Protectionism refers to government policies that restrict international trade to help domestic industries. The 2021 National Trade Estimate Report on Foreign Trade Barriers (NTE) is the 36th in an annual series that highlights significant foreign barriers to U.S. exports, U.S. foreign direct investment, and U.S. electronic commerce. Tariff rates are an imperfect measure of protectionism, because of well-known measurement problems as well as NTBs. Capital Account Liberalization: Theory, Evidence, and Speculation, Journal of Economic Literature, vol.45(4), pp.887935. Definition Trade policy is the set of agreements, regulations, and practices by a government that affect trade with foreign countries. Our work is motivated by the importance of aggregate measures of trade restrictions, and their absence. Such measures are essential controls or determinants in empirical assessments of policy, and may be of intrinsic interest in the context of trade negotiations or economic rescue programs. Estimation and Inference of Impulse Responses by Local Projections, American Economic Review, vol.95(1), pp.16118. Organization of American States. One final concern is that these episodes could still be part of broader reform packages aimed at improving long-term output. However, several export restrictions on food, feed and fertilizers remained in place, compromising the predictable flow of food through international markets and contributing to price volatility at a time when food affordability remains a major . The panels also show a few dramatic cases of MATR changes; particularly noticeable are increases in Venezuelan restrictions to trade, and the reductions for the United Kingdom and Hong Kong. Jord, O., 2005. Still, the results obtained by estimating equation (2) confirm the theoretical predictions (analogues to Figure 11 are contained in Appendix 4). Below, we also investigate the sensitivity of our results by focusing on major episodes of liberalization and tightening of trade barriers, since these can be considered more exogenous. Surrender Requirements on Proceeds. Auerbach, A., and Gorodnichenko, Y., 2013. Repatriation requirements on Proceeds, X.A.1. Happily our results remain robust to these alternative specifications. In particular, we changed the sample through dropping: (i) series with gaps and less than 20 consecutive years of data; (ii) high inflation (>100%) episodes; (iii) small countries (population < one million); (iv) outliers (those with output residuals in the bottom and top percentiles of the distribution)22; (v) years before 1980; (vi) episodes with large changes in MATR change (corresponding to the 99th percentile of the distribution); (vii) observations from the Americas; and (viii) observations from Asia and Sub-Saharan Africa. The left-hand side of figure 1 illustrates the market for a single good whose world price (assumed given) is -X* and whose home import-demand curve is ml(irl). Suppose you're in charge of a small country in which people do two thingsgrow food and make clothes. The results based exogenous measures confirm that trade restrictions are harmful for economic activity. For instance, in modelling capital flows, Fratzscher (2012) uses the Chinn-Ito (2008) measure of capital mobility, and openness to measure trade. PDF International trade rules and environmental protection measures The European monarchies favoured protectionist policies in the 17th and 18th centuries in an attempt to increase trade and build their domestic economies at the expense of other nations; these policies, now discredited, became known as mercantilism. It first covers these topics at a basic level and then introduces the reader to a number of more . A closer look at these principles: back to top Trade without discrimination 1. MATR might have been useful in exactly such circumstances. Trade barriers and quotas restrict the. Yes, say five decades of data from 150 countries, Modelling Non-Linear Economic Relationships. Y axis presents the number of countries that have data for that particular year. The analysis confirms that major trade restrictions are associated with significant output declines, of around 0.35 percent 5 years after the restriction. Caliendo, L., Feenstra, R., Romalis, J., and Taylor, A., 2017. To address this issue, we perform extensive search of narrative records. Figure plots the simple average of MATR by region. One does not want to over-interpret these simple scatterplots, since each is a simple bivariate cross-sectional relationship, taking no account of other factors.10 But collectively they provide reassurance. Large changes in MATR defined as changes in index > |2|, excluding recessions within one year of change: 1. In Figure A1.3, MATR is scattered against all six of these variants; it is highly correlated with each. The factor analysis works relatively well in the sense that the scatter-plot is steep (the first eigenvalue is 6.16, while the second and third are .72 and .64), and