ECN 500 CSUGC Trade Enhancing Effect of Non Tariff Measures Essay
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Option #2: Trade Barriers
The article, The Trade-Enhancing Effect of Non-Tariff Measures on Virgin Olive Oil (Links to an external site.)contends that while tariffs are restrictive of trade, non-tariff measures have actually helped to increase the olive oil trade.
Summarize history of the virgin olive oil industry provided by the author, including the changes in virgin olive oil trade.
Explain why the author believes the non-tariff barriers may lead to increased, rather than decreased, trade rather than decreasing.
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International Journal of Food and Agricultural Economics
ISSN 2147-8988, E-ISSN: 2149-3766
Vol. 5, No. 3, 2017, pp. 9-26
THE TRADE-ENHANCING EFFECT OF NON-TARIFF
MEASURES ON VIRGIN OLIVE OIL
Eyal Ronen
University of Warsaw, Faculty of Economic Sciences, Poland.
Email: shapironen@gmail.com
Abstract
Over the last 15 years, the global trade of virgin olive oil (VOO) seems to face a
stringent regulatory regime, mainly through the imposition of TBT and SPS measures.
Such a development should have adversely impacted global levels of VOO trade.
However, evidence shows that the world’s imports of VOO have more than quadrupled
in value since 2000. Alongside this trend, the share of VOO imports gradually shifts from
traditional sources (mainly EU) to New World producing countries, such as Argentina,
Australia, the USA, and Chile. By extracting data from hundreds of NTM regulations, as
well as all possible registered bilateral trade flows between 2002 to 2014, this paper aims
to empirically explore to what extent particular NTMs impact imports of VOO. The
results indicate that while tariffs remain a stringent barrier, most NTMs have a positive
impact on imports, rather than enhancing restrictiveness. The paper asserts that the
majority of NTMs respond to consumers’ demand for higher food safety standards and
protection of human health, while increasing available information and transparency.
That, in turn, leads to an expansion in the magnitude of imports of VOO products.
Keywords: Non-Tariff Measures, Sanitary and phytosanitary, Technical Barriers to
Trade, Virgin Olive Oil
JEL Classifications: F13, F14, Q17, Q18
1) Introduction
The agreements on Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade
(TBT) of the World Trade Organization (WTO) were designed to provide the member
countries with the freedom to choose a particular measure that allows them to achieve
legitimate policy objectives, such as the protection of human health and the environment.
However, these instruments should be levied only to the extent necessary to achieve the
desired purpose while the prohibitive effects on trade are kept to a minimum. Meanwhile,
over the past two decades, the Dispute Settlement Body of the WTO reports a growing
number of trade disputes, related either to SPS or TBT measures which created
unnecessary trade barriers (WTO, 2012).
The influence of SPS and TBT measures on international market access are more
complicated than those of traditional trade barriers, such as tariffs and countervailing
duties. The pivotal role of SPS and TBT measures ranges from alleviating asymmetric
information in the marketplace (i.e. labelling requirements) to mitigating risk in the
consumption of particular products and enhancing the sustainability of the eco-system.
Accordingly, SPS measures and TBTs are likely to impact both consumers’ and
producers preferences and modify their decisions. Consequently, while NTMs may
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The Trade-Enhancing Effect of
create unnecessary trade barriers and significantly impede market access for agricultural
products from particular sources, it may also enhance consumers demand via risk
mitigation or quality assurance, and possibly serve as trade catalysts.
The paper aims to provide an empirical framework for examining the inclusive effects
of a variety of SPS and TBT measures, collectively organized into seven subgroups, on
the imports of a particular sector. To achieve this objective, the olive oil sector has been
chosen as a case study. Notably, the paper refers to the subcategory of virgin olive oil
(VOO), which despite being the highest quality of olive oil, accounts for over 85% of the
total olive oil exports. This sector is of particular interest given the intensified regulation
environment it operates in, as well as the dynamic developments that have occurred
during the last three decades against the background of the surge in global consumption.
Moreover, a special interest is attributed to the shift in the variety of production sources,
after hundreds of years of absolute dominance of the Mediterranean basin countries
(predominantly Spain, Italy, and Greece).
