Nontariff Barriers as Bridge to Cross

This research assesses the effects of sanitary and phytosanitary (SPS) standards in international trade by introducing a new concept, bridge to cross (BTC), with product standards. The BTC in this paper is the regulatory gap between the exporting and importing countries with regard to any particular SPS measure. Assuming that each country’s standard is binding in its own domestic markets, the standard of the importing country emerges as an effective trade barrier only when it exceeds the standard in the domestic market of the exporting country. Given the need to account for unobserved heterogeneity (multilateral resistance) in empirical trade models; in reduced form gravity models, the effect of regulation cannot be identified as it varies at the level of importing country over time. This happens because correct accounting for multilateral resistance mandates exporter x time and importer x time fixed effects. However, the effect of BTC can still be identified because it varies over time by the pair of countries involved in trade. As an application we apply the method to an SPS regulation relating to aflatoxin contamination in maize. In our empirical analysis we find that the effect of BTC is higher for poorer countries. The results have a significantly different policy implication for market access of poor countries. Not only weaker standards in the importing country but tighter standards in domestic markets of exporters could have a significant positive effect on exports