A classification of trade barriers 1.Taxonomy 2.Breakdown of effects Equivalence and non-equivalence of tariffs & QRs 1.Perfect competition 2.Monopoly.

A classification of trade barriers1. Taxonomy2. Breakdown of effects

Equivalence and non-equivalence of tariffs & QRs1. Perfect competition2. Monopoly3. World price volatility4. QR administration: licence allocation and efficiency

QRs: incidence & measurement issues1. QR cost estimates: a few examples2. Quality upgrading3. Using the gravity equation to assess the effect of QRs

Trade barriers

“Dissipative” barriers

QuotasVERs Contingent tariffs:• antidumping• countervailing• safeguard clauses

Sanitary &Phytosanitary standards

Technical Barriers to Trade

Price undertakings

Noncontingent tariffs:

• MFN• Preferential

“Foreign-capture” barriers

“Domestic-capture” barriers

Quantitative Restrictions (QR)

A Classification of trade barriers1. Taxonomy

Non-tariff barriers (NTB)

World price

Quantities

Prices

Domestic demand

Marginal cost

World price plus tariff

Tariff A B DC

Equivalence and non-equivalence of tariffs & QRs1. Perfect competition

Tariff under competition

Quantity imported

World price

Quantities

Prices

Domestic price

Domestic demand

Quota

Marginal cost

AB DC

Residual (after-quota) demand

Equivalence and non-equivalence of tariffs & QRs1. Perfect competition

Quota under competition

World price

Quantities

Prices

Domestic demand

Marginal cost

Marginal revenue

Equivalence and non-equivalence of tariffs & QRs2. Monopoly

Tariff under monopoly

World price plus tariff

Tariff A B DC

Quantity imported

World price

Quantities

Prices

Domestic price

Domestic demand

Marginal cost

B

Residual (after-quota) domestic demand

Quota

AC D

Equivalence and non-equivalence of tariffs & QRs2. Monopoly

Quota under monopoly

Source: Kee, Nicita & Olarreaga 2006a

(a) Ad-valorem equivalent of core NTBs, by GDP/capita of using country

(b) AVE of agricultural price-support measures

Use of Non-Tariff Barriers (NTBs)

Low world price

Quantities

Prices

Domestic demand

Tariff

Marginal cost

Equivalence and non-equivalence of tariffs & QRs3. World price volatility

Tariff at low price

Quantities

Prices

High world price

Domestic demand

Tariff

Marginal cost

Equivalence and non-equivalence of tariffs & QRs3. World price volatility

Tariff at high price

Low world price

Quantities

Prices

Domestic price

Domestic demand

Marginal cost

Quota

Equivalence and non-equivalence of tariffs & QRs3. World price volatility

Quota at low price

Quantities

Prices

High world price = domestic price

Domestic demand

Marginal cost

Quota (not binding)

Equivalence and non-equivalence of tariffs & QRs3. World price volatility

Quota at high price

Actual imports

Source: Kee, Nicita & Olarreaga 2006a

Overall protection: OTRI and MA-OTRI

i i i ik k kk k

M M T

Define Overall Trade Restrictiveness Index (OTRI) as uniform tariff that gives same level of imports as all current barriers:

OTRI Existing barriers (tariffs + AVE of NTBs)

OTRI and MA-OTRI by level of income

(a) OTRI (b) MA-OTRI

Source: Kee, Nicita & Olarreaga 2006a

Overall protection: OTRI and MA-OTRI in agriculture

“Third-country” tariff-quota2.2 m tons @ 75 ECU/ton

ACP quotatariff-free857,700 tons

EU OST quotaprice support854,000 tons

Dom. Rep.BelizeIvory CoastCameroon

90,000 tons“F.A. countries”:• Costa Rica 23.4%• Columbia 21%• Nicaragua 3%• Venezuela 2%

Other countries50.6% - 90,000 tons

Exporting country breakdown

Licence allocation breakdown (by type of operator)

Category A: 66.5%“Dollar” importers

Category B: 30%ACP/OST importers

Category C: 3.5%New entrants

Primary importers 57%

Custom clearers/ripeners 43%

QRs: incidence and measurement issues2. Using the gravity equation to assess the effect of QRs

Bananas

SEU

SACP

S$

Q$ = 2.65

p* + t

pEU

p*

Million tons

€/ton

QACP = 0.85

(a) (tariff-quota)

QEU

DEU

S$(t)

