Excerpt
TABLE OF CONTENT
DEDICATION
ACKNOWLEDGEMENT
ABSTRACT
CHAPTER ONE: Introduction
1.1 BACKGROUND TO THE STUDY:
1.2 STATEMENT OF THE RESEARCH
1.3 RESARCH QUESTIONS
1.4 RESEARCH OBJECTIVES
1.5 RESEARCH HYPOTHESIS
1.6 SIGNIFICANCE OF THE STUDY
1.7 DELIMITATION OF THE STUDY
CHAPTER TWO: SURVEY OF RELEVANT LITERATURES
2.1 CONCEPTVAL FRAMEWORK
2.2 THEORETICAL LITERATURE
2.2.1 TRADE THEORIES
2.2.1.1 THE MERCANTILIST TRADE THEORIES (1500-1600)
2.2.1.2 THE ABSOLUTE ADVANTAGE TRADE THEORY (1776)
2.2.1.3 THE COMPARATIVE COST ADVANTAGE THEORY (1817)
2.2.1.4 THE HECKSHER-OHLIN MODEL (1819 – 1833)
2.2.1.5 THE NEW GROWTH MODEL (1980’s)
2.2.2 THEORIES OF TARIFF
2.2.2.1 THEORY OF OPTIMUM TARIFF AND RETALLIATION
2.2.2.2 THEORY OF CUSTOM UNION
2.3 EMPIRICAL LITERATURE
2.3.1 FOREIGN STUDIES
2.3.2 DOMESTIC STUDIES
2.4 SUMMARY, LIMITATIONS OF PREVIOUS LITERATURE AND VALUE ADDITION
CHAPTER THREE RESEARCH METHODOLOGY
3.1 ANALYTICAL FRAMEWORK
3.2 MODEL SPECIFICATION
3.2.1 MODEL ONE FOR OUR PRIMARY OBJECTIVE
3.2.2 MODEL TWO FOR OBJECTIVE TWO
3.3 ESTIMATION TECHNIQUE
3.4 METHOD OF EVALUATION
3.4.1 ECONOMIC CRITERIA: A PRIORI EXPECTATIONS
3.4.2 STATISTICAL CRITERIA: FIRST ORDER TEST
3.4.3 THE ECONOMETRIC CRITERIA: THE SECOND ORDER TEST
3.5 The Pre-tests
3.5.1 Stationarity Test
3.5.2 Co-integration Test
3.5.3 Error Correction Test
3.6 SOURCES OF DATA
3.7 Software Package
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF REGRESSION RESULTS
4.1 DESCRIPTIVE ANALYSIS
4.1.1 TIME SERIES PLOT OF THE DATA AND THE TREND ANALYSIS
4.2 PRE-ESTIMATION TEST
4.2.1 THE UNIT ROOT TEST RESULT
4.2.2 ENGLE-GRANGER TWO-STEP CO-INTEGRATION TEST RESULT
4.3 PRESENTATION OF THE ORDINARY LONG RUN STATIC REGRESSION RESULTS
4.4 INTERPRETATION OF THE REGRESSION RESULTS BASED ON THREE SELECTED CRITERIA
4.4.1 ECONOMIC CRITERIA: A PRIORI EXPECTATION
4.4.2 THE STATISTICAL CRITERIA (FIRST ORDER TEST
4.4.2.1 THE COEFFICIENT OF DETERMINATION (R2)
4.4.2.2 TEST OF STATISTICAL SIGNIFICANCE (THE T- TEST STATISTIC, F-TEST STATISTIC AND THE STANDARD ERROR TEST)
4.5 THE SECOND ORDER TESTS
4.5.1 THE NORMALITY ASSUMPTION
4.5.2 THE ASSUMPTION OF NO SERIAL CORRELATION
4.5.3 TEST FOR HETEROSCEDASTICITY
4.5.4 TEST FOR THE PRESENCE OF MULTICOLLINEARITY
4.6 THE SECOND MODEL FOR OBJECTIVE TWO
4.6.1 THE RESULTS OF THE GRANGER CAUSALITY TEST
4.7 EVALUATION OF WORKING HYPOTHESES AND ECONOMIC IMPLICATUONS OF THE FINDINGS
CHAPTER FIVE: SUMMARY, POLICY IMPLICATION, RECOMMENDATION AND CONCLUSIONS
5.1 THE SUMMARY OF THE STUDY
5.2 POLICY IMPLICATION OF THE STUDY
5.3 CONCLUSION
5.4 RECOMMENDATIONS OF THE STUDY
5.5 LIMITATION OF THE STUDY AND SUGGESTION FOR FURTHER STUDIES
REFERENCES
APPENDICES
DEDICATION
This study is wholly dedicated to God Almighty
ACKNOWLEDGEMENT
I sincerely acknowledge all the authors and writers whose books and research works were cited in either paraphrased form or quoted verbatim during the course of writing this research paper.
