An Empirical Investigation into the Determinants of Trade Policy Bias

There exists an extensive literature that attempts to identify important factors that determine trade policies. An understanding of these important factors could be useful when negotiating trade agreements, especially in agriculture, which is a relatively heavily supported industry. Limao and Panagariya (L&P, 2007) modify Grossman and Helpman’s (G&H, 1994) lobbying model in an attempt to understand why anti-trade bias (as opposed to pro-trade bias, which is predicted by the G&H (1994) model) is the predominant pattern in observed trade policy. L&P (2007) propose that governments seek to reduce inequality between sectors by modifying trade policies in a way that reallocates gross revenue from the larger to the smaller sector. We use measures of trade bias calculated in the World Bank Distortions to Agricultural Incentives database (Anderson and Valenzuela, 2008) in an effort to explain trade bias in agriculture. We find little empirical evidence that governments pursue agricultural trade policies to reduce inequality between net-importing and net-exporting sectors in agriculture. Lagged trade policies are significant determinants of current trade-distorting policy, suggesting the presence of policy persistence. We conclude that it is difficult to generalise determinants of trade-distorting policy across a wide and long panel of countries, and that specific knowledge of governments’ priorities are required to explain trade bias.