Misreporting trade: Tariff evasion,corruption, and auditing standards

Official international trade statistics report commerce between every pair of countries twice: once for the importing country and once for the exporter. In principle, the two values differ only by transport costs, but as has long been recognized, they also differ systematically with product‐level tariffs. We aggregate across products to construct a dataset of annual aggregate bilateral trade, separately for the importer and exporter reports. With these data, we show that the reporting differences also vary systematically with country characteristics aside from tariffs: incomes, auditing standards, corruption, and trade agreements.     

Uniform Versus Discriminatory Tariffs

We analyze the non‐cooperative interaction between two exporting countries producing differentiated products and one importing country when governments use optimal policies to maximize welfare. The analysis includes product differentiation, asymmetric costs, and Bertrand competition. For identical exporting countries we demonstrate that the importing country always prefers a uniform tariff regime while both exporting countries prefer a discriminatory tariff regime for any degree of product differentiation. If countries are asymmetric in terms of production cost then the higher‐cost exporter always prefers the discriminatory regime but the lower‐cost exporter prefers the uniform regime if there is a significant cost differential. With cost asymmetry the announcement of a uniform tariff regime by the importer is not a credible strategy since there is an incentive to deviate to discrimination. This implies an international body can play a role in ensuring that tariff agreements are respected.     

Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit unique features of Chinese data by comparing results for two trade regimes: ordinary trade (wherein firms pay import tariffs to import) and processing trade (wherein firms are not subject to import tariffs). While the aforementioned trade liberalization effects and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.     

Developing-Country Benefits from MFN Relative to Regional/Bilateral Trade Arrangements

Using a general‐equilibrium model of world trade, this paper evaluates the benefits of most‐favored‐nation (MFN) treatment to developing countries in multilateral relative to bilateral or regional trade agreements, from three sources. First, developing countries may be able to free‐ride on bilateral tariff concessions exchanged between larger countries in MFN‐based GATT/WTO rounds. Second, MFN benefits developing countries by restricting discriminatory retaliatory actions by other countries, evaluated here by a non‐ cooperative Nash tariff game. Finally, MFN changes threat points in bargaining and hence affects the bargaining solution of multilateral MFN‐based trade negotiation compared to a bilateral/regional arrangement. The authors find that the benefits to developing countries are small in the first case as the tariff rates are already low, and the benefits are small in the second case as the optimal tariffs under unconstrained retaliation are not very asymmetric. Benefits from the third case are large as large countries can extract large side‐payments if they bargain bilaterally.     

Competing specifications of the gravity equation: a three-way model,bilateral interaction effects,or a dynamic gravity model with time-varying country effects?

We investigate bilateral trade flows across the EU-15 countries from 1962 to 2003 by different specifications of the gravity model. We augment the basic gravity model with population and exchange rate variables, and then include time-varying country fixed effects, to account for Anderson and van Wincoop (Am Econ Rev 93(1):170–192, 2003) multilateral resistance terms. Then, following the previous theoretical derivations of the gravity model in the presence of panel data in a dynamic setting we change the specification of our gravity model. We compare the results of different specifications showing the improvement in each case. We claim the comparative superiority of the dynamic gravity model with time-varying exporter and importer fixed effects due to its higher explanatory power. Finally, we compare out-of-sample forecasting performance of different specifications of the gravity model.     

ECONOMIC INTEGRATION AND TRADE PROTECTION: POLICY ISSUES FOR SOUTH ASIAN COUNTRIES

This article shows that economic integration acts as a viable instrument of protection for individual countries, when benefits of discriminatory protectionist policies like the multifiber arrangement are withdrawn. Using United Nations Conference on Trade and Development statistics for 1995–2013 and applying an extended version of the augmented gravity model, we show that the formation of a trade bloc like the South Asian Free Trade Area unambiguously promotes member countries' exports of textile and clothing at both intra‐bloc and extra‐bloc levels. The expansion of south‐south trade is facilitated by the growing intraregional trade in intermediate goods. The creation of a regional value chain can shield the smaller countries in the context of enhanced global competition. (JEL F14, F15, F13)     

Estimating gravity equations: to log or not to log?

In this study we compare the traditional OLS approach applied to the log-linear form of the gravity model with the Poisson Quasi Maximum Likelihood (PQML) estimation procedure applied to the non-linear multiplicative specification of the gravity model. We use the trade flows for all products, for all manufacturing products as well as for manufacturing products broken down by three-digit ISIC Rev.2 categories. We base our conclusions on the gravity model of Bergstrand (Rev Econ Stat 71(1):143--153, 1989) for disaggregate trade flows that allows us to investigate differences in factor-proportions and home-market effects at the industry level. In addition, we compare the effects of other explanatory variables such as exporter and importer total income, distance, preferential trade agreements, common border, historical ties, and common language on the volume of trade. Our main conclusion is that both estimation results as well as results of the regression mis-specification tests provide supporting evidence for the PQML estimation approach over the OLS estimation method. The paper has benefited from comments by an anonymous referee and by the participants at the following conferences: the 4th Nordic Econometrics Meeting, Tartu, Estonia, the 8th Annual Conference of the European Trade Study Group (ETSG), Vienna, Austria, the 21th Annual Congress of the European Economic Association (EEA), Vienna, Austria, the XIth Spring Meeting of Young Economists (SMYE), Sevilla, Spain, and the 5th Annual Conference of the European Economics and Finance Society (EEFS), Heraklion, Greece.     