I equally express my heartfelt gratitude to my parents for giving me this invaluable gift of education. Daddy and Mummy, I say thank you for your steadfastness in this struggle. My siblings and brethren, I appreciate your financial and moral support. Nobody has ever made it without an able assistant. Thank you all for both igniting the zeal and rekindling the writing spirit in me. The academic and non-academic staffs of the Department of Economics are highly acknowledged. I also express my unalloyed gratitude to all my friends and well-wishers, most especially, John Ihejieto for recommending Grin Publishing for me.
ABSTRACT
The debate over the effect of tariffs on trade openness is relatively virgin in international trade literature. This study however, empirically examined the impact of tariff rate on trade openness in Nigeria, relying on annual time series data spanning the period 1985-2016 and using the Engel-Granger two step co-integration test to establish the existence of a stable long run equilibrium relationship among the variables at 5% level of significance. The study employed the Ordinary Least Square (OLS) regression technique and the pairwise granger causality test to validate the nature of the relationship existing between trade openness and tariff rate in Nigeria. Sequel to the regression result, we found that although tariff variable is statistically insignificant, it has a negative effect on the degree of openness. Similarly, the granger causality reveals a uni-directional causality existing between TOPEN and TARF running only from trade openness to the rate of tariff. The study therefore recommends that since TARF has proven to be an insignificant determinant of trade openness and is thus granger caused by the degree of openness, the government should leave tariff rate to be determined by the invisible hand of the free market-economy and not bother in fixing the tariff rate for the purpose of restricting the free flow of international trade.
CHAPTER ONE: Introduction
1.1 BACKGROUND TO THE STUDY:
The unending long debate in international economic theory and history has always been on free trade and protectionism. Consequently, it is not so impossible to argue that the exact link between openness or free trade and long-run economic growth has posed so much difficult issues that are being explored in variety of ways in both practical and theoretical terms. Usually, the most contending question in international economics (Eco 341&342) is; Do open economies grow faster than closed ones? This question is still left for economic historians to contribute as there has not been any widely convincing answer for it. In fact, even the past classical and neo classical economics could not provide answers to this question because it requires a global approach that only general equilibrium and recent developments in game theory can provide. So, an economic history approach may present empirical findings that will challenge theoretical analysts to stir new solutions. This disturbing scenario was as a result of the Smithian and Ricardian conclusions reinforced by the Hecksher-Ohlin theorem that recommends openness/ free trade as the best commercial policy because of its favourable impact on welfare and growth of the trading partners. Moreover, Stolper-Samuelson’s theorem corroborated the above trade doctrine by pointing to an increase in the compensating reward for scarcer productive factors in-free trade context. Against this theoretical atmosphere, economic commentators may ask why so many times and in so many countries governments use protectionist policies if free trade and openness were so positive twelfare and growth? Unarguably, it may be tenable that political lobbying may underscore protection because of the redistributive effects on revenue that are involved in the afore-mentioned specific factor models. Hence under this schematic episode, trade liberalization provokes losses in all productive factors associated with import competing sectors against other immobile factors.
Be that as it may, it is evident that in many countries (E;g Nigeria) trade policies are mainly a function of personal preferences and ideas of politicians because, historically speaking,, their subjects rarely had strong likeness about trade policies and even more rarely communicated them to their political rulers. Hence, in the words of Bauer et al (1972) trade policies remain unfathomable issues for the lay public today.
