COOPERATION IN THE TARIFF WATERS OF THE WORLD TRADE ORGANIZATION

Transcription

1 Uied aios CofereC e o rade a d d evelopme COOPERATION IN THE TARIFF WATERS OF THE WORLD TRADE ORGANIZATION POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES STUDY SERIES No. 62

2 U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES STUDY SERIES No. 62 COOPERATION IN THE TARIFF WATERS OF THE WORLD TRADE ORGANIZATION by Alessadro Niia UNCTAD, Geeva Marelo Olarreaga Uiversiy of Geeva ad Cere for Eoomi Poliy Researh Peri Silva Kasas Sae Uiversiy ad Cero Sudi Lua d'agliao UNITED NATIONS New York ad Geeva, 204

3 Noe The purpose of his series of sudies is o aalyse poliy issues ad o simulae disussios i he area of ieraioal rade ad developme. The series iludes sudies by UNCTAD saff ad by disiguished researhers from oher orgaizaios ad aademia. This paper represes he persoal views of he auhors oly, ad o he views of he UNCTAD serearia or is member Saes. This publiaio has o bee formally edied. The desigaios employed ad he preseaio of he maerial do o imply he expressio of ay opiio o he par of he Uied Naios oerig he legal saus of ay oury, erriory, iy or area, or of auhoriies or oerig he delimiaio of is froiers or boudaries. Maerial i his publiaio may be freely quoed or repried, bu akowledgeme is requesed, ogeher wih a opy of he publiaio oaiig he quoaio or repri o be se o he UNCTAD serearia a he followig address: Alessadro Niia Trade Aalysis Brah Divisio o Ieraioal Trade i Goods ad Servies, ad Commodiies Uied Naios Coferee o Trade ad Developme Palais des Naios, CH-2 Geeva 0, Swizerlad Tel: ; Fax: alessadro.iia@uad.org Series edior: Vior Ogivsev Offier-i-Charge Trade Aalysis Brah Divisio o Ieraioal Trade i Goods ad Servies, ad Commodiies Uied Naios Coferee o Trade ad Developme UNCTAD/ITCD/TAB/62 UNITED NATIONS PUBLICATION ISSN Copyrigh Uied Naios 204 All righs reserved ii

4 Absra I has bee log reogized ha i he presee of marke power, posiive impor ariffs a be opimal. The raioale is ha higher ariffs redue impor demad, whih i he presee of ielasi expor supply from he res of he world allows he imporig oury o irease is erms of rade. Ideed, here is empirial evidee suggesig ha ouries ofe se ariffs o exploi heir marke power whe hey have poliy spae o do so. However, opimal ariff-seig ofe resuls i a egaive exeraliy for radig parers. Suh exeraliies reae ieives for radig parers o ooperae wihi a egoiaig framework suh as he World Trade Orgaizaio (WTO) or regioal rade agreemes. Ideed, here is large empirial evidee suggesig ha WTO egoiaios do failiae ooperaio i ariff-seig by providig a egoiaig able o ieralize erms-of-rade exeraliies. This paper empirially explores wheher ay ooperaive behaviour i ariff-seig exeds beyod he WTO aessio proess. I priiple, he possibiliy of furher ooperaio is provided by he presee of poliy spae i regard o ariffs wihi he WTO framework. Ideed, a key aspe of he WTO proess is he egoiaio of boud ariffs, raher ha applied ariff levels. WTO members a apply ariffs below he boud, if hey hoose o do so. The differee bewee he ariff ha a oury applies a he border ad he oury s ommimes o oher WTO members is referred o as ariff waer, or bidig overhag. I priiple, ariff waers provide he poliy spae for oury o se heir ariff a o-ooperaive levels. The fidigs of his paper sugges ha ouries do ooperae boh durig he aessio proess ad beyod i. However, o-ooperaive ariff-seig is observed i he presee of suffiiely large amous of ariff waer. We fid ha i he absee of ariff waer, imporig ouries marke power eds o be egaively orrelaed wih applied ariffs, whih is osise wih a ooperaive ariff-seig. O he oher had, i he presee of ariff waer, he relaioship bewee imporers marke power ad ariffs eds o beome posiive, suggesig a edey owards o-ooperaive ariffs. However, he posiive orrelaio bewee imporers marke power ad ariffs is oly observed whe levels of ariff waer are above 20 pereage pois. I he presee of moderae levels of ariff waer, WTO members ed o se heir ariffs ooperaively. Oe possible explaaio for seig ariffs a o-opimal levels i he absee of legal osrais is he fear of realiaio from radig parers. We show ha WTO members ha have lile o lose from realiaio ed o se ariffs o-ooperaively wihi heir ariff waers, while WTO members ha may have more o lose i ase of realiaio are more likely o se ariffs ooperaively wihi heir ariff waers. Keywords: Expor supply elasiiies, WTO ooperaio, ariff waer JEL Classifiaio: F iii

5 Akowledgemes We are graeful o Mahieu Croze, Ae-Célia Disdier, Mihael Gasiorek, Saal Lahiri, Jaime de Melo, Chrisoph Moser, Parik Low, Subhash Sharmaad, José de Sousa, Akiko Suwa, Ala Wiers, ad semiar pariipas a ETH Zurih, he Paris Shool of Eoomis, Souher Illiois Uiversiy ad Sussex Uiversiy for helpful ommes ad disussios. The views expressed here are hose of he auhors ad do o eessarily refle hose of he isiuios wih whih hey are affiliaed. iv

6 Coes Iroduio... 2 Opimal ariffs ad he World Trade Orgaizaio Theoreial prediios Empirial sraegy... 3 Esimaig he expor supply elasiiies of he res of he world Esimaig res-of-he-world expor supply elasiiies Esimaig expor supply elasiiies from he poi of view of he exporer Daa Empirial resuls Evidee of ooperaive behaviour i he ariff waers of he World Trade Orgaizaio Fear of realiaio Coludig remarks...26 Referees...27 v

7 Lis of figures Figure. Disribuio of he iverse of expor supply elasiiies faed by imporers...7 Figure 2. Correlaio bewee he expor supply elasiiies faed by imporers ad hose alulaed usig equaio (24)...9 Lis of ables Table. Desripive saisis... 4 Table 2. Exeral ess of he esimaes of expor supply elasiiies faed by imporers...8 Table 3. Is marke power used wihi ariff waers? OLS esimaes...2 Table 4. Is marke power used wihi ariff waers? IV esimaes...22 Table 5. Marke power ad fear of realiaio IV esimaes...25 vi

