THE COSTS OF TRADE 2018 PROTECTIONISM: EVIDENCE FROM SPANISH FIRMS AND NON-TARIFF MEASURES Dmitri Kirpichev and Enrique Moral-Benito Documentos de Trabajo N.º 1814 THE COSTS OF TRADE PROTECTIONISM: EVIDENCE FROM SPANISH FIRMS AND NON-TARIFF MEASURES THE COSTS OF TRADE PROTECTIONISM: EVIDENCE FROM SPANISH FIRMS AND NON-TARIFF MEASURES (*) Dmitri Kirpichev CEMFI Enrique Moral-Benito BANCO DE ESPAÑA (*) We thank, for comments and suggestions, Pol Antrás, Jacopo Timini, Carolina Villegas-Sánchez and participants in the Banco de España internal seminar. We also thank Johannes Fritz for helpful assistance with the GTA dataset and María Jesús González, Eduardo Gutiérrez and Elvira Prades for their work with the Balance of Payments data. The opinions and analyses are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. Documentos de Trabajo. N.º 1814 2018 The Working Paper Series seeks to disseminate original research in economics and fi nance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem. The Banco de España disseminates its main reports and most of its publications via the Internet at the following website: http://www.bde.es. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. © BANCO DE ESPAÑA, Madrid, 2018 ISSN: 1579-8666 (on line) Abstract The rise in non-tariff protectionist measures has been associated to the weakness in global trade over the last few years. We investigate the effect of non-tariff barriers (NTBs) on exports growth over the period 2009-2013 using administrative data at the fi rm-product-destination level in Spain. According to our fi ndings, non-tariff protectionist measures signifi cantly reduce exports growth at the product-destination level. Moreover, NTBs also hinder exports growth at the fi rm level and negatively affect other fi rm outcomes such as productivity growth. In contrast, the impact of liberalizing non-tariff measures is not statistically signifi cant. Keywords: protectionism, non-tariff measures, fi rm level data. JEL classifi cation: F10, F30, F40, G15, G21, G32. Resumen La implantación de medidas proteccionistas no arancelarias se ha asociado a la debilidad del comercio mundial en los últimos años. En este trabajo investigamos los efectos que dichas barreras comerciales no arancelarias pueden haber tenido en el crecimiento de las exportaciones españolas durante el período 2009-2013 utilizando datos administrativos a nivel de empresa-producto-destino. De acuerdo con nuestros resultados, las medidas pro- teccionistas no arancelarias reducen signifi cativamente el crecimiento de las exportaciones a nivel de empresa-producto-destino. Además, estas barreras no arancelarias también reducen el crecimiento de las exportaciones a nivel de empresa y afectan negativamente a otras varia- bles como el crecimiento de la productividad. Por el contrario, el impacto positivo de la elimi- nación de algunas de estas barreras no arancelarias no resulta estadísticamente signifi cativo. Palabras clave: proteccionismo, barreras no arancelarias, datos a nivel de empresa. Códigos JEL: F10, F30, F40, G15, G21, G32. 1 Introduction This paper investigates the consequences of trade protectionism in the form of non-tariff barriers over the period 2009-2013. Periods of trade liberalization have been widely studied in the literature (Lileeva and Trefler, 2010; Topalova and Khandelwal, 2011; Pavcnik, 2002; Amiti and Konings, 2007) but protectionist episodes have been paid much less attention until now. However, protective policies are playing an increasingly important role that goes hand in hand with the rise of anti-globalization episodes like Trump’s election or Brexit. Given the little maneuver that developed countries have to raise tariff rates due to the existence oftheWTOand othertradeagreements, post-crisiseconomieshavedecided toimplement a’murkier’ protectionism in the form of non-tariff measures (Datt et al. 2011; Baldwin and Evenett, 2009). Non- tariff measures (NTMs) are harder to discover and many of them are only detected some time after they have been implemented, but undeniably there has been an increase in the use of NTMs since the Global Financial Crisis. Many developed economies opted for subsidizing their national industries and financing bailouts which in turn distorted international trade. Also, NTMs are adopted in the form of trade volume restrictions, which limits quantities and hence are much more distortive than usual tariff measures.1 The recent increase in non-tariff protectionism measures is a reason of concern for economists and international organizations. According to WTO (WTO, 2009), 1,243 new trade measures were uncovered over the last years being the majority non-tariff protectionist measures. In the case of trade policies affecting Spanish exports, NTMs outnumbered tariff changes and they were clearly biased towards protectionist policies (see Table 4). Since the positive relationship between trade openness and consumer welfare has been widely documented in the literature, the concern now is whether the rise in non-tariff protectionism might have consequences as strong as the effects from trade liberalizations but with opposite sign. In order to shed light on this issue, we combine non-tariff measures at the product-country level over the years 2009-2013 from the Global Trade Alert project with firm-product-country information onexportsfromtheBancodeEspan˜a’sBalanceofPaymentsaswellasfirmBalanceSheetinformation from the Spanish Mercantile Register. In particular, we consider all NTMs implemented by the rest of the world and potentially affecting Spanish exporters. Armed with this database, we regress export growth at the firm-product-destination level on the non-tariff measures affecting Spain by product-destination. To enhance identification, we compare exports growth of the same product to the same country and by the same firm before and after a NTM is implemented (i.e. we include firm-product-country fixed effects). Alternatively, we compare exports growth of the same product 1Despite not being that constrained to tariff bounds imposed by the WTO as developed economies, developing countrieshavealsobroadlyusedNTMssincetheyarelimitedbytariffsofregionaltradeagreementsandtheincreasing interestforhealthandenvironmentallyfriendlyproducts. Forinstance,themembersofMERCOSURhavebeenactive users of non-tariff measures. BANCO DE ESPAÑA 7 DOCUMENTO DE TRABAJO N.