However, tariffs are most common sustainable barriers to international trade and openness (Harrigan, 1973). In this case, tariffs increase transaction costs and reduce trade among countries. Indeed, one of the purposes of world trade organization (WTO) is to negotiate mutual tariff reductions. Obviously, since 1947, the (GATT) has been the standard bearer in an ongoing process of tariff level reductions. During tariff negotiations known as the “rounds” the most recent of which was the “Uruguay rounds", countries set ceilings on their tariff rates, thus known as the “Bound” rates and are referred as the maximum allowable rate against the actually applied rate called “the effective rate”. Noticeably, the general agreement on tariff and trade (GATT) has been successful in promoting commercial reduction of these tariff rates. Even since the conclusion of Uruguay rounds, there have been further efforts to reduce tariffs in specific sectors, one of which is the Information Technology Agreement (ITA) that successfully removes tariff barriers to information equipment and technology. In recent years, there is now the Doha agreement as another form of tariff reduction modality which targets to raise the market access to agricultural, services and manufactured products thereby aiming to make trade rules fairer to developing countries. Nevertheless, both in developed and developing economies, tariff rates tend to be higher on imports of agricultural products in comparison with manufactured industrial products. The agricultural sector, however, suffers from a high incidence of tariff peaks. For instance, the world average applied tariff bound rate for agricultural products is estimated at 17% level in comparison with 9% for industrial products (WTO, 2003). However, in contrast to the agricultural sector where almost all tariff rates abound, the binding of tariffs in industrial goods still remains a negotiating issue. For instance, many Africans and Asian countries have only a limited tariff bound lines (W T O, 2003e). In general, industrial tariffs are lower than agricultural ones. This biasedness in the tariff profile towards high rates on agricultural imports is consequent upon the exclusion of agriculture from multilateral trade negotiations prior to the Uruguay round.
Nonetheless, the current scenario in the world economy is regarded as a period of intensive globalisation and economic liberalization through the process of increasing the connectivity and inter dependency of markets and business by removing restrictions and barriers on exchange products, knowledge and services across boarders and regions thus leading to a universal preaching for massive openness of economies. Trade openness, however, promotes mutual economic and financial relevance. It reduces poverty and enhances economic development through faster growth in the most integrated economics (Ramzan and kalsoom, 2003).
However, this research seeks to investigate the implications of tariff modalities on economic / trade openness in the context of Nigerian economy.
1.2 STATEMENT OF THE RESEARCH
Since the past thirty years, one of the noticeable features of the world economy has been that both developing and developed nations have witnessed rapid trade liberalization either unilaterally or as part of multilateral concordance with the WTO, IMF and World Bank. Thus, several factors such like falling transport cost, trade liberalization, and economic convergence of countries as suggested by Feenstra (1998) are responsible for explaining this growth in world trade. Similarly, Baier and Bergstrand (2001) stated that income growth, tariff rate reductions and lower transport costs are contributory factors for the rapid growth in world trade openness and liberalization. Statistically, in accordance with the research finding of these authors, income growth, tariff and transport cost reductions account for 67%, 25% and 8% of the growth of global trade respectively. The rationalisation of tariff structures, the simplified import procedures, the reduced and elimination of quantitative restrictions are the most widespread reforms. These trade liberalization reforms pose necessary consequences for imports, exports and trade balance of the developing countries. Many developing nations are still hesitant to open up their economies as it will stimulate increments in imports at the expense of exports and thereby leading to a deterioration of trade balance after such liberalization.
However, on overview of Nigeria Economy as one of the developing countries may not be complete if we neglect its trade relationship with other countries. Hence, the establishment of multilateral ties with other countries is believed to have improved the country’s trade over the years. Nevertheless, it is widely accepted that freer trade is no longer an appropriate commercial policy for the emerging economies whose objective is to accelerate economic welfare and hence the tiff for protection (Adebayo, 2006).
Widely speaking, Nigeria has had one of the highest levels of domestic market protection in the world (World Bank 2006). High tariffs and pervasive import prohibitions and other forms of barriers have plagued customers with high prices and have shielded producers from international competition. Thus, tariff is one of the instruments of protection in Nigeria. It is associated with protectionism- the economic theory of restraining trade among countries.
As a matter of fact, tariff policy has evolved over the years as not only a means of generating revenues but also as a tool for achieving other policy objectives such as industrialization through protection of infant industries and import substitution (Akinlo 1996 in Adesola, 2014). Tariff has been implemented increasingly as a discriminatory tool for restricting the importation of certain commodities in Nigeria (Alaba, 2000). Contrary to the above, the table below shows the status/position of Nigeria in trade openness among other 4 selected emerging economies.
Table 1:1 Total trade-to-GDP ratio; Selected emerging market economies.
Abbildung in dieser Leseprobe nicht enthalten
Source: IMF’s based on IFS data
The above table reviewed a research conducted by IMF on four (4) of the emerging economies. Their ratio of trade to GDP was compared and Nigeria appeared to be the most open economy within the years. The research showed that Nigeria is strongly exposed to external shocks like shocks to commodity price, exchange rate and other relative prices of imported intermediate and final goods. This assertion was made on the basis of the computation as the data showed that on the average the ratio of total trade to GDP in Nigeria in the past 5 to 10 years is almost three (3) times as large as what was obtainable in other countries like Chile, Brazil and South Africa.
