Therefore, we also test the subset of instruments that are a priori more likely to be endogenous, such as the export dummy and NTB variables. The results are found in the row “C-Stat” and indicate that we can’t reject the orthogonality of the smaller subsets either.

# 4.4 Quanti fi cation and Interpretation

The simplest interpretation of the coefficient on the PTA variable is that it represents how much the MFN tariff for PTA products increased relative to the non-PTA products. Its value is 1.6 percentage points for products exported under any PTA and about 2.2 for every PTA. The reduction for non-PTA goods was about 3.4 percentage points so the magnitude of the stumbling block effect is not trivial.

We can quantify the tariff effect in terms of price changes to assess its economic importance. In products where the EU is a price taker in the world market the growth in the advalorem tariff is fully passed to the price paid by EU consumers. Writing the domestic price as ln p<sup>d</sup> t<sup>=ln(1 + tt) + ln pw</sup> t we can immediately see that under full pass-through of tariffs the growth in the domestic price of a PTA good is ∆ln(1 + t<sup>PTA</sup> ), which is approximately equal to ∆t<sup>PTA</sup> .<sup>41</sup> Using this and (23) we can immediately see that the growth in the domestic price of a PTA good relative to that of a similar non-PTA good is ∆t<sup>PTA</sup> − ∆t = φ. Therefore the parameter we estimate can be interpreted as the relative domestic price growth between similar PTA and non-PTA goods under full pass-through.

In the context of the average price effects generated by tariff changes during the UR, the stumbling block effect is not negligible. This is clearest from the ratio of the growth effects ∆ln p<sup>d</sup> PTA<sup>/∆ln pd=</sup> ∆ln(1 + t<sup>PTA</sup> )/∆ln(1 + t) ≈ ∆t<sup>PTA</sup> /∆t = 1 + φ/c, where c is the estimated average tariff change for non-PTA products. Therefore, the last equality applies to a “benchmark” good with no changes in market access, nor in the elasticity adjusted production/import ratio. If the stumbling block effect completely offsets the average price effect, then 1+φ/c = 0 and if the price effect for the PTA products were identical to the non-PTA products, the statistic would be equal to 1.

It is also possible to provide an interpretation of the results in terms of price effects for goods where there is imperfect pass-through from tariffs to domestic prices, i.e. when the EU is not a price taker. This is important because one key concern with PTAs is that they have an impact on other countries by affecting the prices received by excluded countries.<sup>42</sup> Moreover there is considerable evidence of imperfect pass-through not only from exchange rate changes but also from tariff changes.<sup>43</sup> Provided

> 41 This approximation is valid in our sample since ∆ln(1 + tt) − ∆tt for all types of products takes a value between 0 and 0.005 for 90 percent of the sample and between 0 and 0.011 for 99 percent of the sample.

> 42 This concern is con fi rmed by Chang and Winters (2002) who fi nd that the formation of Mercosur lowered the prices for non-Mercosur producers exporting to them. Olarreaga et al. (1999) show that terms-of-trade effects pose a relatively important motive in explaining Mercosur’s external tariff structure.

> 43 Kreinin (1961) estimated that less than one third of the U.S. tariff reductions were passed on to its consumers

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