Trade Liberalization and the Theory of Endogenous Protection : An Econometric Study of U.S Import Policy

Daniel Trefler University of Toronto

Journal of economic policy, 1993

Table of Contents      

Motivations Literature review Theory Econometric estimates Sensitivity analysis Conclusion

Motivations 

Main goals of this paper :



Estimate the impact on U.S imports of the elimination of all U.S non tariff barriers to trade



Investigate the theory of endogenous protection

Litterature review 

Theory of endogenous protection

Baldwin and Lewis (1978)

Cline and Al (1978) Whalley (1985) Deardoff and Stern (1986)



But all previous studies have treated the NTB and the imports

equation as separate research efforts…

1. Theory 1.

The NTB Equation

Equilibrium of protection determined by supply and demand.

Demand : interest groups Supply : Politicians

2. The import equation

 

It must predict the pattern of trade It must be compatible with the theory of endogenous protection

The factor endowment import equation is consistent with these criteria.

3. Simultaneity of imports and NTBs

𝑀. 𝛾𝑀 + 𝑋𝑁 . 𝛽𝑁 + 𝜀𝑁  𝑁= 0 0

𝑀 > 0, 𝑁 > 0 𝑀 > 0, 𝑁 ≤ 0 𝑀≤0

𝑁𝛾𝑀 + 𝑋𝑀 𝛽𝑀 + 𝜀𝑀  𝑀= 𝑋𝑀 𝛽𝑀 + 𝜀𝑀 0

𝑀 > 0, 𝑁 > 0 𝑀 > 0, 𝑁 ≤ 0 𝑀≤0

M : import penetration N : NTB Coverage ratio

II. Econometric estimates

Table 4 : The import equation

3. Simultaneity bias and estimate of restricteveness of NTBs



How much NTB’s have restricted US manufacturing imports ?



If US manufacturing NTB were eliminated:



∆𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑒𝑛𝑒𝑡𝑟𝑎𝑡𝑖𝑜𝑛 = 1,65% 𝑖𝑒 𝑖𝑛 𝑑𝑜𝑙𝑙𝑎𝑟𝑠 ∶ $203 𝑏𝑖𝑙𝑙𝑖𝑜𝑛𝑠 → $252 𝑏𝑖𝑙𝑙𝑖𝑜𝑛𝑠 ~ 𝑠𝑖𝑧𝑒 𝑜𝑓 𝑈𝑆 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝑓𝑟𝑜𝑚 𝐽𝑎𝑝𝑎𝑛 !

 

III. Sensitivy Analysis Choice of intruments  Regressor exogeneity and estimator consistency  Sensitivity to outliers  Omission of tariffs  Coverage ratios 𝑤𝑖𝑡ℎ 𝜔𝑖 = 𝑖 𝜏𝑖 𝜔 𝑖 

𝑚𝑖 𝑖 𝑚𝑖

Prohibitive tariffs does not bias the estimates of the impact of protection on imports. Coverage ratio of equal weight have equal effects.

Conclusion Modeling protection endogenously :  In 1983, US manufacturing NTB reduced US imports by $49,5 billions.  10 times the estimate derived from treating NTB exogenously.  Determinants of US Trade Policy ? - The more valuable protection is to private interests, the greater degree of protection - American business has much more influence than organized labor 