The significant growing demand for VOO, highlights the increasing popularity of the
Mediterranean diet, for its highly beneficial nutritional and culinary properties due to its
unique composition in containing fatty acids and antioxidants. Accumulated evidence
demonstrate that demand for VOO has more than quadrupled since the new millennium,
primarily in countries outside the EU. Furthermore, the consumption of VOO is expected
to further increase significantly in near future. Additional notable trend is the shift of
imports of VOO, from the traditional exporting countries to the New World producing
countries, such as Argentina, Australia, the USA, and Chile. This development which is
clearly generated by the growing demand for affordable products, as well as the
consumers interest in diversified supply sources, creates another challenge for producers
of VOO.
The novelty of this paper arises from the detailed analysis of trade regulations and
their impact on global trade flows of VOO. This type of analysis is especially useful for
identifying which regulations (most) efficiently achieve a magnifying effect, in contrast
to those which pose a restrictive barrier to trade. Moreover, it also allows to determine
the extent to which these measures can serve as trade catalysts for the relevant
stakeholders.
The main contribution of the paper is the empirical validation it provides to the tradeenhancing impact of a wide range of regulatory measures on VOO imports. It does so by
building a panel data which consists of thousands of possible NTMs, affecting all possible
bilateral trade flows between the years 2002 to 2014. The estimation results reveal that
while tariffs remain a stringent barrier, most TBT and SPS measures are associated with
a positive impact on imports rather than increasing restrictiveness. The paper asserts that
while aiming to achieve better food safety, human and animal health, and protection of
the environment, the majority of NTMs generate additional economic benefits. Through
risk mitigation, quality assurance and increased traceability, as well as information and
transparency, numerous regulatory measures virtually enhance consumer demand,
resulting in an expansion in the demand for VOO imports.
The paper is comprised of five sections. Following the introduction, the second
section portrays the characterization of the VOO sector and the policy measures which
affect its trade across countries. The third section outlines the relevant literature review,
which examine the relations between tariffs, NTMs, and olive oil trade. The fourth section
presents the econometric methodology which was chosen to conduct the analysis,
accompanied by a discussion of the results of the estimations, and a comparison of the
10
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exports by EU producing countries to non-EU producing countries. The last section
underlines the key findings which can be drawn from the research.
2. The Global Trade of Virgin Olive Oil
2.1 Background and Characteristics
Edible olive seems to have co-existed with humans for millennia, with its origins
traced along the eastern Mediterranean coast, which is nowadays Turkey, Syria, Lebanon,
Palestine, and Israel. After their introduction to Greece, Egypt, and western Turkey,
olives continued to move westward into Italy, France, Spain, Portugal, Algeria, Tunisia,
and Morocco. Since then, through the days of the Roman Empire, olive planting and oil
processing facilities have spread around the Mediterranean basin, which remain up to
recent years, the main region of olive oil production and largest market of consumption.
Table 1. EU vs. Non-EU countries, Olive Oil Statistics
2000
Volume Share
2008
Volume Share
Production (1,000
tonnes)
1.879 79,1% 1.939
72,6%
Consumption (1,000
tonnes)
1.728 70,7% 1.866
67,7%
Exports, Virgin
EU
Olive Oil ($ Mil.)
1.293 84,8% 3.884
81,5%
Imports, Virgin
Olive Oil ($ Mil.)
1.112 71,8% 3.284
66,3%
Per Capita
Consumption (kg)
3,74
Production (1,000
tonnes)
496
20,9% 730,5
27,4%
Consumption (1,000
tonnes)
714
29,3%
887
32,2%
Exports,
Virgin
Non232
15,2%
884
18,5%
EU Olive Oil ($ Mil.)
Imports, Virgin
Olive Oil ($ Mil.)
