Non-homothetic preferences, income distribution, and the burden of NTMs

Trade-weighted coverage ratios are commonly used when estimating the effect of non-tariff measures on trade flows and other outcomes. Because they weight by import shares, for a given sector they can vary across countries even when actual policies are the same. While trade shares can depend on several factors, we link them to income distribution when preferences are non-homothetic. Further, the correlation between coverage ratios and income distribution measures can provide an indication of whether NTMs are more geared towards luxuries (consumed by primarily the wealthy) or necessities (which are consumed by all). Using data on coverage ratios during 2008- 2014 in the European Union, our estimates suggest not only that the variation in coverage ratios are linked to income inequality, but that the relationship is consistent with NTMs primarily on luxuries. Finally, as other studies have shown that income distribution can itself have a direct impact on trade, our results suggest the potential for biased estimates when using NTM coverage ratios but not accounting for inequality