Welfare costs and benefits of non-tariff measures in trade: a conceptual framework and application

Abstract

<p>This paper provides a systematic welfare-based approach to analyze the impact of non-tariff measures (NTMs) on trade and welfare in presence of market imperfections. We focus 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 forgone trade caused by trade costs. The latter ignores market imperfections: welfare increases when NTMs are removed 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. We show that the relationship between trade, welfare, and NTMs is complex. The optimum NTM is often not zero. 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.</p>