Unarguably, because it was widely accepted that open economies grow faster than closed ones, the globalization movement which accelerated especially in the 1980-86 persuaded Nigeria to implement trade reforms alongside with SAP (structural Adjustment programme) enforced by the international monetary funds, the world Bank and other international institutions as a necessary move towards free-market Economy. To acquire financial support, Nigeria should grave proclivity for free-market economy and concede all kinds of conditionality imposed by the World Organizations. As a result, in 1986 and thereafter, trade reform was implemented and trade liberalisation was institutionalized which involved policy measures that initiated the reduction in the level of tariff, removing quantitative restrictions, introducing uniformity in tariff structures and reducing the severity of other kinds of tariff recipes on international trade. These trade reforms were expected to raise both import and export base.
Analytically, the figure below shows how alteration in tariff structures relate to import base in Nigeria.
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s Own Work.
Fg1.1 Tariff structure –import base nexus in Nigeria.
In general, this study seeks to empirically examine the impact of tariffs on trade openness (the ratio of export and imports to real GDP) in Nigeria. Spanning the period 1985-2016.
1.3 RESARCH QUESTIONS
In line with the background and purpose of research, it is expedient to conduct a research that seeks to answer the following questions.
1 What is the nature of the association between tariffs and trade openness in Nigeria?
1 Tariff and trade openness, which influences the other?
1.4 RESEARCH OBJECTIVES
1 The primary objective of this study is to investigate the nature of the relationship between tariff modalities and Economic Openness in Nigeria.
2 To ascertain the direction of causation between tariff and trade openness.
1.5 RESEARCH HYPOTHESIS
Based on the statement of the problem, we claim the following research hypothesis:
Ho: Tariff and trade openness in Nigeria are positively correlated.
Ho: Tariff rate influences the degree of economic openness in Nigeria and not the other way round.
1.6 SIGNIFICANCE OF THE STUDY
This study is poised to examine the impact of tariffs on trade openness in Nigeria. There has been so many complications on the discourse of whether or not open economies perform better than their closed counter parts and how tariffs could be employed to make an economy relatively open and relatively close as well. The reason for this relativity is because the central bank alone finds it very difficult to achieve price stability in an inflationary target regime in emerging nations whose economies are very open such like Nigeria. Therefore, the knowledge on the role of tariffs on trade openness in Nigeria becomes very imperative and will help the government and policy makers to understand how to critically twist the tariff policies so as to achieve a desired degree of openness that will not inflict any infringements on the Nigeria Economy. Needless to say that this study would be of immense benefit to all the international trade dealers such as importers and exporters of assorted types of merchandise goods to enable them to comprehend why the federal government flex with various forms of trade policies. Finally, students of tertiary institutions and other scintillating researchers of related discipline would see this study as a reference material that provokes reasons for more researches on the discourse of the impact of tariff on trade openness. Indeed, this research would be equally seen as a great addition to the existing body of knowledge.
1.7 DELIMITATION OF THE STUDY
The geographical scope of this research will concentrate on the Nigerian Economy, assessing the impact of tariffs on trade openness. This study shall employ a yearly time series data spanning the period 1985-2016. The underlying reason for the choice of this time frame is the necessity to focus on current issues pertaining to tariff-trade openness nexus in Nigeria and also because of data availability as well.
The variables of interest in this study would be packaged under two categories namely, the core and the minor variables. Our core variables shall include trade openness (ratio of export and import to real GDP), tariff rates or taxes on international trade while the minor variables will be exchange rates and consumer price index or inflation rate.
CHAPTER TWO: SURVEY OF RELEVANT LITERATURES
This section will appraise the theoretical construct on tariffs and trade openness. It summarises the perception of authorities in this subject matter as well as the empirical evidence on this discourse- lastly, it sets out current research into proper perspective after gapes in the existing literature must have been pinpointed.
2.1 CONCEPTVAL FRAMEWORK
TRADE OPENNESS: This is mainly defined as the process of minimizing or removing restriction on international trade which may include the reduction or removal of tariffs, abolishment of import quotas, removal of import duties, abolishment of multiple exchange rates, and the removal of requirements for import (Ozioko, 2016). Trade openness is really, indeed, a stretched hand of acceptance for globalization phantom. Hence, globalization, according to fisher (2003) is the ongoing process of greater economic interdependence among countries reflected in the increasing amount of cross-border trade in goods and services, the increasing volume of international financial flows and increasing flows of labour. Sequel to this, globalization is said to be the highest pinnacle for trade/economic openness. However, the trade openness of a country is dependent upon its trade policies as well as the economic features of that country.