8 . INTRODUCTION I has bee log reogized ha i he presee of marke power, posiive impor ariffs a be opimal (Edgeworh, 894). Higher ariffs redue impor demad, ad he more ielasi is expor supply, he larger is he improveme i he erms-of-rade of he imporer. There is empirial evidee suggesig ha o-members of WTO se ariffs o exploi heir marke power (Broda e al., 2008). However, by defiiio, hese opimal ariffs geerae a egaive exeraliy o oher radig parers, whih reaes ieives for ooperaio wihi a egoiaig framework suh as he WTO (Bagwell ad Saiger, 999). Ideed, ree empirial evidee suggess ha WTO egoiaios do failiae ooperaio i ariff-seig by providig he meas o ieralize erms-of-rade exeraliies, resulig i ew members ariff shedules ha o loger o heir marke power i ieraioal markes (Bagwell ad Saiger, 20). A key aspe of he WTO proess is he egoiaio of ariff aps, or boud ariffs, raher ha applied ariff levels. WTO members a apply ariffs below boud raes if hey hoose o do so. The differee bewee he ariff ha a oury applies a he border ad he oury s ommimes o oher WTO members is referred o as ariff waer, or bidig overhag. I priiple, he absee of ariff waer idiaes ooperaio i ariff-seig, as he imporig oury is boud by is ommimes o oher radig parers. O he oher had, he presee of ariff waer provides WTO members wih he opporuiy o se ariffs ha refle heir marke power. I his paper we empirially explore he exe of ariff ooperaio o ieralize erms-ofrade exeraliies i he presee ad absee of ariff waer. To guide our empirial work, we osider a wo-oury model i whih ariffs are drive by a erms-of-rade raioale, as well as poliial eoomy fores. Govermes pu a exra-weigh o he profis of firms i imporompeig seors, bu also o exporers profis. Couries a se ariffs ooperaively depedig o he rade-off bewee he beefis ad oss of ooperaio. Whe he oss of ooperaio are relaively high i a speifi ariff lie of a WTO member, we assume ha a suffiiely high exogeous ariff boud is imposed, allowig he imporig oury o impleme a o-ooperaive ariff wihi is ariff waers. I he presee of ooperaio, he egoiaed ariff maximizes he oi poliial fuio of he wo ouries, ad o ariff waer will be observed. This dihoomy seems o fi well wih he differe maers i whih developed ad developig ouries have so far pariipaed i mulilaeral agreemes as disussed i Croome (995) ad Hoekma ad Kosehi (2009). The model predis ha i he absee of ooperaio, oe should observe he posiive exbook relaioship bewee he imporers marke power ad ariffs. O he oher had, i he presee of ooperaio, he imporig oury s ariffs are iversely relaed o is marke power. To udersad he laer, oe ha exporers profis have a exra weigh i he goverme s poliially moivaed obeive fuio. Thus, he ieives for exporers o egoiae ariff reduios are sroger he larger he imporer s marke power. Ideed, he ariff reduio will have a larger impa o he exporer s profis he more ielasi is is expor supply. This seod prediio is ew, ad we use i o ideify he presee of ooperaio i WTO s member ariff shedules. I he absee of ariff waer, we should observe a egaive relaioship bewee imporers marke power ad ariffs. I he presee of ariff waer, here is room o se o-ooperaive ariffs; herefore, he relaioship bewee imporers marke power ad ariffs should be posiive. We a empirially es hese prediios by explaiig applied mos favoured aios (MFN) ariffs wih he degree of marke power eoyed by he imporer (i.e. he iverse of he expor supply elasiiy of he res of he world), as well as he ieraio of marke power wih a measure of he imporer s ariff waer. The model predis a egaive oeffiie o imporers marke power ad a posiive oeffiie o he ieraio. The lieraure offers several explaaios for he presee of ariff waer. Amador ad Bagwell (202) explai is presee wih a model where ueraiy ad privae iformaio are prese. Hor, Maggi ad Saiger (200) explai is presee i a model wih ueraiy ad ora oss. I praie, he raioale why ouries ofe se heir applied ariffs o levels below he boud ariffs remais a ope quesio. Cooperaio i he Tariff Waers of he World Trade Orgaizaio

9 To impleme he empirial es, we firs eed esimaes of res of he world s expor supply elasiiies. These are obaied buildig o he Kee e al. (2008) adapaio of Kohli s (99) reveue fuio approah o he esimaio of rade elasiiies. I shor, we esimae he reveue fuio of he res of he world for eah WTO member as a fuio of he res of he world faor edowmes ad he prie hey fae i he impor marke. The prie parameer of he reveue fuio of he res of he world a he be used o alulae he expor supply elasiiy of he res of he world i he WTO member s marke as i Kee e al. (2008). We esimaed more ha 260,000 expor supply elasiiies of he res of he world faed by 00 imporig ouries a he six-digi level of he Harmoized Sysem (HS) lassifiaio. The media of he iverse of he expor supply elasiiy is 0.044, suggesig a 4.4 per e opimal ariff if ouries were o se ariffs o-ooperaively. This is smaller ha he 5 per e media ariff we observe i our sample. If par of he erms-of-rade raioale vaishes hrough ooperaio i rade agreemes, fores oher ha erms of rade are eeded o explai he ariff levels observed, whih provides idire suppor for a goverme obeive fuio ha is o oly drive by erms-ofrade moives, bu also poliial eoomy fores. We he es our heoreial prediios ad fid evidee ha i he absee of ariff waer, ariffs are se ooperaively, as he imporer s marke power has a egaive impa o ariffs. We also fid ha i he presee of ariff waer he relaioship bewee he imporer s marke power ad ariffs eds o beome posiive. However, his is oly observed for suffiiely large levels of ariff waer. Below 20 pereage pois of ariff waer, whih iludes more ha wo hirds of our sample, he orrelaio bewee marke power ad applied ariffs remais egaive, suggesig ha ooperaio for erms-of-rade moives i he WTO exeds far beyod he egoiaio of ariff bouds. The presee of ooperaio wihi moderae amous of ariff waers alls for a explaaio. A likely adidae is he fear ha rade parers will realiae. Ideed, Bloige ad Bow (2003) show ha realiaio hreas redue he likelihood of aidumpig measures by he Uied Saes of Ameria. Similarly, Bow (2004) shows ha he fear of realiaio makes he WTO s dispue seleme defedas more likely o omply wih heir WTO ommimes. WTO members wih ariff waer i heir shedules may refrai from usig heir marke power from fear of havig oher WTO members, who also have ariff waer ad marke power, realiae by ireasig heir ariffs. To ivesigae wheher realiaory oers play a role i ariff-seig, we build a idiaor apurig he radig parers marke power ad he sope for ariff ireases wihi heir ariff shedules. We fid ha o-ooperaive behaviour wihi WTO ariff waers is oly observed for hose members who fae lile realiaory hrea form heir radig parers. Couries who suffer from srog realiaory hreas from heir parers ed o behave ooperaively, eve i he presee of large amous of ariff waer. The remaider of he paper is orgaized as follows. Seio 2 provides he heoreial framework ad desribes our empirial sraegy. Seio 3 fouses o he esimaio of he res of he world s expor supply elasiiies faed by eah imporer. Seio 4 preses he empirial resuls regardig he exe of ooperaio i ariff-seig i WTO ariff waers. Seio 5 oais oludig remarks. 2 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

