[Paper Review] Trade Openness, Tariffs and Economic Growth: An Empirical Study from Countries of G-20

S M Toufiqul Huq Sowrov|arXiv (Cornell University)|May 13, 2024

Global trade and economicsEconomics, Econometrics and Finance3 citations

TL;DR

This study examines the impact of trade openness and tariffs on economic growth using panel data from 11 G-20 countries. Employing OLS and fixed-effects regression with lagged variables to address endogeneity, it finds that trade openness significantly boosts economic growth, while tariffs have a negative and statistically significant effect, supporting the need for country-specific trade liberalization policies.

ABSTRACT

International trade has been in the forefront of economic development and growth debates. Trade openness, its definition, scope, and impacts have also been studied numerously. Tariff has been dubbed as negative influencer of economic growth as per conventional wisdom and most empirical studies. This paper empirically examines relationships among trade openness as trade share to GDP, import tariff rate and economic growth. Panel dataset of 11 G-20 member countries were selected for the study. Results found a positively significant correlation between trade openness and economic growth. Tariff has negatively significant correlation with economic growth in lagged model. OLS and panel data fixed-effects regression were employed to carry out the regression analysis. To deal with endogeneity in trade openness variable, a 1-year lag regression technique was conducted. Results are robust and significant. Policy recommendation suggests country specific trade opening and tariff relaxation.

Motivation & Objective

• To analyze the relationship between trade openness, tariff rates, and economic growth in G-20 countries.
• To address endogeneity concerns in trade openness using lagged regression techniques.
• To assess the robustness of findings using both OLS and fixed-effects panel models.
• To provide evidence-based policy recommendations on trade liberalization and tariff reduction.

Proposed method

• Utilized a panel dataset comprising 11 G-20 member countries over multiple time periods.
• Measured trade openness as the ratio of trade (imports + exports) to GDP.
• Employed ordinary least squares (OLS) and fixed-effects panel regression models to estimate relationships.
• Applied one-year lagged regression to mitigate endogeneity in the trade openness variable.
• Conducted robustness checks to validate the significance and stability of estimated coefficients.
• Used standard errors clustered by country to ensure reliable inference in panel data settings.

Experimental results

Research questions

• RQ1 What is the impact of trade openness on economic growth in G-20 countries?
• RQ2 How do tariff rates influence economic growth in the same group of countries?
• RQ3 Is the relationship between trade openness and economic growth robust after accounting for endogeneity?
• RQ4 Does the inclusion of lagged variables improve the reliability of the estimated effects on growth?

Key findings

• Trade openness, measured as trade-to-GDP ratio, exhibits a statistically significant positive correlation with economic growth across the 11 G-20 countries studied.
• Tariff rates show a negative and statistically significant correlation with economic growth in the lagged model, indicating a delayed adverse effect.
• The OLS and fixed-effects regression models both yield robust and significant results, confirming the reliability of the findings.
• The use of one-year lagged trade openness improves model validity by reducing endogeneity bias.
• The study confirms that higher trade openness contributes to stronger economic performance in G-20 economies.
• The results support targeted policy interventions to enhance trade openness and reduce tariffs for sustainable growth.