Three essays on non-tariff measures and the gravity equation approach to trade
Following multilateral and regional trade agreements, import tariffs on agricultural and food products have been declining globally. Meanwhile, the proliferation of non-tariff measures (NTMs), including Sanitary and Phytosanitary (SPS) measures and Technical Barriers to Trade (TBTs), has been triggering trade concerns and protracted trade disputes, and efforts to harmonize these measures. Most standard-like NTMs allegedly protect human and animal health, and the environment from foreign threats. The rising public awareness of food safety and/or consumption externalities drives the emergence of these measures. Protectionist motives may also ride on this emergence and lead to unnecessary impediments in international trade. Delineating the complex impacts of these standard-like NTMs on trade and welfare is central to inform market participation by various stake-holders, as well as for sound policy design. My dissertation contributes new knowledge to the understanding of the impacts of NTMs in agricultural and food markets. Further, the three essays in the dissertation have an additional common thread. They focus on the gravity equation approach to trade, the workhorse used in the analysis and quantification of the effects of NTMs and other trade costs.
The first essay examines whether the harmonization and tightening of European Union (EU) regulations of aflatoxin maximum residue limits (MRLs) have impeded African groundnut exports. Using the state-of-the-art gravity equation approach, I revisit early ex-ante findings of a World Bank investigation predicting a dire adverse effect of the then forthcoming harmonization and tightening on African exports of groundnuts. I find that these African exports are constrained by their own domestic supply limitations, but that the actual harmonization and tightening of EU's aflatoxin MRLs have had no significant impact on these groundnut exports. The essay stresses the importance of addressing Africa's under-trading issue from a development perspective, focusing on domestic supply constraints before the border rather than on the excessive stringency of EU MRLs.
My second essay is a methodological contribution. I provide a parsimonious way to disentangle the role of SPS and technical measures as quality signals to consumers and as trade impediments through cost increases to producers and exporters. Unlike tariffs which always penalize consumers of the taxed commodities, SPS and technical measures can also enhance consumers' demand for the targeted products via quality signaling and by resolving informational asymmetries. The proposed methodology identifies the two effects separately and sheds light on how consumers and producers respond to these regulations. I apply the methodology to an empirical analysis of agricultural trade between OECD countries in 2004. I find that in aggregate, intra-OECD agricultural trade was actually facilitated by these technical measures rather than impeded, although both effects are clearly present. The application adds a new dimension to the continuing debate of "standards as catalysts" versus "standards as barriers" in the sense that both effects take place simultaneously and can be identified.
The third essay is an econometric contribution. It proposes a novel two-step estimator for the gravity equation model to trade that deals with two stylized features in trade data: prevalent zeros trade records and heteroskedasticity. I first conduct Monte-Carlo simulations to investigate how the proposed estimator performs relative to other well-known econometric techniques. In an analysis of world trade data in 1986, I further demonstrate the usefulness of the proposed estimator by providing a model selection strategy using specification tests. The results suggest that the proposed estimator dominates alternative estimators in presence of selection bias in data. The essay highlights how crucial the choice of estimator is in the quantification of the impact of trade barriers and trade costs on the decision to trade and the volume of trade.