Trade Restrictiveness Index of Non-Tariff Barriers Under the CES Preference

Abstract

The literature has suggested formulas for trade restrictiveness index of tariffs based on second-order approximation. This paper shows that in a special case of the constant-elasticity-of-substitution (CES) preference the trade restrictiveness index of non-tariff barriers can be derived explicitly without using approximation and is simply the weighted $(\sigma -1)$th-power average of non-tariff barriers, where σ is the elasticity of substitution and the weights are the observed expenditure shares of imported goods. Numerical simulations show that the proposed index accurately measures the aggregate of non-tariff barriers while other indices have persistent measurement errors.

KEYWORDS:

• Trade restrictiveness index
• non-tariff barriers
• trade protection

JEL CLASSIFICATIONS:

• F13
• F15

Acknowledgments

I thank Anson Soderbery, Sunghyun Kim, and two anonymous referees for their insightful comments. All remaining errors are mine.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Wisarut Suwanprasert http://orcid.org/0000-0002-0494-854X

Notes

3 This condition is supported by empirical works. For example, $\sigma =4.6$ in Bernard et al. (2003) and $\sigma =9.28$ from Eaton Kortum (2002).

2 This statement is true under the condition that the CES preference is consistent with how the real world works. The justification follows from the fact that Krugman (1980), Melitz (2003), and Arkolakis et al. (2012), have been workhorse models in the past fifteen years.

1 See Ossa (2011), Suwanprasert (2018), and Maggi et al. (2017) for rationales of using non-tariff barriers.

5 One may think that the cost of NTBs should be additive, for example, the NTB on good i raises the price from $p_i$ to $p_i+{\gamma }_{ij}$. However, in this case, we can define ${\zeta }_{ij}={\gamma }_{ij}/p_i$ and the results remain unchanged.

4 One possible extension of this paper is to consider a firm-delocation effect, studied in Ossa (2011) and Suwanprasert (2018), so that the welfare losses from the firm-delocation effects are included in welfare calculation.

Additional information

Notes on contributors

Wisarut Suwanprasert

Wisarut Suwanprasert received his Ph.D. from the University of Wisconsin-Madison. Currently, he is an assistant professor of Economics at Middle Tennessee State University. His research interests include international trade, trade agreements, and labor markets.