Re-estimating the effect of heterogeneous standards on trade : endogeneity matters

Abstract

Controlling for endogeneity-induced biases and accounting for the source of heterogeneity may both matter for the proper empirical estimation of the effect of heterogeneous standards on trade. However, existing literature on the trade effects of heterogeneity in pesticides maximum residue levels (MRLs) does not directly address the problem of endogeneity in the standards-trade relationship. Using pesticides MRL data for 53 countries over 2005-14, we thus re-examine the trade effects of stricter (than partner) standards accounting for endogeneity using panel data methods. We find that the direction of the estimated trade effects gets reversed, thereby underlining the greater demand-enhancing effect of more stringent regulation. We also discuss why endogeneity may bias the estimates downwards. In another original contribution, we examine the standards-trade relationship by the direction of imposition of stricter standards for a large panel. Our results suggest that stricter standards do not impede trade, irrespective of who imposes them.