Trade space and trade policy: an empirical assessment

Abstract

PurposeThe purpose of this paper is to examine the behavior of governments in terms of trade policy design when they experience a lack of foreign resources from international trade after ensuring the sustainability of their external debt. To do so, the paper defines two concepts of trade space: “De Facto Trade Space” and “De Jure trade space.”Design/methodology/approachTo conduct this study, the author relies on a panel data set comprising 109 countries over the period 1998–2014. To perform the empirical analysis, the author has mainly used the system generalized methods of moments approach.FindingsThe empirical analysis suggests evidence that trade space matters significantly for trade policy. Indeed, “De Facto Trade Space” is consistently associated with greater trade policy liberalization, with this positive effect being higher, the higher the development level – proxied by the real per capita income – of the concerned country. “De Jure Trade Space” tends to lead to greater trade policy liberalization in less advanced developing countries, but is associated with the adoption of trade restrictive measures in more advanced countries. Additionally, results suggest different impacts on trade policy of “Positive De Jure Trade Space” and “Negative De Jure Trade Space.”Research limitations/implicationsThese findings suggest that the trade space, as defined in this study, plays a key role in trade policy design by policymakers.Practical implicationsThe current study shows that trade space could significantly matter for trade policy design by policymakers.Originality/valueTo the best of the author’s knowledge, this is the study dealing directly with the “trade space” concept as well as its impact on trade policy.