The Effect of Aggregation Bias: An NTB‐modelling Analysis of Turkey's Agro‐food Trade with the EU

• Author: Beyhan Bektasoglu,Tanja Engelbert,Martina Brockmeier
• Date: 01 October 2017
• Published date: 01 October 2017
• DOI: http://doi.org/10.1111/twec.12444

The Effect of Aggregation Bias: An

NTB-modelling Analysis of Turkey’s

Agro-food Trade with the EU

Beyhan Bektasoglu, Tanja Engelbert and Martina Brockmeier

Chair of International Agricultural Trade and Food Security, University of Hohenheim, Stuttgart,

Germany

1. INTRODUCTION

MULTILATERAL negotiations on trade liberalisation and the increasing number of

economic integration agreements have led to a low level of tariffs worldwide.

Consequently, the number and importance of non-tariff barriers (NTBs) to trade has risen,

and the plethora of different NTBs makes their regulation at the multilateral level almost

impossible. Another potential framework to negotiate the reduction in NTBs might be bilat-

eral and regional trade agreements (RTAs). Thus, a reduction in NTBs needs to be taken into

account, particularly in the analysis of RTAs. Recent literature shows that NTB reduction has

a greater impact on welfare results than reduced tariffs in most RTAs (e.g. Lejour et al.,

2001; Engelbert et al., 2014).

Regional trade agreements are negotiated at a very detailed product level, whereas most

empirical studies only consider the aggregated sector level. Against this background, this

paper analyses the effects of different aggregation levels on econometric estimates of the trade

costs of NTBs and their related impact on the policy simulations of Turkey’s potential mem-

bership to the European Union (EU). In our analysis, we consider the importance of the food

and agricultural trade between Turkey and the EU and the high NTBs imposed on this sector.

We calculate two sets of ad valorem equivalents (AVEs) of NTBs using the gravity

approach to disaggregated and aggregated Central Product Classif‌ication (CPC) data for 15

Global Trade Analysis Project (GTAP) agro-food sectors. We compare the disaggregated

CPC-pooled gravity results with the aggregated gravity results to reveal the impact of the

level of data aggregation on the magnitude of trade costs caused by NTBs. Subsequently, we

incorporate the AVEs of NTBs estimated at different aggregation levels into the GTAP model

to simulate the EU’s expansion to include Turkey. We run two experiments, which differ in

terms of the NTBs resulting from the different gravity aggregation estimates, to show the

impact of aggregation bias on the simulation results.

Aggregation bias is well recognised and apparent in the gravity literature. Anderson and

van Wincoop (2004) provide a thorough study on aggregation bias in gravity estimations.

They also discuss the reasons leading to the direction of bias and conclude that there is no

theoretical presumption. While Agostino et al. (2007) and Anderson (2009) f‌ind an upward

bias of using aggregated data in gravity estimations, Anderson and Yotov (2010, 2011),

Raimondi and Olper (2011), and French (2012) show that aggregated data lead to underesti-

mation. Although there is a missing consensus of direction and magnitude of aggre gation

bias, the overall recommendation is to disaggregate the data as much as possible to reduce

aggregation bias. Still most studies on agricultural sector apply aggregated data and thereby

possibly accept biased results for further analysis. One exception is Jensen and Yotov

(2011) who examine data aggregation issues for four agricultural sectors. The importance of

©2016 John Wiley & Sons Ltd 2255

The World Economy (2017)

doi: 10.1111/twec.12444

The World Economy

using different data aggregation levels in CGE models and its related effect on simulation

results are also acknowledged by several authors (e.g. Grant et al., 2007, 2008; Cha rteris

and Winchester, 2010; Alexeeva-Talebi et al., 2012; Brockmeier and Bektasoglu, 2014).

Considering NTBs for the policy analysis of RTAs are predominantly done by conducting

two-stage analysis; f‌irst, the effects of NTBs are estimated using the gravity approach, and

then, they are implemented in CGE or partial equilibrium models (e.g. Andriamananjara

et al., 2004; Philippidis and Sanju

an, 2006, 2007; Fugazza and Maur, 2008; Rau and van

Tongeren, 2009; Winchester, 2009; Chang and Hayakawa, 2010). However, to the best of

our knowledge, none of the existing studies offer gravity estimates at our very detailed

agro-food product level, nor do existing studies offer econometric estimates of NTBs at dif-

ferent aggregation levels used in a CGE model. Thus, in this paper we add to the literature

by expounding the effect of using different data aggregation levels to estimate NTBs for

trade policy analysis.

Our analysis is divided into two parts. In the f‌irst part, we use the gravity approach to esti-

mate the AVEs of NTBs using disaggregated and aggregated data. In the second part, we

incorporate these AVEs, which are calculated at different aggregation levels, into the GTAP

framework to expose the aggregation bias that is transferred from the gravity estimates to the

CGE analysis. We focus on the extent of aggregation bias and the differences b etween the

results of experiments that are either run using the AVEs of NTBs from the disaggregated

gravity estimates or those from the aggregated gravity estimates.

2. GRAVITY MODELLING

The measurement of the effects of NTBs at different levels of aggregation is based on an

ex post study using the gravity approach. The gravity model has become a useful empirical

tool for analysing patterns of trade f‌lows, regional agreements and the effects of trade fric-

tions. Due to its broad theoretical justif‌ication and strong explanatory power, it is also recog-

nised as a useful tool for identifying and quantifying the trade costs of NTBs.

1

In its basic

formulation, the gravity model explains trade between two countries by the economic output

of the exporting country and importing country and by the bilateral trade barriers. Anderson

and van Wincoop (2003) advocate considering multilateral resistance terms because trade

between two countries is lowered by bilateral trade barriers relative to multilateral trade barri-

ers. This theoretical advancement allows accounting for general equilibrium effects. The mul-

tilateral resistance terms are econometrically captured by country-specif‌ic dummies (Anderson

and van Wincoop, 2003, 2004; Feenstra, 2004).

2

Bilateral trade barriers are unobservable, but

they can be approximated by a trade cost function using observable trade cost proxies.

a. Identif‌ication Strategy and Data

There are several strategies to directly estimate trade costs of NTBs in the framework of

the gravity approach. They are differentiated by incorporating explicit or implicit measures of

NTBs into the gravity equation (Chen and Novy, 2012). Studies using explicit measures apply

1

See Anderson (2011) and Head and Mayer (2014) for a thorough review on the theoretical and empiri-

cal developments of the gravity model.

2

Alternatively, multilateral trade barriers can be approximated using Baier and Bergstrand’s (2009)

method.

©2016 John Wiley & Sons Ltd

2256 B. BEKTASOGLU, T. ENGELBERT AND M. BROCKMEIER