Non-tariff measures and competitiveness

In this paper, we explore how tariff and standard-like Non-Tariff Measures (NTMs) introduced by the EU are related with market conditions in domestic EU markets. While Tariffs work as a pure tax on import, standard-like NTMs potentially affect costs of both domestic firms and foreign exporters. NTMs may not necessarily work as protectionist measures and even induce pro-competitive effects in the domestic market in the longer term, especially if we allow for firms mobility. The impact could be different for large and small firms. We extend the model by Melitz and Ottaviano (2008) to include Non-Tariff barriers. We derive some testable implications relating Non-Tariff barriers to the number of firms selling in the domestic market and average efficiency. The link between NTMs and domestic market conditions depends on whether they involve new standards and technical specifications imposed on both domestic and foreign firms, or, rather, the extension to foreign firms of standards and technical specifications already adopted by domestic firms. In the first case, there is a decline in the number of firms and in average productivity; in the second case, NTMs induce pro-competitive effects: an increase in the number of firms and of average productivity. We then take the model to the data for a group of European countries and manufacturing industries. We combine Compnet data for 15 EU countries in 2001-2012, providing information on firms performance at the industry level and by size class, with the STC WTO-I-TIP database, with information on Specific Trade Concerns raised at the WTO on NTMs and with the Trains database with information on Tariffs. The NTMs that we consider have similar effects as in the second NTMs case in the theoretical model; the results for Tariff are in the same direction, albeit of a larger magnitude. These results are consistent with a theoretical framework allowing for firms mobility in the longer term.