Exporters’ Preferences over Import Protection Instruments when Markets are Volatile

We develop a theoretical framework showing that import demand shocks and export supply shocks can increase, keep constant, or reduce the expected level of trade relative to the volume of trade in the absence of volatility. The effect of volatility can be magnified or mitigated by the type of trade policy instrument used by an importing country. In the absence of volatility, the gains from trade for an exporting country can be reproduced whether an importing country uses a specific tariff, an ad valorem tariff or a tariff‐rate quota (TRQ). This equivalence is generally not robust to the introduction of volatility and exporting countries’ preferences vis‐à‐vis the type of trade barriers they face is influenced by the convexity of the import demand and export supply functions and the nature of the shocks. We show that the expected level of trade need not increase for the exporting country’s expected trade gains to rise. This result also holds when perfect competition is relaxed in favor of Cournot competition. Empirical evidence from the estimation of a commodity gravity model about trade in corn confirms the pertinence of accounting for the volatility of daily futures prices. The positive effect exerted by daily variations in futures prices on annual bilateral trade flows is augmented by an interaction effect for the use of non‐ad valorem tariffs.