Non-tariff measures: A methodology for the quantification of bilateral trade effects of policy measures at a product level

Summary

As tariffs in Australia's major trading partners have fallen, trade negotiators are increasingly focussed on the non-tariff elements of trade agreements. A negotiator is faced with the policy challenge of determining what non-tariff measures (NTMs) and products to focus on in bilateral and multilateral negotiations. This means that qualitative and quantitative advice on the trade effects of different measures can inform one aspect of a negotiator’s multifaceted decision-making process to prioritise and allocate scarce negotiating resources.

Raising the quantitative trade effects of NTMs in international forums requires a defensible and robust methodology in the event that the methodology is challenged. However, despite well-established methods for the quantification of trade policies at an aggregate bilateral trade level, the product-level literature demonstrates a misapplication of theory with regard to the optimising behaviour of producers. This leads to the exclusion of important information that explains product level bilateral trade. Additionally, Fell (2020), Head & Mayer (2014) and Heid et al. (2021) outline a number of technical econometric challenges in cross-sectional econometric quantification of the bilateral trade effects of NTMs at a product-level.

As a result of weaknesses in the application of theory and challenges in the econometric estimation, the methods used in existing applications demonstrate scope for improvement. This paper outlines a defensible application of theory that leads to a ‘proof of concept’ quantification methodology. International grains markets are used as an example to demonstrate the ‘proof of concept’.

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