10 2. OPTIMAL TARIFFS AND THE WORLD TRADE ORGANIZATION I a se-up where ariffs are deermied by boh marke power ad poliial eoomy fores, o-ooperaive ariffs refle boh he erms-of-rade raioale ad lobbyig fores i he imporig oury. 2 I priiple, i he presee of ooperaio, he marke power raioale vaishes as i apures ieffiie rasfers from he exporig oury o he imporig oury ha are ieralized hrough ooperaio. We should, herefore, expe o relaioship bewee ooperaive ariffs ad he marke power of he imporer. However, his does o ake io aou ha he goverme i he exporig oury a also be poliially moivaed ad have a obeive fuio ha gives addiioal weigh o he profis of imporers, bu also exporers. If his is he ase, he he ooperaive ariff will be egaively orrelaed wih he marke power of he imporig oury, as a sroger marke power for he imporer ireases he ieives for he exporer o egoiae harder o preve a sharp drop i pries. We firs develop a simple model o illusrae how he presee of ooperaio hages he relaioship bewee a imporer s marke power ad ariffs. We he develop a empirial sraegy o es he prediios of he model. We ideify ooperaive ad o-ooperaive ariff-seig by he exe of ariff waer i he imporer s shedule. Ideed, he absee of ariff waer sigals ha ariffs are se a he egoiaed boud refleig ooperaio amog WTO members. The presee of ariff waer opes he door o o-ooperaive ariff-seig amog WTO members, whih ould legally irease heir ariffs o exploi heir marke power. Noe ha his assumes ha all ariffs are boud i he agreeme, while oly some are se hrough ooperaive egoiaios. The ariff boud is edogeously se whe ouries ooperae, bu is exogeous i he absee of ooperaio. The laer desribes well he seig of WTO ariff bouds i may developig ouries. As desribed i Croome (995), a Ausralia proposal was adoped durig he Uruguay Roud o esure ha mos ouries would bid heir ariffs by allowig eah member o follow is ow approah o ariff bidig. This led may developig ouries, i pariular he smaller ad poorer ouries, o bid almos all of heir previously uboud ariffs a arbirarily high levels. 3 O he oher had, i is lear ha he Uied Saes, he Europea Uio, ad Japa play a promie role i egoiaig ariffs uder WTO. The available daa (see able ) idiae ha hey have very lile ariff waer i heir shedules, whih suggess ha heir applied MFN ariffs are he ouome of rade egoiaios. 2 See Grossma ad Helpma (995) ad Bagwell ad Saiger (999). 3 For example, 9 of he 36 leas developed ouries a he ime, boud heir ariffs a levels above 00 per e, whereas heir applied average ariffs were lose o 0 per e. The bidig levels were also ake arbirarily. Aordig o ierviews wih Mauriaia pariipas i he fial Miiserial meeig of he Uruguay Roud i Marrakeh, heir delegaio was briefed by he GATT serearia s saff i a meeig ha lased a ouple of hours i a hoel room i Marrakeh. The delegaio reviewed he las eigh years of egoiaios i Geeva, where Mauriaia did o have a egoiaig eam, before makig a deisio o he level a whih agriulure ad maufaurig ariffs would be boud. More imporaly, while mos developed ouries had loked i heir offers before he Marrakeh meeig ha oluded he Uruguay Roud, may developig ouries were sill drafig heir offers durig he Marrakeh meeig, ad leas developed ouries had a exra year o submi heir goods ad servies ariff shedules. Thus, egoiaios wih oher WTO members were impossible, ad i is herefore o surprisig ha oday may developig ouries have very large levels of waer i heir ariff shedules. Cooperaio i he Tariff Waers of he World Trade Orgaizaio 3

11 Table. Desripive saisis Impor Expor Res-of-heworld Coury or eiy Saisis Tariff MFN Tariff Vapour demad supply supply boud applied waer waer elasiiy elasiiy elasiiy Aigua ad Barbuda Mea SD Argeia Mea SD Ausralia Mea SD Bahrai Mea SD Bagladesh Mea SD Barbados Mea SD Belize Mea SD Bei Mea SD Bolivia (Pluraioal Sae of) Mea SD Boswaa Mea SD Brazil Mea SD Bruei Mea SD Bulgaria Mea SD Burkia Faso Mea SD Burudi Mea SD Côe d Ivoire Mea SD Cameroo Mea SD Caada Mea SD Ceral Afria Republi Mea SD Chile Mea SD Chia Mea SD Colombia Mea SD Cosa Ria Mea SD Croaia Mea SD Czek Republi Mea SD Demorai Republi of he Cogo Mea SD Domiia Mea SD Egyp Mea SD El Salvador Mea SD Esoia Mea SD / 4 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

12 Coury or eiy Saisis Tariff MFN Tariff Vapour Impor demad Expor supply Res-of-heworld supply boud applied waer waer elasiiy elasiiy elasiiy Europea Uio Mea SD Gabo Mea SD Georgia Mea SD Ghaa Mea SD Greada Mea SD Guaemala Mea SD Guiea Mea SD Guyaa Mea SD Hoduras Mea SD Hugary Mea SD Ielad Mea SD Idia Mea SD Idoesia Mea SD Israel Mea SD Jamaia Mea SD Japa Mea SD Jorda Mea SD Keya Mea SD Kyrgyzsa Mea SD Lavia Mea SD Lesoho Mea SD Lihuaia Mea SD Madagasar Mea SD Malawi Mea SD Malaysia Mea SD Mali Mea SD Mala Mea SD Mauriius Mea SD Mexio Mea SD Mogolia Mea SD Moroo Mea SD Namibia Mea SD / Cooperaio i he Tariff Waers of he World Trade Orgaizaio 5

