Substitution of Trade Policy Instruments: The Case of Serbia

Abstract

In this study, I examine the potential substitutive relationship between tariffs and non-tariff measures, considering the conditions under which such substitution is expected to occur. I develop a deterministic model based on the protection for sale framework, analyzing weighted welfare maximization in a small importing economy. The model derives theoretical conditions for substitution of tariffs with non-tariff measures, highlighting the roles of relative marginal compliance costs between domestic and foreign producers, product price elasticity, consumers’ sensitivity to quality, policymakers’ prioritization of lobbying, and the existence of binding minimal production standards. Notably, the model predicts the lack of substitution effects when minimum standards are binding and compliance costs are comparable, as often expected in sectors with established and well-justified international standards. These predictions are tested empirically using the sample of non-tariff measure usage in Serbia from 2010 to 2021 across HS-2 sectors. The empirical testing was based on estimating a static model using a within regression estimator and a dynamic model of non-tariff measure usage employing the system-generalized method of moments. The empirical results provide significant and robust evidence of substitution between tariffs and technical measures. The identified substitution effects are also found to be scaled by the institutionalization of lobbying, further supporting the underlying theoretical framework. Conversely, only tentative and non-robust evidence of complementarity between tariffs and sanitary and phytosanitary measures was identified. This divergence likely reflects sectoral differences related to standards heterogeneity and domestic competitiveness.