(\qquad\) – Donald Trump, Feb. 2019

“I’m going to have a trade prosecutor…to make sure every trade deal we’re already in is absolutely followed to the letter so nobody takes advantage of us.”
\(\qquad\) – Hillary Clinton, Oct. 2016

“Internationally, we are seeing a tendency toward protectionism and navel-gazing…What we need is trade that’s both fair and free.”
\(\qquad\) – Shinzo Abe, Oct. 2016

“An open world is only worth it if the competition that takes place there is fair.”
\(\qquad\) – Emmanuel Macron, Sep. 2017

  • Free: Foreign firms enjoy same market access conditions as domestic competitors
  • Fair: Barriers that do exist affect all trade partners symmetrically

The Tariff System (GATT/WTO)

  • Free? Applied tariff rates are low, ~5% on average (Baldwin 2016)
  • Fair? WTO members (vast majority of world economy) commit to principle of non-discrimination (Most Favored Nation)

The Tariff System (GATT/WTO)

  • Free? Applied tariff rates are low, ~5% on average (Baldwin 2016)
  • Fair? WTO members (vast majority of world economy) commit to principle of non-discrimination (Most Favored Nation)

Varieties of Barriers

Direct

  • Tariffs
  • Non-Tariff Measures (NTMs)
    • Price controls, quotas, health and safety regulations, technical barriers
    • Mansfield and Busch (1995), Lee and Swagel (1997), Gawande and Hansen (1999), Kono (2006), Rickard (2012), Maggi, Mrázová, and Neary (2018)

Indirect (Behind-the-Border)

  • Government procurement
    • Evenett and Hoekman (2004), Kono and Rickard (2014)
  • Subsidies
  • Excise taxes
  • Regulations

Effective Discrimination: Target trade-disorting instruments to disproportionately affect disfavored trading partners.

  • E.g. high agricultural duties by developed countries disproportionately harm developing countries

Measurement Matters

Measurement Matters

Approach

Trade Costs: Policy distortions and transportation costs to access market \(i\) in excess of those faced by firms in country \(i\)

Overview

  1. Build model of international economy subject to trade costs (Eaton and Kortum 2002)
  1. Derive structural relationship linking trade costs to price levels, trade flows, market shares of home producers
    • Anderson and Van Wincoop (2003), Waugh (2010), Simonovska and Waugh (2014), Sposi (2015), Waugh and Ravikumar (2016)
  1. Decompose trade costs into economic (transportation costs) and political (policy barriers) components
  1. Model transportation costs, combine with data on variables in (2) to separately estimate magnitude of policy barriers

\(\tau_{ij} - 1 \geq 0\) – ad valorem tariff equivalent of policy barriers gov \(i\) imposes on gov \(j\)

Identification

Identification

Model Overview

  • \(N\) countries \(i \in \left\{ 1, ..., N \right\}\) with representative consumers
    • Value C-D mixture of tradable goods and nontradable services
    • Earn wage \(w_i\) for every unit of labor endowment \(L_i\) supplied
  • Competitive economy, stochastic technology
    • Production requires labor and bundle of intermediate inputs

Structural Relationship

\[\begin{equation} \label{eq:Waugh} d_{ij} = \left( \frac{\lambda_{ij}}{\lambda_{jj}} \right)^{-\frac{1}{\theta}} \frac{P_i}{P_j} \end{equation}\]

  • \(d_{ij}\) - trade costs
  • \(\lambda_{ij}\) - share of \(j\)’s producers in \(i\)’s market for tradables
  • \(\lambda_{jj}\) - share of \(j\)’s producers in home market for tradables
  • \(P_i\) - price level of tradables
  • \(\theta\) - trade elasticity

Model

Decomposing Trade Costs


Estimation


Estimating Equation

\[ \tau_{ij} = \left( \frac{\lambda_{ij}^{\text{cif}}}{\lambda_{jj}} \right)^{-\frac{1}{\theta}} \frac{\hat{P}_i}{\hat{P}_j} \frac{1}{\delta_{ij}(\boldsymbol{Z}_{ij})} \]

Math

Data

  • Trade shares: national accounts, COMTRADE Shares
  • Prices: World Bank International Comparison Program Prices
  • Freight Costs: Freight Model
    • US Census Bureau, Australian Bureau of Statistics, OECD Maritime Transport Costs
    • Estimate out of sample
    • Geography (distances, island, contiguity) \((\boldsymbol{Z}_{ij})\)

