Choked by Red Tape? The Political Economy of Wasteful Trade Barriers

Abstract

Red-tape barriers (RTBs) are an important source of trade costs, but have received little scholarly attention. Here we take a first step toward a theory of RTBs, and show that their implications are very different from those of more traditional trade barriers.Our model highlights that RTBs have important impacts on the extensive margin of trade, and yields rich predictions on how changes in the political-economic environment and product characteristics affect RTBs. Taking into account the endogenous response of RTBs is crucial to understanding the impact of reductions in tariffs and natural trade costs on the extensive and intensive margins of trade, as well as on welfare.Moreover, the availability of RTBs affects in important ways the tariff commitments that are specified in a trade agreement.

Regulatory Protection and the Role of International Cooperation

“…The final two assumptions rule out the possibility that the consumption externality is so significant relative to the real expenditure that it is optimal for the government to impose maximum standards. Moreover, higher product standards always reduce the negative externality and hence should not be considered the type of "redtape barriers" studied in Maggi et al (2022). Overall, Assumption 1 is broadly consistent with the role of standards in many GATT/WTO disputes.…”

Wasteful Trade Barriers in Oligopoly

“…It is evident from Figure 1 that RTBs can be prohibitive levels of trade even under δ = 0 and e = 0. In Maggi et al (2022), based on a perfectly competitive market, e had to be sufficiently large for RTBs to occur, but in the oligopolistic competition model in this paper, RTBs occur even when e is zero. However, as we will discuss later, we will focus on the interior point solution of θ * , in which the levels of e and δ play an important role in obtaining the interior point solution.…”

“…This kind of non-tariff barriers are called "red-tape barriers (RTBs)" and have attracted much attention in recent years. Maggi et al (2022) are, to the best of our knowledge, the first theoretical study to explicitly examine the relationship between international trade and RTBs. They constructed a small open economy model based on the simplified Grossman and Helpman (1994) political economy model, which they considered as a trade barrier intentionally set by the government, and found that RTBs can occur endogenously in the presence of rent-seeking against producer surpluses.…”

“…In contrast to Maggi et al (2022), which is based on a perfect competition model, we construct an international oligopolistic competition model that explicitly introduces RTBs and clarify the following three points (1) Governments can choose RTBs even if rent-seeking does not exist. (2) Explicitly assuming rent-seeking to the government and RTBs costs imposed on the government can lead to non-prohibitive RTBs.…”

Trade and Welfare Effects of the WTO Trade Facilitation Agreement

“…8 While trade facilitation leads to a reduction in red tape barriers (RTBs), tariff reductions can be associated with protectionist backlashes through increases in RTBs (Maggi et al, 2022). See also Beverelli et al (2019) for a more general analysis of 'trade policy substitution', defined as the use of non-tariff measures (NTMs) to restore former levels of tariff protection.…”