Are non-tariff measures and tariffs substitutes? Some panel data evidence

The question of the substitutability or complementarity between non-tariff measures (NTMs) and tariffs is unresolved in the extant literature. Using newly available detailed estimates of ad-valorem equivalent (AVE) of NTMs over time, this paper examines this relationship for a sample of 80 economies for 4949 products at the 6-digit HS level over the period 2003-2015. This data allows a panel data methodology to be employed, with the relationship between NTMs and tariffs being investigated in both levels and changes. The data also allows for the modelling of the lagged adjustment of NTMs to tariffs, which is consistent with a causal relationship and sensibly represents the nature of administrative decision-making process involved in implementing NTM changes. It also allows other specific, fixed effects affecting the relationship to be captured. Trade policy substitution is found overall when the models are estimated in both levels and changes, with this holding for both OECD and non-OECD countries. There is, as is to be expected, some heterogeneity across products/sectors, with stronger substitution in the case of products with above average tariff cuts as a result of the Uruguay Round. The measured elasticity of NTM increase with respect to tariff decline is relatively small, but given much higher levels of NTM than tariff protection in general the results indicate fairly complete substitution between policy instruments in absolute terms.