Nontariff Measures and International Trade

The following sections are included:

• About the Editor
• Acknowledgments
• List of Contributors
• Introduction
• Table of Contents

Nontariff barriers (NTBs) refer to the wide and heterogeneous range of policy interventions other than border tariffs that affect and distort trade of goods, services and factors of production. Common taxonomies of NTBs include market-specific trade and domestic policies such as import quotas, voluntary export restraints, restrictive state-trading interventions, export subsidies, countervailing duties, technical barriers to trade (TBT), sanitary and phytosanitary (SPS) policies, rules of origin and domestic content requirements schemes. Extended taxonomies also include macro-policies affecting trade. No taxonomy can be complete since NTBs are defined as what they are not (Deardorff and Stern, 1998). This article is complemented by related articles on ANTIDUMPING, BORDER EFFECTS, COUNTERTRADE, GRAVITY EQUATION, TARIFF VERSUS QUOTA, and TRADE COSTS. Deardorff and Stern (1998) suggest the following taxonomy with five categories.

We assess the literature on public and private quality standards and their impact in food markets, international trade, and global supply chains. We focus on their effects on welfare, trade, industrial organization, and labor markets and with special attention to the North-South context. We also attempt to better characterize when these measures constitute protectionism, a complicated task. We look at studies investigating public and private standards and across various quantitative approaches and countries. These standards have complex effects. The evidence is mixed regarding standards as catalyst for or as impediment against trade and development, reflecting the complexity of these effects and their specificity to industries and countries. The analysis of standard-like non-tariff measures and their impacts does not lead to sweeping prescriptions for policy reforms. We identify more modest prescriptions and make some recommendations for fruitful research directions.

This paper surveys and analyses existing methodologies to model and quantify non-tariff trade barriers (NTBs) in the agricultural and food sectors. The analysis centers on sanitary, phytosanitary, and technical regulations that can have an impact on trade. The paper stresses methods that provide some quantitative estimates of the impact of such barriers on market equilibrium, trade flows, economic efficiency, and welfare. Potential areas for future applied research are identified.

A meta-analysis explains the variation in estimated trade effects of technical barriers to trade broadly defined, using available estimates from the empirical international trade literature, and accounting for data sampling and methodology differences. Agriculture and food industries tend to be more impeded by these barriers than other sectors. SPS regulations on agricultural and food trade flows from developing exporters to high-income importers tend to impede trade. Not controlling for “multilateral resistance” barriers increase the likelihood to overstate the trade impeding effect of technical measures and not accounting for their potential endogeneity with trade does the opposite. Studies using direct maximum residue limits tend to find more trade impeding effects than other measures and clearer policy implications. Other technical measures proxies tend to muddle results and increase the likelihood of inconclusive results and few policy implications.

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. (2009) 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.

Maximum residue level (MRL) regulations in plant products can create unnecessary trade barriers on one hand and enhance demand via risk mitigation or quality assurance on the other. Westipulate a generalized gravity equation model to disentangle the effects of MRLs on the import demand and foreign exporters’ supply. Applying the framework to the MRLs on pesticides imposed by high-income Organization for Economic Co-operation and Development countries, we find that the MRLs jointly enhance the import demand and hinder foreign exporters’ supply. In addition, exporters from the less and least developed countries are more constrained by the MRLs than their competitors from the developed world.

This paper provides a systematic welfare-based approach to analyze the impact of non-tariff measures (NTMs) on trade and welfare in the presence of market imperfections. It focuses on standard-like measures such as technical barriers and sanitary and phytosanitary regulations. The approach overcomes the shortcomings of the mainstream approach based on the analysis of foregone trade caused by trade costs. The latter ignores market imperfections, and welfare is found to increases when NTMs are reduced and trade expands. We explain how to account for external effects and market failures in trade-focused welfare analysis, leading to a more balanced overall assessment of measures despite a potential reduction of trade flows. The relationships between trade, welfare, and NTMs are complex, and generalizations are best avoided. Very often, the optimum NTM is not the absence of regulation. An application to shrimp trade illustrates the feasibility of the proposed approach. The illustration shows that the reinforcement of a food safety standard can be socially preferable to the status-quo situation, both domestically and internationally.