436
28,2% 1.667
33,7%
Per Capita
Consumption (kg)
0,15
Source: WITS and the International Olive Council, Nov. 2016
2015
Volume Share
1.435
58,4%
1.605
55%
4.730
78,6%
3.979
63,5%
3,21
1.024
41,6%
1.312
45%
1.286
21,4%
2.286
36,5%
0,21
The dominant producing countries of olive oil (OO) nowadays are Spain, Italy, and
Greece, which account for more than half of the global production. Spain is also the
leading exporter of VOO, with a share of 52% of the world’s exports, followed by Italy,
Portugal, and Greece. Spains significant growth in production is a result of the vast
plantations and investments made during the 1980s, thanks to the incentives for
production, export, and storage provided within the EU Common Agricultural Policy.
Trailing behind the EU are Tunisia, Turkey, Syria and Morocco, countries that gradually
gain a grip of the worlds production of OO. Table 1 shows the gradual shift in output
share from the EU to non-EU producing countries, which currently account for about
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The Trade-Enhancing Effect of
42% of the global volume produced.
In the last 20 years, several notable developments were associated with olive oil. The
most significant development is the growing popularity of the Mediterranean diet, mainly
due to its acknowledged nutritional properties, but also as a response to the growing threat
caused by global obesity (also known as the silent killer). Notably, the most valuable
benefits are attributed to the quality of VOO. Coupled with improvements in cultivation
and the use of oil-mill technologies, this has generated a substitution drift from generic
olive oil towards VOO.
Table 2: Imports of Virgin Olive Oil by Main Importing Countries
2000
EU
2015
MFN
Applied
Tariff
Rates
$ Mil.
Share
$ Mil.
Share
$ Mil.
Share
Italy
928
46,4%
1.659
33,5%
1.876
29,9%
Spain
15
0,8%
194
3,9%
603
9,6%
France
194
9,7%
435
8,8%
448
7,1%
Germany
108
5,4%
272
5,5%
278
4,4%
Portugal
United
Kingdom
67
3,4%
174
3,5%
245
3,9%
63
3,2%
201
4,1%
181
2,9%
Belgium
31
1,6%
71
1,4%
58
0,9%
Netherlands
16
0,8%
52
1,1%
54
0,9%
1.484
74,2%
3.284
66,3%
3.979
63,5%
40%*
USA
263
13,1%
760
15,4%
926
14,8%
1.3%*
Japan
60
3%
116
2,4%
236
3,8%
0%
Brazil
17
0,9%
152
3,1%
224
3,6%
10%
China
0
0%
41
0,8%
145
2,3%
10%
Canada
37
1,8%
107
2,2%
133
2,1%
0%
Russia
3
0,2%
44
0,9%
40
0,6%
5%
Switzerland
30
1,5%
78
1,6%
79
1,3%
0%
Australia
25
1,2%
55
1,1%
47
0,7%
0%
Total EU
NonEU
2008
S. Korea
4,5
0,2%
45
0,9%
48
0,8%
Total NonEU
515,7 25,80% 1.667,20 33,70% 2.286 36,50%
Source: UN Comtrade Dataset & World Integrated Trade Solution (WITS).
Notes: * Converted to tariff ad-valorem equivalents, using 2015 imports.
5%
After thousands of years of pure dominance, the world is experiencing a remarkable
growing demand for VOO, which is spreading beyond the Mediterranean region to nontraditional markets. In particular, countries such as the USA, Brazil, Japan, Canada, China
have extensively increased their VOO consumption. Since the beginning of the
millennium, while the total consumption of olive oil has increased up to 1.8-fold, the
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share of consumption of olive oil by non-EU countries has soared 4-fold to 45% of the
worlds consumption (IOC, 2016). The highest growth rate in consumption is recorded
in Japan (1400%), and the biggest in terms of volume is the USA, which jumped from 88
to 308 thousand metric tons.
Obviously, the increase in demand for VOO is accompanied by a rise in imports to
supply this consumption. The global imports of VOO, as reported in Table 2 account for
USD 6.3 billion (2015). Excluding intra-EU trade, the rest of the worlds imports of VOO
accounts for 36.5% of the total imports. That represents a dramatic surge of over 500%
since the beginning of the millennium. In 2015, the largest EU importers of VOO were
Italy, Spain, France, and Germany, while outside the EU, the biggest importers are the
USA with 14% of the global imports, followed by Japan, Brazil, China and Canada.
