A Comparison of Approaches to Modelling Non-Tariff Measures

Abstract

Non-tariff measures (NTMs) are a prominent feature of many recent free trade agreement (FTA) negotiations. 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 (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 developed by Walmsley and Minor (2020); and the second, introduced here, provides a new mechanism for adjusting the exporters’ production costs directly, referred to as the export cost method. We find that the choice of mechanism can have important consequences for the estimated impact of changes in NTMs, with mechanisms that raise productivity leading to larger changes in real GDP than those that treat NTMs as associated with economic rents or demand shocks. We emphasize the importance of careful consideration being given to the nature of the NTMs being investigated, the econometric estimates of the associated trade costs, and the CGE model mechanisms being used to assess the impacts of changes in NTMs.