the loadings for the first factor are positive for 21 of the 22 fundamentals. Throughout, we consider alternative specification choices, and provide details of these, and the associated results, in Appendix 4. That is, a TRI would hypothetically, if applied to each import, generate the same effect on economic welfare as the actual set of trade restrictions. A Multidimensional Approach to Trade Policy Indicators, IMF Working Paper WP/18/32. (2009),17, 5. Measuring the Restrictiveness of Trade Policy - JSTOR While these are only imperfect ways to address endogeneity, they provide some reassurance of the main findings. A TRI produced by the World Bank (2009), using methodology from Kee et al. Gravity with Gravitas, American Economic Review, vol.931, pp.170192. Its stability is manifest in Figure 5, which scatters MATR values across four decades.8, Evolution of MATR over time, by income groups, Evolution of MATR over time, for specific countries. where z is the variable measuring a given country characteristics (x, tariff rate and GVC participation), normalized to have zero mean and a unit variance. Overcoming Barriers to Trade Restrictions - Study.com Our narrative source, however, does not provide enough information for us to separate trade policy actions implemented because of cyclical conditions (motivated by the objective to push output back to its normal trend) from those arising from more exogenous reasons. Simple General Equilibrium Modeling (Chapter 6) - Applied Methods for Costinot, A., and Rodrguez-Clare, A., 2013. Types of Trade Restrictions - BrainMass This simple measure is based on sensible, plausible, trade policy inputs from a transparent, accessible, reliable source. Table 3 presents the results obtained estimating equation (1) for each horizon k, from 0 to 5. There are many determinants of openness beyond protectionism; remote, landlocked, thinly populated countries with idiosyncratic languages tend to trade less. Options for Dismantling Trade Restrictions in Developing Countries - JSTOR Restrictions come amid concerns that China could use AI chips from Nvidia and others for weapon development and hacking. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, Why Some Times Are Different: Macroeconomic Policy and the Aftermath of Financial Crises, Exchange Rate Regimes in the Modern Era: Fixed, Floating, and Flaky, Economic Reform and the Process of Global Integration, A New Measure of Aggregate Trade Restrictions (MATR), The Economic Effects of Trade Restrictions, IV. They find that fiscal multipliers are smaller for open as opposed to closed economies, using two definitions of the latter. We also apply Driscoll and Kraay (1998) standard errors to account for cross-sectional and time dependence in the error term tk. Using MATR, as well as a narrative approach to identify the motivation behind changes in MATR, we show that trade restrictions are harmful for the economy and lead to significant contractions in output. Eichengreen, B. J., 1981. We use Jords (2005) local projection method to estimate the response of GDP and other economic outcomes (investment, productivity, employment, consumption, trade flows and inequality) to changes in MATR. Richer countries tend to have fewer trade restrictions, as shown by the scatter of MATR against log real GDP per capita in the top-left panel. Nevertheless, the visual impressions of Figure 4and of other results elsewherestand up to more rigorous statistical inspection. This criterion identifies a large but manageable number of 385 episodes, 123 of increased restrictions and 262 of liberalization; the majority of these occurred between 1989 and 2008. The levels of MATR seem eminently sensible. Non-tariff barriers to trade - Wikipedia We now examine the periods after changes in MATR, to see if the dynamics of aggregate output are different following changes in trade policy. Both papers might have benefited from MATR. We also implement this by including the IMF WEO GDP growth forecasts made in October of the same projecting year (e.g., the growth forecast for 2018 made in October of 2018). Milesi-Ferretti, G. M., and Tille, C., 2011. We provide more comparisons in Figure 8, which is a series of scatterplots of MATR (always on the y-axis) against alternative measures of aggregate trade restrictions. The Effect of MATR on Economic Activity, Components of MATR and Alternative Aggregations, Large and Plausibly Exogenous Episodes of Trade Policy Change, Caliendo, Feenstra, Romalis and Taylor, 2017, https://www.unescap.org/resources/escap-world-bank-trade-cost-database, http://reports.weforum.org/global-enabling-trade-report-2016/files/2016/11/GETR16_Global_FINAL_with-language-links.pdf, http://reports.weforum.org/global-enabling-trade-report-2016/downloads-page/, http://faculty.msb.edu/quinnd/data/capital%20_financial_current_Master_1950_2012_public.xlsx, https://datacatalog.worldbank.org/dataset/overall-trade-restrictiveness-indices-and-import-demand-elasticities, http://iresearch.worldbank.org/servicetrade/default.htm, Protectionist