Interestingly, the annual growth of VOO imports, in the non-EU countries, since the year
2000, is over 10%, with Brazil demonstrating the fastest annual growth rate of 22.9%,
followed by Japan with 11.9%.
Figure 1. World imports of Virgin Olive Oil, By Origin, (Excl. Intra-EU Trade)
An additional trend is the gradual shift of VOO imports from traditional sources in
the EU to New World producing countries. Among these countries, the most noteworthy
sources of VOO are Tunisia, Morocco, Syria, Turkey, and Algeria. Yet, growing demand
is emerging from developed countries such as Argentina, Chile, USA, Australia, and
others. By 2015, non-EU countries are responsible for approximately 40% of the world
OO production. Moreover, the evidence presented in Figure 1 shows that between the
years 2002 and 2014, excluding intra-EU trade, imports arriving from Non-EU exporters
more than tripled their share in the global imports of VOO. Figure 1 displays the growth
in the share of imports from non-EU sources in particular to countries such as the USA,
Brazil, Japan, Canada and China. With the rise in the presence of non-EU producers on
the international arena, these countries are beginning to exercise a more significant
influence on designing trade policies.
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The Trade-Enhancing Effect of
2.2 Policy Measures Affecting the Trade of Virgin Olive Oil
With the exception of the EU, the global applied tariff rates on VOO are relatively
low and range between 0 and 10%. Tariff rates of zero are applied on VOO imports
entering Japan, Australia, Canada, Switzerland and others. While the USA imposes advalorem tariffs equivalent of 1.3%, the EU charge an equivalent tariff of approximately
40% (2015). Yet, only a negligible share of EUs imports is subject to full MFN rates, as
the majority benefit from preferential trade agreements. Statistical evidence validates that
while the average MFN tariff rates on VOO have declined from 9% in 2002 to 5.5% in
2015, the use of TBT and SPS measures affecting the VOO appear to be on the rise
(Figure 2).
Source: Authors calculations based on data of the World Bank and WTO I-TIP.
Figure 2. Evolution of NTMs & MFN Applied Tariffs on Virgin Olive Oil
The regulatory landscape is filled with wide range of NTMs, which partly serve to
protect domestic producers against foreign competition, but undeniably also act to
improve the quality of VOO products entering local markets. Such measures are designed
to protect human health, increase consumers welfare, afford adequate information and
increase risk assurance for consumers, as well as provide protection from counterfeit.
Numerous examples of illegal products confiscated, after failing to follow national
standards, were reported in recent years. To combat such endeavours, countries apply a
broad range of regulations and procedures, among which labelling requirements,
standards and marketing order, as well as food safety regulation. While often these policy
measures are grouped as SPS or TBT measures, the proposed research allows to
differentiate between subgroups of NTMs in order to examine the effective impact of
each individual measure on VOO imports.
The global minimum requirements for olive oil are covered by the Codex
Alimentarius Standard for Olive Oils and Olive Pomace Oils. Also known as the Food
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Code, it aims to develop science-based harmonized international food standards, to
protect consumer health and promote fair practices, in the least trade-distorting manner.
The Food Code covers composition and quality factors for various types of olive oil,
including food additives, contaminants, labelling requirements, physical features and
methods of analysis and sampling. Evidence show that not only that food safety standards
imposed by developed countries are stringent compared to the Food Code, but also, these
standards have become increasingly stricter over time.
For example, Maximum Residue Limits (MRLs) were introduced to control harmful
damage caused due to the widespread dissemination of pesticides for improving
agricultural productivity. In general, MRLs are determined by national regulatory
agencies, whether on their own or based on the Food Code. The European Regulation
from 1991 and its amendments from 2015 classifies eight quality categories of olive oil
to define which may be granted access to the EU market. Similarly, Australia and Japan
have MRLs which are more stringent than the Codex MRLs, whereas other countries set
their standards near or follow the exact Codex wordings.
