Modelling Non-Tariff Barriers as an Exporter Cost

Non-tariff measures (NTMs) are a prominent feature of many recent free trade agreement (FTA) negotiations, including the Trans-Pacific Partnership (TPP), the Canada-EU FTA and BREXIT. The implementation of NTMs within computable general equilibrium (CGE) models has been relatively simple to date, with modelers generally incorporating NTMs as tariff equivalents via export or import taxes or as import-augmenting technological (or iceberg) change. Our study compares and contrasts two new methods with the traditional mechanisms used. The first new method is the willingness to pay method, recently developed by Walmsley and Minor (2015). The second method, introduced here, provides a new methodology for adjusting the exporters’ production costs directly, henceforth referred to as the export cost method. We find that the choice of mechanism can have important consequences for estimates of the impact of changes in NTMs on variables such as GDP and trade. More careful consideration of the NTMs being investigated, the estimates being utilized, and the CGE mechanisms being used, could therefore improve analysis. We find some similarities between the willingness to pay and trade tax methods on the one hand, and the iceberg and new export cost methods on the other, suggesting that the traditional methods may provide reasonable approximations of the impact of NTMs on certain key variables, such as the short run impact on GDP. However, further analysis reveals that the approaches can elicit very different changes in trade, factor prices and terms of trade, leading to larger differences in real GDP over time.