The 16 reference contexts in paper Maggie X. Chen, Aaditya Mattoo (2008) “Regionalism in Standards: Good or Bad for Trade?” / RePEc:gwi:wpaper:2009-14

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    Commission setting out essential health and safety requirements for most regulated products.7The harmonization directives cover every aspect of the relevant standards, including the substantive content, the labeling requirement, and the conformity assessment procedures. Available evidence suggests that harmonization within the EU tended towards the high range of initial standards. For example,
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    Vogel (1995)
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    points out that the role of the Unionís richest and most powerful members, which imposed the most stringent standards, has been critical in setting the EU standards agenda; their political and economic importance has served to make EU standards progressively stricter.8 By mapping each of the harmonization directives on to the SITC 3-digit level industries, we Önd that, in practice, harmonizing dir
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    meet the conformity assessment requirements in each participating country.10 3 Related literature and hypotheses The literature on regionalism has almost exclusively focused on tari§s and quotas with a few notable exceptions.11In this section, we discuss the few studies on standards and identify the hypotheses we examine in the empirical section. 3.1 Related literature Two theoretical studies,
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    Baldwin (2000) and
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    Ganslandt and Markusen (2001), are relevant to our analysis. In particular, Baldwin (2000) provides a systematic overview of regulatory protectionism. He also develops a model to examine the e§ect of mutual recognition and anticipates some of the results of this paper on MRAs.
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    and hypotheses The literature on regionalism has almost exclusively focused on tari§s and quotas with a few notable exceptions.11In this section, we discuss the few studies on standards and identify the hypotheses we examine in the empirical section. 3.1 Related literature Two theoretical studies, Baldwin (2000) and Ganslandt and Markusen (2001), are relevant to our analysis. In particular,
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    Baldwin (2000)
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    provides a systematic overview of regulatory protectionism. He also develops a model to examine the e§ect of mutual recognition and anticipates some of the results of this paper on MRAs. But the implications of harmonization and the asymmetric e§ects on participating and excluded countries, a central aspect of the present paper, are beyond the scope of that model.
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    They discover that the international standards to which Britain is a party have little impact on imports but a signiÖcantly positive e§ect on exports, while British national standards tend to raise both imports and exports.
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    Moenius (2005)
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    regresses bilateral trade volumes in 4-digit SITC industries on counts of shared standards in a sample of 14 countries over 11 years, and Önds a highly signiÖcant positive relationship. Our paper di§ers from these empirical contributions in a number of aspects.
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    Finally, we take a Örst step in addressing the potential endogeneity of the harmonization decision in order to ensure that the parameter estimates are consistent. 3.2 Testable hypotheses on the implications of alternative initiatives As a prelude to our empirical investigation of the e§ects of standards agreements on trade patterns, we present certain testable hypothesis. As in
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    Baldwin (2000) and
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    Ganslandt and Markusen (2001), it is helpful to assume that a Örm must incur Öxed costs to meet each distinct standard in the destination markets to which it sells, and that the variable costs of production increase with the stringency of the standard.12Any policy initiative on standards that a§ects one or both of these factors has a direct impact on the decision to sell as well as on the quantity
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    Furthermore, in Section 6 we speciÖcally address the potential endogeneity of our estimates that could arise from omitted variables. 4.2 Empirical methodology The methodology employed in this paper builds on a traditional strand of trade literature, the estimation of international trade áows using the gravity equation, which dates back to
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    Tinbergen (1962).
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    Over time, this approach has been furnished with theoretical underpinnings and strengthened by improved estimation techniques. Representative studies includeó but are not conÖned toó Anderson (1979), Helpman and Krugman (1985), Helpman (1987), Feenstra (2002), and Anderson and Van Wincoop (2003).18However, as argued by Helpman, Melitz, and Rubinstein (forthcoming), the majority of the previous stu
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    This issue is particularly important when exploiting bilateral trade áows at industry level, where a greater percentage of country pairs have zero trade. Hence, as in Helpman, Melitz, and Rubinstein (forthcoming), we adopt a two-stage estimation procedure to address the potential selection bias. The conventional two-stage
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    Heckman (1979)
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    selection model is often employed for this type of analysis. However, including Öxed e§ects in the Örst-stage probit model would give rise to the incidental parameter problem. Thus, we adopt a modiÖed two-step estimation procedure which is largely similar to the Heckman (1979) model and originally introduced in Olsen (1980).
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    However, including Öxed e§ects in the Örst-stage probit model would give rise to the incidental parameter problem. Thus, we adopt a modiÖed two-step estimation procedure which is largely similar to the
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    Heckman (1979)
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    model and originally introduced in Olsen (1980). In the Örst stage, we estimate countryiís decision to export to countryj, i.e., Pr [tradeijkt>0] =-1+'1Z+-1ikt+<1jkt+\r1ijk+-1ijt+"1ijkt;(4) whereZrepresents the explanatory variables including the instrument.
