An empirical investigation into the determinants of bias in trade policy

Abstract

Limao and Panagariya (L&P, 2007) modify Grossman and Helpman’s (1994) lobbying model in an attempt to understand why anti-trade bias is the predominant pattern in observed trade policy. L&P (2007) propose that governments seek to reduce inequality between sectors by modifying trade policies in a way that reallocates income from the smaller to the larger sector. We assess the empirical validity of L&P’s (2007) theory by exploiting the World Bank Distortions to Agricultural Incentives database (Anderson and Valenzuela, 2008), using their measure of trade bias as our dependent variable. We find little empirical support for L&P’s (2007) theory, and estimated coefficients on most control variables are insignificant. Lagged trade policies are significant determinants of current trade policy, suggesting the presence of policy persistence. We conclude that it is difficult to generalise L&P’s (2007) theory across a wide and unbalanced panel of countries that extends from the 1950s to the 2000s.