An Empirical Analysis of Policy Barriers Related to Trade Costs for Exporters

The trade costs imposed by numerous policy and non-policy barriers on exporters are still considered an impediment in their export growth rate. Thus, this paper aims to measure over-year trends in total trade costs and trends in trade costs related to policy barriers. Further, to find out which trade cost-policy barriers are high. The research found that total trade costs have a decreasing trend for the rest of the world while developing countries like Pakistan have the lowest rate of a declining trend. Trade cost estimates associated with tariff barriers show a declining trend, whereas trade costs related to non-tariff barriers are on the rise as compared to developed countries. The results further reveal that higher trade costs are among the major factors that have rendered especially developing countries’ exports uncompetitive in world markets.


Introduction
The economic size and factor endowment are not the only variables that define the trade capacity for countries. Trade strength also depends upon many other factors, including trade costs. Within the modern stream of international trade research, trade costs have drawn the export growth since 2001 has been in proportion and synchronization with the tariff liberalization. According to GoP (2018), the tariff liberalization has been reversed by gradually increasing the applied tariff to 10.09%; the exports declined by 19% to US$ 20.4 billion since 2014. One of the major causes of the decline in exports was the increase in trade-related revenue through multiple layers of the TBs, NTBs, and other taxes of trade. Production of exports has been rendered less competitive internationally. As excessively employed, the TBs and NTBs of the trade costs have decreased competitiveness for the export industry by increasing the costs of inputs.
The fact is that exports to GDP ratio went down from 13.5% in 2010 to 8.2% in 2017 2 , reflects the impact of higher tariffs on exports. The regulatory duties have increased from 105 tariff lines in 2013 to over 1500 tariff lines in 2017. Currently, Pakistan maintains the thirdhighest average weighted tariff amongst the 68 countries having more than US$ 20 billion annual exports. The customs duty and regulatory duties on raw materials, intermediate goods, and machinery are even higher. Like, the replacement of 0% duty slab, covering primarily the raw materials and machinery, with a 3% duty slab is adversely affecting the competitiveness of the manufacturing sector from 2014 to 2017.
The number of duty slabs further increased to 5% in 2018 (GoP, 2018). To encourage exporters, a range of schemes is implemented to waive/refund import duties on their inputs; however, the advantages of such schemes could not be made use. As many exporters often fail to avail of the benefits of such exemption schemes or duty drawbacks, due to higher tariffs on raw materials and capital goods. Therefore, the trade costs associated with TBs and NTBs need to be examined and these policy barriers established leading to higher trade costs.
list for the enormous application of NTBs to Pakistani exports. Imposing NTBs most restricted the textile and clothing products in Pakistan.
In the empirical literature, Ardakani et al. (2000) use a gravity model for estimating the trade impact on the trade flow of TBs and NTBs levied from importers. Their study showed a negative effect of NTBs, affecting greater than that of TBs. Anderson and Wincoop (2004) surveyed and estimated costs of trade for developed countries to be around 170 percent of which costs of TBs were almost 44%. Along the same line, De (2007) worked on the effect of costs on trade in Asian countries. He used the gravity model and found several trade cost components, including TBs, negatively and significantly influencing international trade patterns. In the same Vein, Kee et al. (2008) calculated an index of trade restrictiveness based on observed international TBs. They showed that tariffs represent a significant degree of trade costs. In a later work, Novy (2013) used the theory-based versions of the gravity model. He showed that NTBs affect international trade for the emerging world more than TBs.
The literature shows there is limited empirical research that documents the importance of trade cost covering the policy barriers particularly for developing countries. This is mainly because the data limitations make it difficult to document general trends in the preparation of trade cost and its policy barriers components like TBs and NTBs. Given the limitations in the available literature, it intends to contribute to the empirical literature, by analyzing the worldwide dataset to measure the trade costs associated with the policy barriers. To obtain a bidirectional micro-founded theoretical based gravity equation, multiply

Methodology
Equation (1) with the opposite direction ( ) for trade flow are given as follows: The same way domestic trade flows are: By dividing Equation (3) with Equation (2) we get By taking square-root (for the geometric average trade costs) and rearranging yields As shipping costs can be asymmetric between i and j, ( ≠ ) represents as national costs of trade can vary crosswise countries. It is valuable to take the geometric average of the obstacles in both ways (which reveals the critical bidirectional tendency of barriers to exchange costs and help identify the impact of policy barriers). It is also beneficial to subtract one to get a look for the tariff equivalent in the fraction of the value of the goods to indicate bilateral costs of trade. The resultant measure for costs of trade is denoted as It also calculates costs of trade in its broader sense, counting not only global costs of transport and tariffs TBs but also adds other elements for costs of trade addressed by Anderson and Wincoop research (2004). These include direct and indirect costs associated with language differences, currencies processes for import, and export. The elasticity of substitution set equivalent to 8 such as measured by Andorson and Wincoop (2004), which is the mid-range of 5 to 10 intended for the elasticity of substitution in all the calculations.
The rationale is clear behind . If bilateral trade flow increases relative to domestic trade flow . Trade between the two countries must become easier compared with domestic trade. This is taken by a reduction in etc. Therefore, calculation measures economic costs indirectly by inferring them from measurable flows of exchange. Since these trading flows differ over time, not simply for cross-sectional data but similarly for panel and time-series data can be estimated for trading costs . This is a benefit above the technique that Anderson and Wincoop (2004) have adopted which is used only cross-sectional data. This is also significant to emphasize that two-sided trade costs are considered as asymmetric ( ≠ ) , instead of symmetric as measured by Anderson and Wincoop (2004) and that bilateral trade flows might be unbalanced( ≠ ).

