Estimating Trade Restrictiveness Indices DECRG-Trade The World Bank October 2004

Motivation: Input to Global Monitoring Report. Request by GMR: Comparison of trade restrictiveness across countries –Any patterns across regions/time? Two indicators: –restrictiveness of own trade policy –restrictiveness vis à vis Low Income Countries (LIC)

Two classic problems: 1)Trade policy takes many different forms How can one aggregate tariffs, quotas, agricultural subsidies, etc..? 2)Trade policy is determined at the tariff line level How can one summarize 5000 different tariffs in one aggregate measure? The OTRI addresses these two problems with sound theoretical approaches, and not ad-hoc criteria.

1) How to measure the restrictiveness of different trade policy instruments? 1) Focus on tariff data –And hope that all other instruments are (perfectly) correlated. 2) Focus on trade data (import, export shares) –It summarizes the impact of all trade policies… –But also taste, macroeconomic shocks, rainfalls…. 3) Measure all instruments with a common metric - IMF’s TRI: ad-hoc criteria. - AVE of NTBs: theoretically sound..

2) Which aggregation procedure? 1) Simple averages? 2) Import-weighted averages? 3) Frequency ratios? 3) IMF’s TRI? 4) GDP weighted for regional groups? No. All are a-theoretical -We follow Anderson and Neary (IER, 2003) -Import-volume Equivalent index: -What is the equivalent uniform tariff that would keep aggregate imports at their observed levels?

Inputs to the GMR Three background papers: –Estimating OTRIs (for 94 countries) –Estimating of AVE of NTBs (for 94 countries) –Estimating import demand elasticities (117 countries) Output includes three datasets: –OTRIs (aggregate and bilateral) for 94 reporters. –AVEs of Core NTBs and Agricultural domestic support for at the 6 digit of the HS for 94 countries. –Import demand elasticities for more than 117 countries at the six digit level of the HS.

Plan 1.Methodologies Estimating MTRIs Estimating AVEs Estimating Elasticities 2.Data sources 3.Results Elasticities AVEs MTRIs 4.Extensions

Estimating OTRI What is the uniform tariff (equivalent) that would keep aggregate imports at their current level? T c is a weighted-average of protection at the tariff line level (T n,c ). Weigths depend on: –Import shares: –Import demand elasticities 1. Methodologies

Estimating AVEs of NTBs First we estimate the impact of NTBs on imports (Leamer, 1990, Harrigan, 1993, Trefler, 1993). –By country and by HS 6 digit tariff line (Leamer’s comparative advantage approach). Then, we convert the import-quantity impact into price or tariff equivalents (AVEs): – Moving along import demand curves using estimates of import demand elasticities.

Estimating Import Demand Elasticities GDP function approach (Kohli, 1991) and Harrigan, 1997). Imports are inputs into domestic production, given exogenous world prices, productivity and endowments. Close links to trade theories -- general equilibrium effects of the reallocation of resources as prices or endowments change Kohli – aggregate level; Harrigan – industry level Here: tariff line level (HS 6-digit)

Import Demand Elasticities: Trade data (COMTRADE) - HS Countries. WDI for factor endowments Between 1000 and 4500 HS products for each country Total number of import demand elasticities estimated is about 320,000 AVEs of NTB: Core NTB (Price control, Quantity control, etc..) Domestic Subsidies (WTO notifications) UNCTAD Data (TRAINS) – HS6 (mostly around 2000) 94 Countries (EU counts as one) OTRI WTO’s IDB OECD Tariff and Trade CD-ROM. Unctad’s AVEs of specific tariffs. 94 Countries (EU counts as one). MTRI estimated at the bilateral level (10,000 different MTRI) 2. Data Sources

Import Demand Elasticities: -Very precisely estimated. -Larger for homogenous goods (i.e., larger for metal than machinery) -Smaller as we aggregate the level at which we estimate them - Larger in large and poor countries AVEs of NTBs: - Average increases with GDP per capita - Contribution to overall level of protection increases with GDP per capita - When present they are more restrictive than tariffs: - in 77 percent of tariff lines where core NTBs are present - in 45 percent of tariff lines where agricultural domestic support is present OTRI: - Peaks in middle income countries - Peaks against middle income countries - Higher in agriculture - LIC face higher OTRI in some markets in spite of preferential schemes. 3. Results

4. Extensions Include cross-price effects in OTRI calculation. Estimate standard errors of AVEs. Include broader set of preferences. Include AVEs of technical regulations. Regular updates? Others?