Exempted sectors in free trade agreements

Almost all participants in free trade agreements (FTAs) exclude at least a few products or sectors from complete tariff removal on the exports of their FTA partners. The positive tariffs that remain within an FTA are often the highest tariffs that the countries apply on an MFN basis. It seems plausible that such exclusions may be chosen because the domestic producers of these products are viewed as especially vulnerable to competition from imports from the partner country. In brief, they are especially “sensitive sectors.” We develop this idea theoretically and then test it empirically on data from 37 countries in 240 importer–exporter pairs within FTAs. We find support for the sensitive‐sector hypothesis only in the high‐income countries. We find that low‐income countries, in contrast, exempt sectors where bilateral tariff removal would be more likely trade‐diverting and therefore harmful. Our explanation for this, supported empirically, is not that they are following the advice of trade economists, but rather that they are avoiding loss of tariff revenue and may also perhaps be influenced by the greater bargaining power of richer and/or larger partners in their FTAs.     

Non‐discriminatory Trade Policies in Panel Structural Gravity Models: Evidence from Monte Carlo Simulations

This paper provides Monte Carlo (MC) simulation evidence on the performance of methods used for identifying the effects of nondiscriminatory trade policy (NDTP) variables in panel structural gravity models. The benchmarked methods include a fixed effect (FE) estimator that utilizes data on intra national trade flows, the bonus‐vetus (BV) and the two‐stage fixed effect (FE‐2S) estimator. The results indicate that only the FE estimates are unbiased and consistent under very general assumptions of the data generating process. The favourable asymptotic properties of the FE estimator unfold as the number of period T increases.     

Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model

It is common in the trade literature to use iceberg transport costs to represent both tariffs and shipping costs alike. However, in models with monopolistic competition these are not identical trade restrictions. This difference is driven by how the two costs affect the extensive margin. We illustrate these differences in a gravity model. We show theoretically that trade flows are more elastic with respect to tariffs than transport costs and find a linear relationship between the elasticities with respect to tariffs, iceberg transport costs, and fixed market costs. We empirically validate these results using data on US product‐level imports.     

Understanding China’s Foreign Trade Policy: A Literature Review

China has continued to experience rapid growth in its foreign trade since the implementation of its reform and opening-up policies. In recent years, the country has become the world’s largest exporter and second largest importer of goods and commodities. China’s trade policy has also gradually been transforming from protectionism to open trade. This paper aims to provide a comprehensive survey on the literature of China’s trade policy. The review covers (1) export and import policies, (2) tariff and non-tariff barriers, and (3) policy effects and motivations behind the policy design. This paper also reports on important topics and issues that deserve more research attention.     

THE IMPACT OF TRADE AND INVESTMENT AGREEMENTS ON AUSTRALIA'S INWARD FDI FLOWS

International trade and investment agreements are one of the primary instruments of global financial liberalisation. They are enacted to enhance the flows of foreign direct investment (FDI) between signatories by reducing regulatory barriers to investment; promoting stable host investment environments; and guaranteeing investors against non‐commercial risk. As a net capital importer, Australia has sought to attract FDI through participation in such accords since the early 1980s. This paper examines the determinants of Australia's inward FDI flows—focussing specifically on the effects of trade and investment agreements. Using panel data, we find that both bilateral trade and bilateral and multilateral investment agreements attract FDI flows into Australia, thereby indicating that the policy of enticing FDI through participation in these accords is quite possibly effective.     

TWENTY‐FIRST‐CENTURY TRADE GOVERNANCE: FINDINGS FROM THE COMMONWEALTH COUNTRIES

This paper focuses on twenty‐first‐century‐trade governance patterns within the Commonwealth (CW) countries. It uses an augmented gravity model to examine the role of governance in influencing trade and investment flows, and whether enhanced trade governance within the CW countries could potentially foster trade gains, on a both intra‐ and extra‐CW basis. Results show a 10% reduction in the costs incurred for a good to exit a country can increase intra‐CW exports by 5%. Second, contract enforcement is more efficient among CW members, and requires 20% less time compared to the world average. Third, every 1 percentage point improvement in government effectiveness triggers an increase in exports from CW, at 3.4%, compared to the rest of the world, at 2.4%. Finally, trade between CW members is three times higher when they belong to an existing regional trade agreement. (JEL F10, 011, F13)     

Preferential Liberalization,Antidumping, and Safeguards: Stumbling Block Evidence from MERCOSUR