TARIFF: This refers to compulsory levies imposed on any merchandize imports and exports. It can be said that tariff is a tax levied on international trade. Etymologically, tariff is an anglicized Arabic word “taa’rif” which means “fees to be paid”. In a more acceptable parlance, tariff is a custom duty on products that move across borders. The most common kind of tariff barriers is the custom duty imposed by the importing countries. Hence, tariffs and custom duties could be used interchangeably. Be that as it may, whether tariff or custom duty is used, there are specific motives or goals which are expected to be achieved, viz. Revenue generation, protection of domestic industries and remedying trade distortions. The aforementioned objectives have, however, formed the basis for the primary functions of tariffs which are fiscal functions, protectionist and punitive functions of tariff.
The fiscal function comes from the fact that the income from tariffs serves as a source for government revenues. In the past, one of the major reasons for applying tariffs was the revenue function. Tariff is also a tool for protecting the domestic industries, known as ‘the infant industry argument’.by enhancing the conditions under which goods/products compete in such a way that competitive imports are placed at a disadvantaged end. At the other extreme, the punitive function of tariff is mainly because, in some cases, a cursory examination of the tariff rates employed by different countries are to remove trade distortions in form of retaliation resulting from trade measures adopted by other countries. For instance, if German government imposes a high tariff on goods imported from Nigeria as a way of discouraging the consumption of Nigerian goods in Germany, then, Nigerian government, not being able to tolerate the kind of effect that such German trade policy will have on its trade balance will also retaliate by equally levying heavy custom duties on German goods consumed in Nigeria. This is why we uphold that the application of tariffs and other barriers to international trade is a ‘Beggar Thy Neighbour Policy’
Consequent upon the above, we are now under pressures to enumerate the different categories of tariffs namely: prohibitive tariff which is meant to discourage people from the importation of certain goods , protective tariff- meant to artificially inflate the prices of imported items, specific tariff, also known as unit tariff is levied on the exact value of each unit of imported products. For example, imposing a 100 German euro charge on every bushel of rice imported in Germany. That is, if 20 bushels of rice are imported, the German government collects 2,000 euro as tariff revenue. Hence, in this scenario, 2,000 euro is earned whether the bushel costs 200 euro or 10,000 euro. Finally, the ad-valorem tariff -designed to make life more uncertain for importers by levying a certain fixed percentage of tariff on a proportion of the value of imported goods, no wonder the Latin word ‘Ad Valorem’ means ‘on value or in proportion to the value’. For instance, charging a 35 percent ad valorem tariff on imported electronics. Hence, if 200,000euro worth of electronics are imported, then the German government will collect 70,000 euro as tariff revenue. Under this ground, 70,000 will be collected whether four (4) 50,000euro worth of HP Laptops or twenty-five (25) 8000euro worth of Apple phones are imported. Generally, both unit and ad-valorem tariffs are almost similar.
TRADE BARRIERS: These are restrictions imposed on movements of goods between countries. Succinctly saying, any deliberate attempt at restricting the cross-border movement of commodities is generally referred to as trade barrier. Meanwhile, trade barriers are of two broad categories namely:
1. Tariff barriers – These are taxes charged on foreign transactions. Tariff barriers are usually moneyed.
2. Non-tariff barriers – NTBs usually involve policy measures aside tariffs that can affect trade flows. Most notable examples of non-tariff barriers are; import bans, embargoes and quota systems. NTBs usually come in form of rules and regulations that make foreign trade more difficult.
However, tariff barriers are the most common barriers to trade.
2.2 THEORETICAL LITERATURE
2.2.1 TRADE THEORIES
Since the tariff profile of every country as well as its economic openness relates to both the degree of liberalization and the trade status of such an economy, we are poised to explain various trade theories generally as it applies to the purpose of our study. Below are some of the relevant trade theories.
2.2.1.1 THE MERCANTILIST TRADE THEORIES (1500-1600)
Mercantilism is considered to be the very first international trade doctrine. Its famous disciples were Jean Baptist Colbert and Thomas Hobbes. This theory was championed by European Merchants who believed in National building, investment and expansion through the accumulation of wealth in form of Gold Bullions. This theory was of the view that the most important way for nation to become rich and powerful is to export more than it imports. This trade doctrine advocated for a reduction in imports by a nation through tariffs, quotas and other commercial trade barriers. This will protect a nation’s trade position. A critical interpretation of this doctrine would reveal that mercantilists are of the opinion that countries should actually manipulate or distort the degree of economic openness through the impositions of tariffs on international trade. To them, economy should neither be completely open nor wholly closed. The economy should thus be relatively opened to encourage export of goods and relatively closed to discourage excess influx of imported item. The mercantilists suggested that the above goals should be achieved by merely tampering with the tariff rates of the nation.
