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Institute for International Integration Studies IIIS Discussion Paper - page 8 / 41





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of different types of barriers and the development of a more accurate system for weighting the barriers. 6

The OECD has assembled a database on the level of product market regulation (PMR) in a number of OECD countries (Nicoletti et al., 2000). The regulations are classified and weighted by their distortionary effect on the market to give an aggregate measure of the regulatory burden for each country.

Price impact approaches are based on the assumption that barriers to trade will result in differences in prices. In an undistorted market domestic and world prices would be equal. Whilst Deardorff and Stern (1997) and others have econometrically estimated the impact of NTBs on the gaps between domestic and world prices (price wedges), many of the applications to services trade have been by APC researchers.

Chen and Schembri (2002) summarise the APC method of measuring price impacts as follows: an econometric model of the determinants of prices is estimated (based on a suitable proxy for domestic prices). One of the explanatory variables in the model is a measure of the NTBs in the sector in question. Typically this is based on an augmented frequency index. The estimated coefficient for the NTB variable can then be used to calculate the tariff equivalents of the restrictions to trade.

Whalley (2004) notes several limitations of price based approaches. First, differences in prices and costs may reflect differences across countries of domestic policies that regulate firm activities (many of the APC studies take this into consideration). Second, price differences may simply arise because of differences in quality across countries rather than differences on policies.

Quantity based methods to estimating the impact of NTBs on trade focus on comparing actual levels of trade flows to potential (or benchmark) levels of trade. The most commonly used quantity based method is the gravity model approach, in which potential trade flows are predicted based on the physical and economic characteristics of countries and their trading partners.

There are several difficulties that arise in the use of this approach. Initial studies on services were severely limited by the lack of available data. As Findlay and Warren (2000) note, research tended to use domestic service consumption data rather than data on services trade between countries. Although the quality of the data has improved significantly in recent years, the availability of information on services trade is still quite poor relative to information for trade in goods. 7

Problems also arise in calculating tariff equivalents based on the results of quantity based models (Whalley, 2004). Taking the total difference between actual and predicted trade flows are likely to overestimate the importance of any NTBs present. Factors other than the presence of NTBs are also likely to generate deviations of trade flows from their predicted values (tariff equivalents may even be generated in the absence of any barriers). This has led to the refinement of the specification of the models to include an

6 The APC’s estimates of tariff equivalents are widely used in the literature and often incorporated in GTAP and other CGE models (e.g., Dee and Hanslow, 2000).

Another issue related to the lack of data, shown in Egger (2002), is the problem that arises in making predictions for a group of countries using data from a different set of countries (Egger refers to this as out- of-sample projection), rather than the countries themselves (in-sample projection). 7


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