SEU

SACP

S$

Q$ = 2.65

p* + t

pEU

p*

Million tons

€/ton

QACP = 0.85

(a) (tariff-quota)

QEU

DEU

S$(t)Total rents

Rents to US companies

Rents to European companies

Rent-sharing

pEU

SACP + SEUSACP

S$

tPG

(b) (tariff only at rate tPG)

pEU

SEUSACP

S$

tPG

Q$ < 2.65QACP > 0.8

(b) (tariff only at rate tPG)

SACP + SEU

+ S$ (tPG)

S$ (tPG)

QEU

DEU

DEU

Million tons

€/ton

€/ton

€75/t in-quota tariff

SEU

SACP

S$

Q$ = 2.65

tPG

p* + t

pEU

p*

Million tons

€/ton

QACP = 0.85

(a) (tariff-quota)

QEU

DEU

S$(t)

“Tariffication” of a quota: EU bananas

PG estimates compared Table 5a. Raboy’s estimates Raboy 1999 2000 2001 2002 Average

Internal price 624 656 614 631

External price

US 542 598 549 563

Norway 546 589 747 627

EU MFN 542 583 612 579

Price gap

IP-US 82 58 65 68

IP-Norway 78 67 -133 4

IP-EU MFN 82 73 2 52

Table 5b. Borrel and Bauer’s estimates Borrel-Bauer 2000

Internal price 624

External price 560

Price gap 64

Table 5c. NERA’s estimates NERA 1999 2000 2001 2002 Average

Internal price 506 538 550 488 521

External price 246 260 286 255 262

Price gap 260 278 264 233 259

The gravity model of international trade

Large country

Large country

Large country

Small country

Close by

Distant

Distant

Distant

0 1 2 3

4 5 6 7

8

ln ln ln ln

ln 1

.

ijt it jt ijt

ijt i j

ijt ijt

X Y Y d

t I I t

Q u

1 if quota applies

0 otherwiseQ

Regression estimates

ˆˆln 0.642i ii QV X Q

(1.1)

ˆ 0.642

0.642ˆ

ˆ ˆ0.526 (which implies ln 0.642)

ˆ ˆ

i ii Q

i ii Q

X

Q Q

XNQ NQ

V Vee

V Ve

Trade-reduction effect of the quota:

ˆ ˆ

1 0.526 0.474 i.e. -47%ˆ

NQ Q

NQ

V V

V

Estimating the price effect of QRs: bananas 2. Interpreting the gravity estimates: trade-reduction effect of QR

Estimating the price effect of QRs: bananas 2. Interpreting the gravity estimates: tariff equivalent of QR

Use again regression estimates

ˆˆln 1.324ln 1t i iiV X t

so

(0.1) 0

ˆln 1.324ln 1

ˆtV

tV

. Combine this with what we had from previous slide 0.642 1.324 ln 1 t

and get 0.4851 1.624t e so that t = 0.624. Thus, the estimated ad-valorem equivalent of the quota, in percentage terms, is 62.4%. Applied to a unit value of €496/ton, this gives a specific-tariff equivalent of €310 per ton.

“Tariffication” of a quota: EU bananas

Gravity estimation

Gravity regression results, 08/02/05Dep. var.: trade value Huber Huber

log (1+t), applied -1.261(-2.69)

log (1+t), unconstrained -1.136(-2.12) *

log (1+t), constrained -1.485(-2.15) *

MFN quota dummy -0.515 -0.459(-3.28) ** (-2.3) *

Framework Agr. dummy 0.395 0.387(1.42) (1.39)

ACP dummy 0.993 0.998(4.73) ** (4.74) **

Ivory Coast*time trend 0.157 0.156(2.51) * (2.49) *

Cameroon*time trend 0.26 0.258(3.64) ** (3.6) **

log distance -1.269 -1.271(-20.89) **(-20.92) **

log importer's GDP 0.729 0.723(2.71) * (2.69) **

log exporter's GDP 0.251 0.252(1.19) (1.2)

log importer's exch. rate -0.034 -0.035(-0.39) (0.41)

log exporter's exch. rate 0.086 0.085(2.79) ** (2.77) **

Constant -321.06 -11.742(-2.55) * (-1.51)

Observations 6'970 6'983 R-squared 0.62 0.62Cook-Weisberg chi-sq.Implied tariff equiv. (€/ton) 221 158With €75/ton in-quota tariff 296 233Implied elasticity of substitutionAll tariffs 2.26QR-constrained market 2.14Unconstrained market 2.49