However, mercantilism received several serious attacks towards the end of the 18th century by its opponents who thought that mercantilism is actually an anti-free trade doctrine. For instance, David Hume said that the trade surplus that the mercantilist preached about is a short run phenomenon and would not survive the course of time because it might elicit retaliatory measures from other nations and hence mercantilist trade policy was referred to as ‘beggar thy neighbour policy’.
2.2.1.2 THE ABSOLUTE ADVANTAGE TRADE THEORY (1776)
In his book titled ‘an enquiry into the nature and cause of the wealth of nations’ published in 1776, Smith opined that different countries enjoyed absolute advantage in the production of some goods that formed the basis of trade between countries. He therefore criticized the mercantile doctrine heavily due to its static views of the world economy and contends that with free trade each nation could specialize in the production of those commodities which it can produce more efficiently than other countries and import those commodities in which it could produce less efficiently at a higher cost. This international specialization would not only benefit the trading nations but would also increase the world output.
Apparently, Smith indirectly vehemently proposed for a free trade and openness by disallowing any forms of barriers from distorting the importation of those commodities that are produced less efficiently at home.
2.2.1.3 THE COMPARATIVE COST ADVANTAGE THEORY (1817)
David Ricardo in the 19th century expressed dissatisfaction with Smithian absolute cost Advantage since Smith put forward the case where a nation has absolute cost advantage in factor A and does not have in factor B whereas another country has absolute advantage in factor B but does not have in factor A. For this reason, they should trade. But Smith’s doctrine failed to tell if it’s still necessary for nation that has absolute cost advantage in both factors A and B simultaneously to still engage in trade with other nations or if a nation who has an absolute cost advantages in the production of two factors could still trade with other countries. David Ricardo, through the comparative cost advantage theory demonstrated that external trade does not arise from differences in absolute cost advantages but from differences in comparative cost advantage. This means that a nation who does not have absolute cost advantage in any factor still has bases for mutual trade. However, for the mutuality to exist, there should be a free atmosphere that enable the undisturbed movement of goods. Hence, Ricardo still recognised the importance and significance of trade barriers (tariff) for international trade flows and openness.
2.2.1.4 THE HECKSHER-OHLIN MODEL (1819 – 1833).
Eli Hecksher and Bertil Ohlin were the two Swedish economists that propounded this theory.
This model tries to explain that the basis for trade is on the relative factor endowment and factor prices between nations, but, the source of this factor endowment determines the nations’ comparative advantage or disadvantage. By implication, this theory stressed the need for nations to make use of their local abundant factors in the .production and export of goods while importing goods that are domestically scarce at home. This arrangement was the basis for the theory to be referred to as the factor endowment theory.
This factor endowment theory holds that nations should produce and export commodities which require much use of its relative abundant factors and import products which require much of its scare factors. This model concludes by suggesting that since the difference in relative resource endowment is the reason for the difference in relative resource prices, emerging economics should concentrate on the production and export of labour intensive goods (Agricultural products) while the developed industrialized nations should therefore produce and export highly capital intensive goods.
However, for encouraging the import of scarce capital intensive goods by developing nations and importation of agricultural products by industrialized countries in exchange for capital goods, this theory still recognizes that trade openness is only possible if barriers to international trade are abolished.
2.2.1.5 THE NEW GROWTH MODEL (1980’s)
Prominent among the developers of the new growth or endogenous theory were Robert Lucas, Paul Romer and Lev-Sheshinski in the mid 1980’s. The contending assumption of this new growth theory is that economies tend to grow when it is opened to international trade. The economy will develop by importing advanced machineries and studying the process, then through human capital development these economies can replicate these machineries and by so, they tend to grow. In furtherance of this, Paul Romer cited the example of Japan having few natural resources, but the economy was open to western ideas and technologies. It imported machines from the USA during the Meyer Era, dismantled them to see how they work and hence manufactured their better prototype.
Generally, these trade theories discussed above uphold vehemently that the growth and performance of an economy is greatly influenced by the degree of openness which, in turn, is influenced by the level of tariff policy of that economy. Thus, inherently tracing the nature of the relationship between tariff polices and the degree of trade/economic openness. Hence, according to trade theories, the higher the tariff rates, the lower the degree of economic openness and lesser the growth in output and vice-versa.
