This indicator measures a country’s openness to international trade based on average tariff rates and non-tariff barriers to trade. Countries are rated on the following factors:
- Trade-weighted average tariff rate;
- Non-tariff barriers (NTBs) including, but not limited to: import licenses; trade quotas; production subsidies; anti-dumping, countervailing, and safeguard measures; government procurement procedures; local content requirements; excessive marking and labeling requirements; export assistance; export taxes and tax concessions; and corruption in the customs service.
Relationship to Growth & Poverty Reduction
Trade openness can help to accelerate long run economic growth by allowing for greater economic specialization, encouraging investment and increasing productivity. Greater international competition can also force domestic firms to be more efficient and reduce rent seeking and corrupt activities. One study estimates that “open” economies on average register 2.2% higher economic growth than “closed” economies. Although the relationship between trade openness and poverty reduction is complex, research suggests trade liberalization can improve the livelihoods and real incomes of the poor through the availability of lower-cost import items, increases in the relative wages of laborers, net increases in tariff revenues as a result of lower rates and higher volume, and insulation of the economy from negative exogenous shocks.
This indicator relies on the Heritage Foundation’s Trade Freedom score which is a component of their annual Index of Economic Freedom. The indicator scale ranges from 0 to 100, where 0 represents the highest level of protectionism and 100 represents the lowest level of protectionism. The equation used to convert tariff rates and non-tariff barriers into this 0-100 percent scale is presented below:
Trade Policyi = (Tariffmax-Tariffi)/(Tariffmax-Tariffmin) - NTBi
Trade Policyi represents the trade freedom in country i, Tariffmax and Tariffmin represent the upper and lower bounds (50 and zero percent respectively), and Tariffi represents the weighted average tariff rate in country i. The result is multiplied by 100 to convert it to a percentage. If applicable to country i, an NTB penalty of 5, 10, 15, or 20 percentage points is then subtracted from the base score, depending on the pervasiveness of NTBs.
In general, the Heritage Foundation uses the weighted average tariff rate (weighted by imports from the country’s trading partners) as the tariff score. In the absence of weighted average applied tariff rate data, a country’s average applied tariff rate is used. In the absence of average applied tariff rate data, the weighted average or the simple average of most favored nation tariff rates are used. In the very few cases where data on duties and customs revenues are not available, the authors rely on measures of international trade taxes. Data on tariffs and NTBs are obtained from the following sources in order of descending priority: the World Bank’s World Development Indicators and Data on Trade and Import Barriers: Trends in Average Tariff Rates for Developing and Industrial Countries; the World Trade Organization’s Trade Policy Reviews; the Office of the U.S. Trade Representative’s National Trade Estimate Report on Foreign Trade Barriers, the World Bank’s Doing Business report, the U.S. Department of Commerce’s Country Commercial Guide, the Economist Intelligence Unit’s Country Reports, Country Profiles, and Country Commerce data, and “official government publications of each country.”