The effects of Indonesia’s technical barriers to trade on manufacturing exports: an empirical analysis using the pseudo-Poisson maximum likelihood method

Abstract

Purpose The purpose of this study is to investigate the effects of Indonesia’s technical barriers to trade (TBT) on manufacturing exports. Design/methodology/approach This study uses the UNCTAD database to calculate the coverage ratio and frequency index of TBTs, which represent the restrictiveness of TBTs on imports. The effects of TBTs are estimated using the gravity model (Tinbergen, 1962) and the pseudo-Poisson maximum likelihood methodology (Santos Silva and Tenreyro, 2006, 2011). Findings An estimation on the manufacturing sector shows that TBT reduces Indonesia’s manufacturing exports. However, the effect of TBT is different in disaggregated manufacturing sector. TBT is found to reduce exports of chemicals and transportation but increase exports of metal and textiles. This finding supports the empirical evidence that TBT can create trade-impeding and demand-enhancing effects on trade flows. The negative effect of TBT on chemical and transportation exports implies that the cost of compliance is higher than the increasing demand rate. This finding suggests the need for policy evaluation and improvements for restrictive TBT. As Indonesia is still highly dependent on imported inputs, restrictive TBT can potentially reduce the productivity of the Indonesian manufacturing sector. Originality/value This study aims to investigate the effects of TBT in Indonesia, as a manufacturing-based economy that relies heavily on imported intermediate inputs. Furthermore, this study contributes to the literature by using country-specific techniques and aggregated and disaggregated manufacturing sectors as subjects for study. Meanwhile, previous studies use multi-country and multi-product approaches and focus on the aggregate sector. This study estimates the effects of TBT on the disaggregated sector, given its high share of imported inputs and reliance on export-oriented industries. TBT is constructed in a more detailed product level (HS-4 digit level) to provide more accurate results.