º 1814 by the same firm in the same year to countries in which the product is differentially affected by NTMs (i.e. firm-product-year fixed effects).2 According to our results, non-tariff protectionist measures significantly reduce export growth. The estimated reduction in exports due to these trade barriers is sizable. It ranges between 37 and 74% of the average export growth by firm-product-destination in our sample. In contrast, the impact of liberalizing measures is not statistically significant. Turning to the firm-level analysis, we find that non-tariff protectionist measures significantly reduce overall export growth implying that firms are not able to undo the negative shock induced by the NTMs by resorting to other product-destination markets. Moreover, firms more exposed to NTMs present significantly lower productivity growth, which points to the presence of important aggregate costs of NTMs in terms of consumer welfare. The present paper contributes to the literature in three dimensions. First, the combination of non-tariff barriers to trade with firm-product-destination data allows estimating the effects of trade protectionism on exports and productivity at a very granular level.3 Second, the use of non- tariff measures in the post-crisis period 2009-2013 allows us to explore potential non-linearities by comparingtheeffectsofprotectionismandliberalizingpolicies. Third, weanalyzeSpainasa’passive’ country, that is, how Spanish exporters are affected when other countries change their trade policies. Thus, we do not analyze the effects of a trade liberalization of a specific country and its consequences on that particular country.4 The remainder of the paper is organized as follows. Section 2 describes the data. Section 3 presents the empirical strategy together with the baseline results at the product-destination level. Section 4 explores additional exercises as well as robustness checks. Section 5 discusses the analysis at the firm level considering not only export growth but also other firm outcomes. Finally, Section 6 concludes. 1.1 Related literature Our paper is related to two different strands of the literature. On the one hand, there is a vast empirical literature about the effects of tariff cuts on trade and other economic outcomes using firm- level data. On the other hand, there is a more recent and scarce literature about the consequences of non-tariff measures (NTMs) using more aggregated data. The literature on NTMs suggests, in general, that non-tariff barries harm international trade. Theoretical papers on the effects of distinct NTMs predict negative effects on trade. For instance, 2It is worth highlighting three caveats of our analysis from the onset. First, we rely in the protectionist versus liberalizinglabelingconductedbytheGTAexperts,whichisnotofficiallyvalidatedbytheWorldTradeOrganization. Second,inspiteofthegranularityofourapproach,therearethreatstoidentificationsinceNTBsmightbeimplemented to those product-country pairs in which Spanish exports perform better. Third, due to data limitations we consider only the intensive margin of trade, while some of the effects of NTMs may operate through the extensive margin. We discuss these issue in more detail below. 3Given the nature of our NTMs data, we focus on changes in protectionism policies and trade flows rather than stocks. 4Some recent papers investigate the effects of China’s adhesion to the WTO on the United States (Amiti et al., 2017; Bai and Stumpner, 2017; Handley and Limao, 2013). BANCO DE ESPAÑA 8 DOCUMENTO DE TRABAJO N.º 1814 Bagwatti (1968) and Shibata (1968) debate on the equivalence between the protective effect from tariffs to that of quotas. Moreover, recent empirical evidence has been provided on the issue as well. Murina and Nicita (2017) test the effect of sanitary and phitosanitary measures (henceforth SPS) on European agriculture from low income economies, showing a negative effect in EU’s imports. Kee et al. (2009) show that NTMs add an 87% of trade restrictiveness (defined as the tariff that should be applied instead of all the trade protection mechanism to leave exports/imports at their current level) to that imposed by tariffs. Kee et al. (2013) show that tariffs and antidumping duties explain only a small fraction of the 2008-2009 collapse in world trade. Conesa and Timini (2018) distinguish between technical and non-technical trade barriers, showing a positive effect of the former and a negative effect of the latter. Turning to the literature about the effects of tariff cuts, research regarding the relationship betweenproductivityandtradeliberalizationhasalsobeenvastlydevelopedusingmicro-data. Along these lines, the empirical analysis of the welfare benefits of tariff cuts is