Quantitative Methods for Trade-Barrier Analysis

Without doubt the major accomplishment of seven multilateral trade negotiations (MTNs) that began in the late 1940s was the reduction of tariffs as trade barriers. Estimates relating to the period prior to the MTNs indicate the average tariff in industrial countries was approximately 40 per cent, but these duties were progressively lowered to under 8 per cent through concessions made in the Geneva (1947) (1956), Annecy (1949), Torquay (1951), Dillon (1962) and Kennedy Round (1968). During the most recent Tokyo Round (1979) negotiations, the General Agreement on Tariffs and Trade (GATT) estimates that developed country most-favoured-nation (MFN) tariffs on manufactures were reduced by about one-third, and now average about 5.5 per cent since the final concessions have been implemented. A further liberalisation of tariffs will undoubtedly occur in the Uruguay Round negotiations which are scheduled for completion in 1990.

A point that must be addressed before any analyses can be undertaken is to define what constitutes a ‘nontariff barrier’. This problem is complicated by the fact that different definitions have previously been advanced. Robert Baldwin (1970), for example, suggests that a nontariff trade distortion is ‘any measure (public or private) that causes internationally traded goods and services, or resources devoted to the production of these goods and services, to be allocated in such a way as to reduce potential real world income’. Potential world income is defined as that level attainable if resources were allocated in the most economically efficient manner. Clearly difficulties exist for applications of this definition since it requires an estimate of ‘potential real world income’ or, at a minimum, knowledge of directional movements in income under alternative policy measures. While there may be agreement on the directional movement for removal of (say) a rigorously enforced quota there are measures whose effects may be more difficult to assess. For example, it may be difficult to determine if removal of some sanitary requirements for imports would increase or decrease income if the resulting trade expansion was accompanied by a decline in health standards and rising medical costs.

Although the procedure does not provide basic information for simulating economic effects of nontariff barriers (as do most of the studies surveyed in Chapter 5), the ‘inventory’ approach has been widely used in NTB studies. However, a problem that must be resolved before any ‘inventory’ analysis of trade restraints is undertaken is to determine which nontariff measures will be included in the empirical analysis. One potential approach is to base an empirical study on all entries in the inventory, but there are acknowledged problems with such a line of analysis. The major difficulty is that it would include measures like health and sanitary requirements or automatic import authorisation systems that may often have no, or relatively unimportant, trade effects. As such, NTM frequency or trade coverage indices which included such regulations would likely overstate the importance of nontariff measures.

This chapter reviews and evaluates findings of previous studies that derived empirical information on the application and incidence of nontariff barriers. Given the basic differences in their methodological approaches, the results of previous ‘inventory’ studies are examined separately from analyses that estimated quantity or price impact measures for nontariff barriers. The review draws upon the theoretical foundation for quantification of NTBs developed in Chapter 2 in order to identify biases and other potential problems in these investigations’ empirical results. In addition, the conclusions of several studies that simulated the trade and other economic effects of a nontariff barrier liberalisation are examined since these analyses have important implications for the Uruguay Round negotiations. Here, several representative analyses that approximated the economic costs of trade intervention measures have been included. Too often, nontariff barriers involve a lack of transparency as far as their costs and economic effects are concerned, and by reviewing several relevant studies their importance can be placed in proper perspective.¹