13 Coury or eiy Saisis Tariff MFN Tariff Vapour Impor demad Expor supply Res-of-heworld supply boud applied waer waer elasiiy elasiiy elasiiy New Zealad Mea SD Niaragua Mea SD Niger Mea SD Nigeria Mea SD Oma Mea SD Paama Mea SD Papua New Guiea Mea SD Paraguay Mea SD Peru Mea SD Philippies Mea SD Polad Mea SD Rep. of Korea Mea SD Romaia Mea SD Rwada Mea SD Sai Kis Mea SD Sai Luia Mea SD Saudi Arabia Mea SD Seegal Mea SD Sigapore Mea SD Slovakia Mea SD Sloveia Mea SD Souh Afria Mea SD Sri Laka Mea SD Swazilad Mea SD Thailad Mea SD Togo Mea SD Triidad ad Tobago Mea SD Tuisia Mea SD Ugada Mea SD Uied Arab Emiraes Mea SD Uied Republi of Tazaia Mea SD Uied Saes Mea SD / 6 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

14 Coury or eiy Saisis Tariff MFN Tariff Vapour Impor demad Expor supply Res-of-heworld supply boud applied waer waer elasiiy elasiiy elasiiy Uruguay Mea SD Veezuela (Bolivaria Republi of) Mea SD Zambia Mea SD Zimbabwe Mea SD Abbreviaios: SD, sadard deviaio 2. THEORETICAL PREDICTIONS We osider a home oury ad a foreig oury where he foreig oury s variables are ideified by supersrip. These ouries rade hree goods labeled 0, ad 2, where good 0 represes a umeraire good ha is freely raded. Cosumer preferees are he same aross ouries ad are desribed by he followig addiive quasiliear uiliy fuio: (,, ) u ( ) u ( ) U + + () 0 2 = whih desribes he preferee sruure i he home oury while a similar expressio desribes he preferee sruure i he foreig oury. We assume ha sub-uiliy fuios are ireasig o osumpio ad oave, i.e. u (.) > 0 ad (.) < 0 ' i 0 '' i 2 u. O he produio side, we assume ha he umeraire good is produed usig labour uder osa reurs o sale, keepig he wage rae osa, regardless of he rade poliy imposed o impors of goods ad 2. Moreover, we assume ha goods ad 2 are produed usig labour ad a speifi faor eeded o produe eah good usig a osa reur o sale ehology. Perfe ompeiio prevails. Thus, he assumpios o he supply side ad o he demad side of he model allow us o olude ha he marke equilibrium for good is o affeed by he marke equilibrium for good 2. 4 We assume ha he differees i he relaive edowmes of seor-speifi apial i seors ad 2 is suffiiely large so ha he home oury impors good ad expors good 2. This implies x ( p) < x ( p), where x ad x are he supply of good i he home ad foreig oury, respeively. The reverse happes for good 2. As a resul, a ariff o good (2) may be imposed by oury (2), as we oly osider ariffs ad disregard expor-relaed rade isrumes. The relaioship bewee he prie i he home ad foreig oury is he desribed by p + = p p = p + 2 ad 2 2. Wihou loss of geeraliy, uis are hose so ha iiially expor pries of good ad 2 are equal o, i.e. p = p 2 =. The os of egoiaig eah ariff bewee hese wo ouries is desribed by he parameer α, whih is assumed o be posiive. If egoiaio he imporig oury imposes a o- oss are high relaive o he beefis of egoiaio, ooperaive ariff. 2 G p, p 2 is defied by a weighed average bewee profis ad soial welfare. I his ase, parameer β > 0 desribes he exra weigh give o profis relaive o osumer surplus ad ariff reveue i his goverme s We osider ha he home oury s goverme obeive fuio ( ) 4 This rules ou ouerlobbyig by exporers wihi he same oury as i Gawade e al. (202). Cooperaio i he Tariff Waers of he World Trade Orgaizaio 7

15 obeive fuio. A similar approah applies o he foreig oury s goverme, where he exra å weigh o profis is apured by parameer β. The, he home oury s goverme obeive fuio is desribed, wih he assisae of expressio (), by he followig expressio: where ( p, p2 ) = u( d( p )) pd ( p ) + u2( d2( p2 )) p2d2( p2 ) m ( p ) + ( + β )[ π ( p ) + π ( )] G (2) + 2 p2 d i is he demad for good i, sads for home firms profis i seor. m = d x sads for impors of good, ad π The hoie of assumpios o he supply ad demad sides, alog wih separae oss o egoiae eah ariff, allows us o idepedely osider he hoie of wheher o egoiae ariffs o goods ad 2. Thus, we fous o he deisio o egoiae a he ariff imposed by he home oury o good, bu a similar logi applies for he ariff imposed by he foreig oury o impors of good 2. We firs ivesigae he ariff for good ha emerges wih ad wihou egoiaio bewee he ouries. Laer, we use he equilibrium ariffs uder he wo searios o osider he role played by marke power ad poliial ifluee i deermiig he beefis of egoiaio. The opimal o-ooperaive ariff o impors of good is obaied by differeiaig expressio (2) wih respe o ariffs o obai he firs-order odiio of he home oury maximizaio problem: dg dp ' dp = d + + m + m + d d d dp + ( + β ) x + d (3) whih a be arraged as follows: dg d = m dp d + m ' dp d + βx dp d (4) dp d Noe ha = +. We a solve for he o-ooperaive ariff by seig expressio (4) equal dp d o zero. As usual, we a use he marke-learig odiio o solve for he o-ooperaive ariff usig (4) ad express he o-ooperaive ariff as a fuio of he imporig oury s marke power. Sie impors equal expors, we a express he markeig learig odiio as follows: ( p ) m ( p ) = 0 ad oal differeiaio of he marke learig odiios yields m + (5) 8 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

16 m dp ' = d ' dp m (6) d We a apply relaioship (6) o solve for he o-ooperaive ariff usig (4) o obai: βz p N = + e e (7) N where is he o-ooperaive opimal ariff, z sads for he iverse of he impor peeraio raio expressed i moeary uis, e represes he impor demad elasiiy, ad e sads for he expor supply elasiiy faed by he imporig oury. Expressio (7) displays he usual wo moives for deviaios from free rade uder perfe ompeiio. The poliial eoomy moive is represeed by he firs erm o he righ-had side of (7), while he marke power moive, also kow as he erms-of-rade moivaio, is desribed i he seod erm o he righ-had side. As Bagwell ad Saiger (999) explai i deail, he laer moivaio orrespods o a egaive exeraliy of he imporig oury s rade poliy o he exporig oury. Negoiaios bewee ouries should ieralize his moivaio by desig, while respeig he poliial eoomy fores i eah egoiaig pary. We a ow ivesigae he equilibrium ariff o good ha emerges whe he wo ouries ooperae. We adop he usual assumpio ha egoiaed ariffs maximize he sum of he govermes poliial fuios. 5 I his ase, we represe he sum of he poliial fuios by he global poliial fuio, whih is represeed by G w = G + G. 6 Fousig o he equilibrium ariff w for good, we a oally differeiae G o obai: w dg dp ' dp = d + + m + m + d d d dp + ( + β ) x + d dp dp d + ( + β ) x d d (8) where he firs ad seod lies a be foud i expressio (3) ad he hird lie omes from alulaig dg. Rearragig equaio (8) yields: d dg d dp dp dp + (9) w ' = m β x + β x d d d 5 This follows oher papers i he lieraure suh as Bagwell ad Saiger (999), Hor, Maggi ad Saiger (200) ad Beshkar, Bod ad Rho (202), amog ohers. 6 The usual raioale for fousig o he oi poliial pay-off is he presee of similar ouries i eoomi ad poliial power or he presee of ross-oury rasfers. We follow sui i lie wih he lieraure. Cooperaio i he Tariff Waers of he World Trade Orgaizaio 9