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    However, including Öxed e§ects in the Örst-stage probit model would give rise to the incidental parameter problem. Thus, we adopt a modiÖed two-step estimation procedure which is largely similar to the Heckman (1979) model and originally introduced in
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    Olsen (1980).
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    In the Örst stage, we estimate countryiís decision to export to countryj, i.e., Pr [tradeijkt>0] =-1+'1Z+-1ikt+<1jkt+\r1ijk+-1ijt+"1ijkt;(4) whereZrepresents the explanatory variables including the instrument.
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    Örst stage.19To be speciÖc, we use an indicator variable that takes the value of 1 if the exporter sold the product to the importer at timet-5.20A Linear Probability model is employed in this stage to avoid the incidental parameter problem noted above. A general drawback of the Linear Probability model is the possibility that predicted probabilities may be negative or higher than one. However,
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    Wooldridge (2001)
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    points out that the Linear Probability model is completely general when most of the explanatory variables are discrete and contain mutually exclusive and exhaustive categories (see Chapter 15), which is the case in this paper.
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    Mills ratio, and because"1ijktand "ijktare assumed to have a joint normal distribution-(:)is equal to-(:)=\b(:), where-(:) denotes the standard normal probability density function and\b(:)the standard normal cumulative distribution function.21In our modiÖed selection model,"1ijktis uniformly distributed because of the adoption of a Linear Probability model in the Örst stage, and as shown in
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    Olsen (1980)
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    -(c) =c-1in this case.22 5 Empirical Evidence The estimated e§ ects of initiatives Table 2 presents the estimates obtained from the above two-stage model. The Örststage results show that the explanatory variables have a signiÖcant impact on a countryís decision to export to another market.
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    of scale, this e§ect is reinforced in the former group by the reduced costs of meeting a lower standard and (partially) o§set in the latter group by the increased costs of meeting a higher standard. In order to distinguish between harmonizing countries according to the stringency of their initial standards, we rely on two sources of information. First, we generate an indicator variable, based on
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    Vogel (1995), to
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    represent the harmonizing countries which are considered to have stricter initial standards, i.e. Germany, Denmark and the Netherlands. We interact this variable with the harmonization measures of importing countries and test our prediction.
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    Automobile producers are required to satisfy numerous environmental and safety standards in each destination market which raises Örmsí costs of selling in multiple markets that do not share common standards. Harmonization plays an especially important role in these industries in helping Örms achieve economies of scale and expand export destinations. Several studies, such as Swannet al.(1996),
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    Moenius (2005), Essaji (2006), and
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    FontagnÈet al.(2005), have used the count of the standards as a proxy for the regulatory intensity at an industry in a particular country. We follow Essaji (2006) and FontagnÈ et al.(2005) in drawing from the UNCTADís TRAINS database, which records product standards, testing and certiÖcation procedures, and labeling requirements set by a number of countries at the HS 8-digit industry level.26Even
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    Several studies, such as Swannet al.(1996), Moenius (2005), Essaji (2006), and FontagnÈet al.(2005), have used the count of the standards as a proxy for the regulatory intensity at an industry in a particular country. We follow
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    Essaji (2006) and FontagnÈ et al.(2005)
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    in drawing from the UNCTADís TRAINS database, which records product standards, testing and certiÖcation procedures, and labeling requirements set by a number of countries at the HS 8-digit industry level.26Even though the number and content of regulations varies across countries, the more heavily regulated industries tend to be the same.
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    ó may be endogenous for two main reasons: it could be correlated with some exogenous factors that are omitted in our estimation equation or it could be, at least in part, the result rather than the cause of trade, the dependent variable. A similar concern also arises in the estimation of the e§ect of free trade agreements. To address this issue, Baier and Bergstrand (2004, 2007a) and
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    Magee (2003)
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    have formally estimated the economic determinants of FTAs. These papers Önd that country pairs that are similar in market size, su¢ ciently di§erent in factor endowment, and geographically proximate are more likely to have an FTA in place.
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    After including the predicted probability of harmonization in the second and third stages, we Önd its e§ects on both the decision to trade and volume of trade remain signiÖcant. The rest of the results also remain essentially unchanged. The
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    Hausman (1978)
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    tests lend further support to the 3-Stage estimates. 7 Conclusion This paper analyzes the implications for trade of various regional initiatives that deal with technical barriers. It is evident that harmonization and mutual recognition can have a positive impact on both the likelihood and volume of trade within the region and with third countries.
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