We derive a method to econometrically estimate the tariff equivalent and forgone trade effects of a prohibitive technical barrier to trade (TBT) based on Wales and Woodland’s Kuhn-Thcker approach to corner solutions in consumer choice. The method overcomes the lack of observed data on bilateral trade flows and accounts for differentiated goods by place of origin. We apply the derived random utility model to international trade in apples to identify the tariff equivalent of prohibitive phytosanitary barriers imposed by Australia on potential imports of New Zealand apples. We estimate the forgone apple trade between the two countries, the implied trade injury imposed by Australia on New Zealand, and the welfare loss to Australia. The removal of the Australian policy would induce net welfare gains around US$50 million annually for Australia.

The price-wedge method yields a tariff-equivalent estimate of technical barriers to trade (TBT). An extension of this method accounts for imperfect substitution between domestic and imported goods and incorporates recent findings on trade costs. We explore the sensitivity of this revamped TBT estimate to its key determinants (substitution elasticity, preference for home good, and trade cost). We use the augmented approach to investigate the recent Japan-U.S. apple trade dispute and find that removing the Japanese TBT would yield limited export gains to the United States. We then draw policy implications of our findings.

We propose aggregation indices of Non-Tariff Measures (NTMs) to quantify their protectionism relative to international standards of stringency. We apply the indices to national Maximum Residue Limit (MRL) regulations on pesticides and veterinary drugs affecting agricultural and food trade and using a science-based criteria embodied in Codex Alimentarius international standards. The approach links two streams of the NTM literature, one concerned with the aggregation of various NTMs into operational indices for econometric and modeling purposes, and the other attempting to evaluate the protectionism of NTMs. The data used in the application come from a large international dataset on veterinary and pesticide MRLs and CODEX MRL standards for a large set of countries.

We analyze the effect of heterogeneity of foreign and domestic producers on product standard and investigate whether the standard chosen by the welfare-maximizing policymaker is protectionist. In a partial-equilibrium set-up, both domestic and foreign producers compete in selling a product in the domestic market, in the presence of consumption externalities. The policymaker chooses a minimum domestic standard that has to be met by both domestic and foreign producers. Protectionism occurs when the welfare-maximizing domestic standard is higher than the international standard maximizing welfare inclusive of foreign profits. We show that the standard is anti-protectionist when foreign producers are much more efficient at addressing the externality than are domestic producers. Possible exclusion of domestic or foreign producers arises with large standards, which may alter the classification of a standard as protectionist or non-protectionist. The paper identifies multiple caveats for the estimation of tariff equivalents of nontariff barriers.

Maximum residue limits (MRLs) on pesticides and veterinary drugs in plant and animal products are established to promote food safety and animal and plant health. In practice, however, they are often accused of creating unnecessary trade barriers. The controversy is more prominent when a given MRL is stricter than the corresponding international standard developed by Codex. Using the score indices constructed by Li and Beghin (2012), we empirically assess the implications of stringency in MRLs in plant and animal products, relative to Codex levels, for Canadian and US trade performance. We find little evidence that US imports are influenced by domestic stringency or those imposed by its trading partners. However, US exports are negatively affected by stringency in destination markets. Canada’s stringent MRLs facilitate its exports of plant and animal products and these exports do not seem to be impeded by MRL stringency in destination markets. Canada’s imports do not appear to be systematically influenced by either its own or its trading partners’ MRL stringency. We draw implications for the potential harmonization of MRLs between the two countries.

We formally investigate the effects of an inspection system influencing safety of foreign and domestic food products in the domestic market. Consumers purchase domestic and imported food and value safety. Potential protectionism à la Fisher and Serra (2000) can arise: inspection frequency imposed on foreign producers set by a domestic social planner would be higher than the corresponding policy set by a global social planner treating all producers as domestic. The domestic social planner tends to impose most if not all of the inspection on foreign producers, which improves food safety for consumers and limits the production loss for domestic producers. Despite this protectionist component, inspections address a potential consumption externality such as health hazard in the domestic country when unsafe food can enter the country undetected. We then calibrate the analytical framework to the U.S. shrimp market incorporating key stylized facts of this market. Identifying protectionist inspection requires much information on inspection, safety, damages, and costs. We also investigate how to finance the inspection policy from a social planner perspective. Financing instruments differ between the domestic and international welfare-maximizing objectives.