17 where i is lear ha he poliial eoomy fores i eah oury are drivig fores i deermiig he egoiaed ariff. The equilibrium ooperaive ariff a be alulaed by seig expressio (9) o zero, ad wih assisae of expressio (6), we a rearrage he equaio o obai: C = βz p e β z (0) e Where (0) is he opimal ooperaive ariff, ad z is he iverse of he expor peeraio raio i he foreig oury. I is lear from expressio (0) ha a ooperaive ariff differs from zero å due o he poliial fores prese i eah egoiaig pary ( 0 β ). Oherwise, free β ad 0 å rade would prevail. Noe ha poliially impora exporers ( > 0 ) ifluee he ooperaive ariff i a very iuiive way. If he imporig oury marke power is high (low e ), he he equilibrium ooperaive ariff is lower, as a high ariff would ause a sigifia derease i he exporig oury s prie, whih obviously has a egaive effe o he poliially iflueial produers i he foreig eoomy. This suggess ha whe movig from a o-ooperaive o a ooperaive se-u marke power is more ha fully ieralized whe he foreig oury ares abou heir exporer s profis. Ideed, he ooperaive is lower he higher he marke power of he imporig oury. This is he opposie of he prediio we obaied for o-ooperaive ariffs. Wheher ouries ooperae i ariff-seig depeds eirely o wheher he gais from w C w N ooperaio are larger ha is oss, i.e. ( ) G ( )) ( β G eeds o be greaer ha α. We follow Hor, Maggi ad Saiger (200) o obai he suffiie odiio for obaiig suffiiely large gais from ooperaio. By defiiio, he fuio dg ( d w C w G is oave, ad = 0 ) sie he ooperaive ariff maximizes he global poliial fuio. Thus, a suffiie odiio for large gais dg w ( N ) dg ( N ) from ooperaio is o have large, bu his boils dow o have large, sie ( d ) = 0 d dg N by defiiio of he o-ooperaive soluio. Usig he defiiio of he foreig oury s obeive fuio we a obai: d ( ) ( d x ) dp dp () dg N = β x d d d Expressio () a be rearraged wih he assisae of expressio (6) o yield he followig suffiie odiio: dg ( d N ) = ( m + β x ) m ' ' ( m + m ) ' (2) whih a be rewrie o display he releva elasiiies as follows: 0 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

18 ( ) ( m β x ) dg N = d + e + e p (3) We a relae expressio (3) o he disussio above abou he equilibrium ariffs. This suffiie odiio idiaes ha ouries are more likely o ooperae whe he imporig oury has sigifia marke power (low e ), or a ariff reaes sigifia disorios i he imporig oury (high e ), or foreig exporers are poliially iflueial(high β ), or he ouries rade a grea deal wih eah oher (high m ). If hese odiios apply, he ouries ooperae, ad ariff waer is o prese sie he boud ad applied ariff are desribed by he ooperaive ariff (0). Oherwise, ouries do o ooperae, waer is prese ad ariffs refle he marke power of he imporig oury. This is summarized i he followig prediio: Prediio. If gais from ooperaio desribed by expressio (3) are relaively large (small) ompared wih egoiaio oss, he ariff waer is abse (prese) ad ariffs are egaively (posiively) relaed o marke power. Our ideifiaio sraegy i he empirial seio relies o his prediio. I he presee of ooperaio, i.e. whe here is o ariff waer, we should observe a egaive relaioship bewee marke power ad applied ariffs, whereas if ariffs are se o-ooperaively, ad ariff waer is prese, he he relaioship bewee ariffs ad marke power should be posiive. 2.2 EMPIRICAL STRATEGY I order o empirially es he prediio developed i he previous seio, we will use ariff daa for 00 WTO members a he six-digi level of he HS lassifiaio 7 ad ivesigae he exe o whih he imporer s marke power (he iverse of he expor supply elasiiy of he res of he world) a explai he variaio i ariffs, i pariular i he presee of ariff waer:, = α α α α α + µ + 2 W, + 3 W, + p +,2HS,, (4) e e where p,, is he applied ariff i produ p (defied a he six-digi level of he HS lassifiaio) i oury a ime, W apures ariff waer ha is measured as he differee bewee boud ad applied ariffs, α is a produ fixed effe defied a he six-digi level of he HS lassifiaio, ad,2 HS, p α is a wo-digi HS fixed effe ha varies by oury ad year, whih serves as a orol for poliial eoomy deermias of ariffs, suh as firm oeraio ad apial/labour iesiy. 8 Our prediio will herefore be ideified usig he variaio aross HS six-digi ariff lies wihi HS wo-digi aggregaes for eah oury ad year, while hekig for HS six-digi ommo effes. We expe α < 0 as he relaioship bewee marke power ad ariffs is egaive i he absee of, 7 For a lis of ouries, see able. 8 Ideally, we would like o have hese ypes of orols varyig a he six-digi level of he HS lassifiaio, bu suh daa do o exis aross ouries, so a good ompromise is o use fixed effes a he wo-digi level of he HS lassifiaio. Cooperaio i he Tariff Waers of he World Trade Orgaizaio

