Unprotective tariffs, ineffective liberalization, and other mysteries: An investigation of the endogenous dimensions of trade policy formation in Australia

At the forefront of research on Australia's trade policies two items have attracted considerable interest: (1) the endogeneity of tariff concessions and (2) the impact of liberalization on imports. Studies that investigate the former examine the impact of import penetration on tariffs, and studies that explore the latter consider the effect of tariffs on import penetration. Despite the simultaneity of these variables, research lines (1) and (2) followed separate paths by only considering unidirectional causal relationships. And yet, these paths do converge. The meeting point: perplexing results! Tariffs are found to protect those industries that have the least use for protection, and liberalization is often determined to be entirely ineffectual in stimulating imports. The present article explains that the source of such puzzling results is found in the misspecification of the employed frameworks of analysis, which ignore relevant feedback effects. When reciprocal causation is addressed in the analysis, the estimated impact of import penetration on the tariff level increases by almost fivefold and that of tariffs on import penetration more than doubles.