2.2.2 THEORIES OF TARIFF
This section exposes the structure and dimensions of tariff and the rationale for the imposition of trade barriers in the form of tariff policies. Such theories are expounded below.
2.2.2.1 THEORY OF OPTIMUM TARIFF AND RETALLIATION
The term of trade argument is a full justification for this concept of optimum tariff. This agreement is based on the assumption that nations are big enough to influence the world’s relative import and export price of their products. The import tariff imposed by such a large economy contracts its import demands which reduces the world’s relative import prices of its goods leading to an improvement in its terms of trade. Though, the country suffers from reduced trade volume as a result of an import tariff--- the bedrock backing the argument for free trade, yet it still benefits from the tariff through an improvement in its terms of trade. This theory upholds that there exists a tariff rate which is not so large that the costs of reduced trade volume exceed the benefit from terms of trade improvement. In line with the basic assumption of the theory of optimum tariff that the tariff imposing country has the market power to influence world prices, the country’s optimization problem with respect to its tariff choice is analogous to the pricing behaviour of monopoly because the extent to which the country can impose the tariff depends on the price elasticity of foreign demand for its exports. For instance, consider the two countries X and Y trading two goods M and N. It is conventional in all the text books for international Economics such as Krugman and Obstfeld (2003) that the formulae for country X’s optimum tariff is given as; tx 1/ ex-1. Where tx is x’s optimum tariff and ex is the price elasticity of foreign demand for x’s export (which is y’s price elasticity of import demand). The optimum tariff that X can set will be high if Y’s demand is relatively inelastic so that there is less reduction in the volume of trade for a marginal rise in X’s tariff. X will always gain from imposing tx as long as Y has Zero tariff.
However, since X’s gain from imposing the tariff comes at the expense of Y, this apparently will invite “retaliations’’ from Y also in the form of an optimum tariff. The term “trade war” is used to represent the equilibrium in which the large countries set their optimum tariff in retaliation to one another. It is largely uncertain that large nations can win the trade war, that is, can raise its revenue/welfare in relation to free trade, but, it is certainly certain that at least one country will lose.
2.2.2.2 THEORY OF CUSTOM UNION
This theory has concerned itself with the welfare effect of a custom union on its members as well as the rest of the world. As pioneered by Viner (1950), the welfare effect of a custom union is studied alongside the trade creation-trade diversion approach. It is highly recognised that the resulting changes in the volumes of trade, and possibly in the direction and composition of trade flows due to the intra-union trade liberalization and the coordination of external tariff policies may improve the terms of trade of its members against the outsiders.
In summary, the source of gain from the trade agreement, following the literature, is from an increase in the trade volumes of countries. However, as it is apparent in the available literatures of customs union, another source of gain from the trade agreement is that it enables the member countries to exploit their collective market power to improve their terms of trade. It is generally contended that countries that import similar products can internalise their positive tariff externality by setting their tariffs jointly in a custom union.
2.3 EMPIRICAL LITERATURE
Economic theories have been very plain at providing a framework for understanding how the world works, but, empirical evidence helps to determine which economic theory is most accurate suggesting that empirics validate and authenticate theories. This section reviews academic work that has both direct and indirect bearing to our discussion at hand.
Empirical works on the impact of tariffs on trade openness appear to be very scanty in economic literature. Nevertheless, there are similar related works on this discourse such as; ‘ empirical evidence on trade openness and economic growth, trade openness on inflation, impact of trade barriers on trade liberalization and economic growth, as well as, the determinants of international trade among others.
However, for the sake of simplicity and in line with the purpose of our study such related works have been grouped into two different perspectives. First, is the foreign studies and the second is the domestic / home studies.
2.3.1 FOREIGN STUDIES
Zakaria (2014) applied the method of ordinary least squares with fourth order autoregressive and interaction model on a number of variables to empirically analyse the effect of trade liberalization on exports, imports and trade balance in Pakistan for the period 1981/82 to 2007/08. Employing quarterly time series data, his econometric result concludes that trade liberalization stimulates both exports and imports with the impact being so huge on imports than on exports and thereby worsening the trade balance. The inclusion of interaction terms also indicates that trade liberalisation affects both price and income elasticity of exports, imports and trade balance.