There is not yet consensus in the trade agreements literature as to whether preferential liberalization leads to more or less multilateral liberalization. However, research thus far has focused mostly on tariff measures of import protection. We develop more comprehensive measures of trade policy that include the temporary trade barrier (TTB) policies of antidumping and safeguards; studies in other contexts have also shown how these policies can erode some of the trade liberalization gains that arise when examining tariffs alone. We examine the experiences of Argentina and Brazil during the formation of the MERCOSUR over 1990–2001, and we find that an exclusive focus on applied tariffs may lead to a mischaracterization of the relationship between preferential liberalization and liberalization toward non‐member countries. First, any “building block” evidence that arises by focusing on tariffs during the period in which MERCOSUR was only a free trade area can disappear once we also include changes in import protection that arise through TTBs. Furthermore, there is also evidence of a “stumbling block” effect of preferential tariff liberalization for the period in which MERCOSUR became a customs union, and this result tends to strengthen upon inclusion of TTBs. Finally, we also provide a first empirical examination of whether market power motives can help explain the patterns of changes to import protection that are observed in these settings.     

The United States is a Small Country in World Trade*

Despite being the largest country in world trade and thus presumably having high optimal tariffs, the United States has long had low and declining levels of protection. This paradox suggests that the United States is failing to exploit its monopsony power by levying optimal tariffs. Using data on world output and trade flows, we find that the United States is a small country in world trade in that its trade policies have negligible impacts on world prices. In the median manufacturing industry, US tariffs reduce world prices by only 0.12%. United States optimal tariffs are also typically small (3.6% in the median industry) and are lower than existing US tariffs in most industries. It is no puzzle that the United States has been a champion of free trade since the 1930s—the United States, like other small countries, benefits economically from tariff reductions.     

Second thoughts on the exporter productivity premium

Abstract Contrary to the prevailing interpretation, this paper shows that the central models of trade with heterogeneous firms ( Melitz 2003 ; Bernard et al. 2003 ) exhibit ambiguous predictions for the exporter productivity premium. This prospect arises because of differences between theoretical and empirical representations of firm productivity. Instead of marginal productivity, we examine in both models the theoretical equivalent of empirically observable productivity (value‐added per employee). Given the presence of fixed export costs or heterogeneous mark‐ups and trade costs, the observable productivity of exporters in proximity to the export‐indifferent firm turns out to be lower than that of non‐exporters; that is, the productivity distributions overlap. The paper reviews empirical literature that reports non‐positive exporter productivity premia in firm‐level data and discusses implications for empirical research on exporter performance, including learning and the role of non‐parametric regressions (stochastic dominance, quantile regressions), fixed costs, and productivity distributions.     

Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule

Abstract. A fundamental difference between multilateral trade agreements like the GATT and WTO and a preferential agreement is the multilateral agreements’ inclusion of a most‐favoured‐nation principle. Though MFN requires that members implement policies that provide equal treatment to all GATT/WTO countries, how far do members actually follow the MFN principle when so required? We empirically investigate a sample of GATT/WTO trade disputes and the effect of successful dispute settlement negotiations on the disputed product trade of third country exporters to the defendant country. We document evidence of trade liberalization consistent with defendant countries successfully applying the equal treatment rule. JEL classification F13     

The trade impact of European Union agricultural preferences

We assess the impact on agricultural trade of European Union (EU) trade policies, using a gravity model based on disaggregated trade flows from 161 developing countries (DCs) to 15 EU member countries. We use a sample selection framework to account for potential selection bias of positive trade flows and provide an explicit measure for relative preference margins. From a policy perspective, our results debunk some of the most widespread criticisms of preferential policies: EU preferences matter and have a positive impact on DCs agricultural exports at both the extensive and intensive margins, although with significant differences across sectors.     

Export performance of developing countries: Does landlockedness matter?

Landlockedness imposes additional costs on trade and reduces international competitiveness. This paper examines the determinants of export performance in developing countries, within a comparative perspective of landlocked developing countries (LLDCs) and non‐landlocked developing countries, by using a standard gravity modeling framework. The study covers data from 1995 to 2015. The results suggest that despite recent trade policy reforms, the overall export performance of LLDCs is lower than that of non‐landlocked developing countries due to the inherent additional trade costs associated with landlockedness. The conventional wisdom that export performance is aided by economic openness also applies to LLDCs, but distance‐related trade costs have a greater negative impact on exports from LLDCs than on other developing countries. The immediate trade policy challenge for LLDCs is therefore to create a more trade‐friendly environment by lowering tariffs, reforming exchange rates and entering into regional trade agreements.     

Efficiency in International Trade with Firm Heterogeneity and Networks

This paper examines integrated effects of firm heterogeneity and communication network services on international trade. Patterns and effects of trade are analyzed in a general equilibrium model where firms with different productivity levels share among them the cost of network services and compete in a monopolistically competitive market for a differentiated good. The paper reveals that the more efficient country in the production of the differentiated good is not always the net exporter of the good. The less efficient country also has the chance to expand the industry and then to become the net exporter in this intra‐industry trade due to the combination of the efficiency effect induced by firm heterogeneity and the cost‐sharing effect by the existence of the network service industry.