typically based on firm- level productivity measures due to the difficulty to quantify consumer welfare.5 A reduction in tariffs decreases the threshold marginal costs for which it is worth to enter the market. Thus, when trade liberalization happens, the most unproductive firms are forced to leave the market due to the presence of foreign competitors, while the best firms can take advantage of the increased size of the market (Melitz, 2003; Melitz and Trefler, 2012). Also, recent work by Bustos (2011) and subsequent applications (e.g. Wagner, 2014) show the relationship between technological spending, productivity and exports. Given all these positive effects from trade liberalizations on productivity and welfare, there are reasons of concern about the recent rise in protectionist measures. However, not only positive consequences of trade liberalization have been documented in the lit- erature. When analyzing the bilateral tariff cuts between the US and Canada, Trefler (2004) shows that trade liberalization led to the exit of the most unproductive firms. As these companies closed, substantial losses of employment took place in hand with considerable increases in labour productiv- ity. This phenomenon reflects the conflict between the short-run adjustment costs for stakeholders of closing companies and displaced workers and the long-run gains from increased efficiency and con- sumer welfare improvement. Other papers find solid evidence that liberalizations reduced poverty for developing countries (Topalova, 2007, 2010), and that his effect was higher for regions with more flexible labour laws and the regions that were less exposed to tariff cuts. 2 Data We combine non-tariff measures at the product-country level from the Global Trade Alert project with firm-product-country information from the Banco de Espan˜a’s Balance of Payments and firm Balance Sheet information from the Spanish Mercantile Register over the years 2009-2013. 5Melitz and Trefler (2012) summarize gains from trade openness through three different channels: i) gains from love for variety, ii) gains from increased productivity, and iii) increases in technology spending on behalf of firms. BANCO DE ESPAÑA 9 DOCUMENTO DE TRABAJO N.º 1814 2.1 Firm-level Balance of Payments database We exploit a unique administrative database of Spanish exporters for the years 2009 to 2013. This dataset, provided by the Banco de Espan˜a, contains the micro data information used to construct the official Spanish Balance of Payment Statistics. For each exporter we observe the fiscal id and the value of exports at the product-destination level. The dataset accounts for around 97% of aggregate Spanish exports, as we can see in Figure 1, and includes transactions with 242 partner countries and 119 types of products harmonized under the system HS-2.6 In table 1, we present the descriptive statistics for the Balance of Payments dataset. As shown, our sample includes data for more than 20,000 Spanish firms, whose average volume of exports revolves around two million euros in the covered sample. The destinations to which these exports were headed ranges from 1 to 7, with the average firm exporting to 3 different countries. Regarding the number of products, most firms focus their exporting activities on approximately 2 different products at the 2-digit HS level. 2.2 Quasi-census balance sheet data In order to conduct the firm-level analysis in Section 5, we use administrative data taken from the SpanishCommercialRegistry, whichcontainsthebalancesheetsoftheuniverseofSpanishcompanies given the firms’ legal obligation to deposit their balance sheets on the Commercial Registry.7 For each firm, among other variables, it includes information on: name, fiscal identifier; sector of activity (4-digit NACE Rev. 2 code); 5-digit zip code location; annual net operating revenue; material expenditures (cost of all raw materials and services purchased by the firm in the production process); number of employees, labor expenditures (total wage bill, including social security contributions); and total fixed assets. Our final sample covers balance sheet information for a total of 1,801,955 firms with an average of 993,876 firms per year. The firm-level database covers around 85-90% of the firms in the non- financial market economy for all size categories in terms of both turnover and number of employees. Moreover, the correlation between micro-aggregated employment (and output) growth and the Na- tional Accounts counterparts is around 0.95 over the 2003-2013 period (see Figure 1). Almunia et al. (2018) describe this database in greater detail. 6Tobemoreconcrete,thedatabasecoversalltransactionswithforeigntradepartnersabove50,000Euros. Westart our analysis in 2009 using exports growth between 2008 and 2009 because the reporting threshold was lower (12,500 Euros) until 2008 making growth rates potentially misleading for some firms exporting around the thresholds in that year. Also, the high reporting threshold complicates the measurement of the extensive margin of trade (entry/exit) in our database. 7In particular, we combine two alternative databases independently constructed from the Commercial Registry, namely, Central de Balances Integrada (CBI) from the Banco de Espan˜a and SABI from Bureau Van Dijk (used to constructtheSpanishandPortuguesesamplesofAMADEUS).Theresultingdatabaseincludesaround1,000,000firms in each year from 2000 to 2013 and it is only available for researchers undertaking projects for the Banco de Espan˜a. BANCO DE ESPAÑA 10 DOCUMENTO DE TRABAJO N.º 1814