Results (Magnitudes)

Results (Magnitudes)

Results (Magnitudes)

Results (Economic Blocs)

EU Placebo

Correlates of Policy Barriers

DV: Structural Policy Barrier
Tariffs 0.976
(0.673)
PTAs -0.351***
(0.074)
Core NTM 0.151
(0.193)
Health/Safety NTM 0.192
(0.178)
Other NTM -0.246
(0.245)
Importer Fixed Effects Yes
Exporter Fixed Effects Yes
N 361
R2 0.892
Notes: ***Significant at the 1 percent level.
**Significant at the 5 percent level.
*Significant at the 10 percent level.

Conclusion

State Capacity and Protectionism

  • Tariffs as “second-best” solution to revenue-raising problem facing low-capacity governments
    • Acemoglu (2005), Rodrik (2008), and Queralt (2015)
  • Developing (more autocratic) world not necessarily more “welfare-concious” than developed counterparts
    • Milner and Kubota (2005), Gawande, Krishna, and Olarreaga (2009); Gawande, Krishna, and Olarreaga (2015)

Development and Trade Discrimination

  • Growth causally linked to market access conditions abroad (Romalis 2007)
  • Lack of market access by developing countries may hinder development prospects
    • Redding and Venables (2004), Romalis (2007), Waugh (2010)

TRI, MAI

Thank You

brendancooley.com

[email protected]

Model (Consumption)

Consumer’s Problem

\[\begin{equation*} \label{eq:consumer} \begin{split} \max & \quad U_i = Q_i^{\nu_i} S_i^{1 - \nu_i} \\ \text{subject to} & \quad P_i Q_i + P_i^s S_i \leq w_i L_i \end{split} \end{equation*}\]

CES Preferences over Tradable Varieties

\[ Q_i = \left( \int_{[0,1]} \alpha_{h(\omega)}^{\frac{1}{\sigma}} q_i(\omega)^{\frac{\sigma - 1}{\sigma}} d \omega \right)^{\frac{\sigma}{\sigma - 1}} \]

Tradable Price Index

\[ P_i = \left( \int_{[0,1]} \alpha_{h(\omega)} p_i(\omega)^{1 - \sigma} d \omega \right)^{\frac{1}{1 - \sigma}} \]

Expenditure on Tradables

\[ E_i^q = \nu_i I_i + D_i = P_i Q_i^\star \]

Back

Model (Production)

Costs

\[\begin{equation} \label{eq:c} c_i = w_i^{1 - \beta} P_i^{\beta} \end{equation}\]

  • \(w_i\) - cost of labor
  • \(P_i\) - cost of composite intermediate good
    • equivalent to composite consumption good

\[ E_i^x = \beta X_i \]

Local Prices

\[ p_{ii}(\omega) = \frac{c_i}{z_i(\omega)} \]

Technology (Frechet)

\[ F_i(z) = \text{Pr} \left\{ z_i(\omega) \leq z \right\} = \exp \left\{ - T_i z^{-\theta} \right\} \]

Back

Model (Equilibrium)

Total Expenditure on Tradables

\[ X_i = \underbrace{E_i^q + E_i^x}_{E_i} - D_i \]

Trade Shares

\[ \Omega_{ij}^\star = \left\{ \omega \in [0,1] \left. \right\vert p_{ij}(\omega) \leq \min_{k \neq j} \left\{ p_{ik} \right\} \right\} \]

\[ \lambda_{ij}(\boldsymbol{w}) = \frac{1}{E_i} \int_{\Omega_{ij}^\star} p_{ij}(\omega) q_i \left( p_{ij} (\omega) \right) d \omega \]

Market Clearing

\[ X_i = \sum_{j=1}^N \lambda_{ji}(\boldsymbol{w}) E_j \]

Back

Isolating Policy Barriers (I)

Trade Shares (w/ Frechet)

\[\begin{align*} \lambda_{ij}(\boldsymbol{w}) &= \frac{ T_j \left( d_{ij} w_j^{1 - \beta} P_j^{\beta} \right)^{- \theta} }{\sum_j T_j \left( d_{ij} w_j^{1 - \beta} P_j^{\beta} \right)^{- \theta}} \\ &= \frac{ T_j \left( \underbrace{\rho_j \delta_{ij} \tau_{ij}}_{d_{ij}} w_j^{1 - \beta} P_j^{\beta} \right)^{- \theta} }{ \frac{1}{\gamma} P_i^{-\theta}} \end{align*}\]