Responses to the Crisis: Damage Observed in Product-Level Trade, International Trade, Distortions and Long-Run Economic Growth, Effective Trade Costs and the Current Account: An Empirical Analysis, Japan's Restrictive System of Trade and Payments: Operation, Effectiveness, and Liberalization, 1950-1964, Food Prices and the Multiplier Effect of Trade Policy, The African Continental Free Trade Agreement: Welfare Gains Estimates from a General Equilibrium Model, Estimating the Effects of the Trans-Pacific Partnership (TPP) on Latin America and the Caribbean (LAC), Trade, Growth, and Poverty: A Selective Survey, Review of the IMF's Trade Restrictiveness Index, Review of the Role of Trade in the Work of the Fund, International Trade, Distortions, and Long-Run Economic Growth, Protectionism: Increasing restrictions on trade; implications for developing countries, After the Crisis: Avoiding Protectionism: So far the world has resisted widespread resort to trade measures, but the hardest part may be yet to come, The Long and Winding Road: Toward Freer World Trade. 2012; Duval and Furceri 2018). The effects are not statistically different across components. Protectionism is the economic policy of restraining trade between countries through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to foster fair competition between imports and domestically produced goods and services. Furceri, D., and Loungani, P., 2018. Why do Some Countries Produce So Much More Output per Worker than Others?, Quarterly Journal of Economics, pp.83116. Each of the underlying fundamentals is quantitative, based on clear criteria, and the fundamentals include a host of non-tariff barriers as well as tariffs. Finally, the results also suggest that increases in trade restrictions are associated with a reduction in inequality. Our objective in this paper is to present a new way to quantify policy towards international trade at the aggregate level. Statistical analogues to the figures are reported in Table 1, when MATR is regressed against these variables, along with income, size, and year effects. Cumulative IRFs after one standard deviation increase in MATR; shaded area is 90 percent confidence interval; Driscoll-Kraay standard errors. Variant 4 is the least restrictive and adds in 27 more fundamentals, using all the sub indicators of the main subcomponents (if there are any).Variants 3 and 4 are intermediate between Variant 1 and variant 4. Corsetti, G., Meier, A., and Gernot Mller, G., 2012. Ilzetzki, E., Mendoza, E., and Vgh, C., 2010. To test these hypotheses, we modify equation (1) to allow the response to vary across according to a given countrys characteristicsthe level of tariff and the degree of GVC participation. TRIs use as a standard metric, the uniform tariff that would produce the same overall level of trade restrictiveness as the actual pattern of policies. These results are robust to alternative non-linear specifications, such as including in equation (1) either a) an interaction term between change in MATR and the level of tariff (GVC participation), or b) interactions between change in MATR and dummies that denote alternatively quartiles of distribution of the countrys characteristics. Response of (log) Economic Indicators to Changes in MATR. MATR is strongly correlated with existing measures of openness and trade policy but is both more comprehensivewith greater country and time coverageand more granular; it is also robust to minor methodological perturbations. This approach produces a smaller list of 58 episodes, 7 increase in restrictions and 51 liberalizations (see Table A1.5 of Appendix 1, for the list of episodes and the associated narrative records). Tariffs The taxes or duties imposed on imports are known as tariffs. But we also create more inclusive measures than MATR. Tariffs generally make the product more expensive to purchase. The classification of countries in income groups (advanced vs. emerging and developing economies) and regions (Africa, Asia-Pacific, Europe, MENA and the Americas) follows that of the IMF World Economic Outlook. One tack is to aggregate the underlying AREAER variables in a more sophisticated way. Modelling Non-Linear Economic Relationships, OUP Catalogue, Oxford University Press, vol.9780198773207. When a countryis reluctant to impose quotas and tariffs, another way itcan protect domestic markets is withlocal content requirements. Below, we consider both broader and more narrow sets of fundamentals, and we use both factor and principal component analysis to weigh the fundamentals differently; each of these variants is provided in the MATR database which we will make available. Why do More Open Economies Have Bigger Governments? It is the byproduct of protectionism. We examine official national documents, reports from international organizations (IMF, World Bank, OECD, WTO), policy papers and academic publications. International