Another example of a NTMs may be the labelling requirements, which were originally
intended to provide better traceability information, but also inform more knowledgeable
consumers regarding their preferences. Along with labelling requirements, there is a
growing importance of organic and fair trade schemes, which resulted in the demand for
such products to follow organic certification requirements. For instance, for the olive oil
to be marketed as organic-certified in the EU, it must contain the EUs organic logo, after
complying with the EU regulation for organic farming and marketing.
3. Literature Review
An extensive literature on the effects of NTMs on import flows has evolved in the last
two decades, primarily due to the proliferation in the use of trade-related regulatory
measures. Supplementary conceivable explanations involve the global reduction of
tariffs; the growing demand for transparency and reporting requirements on the
application of NTMs by WTO; and the harmonization of regulations, as a result of PTAs
signed and implemented by various countries. Lastly, the valuable advancement in
estimation methodologies allow the quantification of trade impact of NTMs and provide
a strong base for comparison across countries or within sectors.
The economic literature, however, provides an indecisive response regarding how and
to what extent these policy regulations, affect trade in the myriad of agriculture or food
products. Particularly, it is often uncertain whether these regulatory measures necessarily
hamper trade, mainly through the associated compliance costs of stringent regulations.
Alternatively, these measures may raise consumers confidence in the safety associated
with the product, while creating a positive feedback which. This may result in the
expansion of imports of a particular product which has initially been subject to a stringent
measure.
The ambiguous trade effect of NTMs evidently differs across sectors, and varies
among countries, depending on the economic development level. Disdier et al. (2008),
examine the impact of SPS and TBT on 30 disaggregated Agri-food products imported
to OECD members and find a significantly adverse effect on 10 industries. Yet, SPS and
TBTs can have no impact (as found in 12 industries) or even a positive effect, as these
measures carry information and provide confidence in the imported products. While
OECD exporters are not significantly affected by SPS and TBTs in their exports to other
OECD countries, developing and least developed countries exports are negatively and
significantly affected. Furthermore, EU imports seem to be more negatively influenced
by tariffs and SPS and TBTs than imports of other OECD countries.
15
The Trade-Enhancing Effect of
In the large share of surveyed literature, a trade-reducing impact of food safety
standards on Agri-food products is observed. In particular, the heterogeneity of standards
is associated with an adverse effect on trade. Winchester et al. (2012) validate the
significant trade-restrictive effect of stringent MRLs for plant products in importing
countries compared to exporting countries. Further, Chen et al. (2006) determine that in
developing countries, the testing procedures and lengthy inspection times significantly
reduce firms propensity to export to developed countries, predominantly in agricultural
firms. Moreover, the compliance costs associated with SPS measures tend to create a
comparative disadvantage for the small and medium-sized firms. Fontagné et al. (2013)
show that SPS compliance costs create market entry prohibition and increase the
probability to exit the restricted market by 2%.
By contrast, several scholars acknowledge the trade-enhancing effects of NTMs due
to their beneficial impact on public health, well-being, animal welfare, food safety and
sustainable environment. Josling et al.(2004) find that in nations where consumer
awareness to such features is valued, demand is stimulated for products under such
policies. Another key channel through which NTMs may positively affect trade flows is
the correction of market imperfections (Thilmany and Barrett, 1997). Moreover, as
countries differ in their capacity to meet with foreign standards, some countries may
enjoy a competitive advantage. Henson and Jaffee, (2008) show that exporters facing
stricter food safety standards incur compliance costs which may be offset by benefits
from the enhancement of food management capacity. Supplementing this, Swinnen and
Vandemoortele (2011) acknowledge the trade-augmenting role of food standards, and
Chevassus-Lozza et al. (2008), report positive trade effects of sanitary measures, despite
some negative or insignificant impacts of phytosanitary and quality measures.
Xiong and Beghin (2014) highlight the gradually challenged standards-as-barriers
perception, by the two faces of standards approach. Consequently, even if there is a cost
involved in complying with standards, the trade-enhancing effects may be larger. The
effects of MRLs regulations imposed by high-income OECD countries jointly enhance
the import demand and hinder foreign exporters supply. Although the net effect is
positive for most countries, it is smaller for developing countries. This implies that
exporters from developing countries face greater difficulty than their competitors from
developed countries when food safety standards exist in export markets.