19 α ariff waer, > 0, suggesig ha as a o-ooperaive ariff-seig is possible wihi WTO s ariff 3 waers, he relaioship bewee applied ariffs ad marke power beomes posiive. There are several issues regardig he esimaio of (4). Firs, expor supply elasiiies of he res of he world are measured wih a lo of oise as suggesed by Broda e al. (2008). 9 We follow å heir sraegy ad use as a aleraive he log of / e, as well as dummy variables ha spli he sample io high, medium ad low levels of marke power aross all ouries, produs ad ime. This aleraive fis our aalyial se-up beer, sie i implies a disoiuiy i he relaioship bewee ariffs ad marke power above a erai level of marke power ha would yield ooperaio gais larger ha he egoiaio oss. The seod issue has o do wih he edogeeiy of our measure of ariff waer ad marke power. We solve he edogeeiy of ariff waer by isrumeig i wih wha Folei e al. (20) labelled as waer vapour: where, sads for he boud ariff, ad b p b pr { 0 } Waervapor, max,, pr p, = (5), for he prohibiive ariff. So waer vapour is ariff waer above he prohibiive ariff. 0 Arguably, his isrume saisfies he exlusio ad he ilusio resriios, as he level of he applied ariff should o deped o how muh waer vapour exiss, ad by osruio, waer vapour is orrelaed wih ariff waer as i is par of i. To osru waer vapour, we eed a measure of prohibiive ariffs for every ariff lie. These are o observable, bu we use he approximaio i Folei e al. (20), whih wih he help of impor demad elasiiies alulaes he prohibiive ariff as he oe ha will lead o zero impors usig a liear approximaio aroud he observed level of impors. The prohibiive ariff is he give by: pr, =, ( + ), m + (6) e where e, represes he impor demad elasiiy ha varies by oury ad by produ. Table m p provides summary saisis by oury of ariff waer ad waer vapour, applied ariffs ad boud ariffs, as well as he various elasiiies. The edogeeiy of marke power is addressed by usig a some heory. Olarreaga e al. (999) show ha wo deermias of he expor supply elasiiy of he res of he world are a average of he expor supply elasiiy aross all ouries measured from he exporers poi of view ad a average of he impor demad elasiiies aross all ouries i he res of he world. 9 We also do o have esimaes ha vary aross ime; herefore, he oly variaio i hese elasiiies is aross produs ad ouries. 0 Noe ha ariff bouds do o vary by ime, give ha hey were he ouome of he Uruguay Roud egoiaios. x For a give produ, le us defie world expor supply as w = (he sum of eah oury s expor supply). The res of he world expor supply faed by oury i is he give by xi = xw m i where m are impors of oury. Differeiae boh sides by he world prie p ad muliply by p/ xw ad rearrage he expressio o obai: e i = m / x i w e x + i e m m x x where e is he expor supply of he world, ad w x e is he absolue value of he impor demad elasiiy of oury. 2 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

20 We have esimaes of impor demad elasiiies a he six-digi level of he HS lassifiaio from Kee e al. (2008), ad we adap heir mehodology o esimae expor supply elasiiies for eah oury i our sample a he six-digi of he HS lassifiaio. The mehodology employed o measure he expor supply elasiiies of he res of he world from he poi of view of he imporers is disussed i seio 3. We he ake averages of hese elasiiies ad use hem as isrumes for marke power (he iverse of he expor supply elasiiy of he res of he world from he poi of view of he imporer). Below, we provide more deails o his issue. I priiple, hese wo averages saisfy he exlusio resriio. We isrume he ieraio erm wih he ieraio of hese averages wih waer vapour. We perform over-ideifiaio ad weak isrumeal variables ess o hek he validiy of our isrumes. 3. ESTIMATING THE EXPORT SUPPLY ELASTICITIES OF THE REST OF THE WORLD We sar by desribig our adapaio of he mehodology used i Kee e al. (2008) o esimae he expor supply elasiiies of he res of he world faed by eah imporig oury ( e ). We he disuss he adapaio of heir mehodology o esimae expor supply elasiiies of eah exporig oury a he six-digi level of he HS lassifiaio ha will be used oily wih he esimaes i Kee e al. (2008) o isrume he expor supply elasiiies of he res of he world faed by eah imporer. We he desribe he daa used o esimae he elasiiies ad provide some desripive saisis of hese esimaes, as well as some exeral ess. å 3. ESTIMATING REST-OF-THE-WORLD EXPORT SUPPLY ELASTICITIES I his seio, we desribe he mehodology employed o esimae he res-of-he-world supply elasiiies faed by eah imporer. They orrespod o our measure of marke power i ieraioal markes ad apure he abiliy of ouries i hagig heir erms of rade by usig rade poliy isrumes, for isae. The empirial model is based o he adapaio by Kee e al. (2008) of Kohli s (99) gross domesi produ (GDP) fuio approah for he esimaio of rade elasiiies a he ariff-lie level. Kee e al. (2008) provides esimaes of impor demad elasiiies a he six-digi HS level, whereas our fous here is he expor supply of he res of he world, so we eed o model he GDP fuio of he res of he world for eah imporig oury. We assume ha he GDP fuio is ommo aross all ouries up o a osa erm ha aous for produiviy differees. The GDP fuio of eah oury, deoed ( p v ) G, is a fuio of pries ad edowmes. Wihou loss of geeraliy, we assume ha his GDP fuio has a flexible raslog fuioal form, where ad k are idex goods, ad m ad l are idex faor edowmes, as follows: l G + + N N N ( p, v ) = a + a0 l p + ak l p l p 00 k M b0 m l vm + m= N M m = m= 2 M = M m= l= m b ml l v m 2 l v l = k = l p l v (7) Cooperaio i he Tariff Waers of he World Trade Orgaizaio 3

21 whe idexed by allow for hages over ime. 2 where all he raslog parameers a, b ad m We also impose he eessary resriios so ha he GDP fuio saisfies he homogeeiy ad symmery properies of a GDP fuio. For eah oury we a he osru he GDP fuio of he res of he world by summig he GDP fuios of eah oury give by (7). The, akig l G p, v wih respe o l ad summig aross eah oury i he res he derivaive of ( ) p of he world, we obai he equilibrium share of expored good i he res of he world s GDP a period, 3 s p q ( ) ( p, v ) p, v G ( p, v ) N M C w = ( Cw ) a ( Cw ) ak l pk m k = m= = M C w a l p ak l pk m ( l vm ) k m= = ( l vm ) = ( Cw ) a (8) where s is he share of expor good i he res-of-he-world GDP, C w is he oal umber of C w = l v ouries i he world, ad ( m ) ouries i he res of he world. is he sum of he log of faor edowme m aross all The res-of-he-world expor supply elasiiy of good is he give by: 4 ( p, v ) q p ( Cw ) a e = + s 0 (9) p q s Thus we a alulae he expor supply elasiiies oe a is properly esimaed. Noe ha he size of he expor supply elasiiies e posiively depeds o he size of a, whih apures he hages i he share of good i eah oury s GDP whe he prie of good ireases. Wih daa o expor shares, ui values ad faor edowmes, equaio (8) is he basis for our esimaio of expor elasiiies. There are, however, several problems wih he esimaio of a usig (8). Firs, here are housads of goods raded amog he ouries i ay give year. Moreover, here is also a large umber of o-raded ommodiies ha ompee for sare faor edowmes ad oribue o GDP i eah oury. Thus, we do o have eough degrees of freedom o esimae all ak s. We follow Kee e al. (2008) o solve his problem by rasformig he N -good eoomy problem io a olleio of N ses of wo-good eoomies. This is doe by osruig a prie idex of he remaiig goods i he eoomy (iludig impored ad o-raded goods) for eah expored good. For his we use iformaio o GDP deflaors, a prie idex for eah of he expored goods as well as Caves, Chrisese ad Diewer s (982) resul ha if he GDP fuio follows a raslog fuioal form ad he raslog parameers are ime-ivaria, he a Torquis prie idex is he exa prie idex of he GDP fuio. Usig he defiiio of he Torquis prie 2 We assume some parameers o be ime-ivaria so ha we a esimae hem usig he variaio over ime. 3 This assumes ha goods expored by he res of he world are differeiaed by desiaio, ad he prie of goods o oher desiaios are iluded i he seod erm of he righ-had side o he op lie of (8). q p, v p 4 ( ) k k Cross-prie elasiiies of expor supply are give by: = + s, k. ε k k p q a s k 4 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

