Measuring the Restrictiveness of Trade Policy
AbstractAlternative methods of measuring the restrictiveness of trade policy are reviewed. A new measure is proposed and it is shown to be theoretically superior to other measures and to be easily implementable in practice. Measuring trade restrictiveness is an important aspect of evaluating the stance of a country's economic policy. Yet, in the presence of a variety of trade interventions, there is no consensus on how an overall summary measure of trade restrictiveness should be calculated. This paper provides an introduction to the Trade Restrictiveness Index (TRI), which the authors have proposed as a solution to this dilemma. The TRI equals the uniform tariff that is welfare?equivalent to a given pattern of trade protection. The paper outlines both its theoretical properties and the methods which have been developed to operationalise it. Anderson and Neary begin by reviewing other commonly used measures of trade restrictiveness. Measures such as the trade-weighted average tariff or the coefficient of variation of tariffs are shown to lead to potentially misleading inferences. By contrast, the TRI yields results which accord with intuition in both simple and complex situations. Furthermore, the TRI has a solid theoretical basis, can deal with both tariffs and quantitative restrictions and can be adapted to construct the trade policy equivalent of domestic distortions. The theoretical superiority of the TRI would be of little use if operationalising it required detailed information on the structure of the economy or extensive computational resources. Anderson and Neary therefore consider how the TRI may be implemented in practice and present a sequence of empirical models for doing so. For some purposes, a partial equilibrium framework may be adequate and the authors show how the Index may be estimated on a subset of imports, taking U.S. imports of textiles and apparel from Hong Kong under the Multi-Fibre Arrangement as a case study. For economy-wide trade liberalisations, a computable general equilibrium (CGE) approach is needed and the authors examine alternative methods of implementing this. These involve a trade-off between flexibility of response on the one hand and level of disaggregation on the other. Since the focus of the TRI approach is on the detailed structure of trade policy, any CGE model used to implement it must allow for thousands of distinct trade categories. Finally, the authors outline a computer program they have developed which allows the last of the models they present to be estimated. Because the structure of the economy is tightly specified, this model has very modest computing requirements and can easily be implemented on a personal computer. It can nonetheless cope with information on a large list of trade categories and holds out
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0186.
Date of creation: Jan 1994
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
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