In his review of the economic literature and surveys on the trade effects of
international and national standards as well as regulations of various products, across
countries, Swann (2010) provides valuable insights. First, compared to national standards
and regulations, which tend to negatively impact imports, in most of the economic
literature, international standards and regulations are found to have a positive effect on
imports. With respect to data based on surveys, the effects of national standards on
imports can be either positive or negative. Nevertheless, the effects of national regulations
on domestic imports are mostly found to be negative.
Michalek et al. (2005) analyse the effects of three EU approaches for dealing with
TBTs for the new member states (CEEC) and the Mediterranean countries. Their results
suggest that the Harmonization Approach and the New Approach are likely to increase
trade, while the Mutual Recognition approach (MR) tends to reduce trade. The effect of
MR may seem surprising, since supportive studies find it the most efficient method to
overcome TBTs. Their interpretation highlights the reverse direction of causation
connection, i.e. that MR may be introduced in sectors when trade flows are relatively low
but there are few TBTs, meaning little to be gained from a policy other than MR.
As increased cooperation among countries reduces regulation heterogeneity,
importers may gain market share at the expense of domestic producers. Liu and Yue
(2012) argue that the EUs adoption of the Hazard Analysis Critical Control Point
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(HACCP) standard was a catalyst for orange juice imports. It resulted in increased
imports, reduced sales of domestic producers, and improved consumer welfare. By
contrast, Anders and Caswell (2009) find a negative effect of a HACCP food safety
standard on the overall seafood imports. However, a differentiation by exporting country
shows negative effects for developing countries, but positive effects for developed
countries.
Drogué and Federica (2012) finds that reducing the heterogeneity between MRLs has
a trade-enhancing impact on apples and pears, however, the impact differs depending on
the exporter. Nevertheless, regulatory harmonization where previously a country did not
have a standard may imply new or higher costs for existing producers and an increase in
the stringency. This was the case with the harmonization of MRLs for aflatoxin in the EU
in 2002, which meant that aflatoxin standards became more stringent in most countries
(Xiong and Beghin 2012; Otsuki et al. 2001). According to the latter, the new EU
regulation on aflatoxins will reduce trade flows by 63% compared to when the Food Code
standards are followed.
In recent years, several attempts have been undertaken to study the effects of various
regulatory policies on consumers willingness to pay (WTP) for OO across and within
countries. Labelling and Geographical Origin Certification seem to affect consumers’
purchasing decisions. Menapace et al. (2011) underline that EU consumers have a greater
WTP for Geographical Indication (GI) than non-GI labelled products. Dekhili et al.
(2011) assert that official cues are more important for consumers of non-producing
countries, whereas consumers from producing countries choose OO based on origin and
sensory cues (e.g., colour and appearance). The Origin information and traceability as
reported on the label is important as consumers are increasingly concerned about food
safety (Krystallis and Ness, 2005). Higher value is also placed on quality assurances, such
as MRLs, and Protected Designation of Origin labels, which improve the signalling of
credence to consumers (Combris et al.,2010).
Sandalidou et al. (2002) find that the Organic certification of OO in Greece is
positively perceived by consumers, irrespective of the continued unsatisfactory level of
information. Gil and Sofer (2006) observed that information about the conventional
product (reference price) increased the perceived value of the Organic OO for Spanish
consumers. Cicia et al. (2005) valued at one euro per bottle the attribute of Italian product
origin (COOL) ascribed by Italian consumers. Dekhili and dHauteville (2009) highlight
consumers preference for traditionally known brands and private labels. By contrast,
Kavallari et al. (2011) find that bulk olive oil is more likely to enter the German and the
UK markets compared to similar packaged and branded products.
As seen in the review, the extensive and divergent studies which were reviewed
reinforce the assertion that some regulatory measures are not necessarily protectionist,
and at times actually boost imports. Yet, empirical validation regarding the impact of a
wide range of regulatory measures on a particular agriculture sector is rare. The current
research attempts to fill this gap by empirically studying the influence of various
subgroups of SPS and food related TBT measures on the virgin olive oil sector. In
particular, it encompasses a large dataset of national regulations in order to underpin
further their trade-enhancing impact on imports of VOO during the years 2002-2014.
