Some estimates for the effect of removing import tariffs.(RESEARCH NOTE)

On April 19, 2005, the countries of Thailand and New Zealand (NZ) signed a Closer Economic Partnership Agreement that was to have eliminate most tariffs on Thailand's agricultural imports. This research found that the agreement had the effect of increasing the imports and some estimates are provided for the effect.

The data consisted of 32 quarterly observations of import volume for between the years of 2000 and 2007. For the agreement itself, a dummy variable of zero was coded as one beginning from the third quarter of year 2005, which was when the agreement came into effect. To correct for reverse-causality between the imports and Thailand's gross domestic product (GDP), GDP was instrumented by a variable for the Baht exchange rate.

From using indirect least squares, regression estimates showed that the agreement increased quarterly volume by 2.6 million metric tons, an amount equivalent to nearly a tenth of the average of the total imported. Furthermore, the estimated effects upon the imports of GDP and of the relative prices of domestic agricultural products were correct in sign, these effects having been positive rather than negative.

While checking for spuriousness in the regression, unit roots could not be rejected for GDP and for the relative prices. Hence, a Dickey-Fuller test was conducted of the residuals for a variety of regressions with imports as the dependent variable. A unit root was rejected at a significance level of ten percent for all the residuals, including those for which an augmented test applied. An auto-regression of imports was therefore conducted and the result was a large increase in the estimated effect of the agreement, to 5.5 million tons.

To extend the research, an error-correction model was specified for the relationship between imports and GDP, while assuming the agreement to be an exogenous event. Based upon a long-run model and a short-run auto-regressive process, differenced imports were derived as being theoretically dependent upon lagged values of the difference between GDP and imports. The lagged values werefound to have a statistically significant influence upon the differenced imports. This showed that imports had a tendency to return to the long-run. More importantly, the agreement also had a statistically significant influence, thereby demonstrating its important role in the process of return.

Thus, it can be said that all of the findings corroborated theoretical predictions concerning the removal of tariffs in trade.

Antong (Andres G.) Victorio

Published online: 15 November 2008

A. (Andres G.) Victorio

Victoria University of Wellington, P.O. Box 600, Wellington, New Zealand

e-mail: antong.victorio@vuw.ac.nz

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