Food safety standards have proliferated as multilateral and bilateral trade agreements constrain traditional barriers to agricultural trade. Stringent food standards can be driven by rising consumer and public concern about food safety and other social objectives, or by the lobbying efforts from domestic industries in agriculture. We investigate the economic and political determinants of the maximum residue limits (MRLs) on pesticides and veterinary drugs. Using a political economy framework and econometric investigation, we find that nations with higher income and larger population adopt stricter MRLs. We also find that countries set more stringent MRLs in their more competitive sectors. Moreover, we show that MRLs and import tariffs are policy substitutes for policy makers. Finally, we find that countries with higher regulatory quality set tougher food standards.

The following sections are included:

• INTRODUCTION
• AUSTRALIA’S PIGMEAT TRADE POLICY
• METHODOLOGY
• DATA
• EMPIRICAL SPECIFICATION AND ECONOMETRIC RESULTS
• CONCLUSIONS
• REFERENCES

We provide an ex post econometric examination of the harmonisation and tightening of the EU maximum residue limit (MRL) on aflatoxins in 2002, and its impact on African exports of groundnut products. We find no evidence of the EU MRL having a significant negative trade impact on these groundnut exports from Africa across various methods of estimation. African domestic supply plays an important role in the determination of the volumes of trade and the propensity to trade. Our findings suggest that the trade potential of African groundnut exporters is more constrained by domestic supply issues rather than by limited market access.

The expansion of the U.S. corn seed trade is not well understood. This article econometrically investigates world demand for U.S. corn seeds, focusing on trade costs impeding exports, including transportation, tariffs, and sanitary and phytosanitary (SPS) regulations. The analysis estimates a derived demand for seed by foreign corn producers using data from 48 countries for the years 1989 to 2004. An SPS count variable captures shifts in the cost of seeds faced by foreign users. A sample selection framework accounts for the large presence of zero trade flows. All trade costs have a significantly negative impact on U.S. com seed exports.

We provide a formal analysis of the welfare and trade implications of ecolabeling schemes. We couch our analysis in the context of a stylized model of the textiles market between an industrialized North and a developing South. Textiles ecolabeling involves production-process standards, raising concerns of protectionism against the South. We investigate several labeling scenarios (labeling by North, labeling by both North and South, and harmonization).

This paper examines the effects of the use of increasingly-popular phytosanitary regulations on production costs, and output and factor trade flows. The case addressed is that of the European regulation of maximum chemical residues in cigarettes manufactured with tobacco containing maleic hydrazide. The paper presents simulations of the effects of tightening the EU regulation on the tobacco growing and manufacturing industries. The analysis focusses on input/output market linkages and on the substitution away from the residue-contaminated U.S. input to residue-free non-U.S. inputs. This induced substitution results in higher costs, lower quantity supplied of the final product, and higher prices for U.S. cigarettes in Europe. Cross-price effects lead to higher quantities of EU cigarettes sold and a corresponding increase in the use of all inputs, including U.S. tobacco. When the U.S. tobacco price is allowed to fall, direct price effects stimulate the EU derived demand for U.S. tobacco. Although the regulation is protectionist in the output market, it leads to increased EU imports of the residue-contaminated input. When the price of U.S. tobacco adjusts, the regulation is actually antiprotective for EU growers. The regulation also indirectly influences production practices of U.S. tobacco growers and leads to lower levels of MH residues on U.S. leaf.

We investigate producers’ choice between geographical indications (GI) and brand advertising (BA) as pure marketing strategies to convey information to consumers. Producers also decide whether or not to select an effort level for improving the quality of their products. We identify conditions under which GI and BA emerge with and without quality effort, depending on the relative costs and effectiveness of marketing strategies and quality improvement. Beyond the conventional equilibrium cases of GI-no-quality-effort and BA-with-quality-effort, we identify several other equilibrium strategies. Under plausible parameter characterization, and in spite of the free-riding problem of collective reputation, producers choose GI and quality improvement efforts at equilibrium. This occurs when the cost of marketing is high, the relative cost of quality effort is low relative to the former, and when the effectiveness of marketing promotions is low. BA without quality improvement also emerges as an equilibrium strategy for the opposite cost structure (low cost of promotion, high cost of effort relative to promotion, and higher effectiveness of promotion). Finally, the joint selection of both instruments BA and GI is examined. We motivate and illustrate our analysis with the European and New-World wine industries.