Monetary Fund Copyright 2010-2021. It is the byproduct of protectionism. Types of Protectionism Protectionist policies come in different forms, including: 1. In the last two decades, changes in the external environment and economic policies have been instrumental in determining the performance of these economies. While closer to being exogenous, these major MATR changes could be driven by the desire of policy makers to bring growth to trend. R denotes the change in MATR, increasing with restrictions, {} and {} are nuisance coefficients, and. Rose, A., 2011. Dynamic factor analysis country-by-country does not seem sensible, since we only have 21 time-series observations. Based on 2 documents. In their absence, practitioners and researchers are forced to use other, admittedly less perfect, measures of aggregate trade restrictions. What's is: Trade restriction refers to the various barriers that make the flow of goods and services between countries immobile. Governments continue to control trade. Sample 1 Sample 2. The Definition of Trade Restrictions in Economics - The Classroom The Definition of Trade Restrictions in Economics Nick Robinson - Updated September 26, 2017 In economics, a trade restriction is any government policy that limits the free flow of goods and services across borders. We also generate a closely related variant, the first principal component, following Chinn and Ito (2008) on capital account restrictions.11,12 Both measures are strongly correlated with the baseline version of MATR (Figure A1.3). Sample 1. Factors and principal components extracted from the cross-section, year by year, yield basically the same factors as ours. Novys (2012) measure of Trade Costs, a comprehensive all-inclusive measure providing an alternative measure of trade facilitation performance, used by the UNs ESCAP in conjunction with the World Bank, with export weights,14, 2. Goldberg, P., and Pavcnik, N., 2016. Although trade and commercial activities are barred under an embargo, medical and humanitarian supplies are usually exempt. The results, presented in Figure 14, are similar to but smaller than those of the baseline Figure 11. The most straightforward version of MATR is a sum of up to 22 binary dummy variables, each weighted equally. Methods of trade restrictions - Tutorke Panel cointegration tests reject the null hypothesis that the estimated residual of equation (1) is non-stationary. This paper asks whether EU law permits national rules which prohibit, restrict, or tax imports according to the way they are produced, rather than the measurable characteristics of the end product. Chip maker Nvidia broke into the exclusive club of companies that have a $1 . MATR covers an unbalanced sample of 157 countries annually between 1949 and 2019, is strongly correlated with existing measures of openness and trade policy, and is more comprehensive than existing measures. The results confirm that trade restrictions have statistically significant negative effects on output, with output falling by almost 0.4 percent 5 years after. Figure 10 presents four scatter plots (for the same years as Figure 9) of MATR against kaopen. Guide to the Services Trade Restrictions Database, Emerging Economies, Trade Policy, and Macroeconomic Shocks, https://doi.org/10.5089/9781616359645.001, II.A. Abstract. We estimate equation (1) for an unbalanced sample of 157 countries from 1949 to 2019, using ordinary least squares (OLS) for k = 0,,5. Why do More Open Economies Have Bigger Governments?, Journal of Political Economy, vol.106(5), pp.9971032. We commend this guide to those engaged in creating trade policy and we Henry, P. 2007. MATR aggregates the multitude of ways that countries restrict the international trade of goods and services. There are alternative ways to use the fundamentals from AREAER, and we now briefly consider some. Measuring the restrictiveness of a countrys trade policy is important. In constructing our measure, we are guided by principles. Gravity Redux: Measuring International Trade Costs with Panel Data, CEPR Discussion Paper, pp.1114. The Effects of Labor and Product Market Reforms: The Role of Macroeconomic Conditions and Policies,, Palgrave Macmillan; International Monetary Fund, Non-Tariff Measures and the World Trading System, A dynamic model of tariffs, output and employment under flexible exchange rates, When Fast-Growing Economies Slow Down: International Evidence and Implications for China, Capital flows, push versus pull factors and the global financial crisis, The distributional effects of capital account liberalization, The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data, Are tariffs bad for growth? This embargo has not come without contest. To address this question, we repeated the analysis to consider separately the five main components of MATR: (i) exchange measures; (ii) payment restrictions; (iii) import restrictions; (iv) export restrictions; and (v) payment for invisibles.