Isolating Policy Barriers (II)

In Differences

\[ \frac{\lambda_{ij}}{\lambda_{jj}} = \left( \underbrace{\delta_{ij} \tau_{ij} \frac{P_j}{P_i}}_{\text{observables}}\right)^{- \theta} \]

\[ \tau_{ij} = \left( \frac{\lambda_{ij}}{\lambda_{jj}} \right)^{-\frac{1}{\theta}} \frac{P_i}{P_j} \underbrace{\frac{1}{\delta_{ij}}}_{\substack{\text{freight cost} \\ \text{correction}}} \]

Back

Trade Shares

Behind the Border Barriers

\[ \lambda_{ij} = \tau_{ij} \lambda_{ij}^{\text{cif}} \]

Home Expenditure

\[ \lambda_{jj}(\boldsymbol{\tau}_j) = \left( 1 - \sum_{i \neq j} \tau_{ji} \lambda_{ji}^{\text{cif}} \right) \]

Modified Estimating Equation

\[ \tau_{ij} = \left( \frac{\lambda_{ij}^{\text{cif}}}{\lambda_{jj}(\boldsymbol{\tau}_j)} \right)^{-\frac{1}{\theta + 1}} \left( \frac{P_i}{P_j} \right)^{\frac{\theta}{\theta+1}} \left( \frac{1}{\delta_{ij}(\boldsymbol{Z}_{ij})} \right)^{\frac{\theta}{\theta+1}} \]

Back

Prices (Model)

  • Set\(\mathcal{K}\) of tradable good categories indexed \(k \in \left\{ 0, ..., K - 1 \right\}\)

\[ h : \Omega \rightarrow \mathcal{K} \]

\[ \Omega_k = \left\{ \omega : h(\omega) = k \right\} \]

Demand

\[ x_i(\omega) = p_i(\omega) q_i(\omega) = \alpha_{h(\omega)} p_i(\omega)^{1-\sigma} E_i^q P_i^{\sigma - 1} \]

Normalization

\[ \frac{\lambda_{ik}}{\lambda_{i0}} = \alpha_k \left( \frac{p_{ik}}{p_{i0}} \right)^{1 - \sigma} \]

Estimation

\[ \ln \Delta \lambda_{ik} = \ln \alpha_k + (1 - \sigma) \ln \Delta p_{ik} + \ln \epsilon_{ik} \]

Back

Prices (Data)

Back

Freight Costs (Model)

  • Products \(m \in \left\{ 1, ..., M \right\}\)
  • Transportation modes \(k \in \left\{ 1, ..., K \right\}\)
  • \(\zeta_{ij}^{m k}\) share of product \(m\) transported by mode \(k\)

Mode and Cost Functions

\[ g: \left\{ \boldsymbol{Z}_{ij}, d^m \right\} \rightarrow \delta_{ij}^{m k} \] \[ h: \left\{ \boldsymbol{Z}_{ij}, d^m \right\} \rightarrow \zeta_{ij}^{m k} \]

Aggregate Freight Costs

\[ \hat{\delta}_{ij} \left( \boldsymbol{Z}_{ij}, \boldsymbol{d}_{ij} \right) = \frac{1}{X_{ij}} \sum_{m = 1}^M x_{ij}^m \sum_{k=1}^K g \left( \boldsymbol{Z}_{ij}, d^m \right) h \left( \boldsymbol{Z}_{ij}, d^m \right) \]

Back

Freight Costs (Cross Validation)

Back

EU Placebo

Back

Trade Restrictiveness and Market Access (I)

Trade Restrictiveness Index

\[ \text{TRI}_i = \frac{1}{\sum_{j \neq i} E_j} \sum_{j \neq i} \tau_{ij} E_j \]

Market Access Index

\[ \text{MAI}_j = \frac{1}{\sum_{i \neq j} E_i} \sum_{i \neq j} \tau_{ij} E_i \]

Back

Trade Restrictiveness and Market Access (II)

Back

Market Access Barriers

Back


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