The magnitude of two sources of bias in standard partial equilibrium trade simulation models

For products covered jointly by tariffs and nontariff barriers (NTB), the traditional partial equilibrium trade projection model will misstate both the percentage price change and trade creation effects of tariff reductions unless the joint price effect of the tariff and any NTBs is accounted for. The importance of this point is highlighted by 2 related findings: 1. About 75% of all European Community (EC) tariff lines subject to high (over 10%) import duties have one or more forms of NTBs applied while the corresponding figure for the US is more than 40%. 2. Recent surveys that consisted largely of Type III NTBs' ad valorem equivalents reported estimated values for these parameters that ranged to over 300%, particularly in such sectors as agriculture. Using the same range for Type I NTB ad valorem equivalents, it is shown that a failure to properly account for the NTB's influence may impart an upward bias in the trade creation effects of tariff cuts that can reach 100% or more.