Bilateral Trade Costs Associated with TBs
The bilateral trade costs associated with TBs is a measure of the tariffs levied by the two-member countries for each other's imports. The traditional trade models such as (Melitz 2003;Eaton andKortum 2002 andMelitz andOttaviano 2008) specifically explain that exporting countries have a greater number of exporters with large productive firms and goods sent to foreign markets. On the other side, if exporting countries have high trade costs due to TBs, these measures forecast a decline in the total number of exporters, and hence several goods are exported. Nevertheless, they do not openly solve the problem of empirically measuring the extent of the effects of these policy barriers. This study empirically defines the bilateral costs associated with TBs as follow: where, The TBs related to trade costs are calculated using effectively applied (AHS) dutiable tariff lines percentage share for all products.  Table 2).

Bilateral Trade Costs Associated with NTBs
Trade costs associated with NTBs are not easy to define. Their measurement is a multifaceted task that is faced with specific quantitative restrictions and limited accessibility of the data. To overcome this problem, by following Anderson and Wincoop (2004), this research analyzes the bilateral costs of trade associated with NTBs, which includes all other costs except tariffs for trading goods as follows: (7) where, = ℎ .
Like total trade cost between Pakistan-China in 2018 is 2.263952 (while in ad valorem equivalent form it is 126.39521) and geometric mean or average bilateral tariff cost is 1.0756575. Then nontariff trade cost without tariff trade cost is ((2.263952/1.0756575)-1)*100 = 110.47% (see Table   3). This measure of non-tariff trade cost is best applicable as this research more focus on to facilitate the exporters for their export.

Total Trade Costs
The countries for which trade costs can be estimated in the sample for all years were only considered for analysis. Table 1 represents that the trend in the costs of trade is declining and this trend is fairly steady worldwide. Results show that a steady historical reduction in the costs of trade trend stayed undoubtedly one of the main reasons for the rise of worldwide trade flows to the extent that almost every country trades more today than it did decades ago.
The In 2003, the ad valorem equivalent trade cost for all trading goods between Pakistan and partner countries was 274% (see Table 1)

. It indicates that, on average, trade in goods between
Pakistan and the partner countries concerned for all tradable goods imposes an additional cost of approximately 274% of the value of the goods when Pakistan trade these goods within its borders. the gap in declining trend steadily increased by 74% and 115% respectively. The country's relative position is, nonetheless, deteriorating because the reduction in the costs of trade for the rest of the world is faster than Pakistan (Table 1). paid to the issue of trade cost shows the inability of Pakistan to export its potential from the last two decades. Since the government's lack of support in terms of regulations, legislation, and institutional support, etc., hurts further export growth.
Figure 1 also show empirical facts in the support of Pakistan's low export share to partner countries because of the higher costs of trade. As a first look at the data, Figure 1 represents that the export share more than 70 to 80% was going to limited partner countries (China, UK, USA, U.A.E, Bangladesh, Afghanistan, Spain, Germany, France, and Italy) due to the different size of their costs of trade.

Figure 1 Export Partner Share and Bilateral Trade Costs of Pakistan
Source: Author's calculations, export's share data taken from WITS.
Therefore the difference in the costs of trade for different countries accounts for the difference in the share of exports to them. This suggests that merchandise goods are not exported more to those partners with them trade costs are large, it holds for a large range of countries. For that, one can see that maximum export share to partner countries are below the forty-five-degree line in Figure 1. This indicates that higher trade costs lower down the speed of exports growing in Pakistan. This empirical fact is consistent with a greater number of studies in the literature for the trade costs, which also finds that export has been seen on the continuous decline because of the imposition of large trade costs (Brenton et al., 2001;De, 2007 andWere 2014).
In these conditions, creating a structure and guidelines to assist and reduce the costs of trade faced by their exporters is a policy challenge. Only then it will be in a position to participate efficiently in the global value chain and supply for long-term development. As lower and more competitive trade costs encourage the countries to move up in the global value chains (GVCs). Therefore, a need for the adoption of efficient trade policies is essential for the future faster decline of trade costs and to promote international trade.

Trade Costs Associated with TBs
In the quantification of trade costs associated with TBs for Pakistani exporters levied by partner countries, This trend decreased, but with a small proportion in 2018, nearly 11.89%, 66.45%, and 64.74% respectively. Pakistan's three largest trading partners are not regional neighbors, but they represent its relatively large export markets. GSP+ status allows Pakistan duty-free access to the European market at zero tariffs and preferential rates of 70%. A declining trend in trade costs associated with TBs, but with a small proportion gives a way of thinking in promoting further bilateral free trade agreements and liberalizing trade with them.

Trade Costs Associated with NTBs
Between 2003 and 2018, the increase in trade costs associated with NTBs for Pakistan is rising.