Tariffs and income: a time series analysis for 24 countries

Abstract

We argue for a new approach to examining the relationship between tariffs and growth. We demonstrate that more can be learned from time series analyses of the experience of individual countries rather than the usual panel data approach, which imposes a causal relation and presents an average coefficient for all countries. Tentative initial results using simple two variable cointegrated VAR models suggest considerable heterogeneity in the experiences of the countries we look at. For most, however, there was a negative relationship between tariffs and levels of income for both the preand post-Second World War periods. However, in the second half of the twentieth century, the causality ran from income to tariffs: i.e. countries simply liberalized as they got richer. Policy decisions based on the usual panel approach might thus be very inappropriate for individual countries. Abstract: We argue for a new approach to examining the relationship between tariffs and growth. We demonstrate that more can be learned from time series analyses of the experience of individual countries rather than the usual panel data approach, which imposes a causal relation and presents an average coefficient for all countries. Tentative initial results using simple two variable cointegrated VAR models suggest considerable heterogeneity in the experiences of the countries we look at. For most, however, there was a negative relationship between tariffs and levels of income for both the pre-and post-Second World War periods. KeywordsHowever, in the second half of the twentieth century, the causality ran from income to tariffs:i.e. countries simply liberalized as they got richer. Policy decisions based on the usual panel approach might thus be very inappropriate for individual countries.JEL codes: F1, F4, N1, N7, O2

Tax revenues and the fiscal cost of trade liberalization, 1792–2006

“…at the start of the 20th century), in part because quantitative restrictions on foreign trade were replaced by tariffs (see Prados de la Escosura et al, 2012;Lampe and Sharp, 2013 ). 20 The average episode during this period, described in the last column of Table 3 , looks extremely similar to the average episode in the contemporary (post 1970) period, described in column six of Table 2 .…”

“…It is available for 34 countries in 1998 and 150 countries in 2006. We also use data on 'average ad valorem equivalent tariff rate' (hereafter AVEs), the weighted average tariff rate (typically computed as the ratio of trade tax revenues to imports) from four sources: the World Development Indicators for the post-1988 period, Lampe and Sharp (2013) , Clemens and Williamson (2004) and Schularick and Solomou (2011) for the earlier periods. Number of episodes 1 7 9 2 1 8 0 0 1 8 0 8 1 8 1 6 1 8 2 4 1 8 3 2 1 8 4 0 1 8 4 8 1 8 5 6 1 8 6 4 1 8 7 2 1 8 8 0 1 8 8 8 1 8 9 6 1 9 0 4 1 9 1 2 1 9 2 0 1 9 2 8 1 9 3 6 1 9 4 4 1 9 5 2 1 9 6 0 1 9 6 8 1 9 7 6 1 9 8 4 1 9 9 2 2 0 0 0 2 0 0 8 The blue bars, labelled on the left y-axis depict the number of trade liberalization episodes each year -see the text for a description of the method used to define an episode.…”

“…To better understand the mechanisms at play for these particular episodes, online Appendix Fig. 1 plots the evolution of total and trade tax revenues as well as the AVE variable from Lampe and Sharp (2013) over the period for these four countries. We see a clear increase in trade tax revenues as a share of GDP and/or AVE in Belgium, Switzerland and the Netherlands prior to the start of the episodes.…”

“…How do trade liberalizations affect macroeconomic outcomes? Previous research has shown that a long-run perspective on this question is useful for exploring how trade liberalizations influence growth, employment, and living standards ( Jacks, 2006;Lampe and Sharp, 2013;O'Rourke, 2000 ); however, comparatively less is known about their impact on fiscal revenues and hence on governments' capacity to provide public services. Using a new panel dataset on tax revenues and government expenditures covering 130 countries between 1792 and 2006, we analyze whether countries in which trade tax revenues decrease experience a simultaneous fall in total tax revenues -an effect we call "the fiscal cost of trade liberalization ".…”

“…This paper contributes to a large literature on the history of trade liberalization. In particular a number of papers have investigated the relationship between tariffs and growth ( Clemens and Williamson, 2001;Estevadeordal and Taylor, 2013;Irwin, 2002;Lampe and Sharp, 2013;O'Rourke, 2000;Schularick and Solomou, 2011 ), and more broadly questioned the costs of protectionism (for a discussion see Krueger, 1997 ). We focus on a consequence of trade liberalization -its impact on government revenues -that has attracted relatively little attention in the literature.…”