4. Econometric Methodology and Data
In the empirical econometric analysis, the determinants of imports of VOO are
examined with respect to various explanatory variables. Among these variables, some are
directly related to the olive oil sector, such as production, tariffs and NTMs which fall
under the broad umbrella of the TBT and SPS practices, while others variables are
17
The Trade-Enhancing Effect of
standard in gravity modelling. The size of the sample which was developed for this
purpose is comprised of approximately 2,600 observations, encompassing imports panel
data of 160 importing countries, during the years 2002 to 2014.
The econometric methodology applied in this analysis is the following:
1
2
3
4
???? IMPORTS?????? = ????,??
????GDP???? + ????,??
????PROD???? + ????,??
????GDPpc???? + ????,??
????TARIFF????
5
6
7
8
+ ????,?? ????DIST?????? + ????,?? ????POP?????? + ????,?? Comlang?????? + ????,??
Contig??????
9
10
11
+ ????,?? Comcur?????? + ????,?? RTA + ????,?? NTM???????? + ? ?? , ??
For the purpose of this study, a log-linear transformation of the ordinary least squares
(OLS) model has been employed. The dependent variable in all the specifications is ln
IMPORTS ijt, which is the natural logarithm of the import values of VOO to country i
from country j in a particular year t. From an empirical perspective, both the presence of
zero flows and heteroskedasticity in the idiosyncratic error term are matters to take into
consideration due to their possible effect on gravity-type estimations (Silva and Tenreyro,
2006). The solution to that has been to add an additional estimation using a Tobit model
to correct for the presence of zero trade flows bias (Martin and Pham, 2008). Moreover,
the paper assumes an additive error in specification and estimates the model using the
Poisson pseudo-maximum likelihood estimator (PPML).
The econometric analysis is comprised of a vector of variables, which may account
for control variables explaining the imports of VOO. The first control variable in the
analysis is denoted as lnGDPi,t , which is the natural logarithm transformation of the
Gross Domestic Product (GDP) of the importing country i in a particular year t. As the
theory predicts, the correlation between imports of VOO and the variable is expected to
be positive and significant, in line with the view that larger markets foster higher volumes
of trade. The second major control variable is Production (denotes lnPRODj,ti), which
represents the output of VOO, allowing to capture the exporting countrys supply
capacity. A positive coefficient for production of is expected, in line with the view that
larger producers export higher volumes of VOO. The variable lnGDPpci,t , represents the
GDP per capita in the importing country I, and is likely to be positive since increasing
income lead to higher demand for VOO.
The fourth control variable is denoted as ln(1+TARIFFi,n), which is a vector of the
Most Favoured Nations (MFN) applied tariffs on VOO. Specifically, it provides the tariff
rates on the 6-digit HS classification 150910. Data is provided for each of the importing
country, depending on the source of import (i.e. a particular importing country may have
dissimilar applied tariff rates to two exporting countries, depending on benefits granted
by different trade agreements). As the theory predicts, the correlation between imports
and tariffs is expected to be negative and significant, since the higher a tariff rate (i.e.
higher costs on imports), the smaller the demand for VOO.
Several additional gravity variables were extracted from the CEPII database (Mayer
and Zignano, 2011). Distance is measured in km between the sample countries
economic centres. Common language, currency and contiguous are dummy variables that
take the value 1 when two countries share the same language, currency or are contiguous,
correspondingly, and zero otherwise. In all cases, proximity among countries contributes
to decreasing transaction costs and enhances imports. An additional dummy variable
RTA takes the value 1 if a regional trade agreement exists between the importing and the
exporting countries, to reflect the positive influence on imports of the recent proliferation
of trade agreements in the last three decades. Therefore, except for distance, the
coefficient signs are expected to be positive and significant.
18
E. Ronen
As mentioned, the most significant set of variables is the NTMs, which were obtained
following a careful analysis of hundreds of relevant regulations, extracted from I-TIP.
The entire database provides information on over 25,000 mea