22 idex, i is he easy o ompue for eah good a prie idex for all oher goods i he eoomy, deoed p. Equaio (8) beomes: s ( p, p, v ) M p v m = ( Cw ) a0 ( Cw ) a l m l,. p + m l, m= = v + + µ (20) l C w Wih a addiive sohasi error erm, µ, o apure measureme errors, equaio (20) is he basis used for he esimaio of ow prie effe,, ad hee he expor prie elasiiy of he res of he world, e. The seod problem is ha we do o have eough ime variaio o esimae hese parameers by oury. Therefore,0. give ha we assume ha he GDP fuios are ommo up o a osa, we pool he daa ogeher ad esimae he ommo a usig boh ross-oury ad ime variaios ad iroduig year- ad oury-speifi fixed effes ha are all speifi o eah good. The oury-speifi fixed effes (for eah good ) will orol, for example, for he level of rade resriiveess i eah imporig oury ha may be orrelaed wih he prie reeived by exporers, as log as rade resriiveess does o vary sigifialy aross ime. The year fixed effes (for eah good ) will apure geeral shoks o good s world marke. There are also several eoomeri problems. Ui pries a be edogeous or measured wih error. There may also be seleio bias due o he fa ha some produs may o be expored by he res of he world o a pariular oury. Fially, here may be parial adusmes of expored quaiies o hages i pries whih may lead o serial orrelaio i he error erm. To address all he eoomeri problems, we follow he proedure i Kee e al. (2008). We isrumeed ui values usig he simple ad iverse-disae weighed averages of he ui values of he res of he world, as well as he rade-weighed average disae of oury o all he exporig ouries of good. We orreed for seleio bias by iroduig he Mills raio of probi equaio ha deermies wheher or o he good was expored by he res of he world usig he proedure i Semykia ad Wooldridge (200), bu oly whe he es hey propose suggess ha seleio bias is a problem. We also es for serial orrelaio i he error erm, ad, whe serial orrelaio is prese, we he esimae a dyami model by iroduig a lagged depede variable usig he geeralized mehod of momes (GMM) sysem esimaors developed by Arellao ad Bover (995). This esimaio sraegy orrespods o he Arellao ad Bod (99) differee GMM esimaors, wih a level equaio added o he sysem o improve effiiey. 5 Fially, for equaio (8) o be he soluio of he GDP maximizaio problem, he seod order eessary odiios eed o be saisfied (i.e. he Hessia marix eeds o be egaive semidefiie). This implies ha he esimaed expor elasiiies of he res of he world are o egaive. For his o be rue for all observaios: a a ( s ) s (2) where s is he maximum share i he sample for good. Thus, whe he esimaed saisfy he urvaure odiio desribed by expressio (2), we impose he esimaed whih esures ha all elasiiies are posiive. a does o a s, 5 See Kee e al. (2008) for furher deails. Cooperaio i he Tariff Waers of he World Trade Orgaizaio 5

23 3.2 ESTIMATING EXPORT SUPPLY ELASTICITIES FROM THE POINT OF VIEW OF THE EXPORTER The expor supply elasiiies from he he exporer s poi of view are used as isrumes for he expor supply elasiiy of he res of he world from he poi of view of he imporer. The esimaio proedure is ideial o he oe followed above, exep ha we are o summig he GDP fuios of res of he world s ouries. We he ake he derivaive of he GDP fuio wih respe o pries ad rearrage o obai he share equaio ha will be esimaed: s M p v m ( p, p, v ) = b b l + d u m p m l m v (22), = l, where b ad d s are parameers o be esimaed afer poolig observaios aross ouries for eah good. The expor supply elasiiy of good i eah exporig oury is he give by: x q ( p, v ) p b e = + s 0 (23) p q s We are faig he same eoomeri problems ad daa osrais as whe esimaig he expor supply elasiiies of he res of he world, ad we herefore follow he proedure desribed i he previous seio. 3.3 DATA The daase used o esimae expor supply elasiiies osiss of expor values ad quaiies repored by differe ouries o he Uied Naios Comrade sysem a he six-digi level of he HS lassifiaio (aroud 4,600 produs). 6 The HS lassifiaio was irodued i 988. The basi daa se osiss of a ubalaed pael of expors for 00 ouries a he six-digi level of he HS lassifiaio for he period The umber of ouries obviously varies aross produs, depedig o he presee of expor flows ad o he availabiliy of rade saisis usig he HS lassifiaio. There are hree faor edowmes iluded i he regressio: labour, apial sok ad agriulural lad. Daa o labour fore ad agriulural lad are from he World Bak World Developme Idiaors (WDI). Daa o apial edowmes are osrued usig he perpeual iveory mehod based o real ivesme daa i WDI. The esimaio sample did o ilude goods where he reorded rade value a he six-digi level of he HS lassifiaio represeed less ha 0.0 per e of expors (or i had a absolue value of less ha $50,000). This elimiaed less ha per e of he value of expors i he sample, ad i is eessary i order o avoid biasig our resuls wih eoomially meaigless expors. The elasiiies are osrued followig equaio (9), where he expor share is he sample average (i.e. we osraied he elasiiies o be ime-ivaria). We also purged he repored resuls from exreme values by droppig from he sample he op ad boom per e of he esimaes. 6 Available a he World Bak hrough he World Iegraed Trade Soluio. 6 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

