Econometric Analysis: Effect of Barriers on Trade
In this analysis we seek to investigate the impact of various import tariffs on trade as a percentage of GDP. Members of the World Trade Organization (WTO) set up defined tariffs to help facilitate trade with one another. There are specific guidelines for joining, namely the equitable tariff limits that disallow discrimination among countries. These universal rates allow for a firm investigation into how tariffs affect trade as percent of GDP, because it assists in diminishing the impact of substitutes among countries that are not apart of WTO. After regressing the countries' average weighted tariff to their trade percentage of GDP it was concluded that there is a negative correlation between a country's import tariff and the amount of total trade as percent of GDP. Introduction: International trade is defined as the exchange of capital, goods, and services across international borders or territories. Such trade makes up a large share of gross domestic product (GDP) for most nations. In theory, countries engage in trade with other countries when one does not have the resources or capacity to meet their own needs and wants. As nations develop domestic scarce resources, they can produce a surplus of goods and trade this surplus of goods for the resources they need with another nation. The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. WTO agreements are negotiated and signed by the bulk of the world's trading nations and ratified in their parliaments. For socioeconomic reasons many nations choose to impose tariffs on imported goods. A tariff is simply a tax or duty placed on an imported good by a domestic government. Tariffs are usually levied as a percentage of the declared value of the good, similar to a sales tax. Unlike a sales tax, tariff rates are often different for every good and tariffs do not apply to domestically produced goods. The benefits and drawbacks of tariffs are usually distributed unevenly, since a tariff is a tax, for which the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. The main objective of tariffs is to decrease demand for imports while increasing demand for domestic products. On the other hand, a disadvantage of tariffs is that they raise the price of imports, leading to a decrease in consumer surplus. Tariffs discourage international competition, leading to decreases in domestic product variation or availability. The analysis motivates the economic rationale that there is a limit to the effectiveness of an imposed tariff. As the tariff on imported goods increases, so does the cost of doing business, meaning the profitable margins faced by a trading nation diminish. The paper illustrates, how tariffs affect trade as a percentage of GDP. The expectation is countries that impose higher weighted average tariffs will have a lower trade percentage of GDP. Literature Review: Imbruno (2016) explores the effectiveness of trade policy applications on Chinese imports for time period of 2000 2006. The decline in tariffs also includes gradual removal of non tariff barriers (NTBs) as agreed within the WTO's accession protocol in 2001. While manufacturing imports increase because of tariff cuts, agricultural imports grow due to the elimination of import licenses in China. The official entrance to the WTO of China was in December 2001 which was an important factor to the decrease of tariffs. In 1985, for instance, China's average duty rate was 43 percent and in 2001 it changed to an average of approximately 15 percent. Imbruno supports the hypothesis, that a reduction of tariffs would suggest an increase in the trade, which is also a direct effect of the benefit to join the WTO. By 2005 China set its most favorable nation (MFN) tariff at 9.7 percent, a further decrease. In the agreements, this MFN percentage is applied to all WTO nations. Although agricultural imports increased because of the removal of import licenses, tariffs reduction had a different result than the hypothesis of our paper as well, which in this case meant that the statistical effect was not significant. Non tariff barriers are composed of a few different categories they are licenses, border taxes and anti dumping, customs, Technical barriers such as health safety and welfare, and subsidies and aids. These barriers are also attempted to be regulated by the WTO to help facilitate trade and allow trade to be uniform regardless of whomever is importing. Over the years countries have started limiting these barriers, but the Technical trade barriers still persist. There are also, at least related to wine, unique requirements per country, Mariani et al (2014) As in wine can only be called wine if it adheres to a distinct process and science of manufacturing. With the large amount of growth the wine industry has seen over the past decade there are now more imports of wine from new producers than the Originals (France, Italy, Spain) These exchanges and new markets are not unlike many of the agricultural products that are currently on the market. These barriers if removed would help ease trade, but the cost as Mariani et al (2014) points out is getting uniformity. The FDA in the USA has different regulations for its citizens than the other national regulators for food and pharmaceuticals. This pertains to wine in that there are now a diverse range of wines with grapes grown differently than regions are used to. It is further complicated in WWTG an independant wine organization looking to standardize wine to allow for seamless trade isn't recognized by the WTO as being a standard. All WTO members have to conform to the WTO standards. This complication is causing rising prices and for a slow dispersion of wine throughout the world. Demand is still being met, but at the expense of welfare to the consumers of each participating country as well as all countries looking to export. In investigating the non tariff barriers on trade as percentage of GDP, there is hope to determine the effect that these regulations and differing standards have on a free exchange of goods. In the international trading system, countries are at constant odds to develop a trading scheme in which they will each reach a Pareto optimum. The trouble lies within maintaining and upholding agreements while simultaneously ensuring that your country is able to receive all the necessary benefits or gains that trade allows, Graaff (2000) From this game of trade comes a many theories that conclude a tariff war will result in a Nash Equilibrium and a pair of tariff trading strategies. In the paper written by Kemp, Long, and Shimomura a dynamic model of international trade is explored and results in again a set of tariff and trade strategies that will result in a Nash equilibrium. The regression analysis that we wish to perform will add to how the countries grow with trade agreements and tariffs. It should be seen or expected to be seen that all countries gain from trade regardless of the tariffs, because a Nash equilibrium will be reached as seen at the dynamic level. A dynamic Nash analysis performed by Kemp et al (2001) defines a set of state variables that refer to the temporal change in price of a tradeable good in the domestic market. That means that a good that is produced domestically is price compared to a good that is imported. The same good, but unique in where it came from. These goods are mapped to the tariff factors that vary with time. Under these mechanisms the price of the domestic good is mapped to a scaling factor that is based upon the end result i.e. "playing" one round. The key idea to ensure that the experiment doesn't map to a series of infinite repeated games is to state that the history of the tariff factors is limited to a statistical history Kemp et al (2001) This in essence models a world where trade isn't free, thus a realistic approach. The end result of dynamic Nash experiment, which compares the free trade dynamic outcome to an optimized "feedback tariff" game shows that there are welfare gains to be had when countries tariff at an optimum level, Kemp at al (2001) and Graaff (2000) The only issue that arises is the time sensitivity. Since this is a dynamic model the assumption is that countries can trade and exchange in a meaningful amount of time. This means that goods are paid for and enter into the market place without too much delay of receipt. This will become very important in analysis of growth in the regression model. If gains are not realized, then it is foreseeable that the tariff factors are sub optimal or that the countries time preferences are violated. Our first linear regression includes 121 nations (counting the European Union as one because it is also a custom union) which approaches a broader analysis compared to just one single country, analised in Imbruno(2016) Our multiple regression model aims to examine the relationship between the average tariff and Trade, but we added several independent countries that we believe are relevant to this model, in particular we added other barriers to trade in order to seek if not only tariffs but also the other barriers are negatively related to Trade. Data: Simple Linear Regression This is the summary for our variables of the Linear regression Model. I. Trade as Percent of GDP To conduct our analysis we decided to choose "Trade as percent of GDP" as our dependent variable (our "Y" Trade as percent of GDP is a variable that has grown since the foundation of WTO in 1994, the worldwide trade growth was and still is a goal of the WTO. In the following chart is show all the possibilities of trade as percent of GDP, the data goes from a minimum of 25% to a maximum of 455% Almost all the possibilities are taken from 25% to 150% then there are 3 outliers which are Macao, Sing