The Mercantilist Index of Trade Policy

Abstract

1 An index of home country tariffs which holds constant the real income of the foreign country is an appealing alternative for a two-country world.In a many-country world, this loses its appeal because an index of Japan's trade distortions can hold constant only one of its trading partners' real incomes.Thus there would be N!1 different indexes of each country's trade policies, differing from each other in complex and unintuitive ways.A single constant-volume index treats no one trading partner as special and is appealing as a summary of a country's restrictiveness relative to the rest of the world.International trade policies are often compared across countries and over time for a variety of purposes.Analysts use such measures as arithmetic or trade-weighted average tariffs, Non-Tariff Barrier (NTB) coverage ratios and measures of tariff dispersion.All such measures are without theoretical foundation.In this paper we develop and characterise a theoretically-based index number of trade policy which is appropriate to trade negotiations.We also present a sample application which demonstrates the operationality of our index and shows that it differs significantly from previously employed atheoretic indexes.We call our index the Mercantilist Trade Restrictiveness Index (MTRI), since it takes as its starting point the Mercantilist preoccupation with the volume of trade.Modern avatars of Mercantilist thinking are everywhere, and their concern with trade volumes plays an important constraining role in policy formation.For one example, successive GATT rounds of reciprocal trade negotiations have interpreted reciprocity in tariff negotiations to mean equivalent import volume expansion.The WTO goes further, sanctioning retaliation by the offended party to displace a volume of trade equal to that displaced by the original offending protection.(See Bagwell and Staiger (1997) for discussion.)For another example, interest group pleading and even U.S. government negotiators have focused in recent years on trade volumes in auto parts and in semiconductors, as well as on aggregate U.S.-Japanese bilateral trade volumes.The ubiquity of such examples shows that there is a demand on the part of practical trade policy makers for measures of trade restrictiveness which hold trade volume constant.1 Such measures thus have a useful role to play both as an input to

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