Measurement of Protection

Protection is defined broadly as government action or inaction that discriminates in favor of home producers against foreign producers. Measurement of protection has two aspects: observing or inferring protection at the product level and appropriately aggregating the highly differentiated product level protection to manageable indexes of protection. Better practice in each aspect makes a very significant difference to the measured level of protection across product groups, countries and time. JEL Classification: F13 Prepared for the Palgrave Handbook of International Trade. Contact information: James E. Anderson, Department of Economics, Boston College, Chestnut Hill, MA 02467, USA. This essay surveys the measurement of protection. Protection is defined here to cover governmental action (or inaction) that effectively discriminates in favor of home producers against foreign producers. Protection consists of transparent formal barriers such as tariffs and quotas, less transparent formal barriers such as licensing requirements and product standards, and informal barriers such as effectively discriminatory access to law enforcement, contract enforcement and market information. The broad definition of protection is adopted because there is good evidence that informal barriers are considerably higher than formal barriers, but not uniformly so across goods or countries. A disadvantage of the broad definition is that at the informal end of the spectrum, the barriers are less obviously connected to governmental action or inaction. Two distinct aspects of Measurement are treated. The first is observing or inferring protection at the disaggregated product line. The second aspect is appropriately aggregating the product line protection so observed or inferred. Aggregation is a central concern because all empirical work requires reducing the very high dimensionality of product line trade barriers to a manageable size. Aggregation should be consistent with the purpose of the analysis, and inconsistent aggregation leads to highly biased results. Section 1 deals with product line measurement of protection. The main emphasis is on inference because that is where the difficulties lie. Only a small portion of protection is directly observable as an ad valorem tariff set down in national tariff schedules. The problem is to go from what is observable to an ad valorem tariff equivalent of protection inferred. Quotas exemplify the problem in a simple form. When no price information is available the tariff equivalent of the quota can be inferred using an economic model, for example a model of import demand and supply limited by the quantity restriction. Turning to informal protection, anecdotes of discriminatory treatment against foreign producers abound. Informal protection can be inferred from trade flows that are ‘too small’ to be explained within the model by observable trade costs, geography and other natural features not subject to government policy. The shortfall can be related to measures of informal institutional performance such as contract enforcement and corruption, and a tariff equivalent extracted. The gravity model has been used with success following this strategy of inference. Evidently, inference is only as accurate as the model on which it is based. For example, the tariff schedules of the US contain some 10,000 lines. Section 2 deals with the appropriate aggregation of product line measures of protection. Until very recently, atheoretic aggregation has been the standard practice. There are several appropriate aggregators in a recently developed literature, each one ideal for a particular purpose. The survey reviews the most significant ones. Applications thus far show that atheoretic aggregation results in significantly biased aggregate measures of protection. Section 3 discusses the complications that arise for aggregation when world prices are affected by a country’s trade policies. An operational measure is proposed for protection that discriminates across countries within a product class, motivated by the discriminatory non-tariff barriers that characterize much of world trade as well as the discrimination arising from free trade areas. 1 Primary Measures of Protection Some instruments of protection are directly observable. Here the analyst still faces a few data problems outlined below, with deepening complexity as the instruments depart from simple tax rates. Protection can be inferred from international price differences where these are available. This is usually not possible, but it is possible to infer protection from trade flows in the context of a model. See Anderson and van Wincoop (2004) for more discussion of the points developed below. 1.1 Directly Observable Measures When countries tax trade on an ad valorem basis, national tariff schedules with published rates at the product line level are published and some of this data is available in online databases. There is a primary classification issue to be resolved stemming from the fact that product line definitions used by national customs authorities are not common. Since the classification issues become less severe as data is aggregated (as an extreme example, everyone’s definition of imports is the same), the primary measures are often taken as atheoretic trade weighted averages at a higher level of aggregation than the finest available. The main source for this type of data is UNCTAD’s TRAINS database. The World Bank’s WITS software is a front end for TRAINS and the trade flow data of COMTRADE, allowing the user to construct tariff measures at the product line level for a substantial number of countries over