DP13602 Heterogeneous Effects of Tariff and Non-tariff Trade-Policy Barriers in Quantitative General Equilibrium

Author(s): Peter Egger, Katharina Erhardt
Publication Date: March 2019
Keyword(s): Generalized propensity scores, Gravity models, Non-parametric methods, Semi-parametric methods, trade policy
JEL(s): C14, F13, F14
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13602

Structural quantitative work in international economics typically treats trade policy as log-linearly related to trade costs and as exogenous. This paper proposes a structural approach that allows for a non-parametric relationship and treats tariff and non-tariff trade-policy variables as potentially endogenous in log-linear estimation. We document that the data reject the assumption of log-linearity of trade costs in both the tariff- and the non-tariff-policy domains. Specifically, the partial impact of a change in tariffs is strongest for low policy barriers and medium levels of tariffs but generally decreases in the level of both non-tariff barriers and tariff barriers. To give a relevant illustration, we assess the effects of a unilateral increase of US tariffs on Chinese imports by 10 percentage points and document that the estimated effects on real bilateral trade-flow changes would be largely underestimated by standard approaches.