Impact of tariff rates on the probability of trade relationship survival: Evidence from ASEAN+6 manufactured goods

• Published date: 01 October 2020
• Date: 01 October 2020
• DOI: http://doi.org/10.1111/1468-0106.12260

ORIGINAL MANUSCRIPT

Impact of tariff rates on the probability of trade

relationship survival: Evidence from ASEAN+6

manufactured goods

Chin-Ho Lin

Graduate School of Economics, Keio University,

Tokyo, Japan

Correspondence

Chin-Ho Lin, Graduate School of Economics,

Keio University, 2-15-45 Mita, Minato-ku, Tokyo

108-8345, Japan.

Email: chinho0929@gmail.com

This article explores the links between imported trade

relationships, their duration and tariff rates. We use sur-

vival analysis to investigate how the probability of trade

relationship survival is affected by the difference in the

tariff rates. We use the ASEAN+6 as the basis of our

report and consider a total of 89 trading partners for man-

ufactured goods from 1996 to 2011. Our findings are as

follows. First, low-tariff trade survives longer than high-

tariff trade of manufactured goods. Second, we find a sig-

nificantly negative correlation between tariff rates and

duration, and regional trade agreements help prolong the

length of trade relationships. Third, the hazard ratios of

intraregional differentiated goods and the parts and com-

ponents trade are lower. We have also obtained robust

results for distinct specifications through consideration of

production networks and Rauch’s product classification.

Finally, we believe that these findings could be used as a

reference for other economic organizations working

toward the diminution of tariff rates.

1|INTRODUCTION

When survival analysis was first applied in international trade (Besedeš& Prusa, 2006a,b), many

studies concentrated on the issue of trade relationships by examining the probability of survival

throughout the duration of trading partner relationships. Without question, the survival of trade rela-

tionships depends on whether nonzero trade values exist in country–product pairs. Besedes (2008)

indicates that higher initial export values are associated with positive trade relationship durations.

Moreover, intensive margins significantly affect export growth and further expand the duration of

trade relationships (Besedes & Prusa, 2011; Felbermayr & Kohler, 2006; Helpman, Melitz, &

Rubinstein, 2008).

Received: 11 September 2016 Revised: 28 August 2017 Accepted: 3 February 2018

DOI: 10.1111/1468-0106.12260

Pacific Economic Review. 2020;25:457–474. wileyonlinelibrary.com/journal/paer © 2018 John Wiley & Sons Australia, Ltd 457

Other essential factors may affect trade value volume and directly impact costs. For example,

sunk costs significantly affect firm performance in terms of entry costs and the probability of exports

(Bernard & Jensen, 1999; Impullitti, Irarrazabal, & Opromolla, 2013; Roberts & Tybout, 1997), as

trade costs fall relative to the increase in trade value (Bridgman, 2013; Novy, 2013). As previously

mentioned, those studies do not directly explore the impact of costs on the probability of trade rela-

tionship survival; in particular, they do not consider impact as defined in survival analysis.

Besedešand Prusa (2006b) employ survival analysis to investigate the duration of trade relation-

ships for US imports based on product differentiation. They find that homogeneous goods have a

higher hazard rate than differentiated products by using Rauch’s product classification. They also

note that higher tariff rates accompany lower hazards for the duration of trade relationships because

incumbent firms face less competition. In other words, these researchers demonstrate the significant

positive relationship between tariff rates and trade relationship duration.

1

Tariff rates could be seen as a transaction cost; they serve as an effective protection tool for

domestic firms.

2

However, gains from trade are mostly related to the reduction of trade cost

(e.g. tariff reductions). The aforementioned economic concept originates from trade elasticities,

which are crucial in the quantitative analysis of the impact of tariff rates on trade. Even the magni-

tudes of trade elasticities have been considerably inconsistent in the trade literature (Broda &

Weinstein, 2006; Caliendo & Parro, 2015; Hummels, 2001; Romalis, 2007; Simonovska & Waugh,

2014). We link this economic concept between tariff liberalization and trade relationships. Specifi-

cally, the impact of exogenous variation in trade costs on the duration is explored in this article.

Suppose that tariff liberalization drives the growth of trade with longer trade relationships, then the

tariff barrier may inversely lead to the exit of the trade relationship due to higher trade costs.

Goldberg, Khandelwal, Pavcnik, and Topalova (2010) indicate that new products should be intro-

duced by domestic firms at an average lower input tariff of 31%. Several discussions on tariff

changes in exported or imported volumes (Amiti & Konings, 2007; Debaere & Mostashari, 2010;

Hayakawa, 2013) and the reduction of tariffs in production networks (Florensa, Márquez-Ramos,

Martínez-Zarzoso, & Recalde, 2015; Hayakawa, 2014) are studied. Yet, in practice, we still lack

reliable estimates of the effect of tariff liberalization on trade relationships, and this article attempts

to fill this gap.

We propose that firms may exit the trade if the tariff rates are too high to afford. High tariffs

lead to reduced trade values, and, correspondingly, negative correlations with trade values. There-

fore, tariff rates presumably have a negative relationship with the duration of trade relationships

instead of the positive correlations evidenced in previous studies. Debaere and Mostashari (2010)

investigate the probability of exporting to the United States by using a probit model and demonstrate

that tariff reduction leads to the increase of nonzero country–product pairs.

3

Therefore, we hypothe-

sized that trade relationships with low tariff rates are more likely to survive. Moreover, we consider

the fact that once a trade relationship is formed or products are traded, each country’s products

1

Besedešand Prusa (2006b) indicate that tariffs have two different impacts on the duration of trade relationships, depending on the

time-series or cross-sectional variations in tariffs. The time-series variation in tariffs may cause foreign firms to exit the trade relation-

ship because of an increase in costs induced by higher tariffs, implying that higher tariffs raise the hazard. The cross-sectional varia-

tion in tariffs leads to higher tariffs lowering the hazard because higher tariffs imply less competition for incumbent firms. The result

of Besedešand Prusa (2006b) indicate that higher tariffs lower the hazard because the effect of cross-sectional variation in tariffs is

dominated in their empirical statistic.

2

The imposed tariff rate provides relatively cheaper domestic goods for consumers as well as protection for domestic firms against

foreign competition.

3

Trade relationships in this article are also defined as a nonzero country–product pair; therefore, the findings of Debaere and

Mostashari (2010) indirectly help our expectation that suggests exporters are more likely to export and promote the increase of trade

relationships because of tariff-reduced transaction, service and import costs.

458 LIN