24 3.4 EMPIRICAL RESULTS We have esimaed a oal of 268,240 res-of-he-world expor supply elasiiies orrespodig o 00 imporers a he six-digi level of he HS lassifiaio. 7 Figure provides a plo of he disribuio of he iverse of hese res-of-he-world supply elasiiies, whih apures he imporer s marke power whe faig expors from he res of he world. The iverse of hese expor supply elasiiies is also equal o he level of he opimal ariff if he imporer were o use is marke power. The media of he iverse of he expor supply elasiiy of he res of he world is equal o 0.044, whih implies ha he media opimal ariff i he world should be aroud 4.4 per e. Figure. Disribuio of he iverse of expor supply elasiiies faed by imporers Table also provides he mea ad sadard deviaio of expor supply elasiiies faed by eah imporer i he sample used o esimae equaio (4), so i exludes some ouries for whih we do o have applied or boud ariffs. Moreover, hese elasiiies do o ake io aou iformaio abou idividual members of he Europea Uio, give ha his prefereial rade agreeme represes a sigle deisio-makig uiy for rade poliy purposes. 8 The eoomies faig he lowes expor supply elasiiies, ad herefore havig he sroges marke power, are he Uied Saes ad he Europea Uio, wih average opimal ariffs above 5 per e. The ouries faig he highes expor supply elasiiy, ad herefore beig lose o prie-akig behaviour i ieraioal markes are Burudi, Greada ad Bei, all wih average opimal ariffs below 0.00 per e. 7 We have also esimaed res-of-he-world expor supply elasiiies for idividual members of he Europea Uio. If we ou idividual Europea members, we reah a oal umber of 37,348 res-of-he-world expor supply elasiiies orrespodig o 27 imporers a he six-digi level of he HS lassifiaio. 8 We perform he same aalysis usig daa for idividual members of he Europea Uio isead. The resuls are very similar eoomially ad saisially ad are available upo reques. I order o alulae he marke power of he Europea Uio, we followed a proedure similar o he oe desribed i seio 3: We firs esimae parameer a usig equaio (20) ad he, usig aggregaed daa for members of he Europea Uio where we purged ira-europea Uio rade flows, we alulae marke power usig expressio (9). Cooperaio i he Tariff Waers of he World Trade Orgaizaio 7

25 We provide a few exeral ess of hese esimaes. Firs, wih iformaio o impor demad elasiiies ad expor supply elasiiies for eah esporer, he res of he world expor supply epasiiy faed by imporer i a be approximaed by: e i x m m = e + e (24) mi/ xw i xw where x e is he expor supply of he eire world, whih a be approximaed by he weighed sum m e is he absolue value of expor supply elasiiies esimaed from he exporer s poi of view, ad of he impor demad elasiiy of oury, whih has bee esimaed by Kee e al. (2008). The average ad sadard deviaio of expor supply elasiiies esimaed for eah exporig oury are give i able. The average ould seem high, bu i is impora o remember ha hese expor supply elasiiies are esimaed a he six-digi level of he HS lassifiaio keepig all pries osa, ad amog hese pries ha are kep osa here are some ha are very lose subsiues. For example, HS 005 is he produ ode for live hikes uder 85 grams, ad HS 0052, for live urkeys uder 85 grams. Noe ha i order o derive equaio (24), we assumed ha he expor supplies were o differeiaed by imporer, whereas our esimaes of e desribed i seio 3. assume ha he expor supply elasiiies of he res of he world are differeiaed by desiaio. Thus, we do o expe he esimaes i seio 3. o be equal o he oes i obaied usig equaio (24). Table 2. Exeral ess of he esimaes of expor supply elasiiies faed by imporers i Log of expor supply elasiiy of res of he world () (2) (3) (4) (lef-had side of equaio (24)) (0.002) Log of world s expor supply elasiiy (righ-had side of equaio (24)) (0.003) Log of impor demad elasiiy of res of he world 0.09 (righ-had side of equaio (24)) (0.004) Log of impor share (righ-had side of equaio (24)) (0.002) (0.003) Log of Expor supply elasiiy of res of he world (Broda e al. (2008) esimaes) (0.006) Log of GDP (0.002) Log of remoeess (iverse of disae-weighed GDP of res of he world) (0.02) R2 adused Number of observaios Number of ouries HS six-digi fixed effes No No No Yes Coury fixed effes Yes Yes Yes No Noe: Robus sadard errors are i parehesis; sads for 5 per e saisial sigifiae ad sads for 0 per e saisial sigifiae. 8 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES

26 I he firs olum of able 2, we provide esimaes of he orrelaio bewee our esimae of he expor supply elasiiy faed by eah imporer ad is proxy usig equaio (24). 9 I he seod olum we spli equaio (24) io is hree elemes: he world s expor supply elasiiy for eah good, whih is proxied by he weighed average expor supply elasiiy of eah exporer; he imporweighed impor demad elasiiy i he res of he world ad he impor share of he imporer i world s markes. As expeed, here is a posiive orrelaio i he firs olum, ad figure 2 provides a parial plo of our esimae of he expor supply elasiiy faed by eah imporer, agais he oe alulaed usig he righ-had side of equaio (24). The posiive orrelaio is learly illusraed i figure 2. I he seod olum of able 2, as expeed, whe deomposig equaio (24) io is hree elemes, we fid ha boh average elasiiies have a posiive sig (he impor demad elasiiies are measured i absolue value), ad he impor share has a egaive sig. Figure 2. Correlaio bewee he expor supply elasiiies faed by imporers ad hose alulaed usig equaio (24) The seod exeral es uses he esimaes by Broda e al. (2008) of expor supply elasiiies faed by imporers a he six-digi level of he HS lassifiaio for 3 ouries ha were o WTO members. Thus, he hird olum i able 2 provides he orrelaio bewee he esimaes of Broda e al. ad our esimaes. There is a posiive ad saisially sigifia orrelaio for hese 3 ouries, whih agai ofirms he validiy of our esimaes. Noe agai ha heir esimaes ad ours vary i he assumpios made o obai hem, as hey impose a osa elasiiy of sale sruure o he demad side, whereas our elasiiies are derived from he supply side (he GDP fuio) ad we make o assumpios o he demad side. Thus, we should o expe he elasiiies o be equal, bu posiively orrelaed as hey boh apure he expor supply elasiiies faed by imporers. 9 Noe ha i order o provide esimaes of he proxy usig equaio (24) for all six-digi level HS goods, we replaed some missig average expor supply elasiiies wih he four-digi HS average (or he wo-digi HS average whe he four-digi HS average was also missig). The reaso is ha i was impossible o esimae some expor supply elasiiies from he poi of view of he exporer for some produs usig equaio (23) beause here was o eough variaio i he daa (o eough exporers). This was o a problem whe esimaig he expor supply elasiiy faed by imporers usig equaio (9) beause here was always a suffiiely large umber of imporers. Cooperaio i he Tariff Waers of he World Trade Orgaizaio 9