Unprotective Tarriffs, Ineffective Liberalization and Other Mysteries: An Investigation of the Endogenous Dimensions of Trade Policy Formation in Australia

2017-06-08T06:45:38Z (GMT) by Tombazos, Christis G.
At the forefront of empirical research on Australia's trade policies two items seem to have attracted considerable interest: (i) the host of determinants of the highly dispersed tariff concessions, and (ii) the impact of liberalization on imports. Studies that investigate the former, in the context of endogenous trade policy formation, examine the impact of import penetration on tariffs, and studies that investigate the latter consider the effect of tariffs on import penetration. Despite the obvious simultaneity of these variables, research lines (i) and (ii) followed separate paths by only considering uni-directional causal relationships. And yet, these paths do converge. The meeting point: perplexing results! Tariffs are found to protect those industries that have the least use for protection, and liberalization is often determined to be entirely ineffectual in stimulating imports. In this paper we argue that the source of these puzzling results is found in the misspecification of the employed frameworks of analysis that ignore relevant feedback effects. This is illustrated using a model that facilitates the simultaneous determination of import penetration and tariffs. The results are startling. When the bidirectional causal relationship between the two variables is "disentangled" the estimated impact of import penetration on the tariff level increases by a fivefold, and that of tariffs on import penetration doubles.