Kassim (2010) adopted the Panel data methodologies to investigate the impacts of trade liberalization on export and import growth across 28 sub-Saharan Africa countries from 1981 to 2010. His empirical findings showed that determinants of trade liberalization such as tariff reductions/import duties, export duties and other barriers to trade removal increase the growth of exports. However, imports grew faster by two (2) percentage points which gives considerable evidence that the trade balance in the region deteriorated in the post liberalization era.
Using a liberalization dummy, according to the Wacziarg and Welch classification (2008), the United Nations conference on the trade and development (2008) conducted a study on the post liberalization export performance of 34 African countries. Applying the Generalized Methods of Moments (GMM) estimator, the empirical findings showed that trade liberalization increased the ratio of exports –to- GDP ratio by 0.09 percentage points.
Similarly, Babatunde (2009) used Fixed and Random effects estimation techniques to examine the impact of trade liberalization on export performance across twenty (20) SSA countries over the period running from 1980 to 2005. Employing the average tariff rates as an indicator of trade liberalization, expectedly, he found no significant association between trade liberalization and export performance in those countries. Additionally, applying a fixed effect estimation technique on a panel data set of 20 countries, Olofin and Babatunde (2007) analysed the price and income elasticity of Sub-Saharan African exports from 1980 to 2003 and found that the estimated long run elasticity of demand for exports ranges between 0.48 and 1.30 while the calculated long run price elasticity of demand for imports varies from -0.01 to -0.17. Thus, implying that the SSA exports have performed poorly overtime because the demand for export products from African countries has low elasticity when compared to changes in the global income and in most cases, they are less competitive in the global market.
Studying the impact of trade liberalization on exports, imports and trade balance in Mexico, during the mid- 1980s Lopez (2004) employed the methodology of Autoregressive Distributed lag (ARDL) framework and the empirical results suggested that the trade reforms during this period had a significant impact on trade exports and imports by increasing the propensity to import more than the propensity to export thereby worsening the growth rate consistent with Mexican balanced trade.
Using a two stage least square, Wang (2001) in IMFs working paper (2001) conducted a cross country study on the import-reducing Effect of trade Barriers across over 70 countries. Focussing more on tariff structures, the both tariff and non-tariff barriers are quite significant in restricting imports.
Trefler (1993) carried out an empirical investigation on the impact of both tariffs and non-tariff barrier on import-export and balance of payment in the United States. By employing the Generalized Factor Proportions model he found that when non-tariff barriers (NTB) are modelled endogenously, their restrictive impact on imports is much larger than otherwise.
By comparing the empirical results obtained from ARDL, co-integration technique and the Error Correction Model (ECM) on an econometric analysis of the impact of trade liberalization on imports and exports volume over the short and long run periods in Thailand, Suparerk (2009) found out that for Thailand, trade liberalisation does not lead to the deterioration in the trade balance, instead, it helps to improve export performance. Tang (2006) studied the effects of both tariffs and transport costs on U.S imports using the well-known gravity model. The empirical results revealed that for differentiated goods, tariffs have a positive impact on the U S imports, and conversely a negative effect on the US imports for homogenous product/goods thus showing an ambiguous effect of tariffs on trade while transport costs have a higher effect on trade for homogenous goods.
Laura (2006) conducted an economic experiment to understand the determinants of international trade in Ghana and South Africa. He employed the methods of ordinary least squares (OLS) and found out that the determinants of trade (tariffs, transport and other factors) have different impacts in different countries and that geographical and social factors play a key role on trade relationship in South Africa. The result also showed that Ghana’s exports are higher when they are compared to countries with higher levels of economic freedom.
Using a paned data set comprising 60 countries and spanning the period 1975-2000, Dejong and Rippol (2005) examined the relationship between ad-valorem tariffs and trade growth using OLS, FGLS AND GMM estimators. Their empirical findings revealed that the mean trade growth rates decreased monotonically from 1.963% and 0.633 standards to 1.459% and the standard deviation of 2.443 in moving from higher to lower income countries. Again, the study suggested that the relatively poor countries tend to impose relatively high tariff barriers. For instance, average tariff increases monotonically from 2-6878 to 17.978 in moving from the high to low income countries showing that the marginal impact of tariffs on trade growth declines with respect to income.
2.3.2 DOMESTIC STUDIES
In the infant manufacturing industry argument on tariff, Adesola et.al (2012) employed the methodology of Ordinary least squares (OLS) to analyse the general relationships and effects of tariffs on Macroeconomic variables over the period 1988-2010 in Nigeria. The regression results on a secondary time series data obtained from CBN Statistical bulletin showed that although tariff was insignificant, it impacts positively on the growth of manufacturing sector.
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