How policy uncertainty harms global trade

Bengaluru: Trade across the G20 nations fell in the second quarter of 2018 for the first time since mid-2016. The decline was partially driven by US-imposed tariffs on major imports such as aluminium, steel and Chinese products. Such changes in tariffs can generate trade policy uncertainty and hinder global trade. But, by how much?

A new World Bank policy research working paper by Alberto Osnago and Roberta Piermartini of the World Trade Organization and Nadia Rocha of the World Bank attempts to quantify the impact of trade policy uncertainty on exports and trade volumes. They analyse trade data from 65 World Trade Organization (WTO) member countries to find that with an elimination in trade policy uncertainty, trade volumes will increase by 1.3% and the probability of exporting is likely to increase by 6%.

To measure trade policy uncertainty, they use the concept of ‘tariff water’—the gap between bound rates and current applied rates. Bound rates are the highest applicable tariff rates as defined by the WTO members’ agreement; applied rates are the rates actually in place. A larger tariff water implies more room for a country to increase its applied rate to the bound rate without incurring a dispute at the WTO. The authors analyse tariff rates for more than 4,000 different products and find that the average applied tariff rate is 4.94%, while the average bound rate is almost double at 9.12%, resulting in tariff water of around 4%. Eliminating this water will bring countries to their bound rates, resulting in more certainty and boosting exports.

This is so because a firm’s decision to export (both in terms of destination and volume) is based on its perceived risk of a trade policy reversal.

More generally, the authors claim that, in a world where all WTO members abide by their agreement commitments, global trade volumes would increase by 10-30% .

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