India: Effects of Tariffs and Nontariff Measures on U.S. ... - USITC

Model Limitations
Simulated effects from this PE-GE model are based on established U.S. export patterns
that may exist for such reasons as the distance between countries <strong>and</strong> the presence or
absence <strong>of</strong> transport infrastructure. These factors are imperfectly captured by the model.
Furthermore, the model does not directly account for historical or cultural factors as
determinants <strong>of</strong> trade patterns. The model assumes that these factors are unaffected by the
economic policy changes.
Economic models capture the most important factors for the question under
consideration: existing trade flows <strong>and</strong> trade policies <strong>and</strong> the degree <strong>of</strong> consumer dem<strong>and</strong>
sensitivity to price changes. However, economic models are limited in their ability to
reflect the degree <strong>of</strong> complexity evident in the real world. 13 Despite these limitations, the
simulations performed here can be quite useful in providing insights on the effects <strong>of</strong>
economic policies. The model presents a unified framework in which the likely effects <strong>of</strong>
the policy can be assessed.
Estimation <strong>of</strong> Price Gaps for <strong>Nontariff</strong> <strong>Measures</strong>
Estimation <strong>of</strong> <strong>Nontariff</strong> Measure Price Gaps
The quantification <strong>of</strong> nontariff measures (NTMs) using the method <strong>of</strong> price gaps, or
“tariff equivalents,” has been frequently used in Commission studies on NTMs. 14 In this
study, we estimated price gaps at the HS6 subheading level. We estimated separate price
gaps for <strong>India</strong>n imports from the United States <strong>and</strong> <strong>India</strong>n imports from the rest <strong>of</strong> the
world in order to account for possible quality differences between U.S. <strong>and</strong> non-U.S.
varieties <strong>of</strong> agricultural exports. The fact that imports from the United States <strong>and</strong> other
countries sell at different prices is indicative <strong>of</strong> quality differences. Estimating separate
price gaps recognizes both these differences <strong>and</strong> the possibility that the NTMs may have
a greater or lesser impact on <strong>India</strong>n prices for imports from different sources. 15 We used
unit values from available trade data to construct the price gaps. In particular, we
considered price data for 2005–07 to account for variable effects <strong>of</strong> NTMs under
different market conditions. The median price gap for the three years was used as the
estimate. We eliminated some products that presented data difficulties. 16
13 Examples <strong>of</strong> real-world complexities that are difficult to reflect in the model include the changing
relative growth <strong>of</strong> different economies; politically motivated, export-oriented investment; relationships
between multinational subsidiaries that influence trade patterns; <strong>and</strong> such events as catastrophic weather or
violence that are inherently unpredictable (at least in their details).
14 For the foundations <strong>of</strong> the method for estimating price gaps for NTMs at the Commission, see Linkins
<strong>and</strong> Arce, “Estimating Tariff Equivalents <strong>of</strong> Non-Tariff Barriers,” August 2002. For further descriptions <strong>of</strong>
the price-gap method, as well as literature reviews, see Deardorff <strong>and</strong> Stern, Measurement <strong>of</strong> Non-Tariff
Barriers, 1998, <strong>and</strong> Ferrantino, “Quantifying the Trade <strong>and</strong> Economic <strong>Effects</strong> <strong>of</strong> <strong>Nontariff</strong> Measure,” January
2006. The methods used in this study with respect to quality adjustments for different trading partners build
on a previous Commission study. See USITC, U.S.-Korea Free Trade Agreement, September 2007.
15 In general, it is not feasible to correct for all possible quality differences while estimating NTM price
gaps because some <strong>of</strong> these differences are unobservable. Certain countries consistently export products at
higher unit values than other countries, however, suggesting a quality difference, particularly for relatively
homogeneous goods. The methods used in this study exploit the observed quality differences arising from
differences in exporter-specific unit values.
16 These difficulties included, inter alia, nonst<strong>and</strong>ard units <strong>of</strong> measurement <strong>and</strong> thinly traded products
exported from small countries, for which a reference price could not be established. The st<strong>and</strong>ard unit <strong>of</strong>
measurement for almost all agricultural products is the kilogram or the metric ton. Beverages are typically
measured in liters.
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