<mark>up to their bound levels and can take another member to dispute settlement only when it increases its applied tariff above the bound level.</mark> The size of water measures the possibility of a country to freely increase its applied MFN tariffs up to the bound rate without incurring into a dispute at the WTO. The simple presence of water makes trade policy less predictable and therefore more uncertain.

In our analysis we take commitments under PTAs into account by setting the bound rate equal to the preferential tariff for those country pairs that have signed a preferential agreement. Specifically, the level of water is equal to zero for country pairs belonging to the same PTA unless preferential rates are higher than MFN.<sup>6</sup> Algebraically, we define water in product � for a country pair �� as follows: Data on MFN applied rates and WTO bound rates are obtained from Groppo and Piermartini (2014). Their database combines information on MFN applied tariffs from the WTO's Integrated Data Base (IDB) and UNCTAD's Trade Analysis and Information System (TRAINS).<sup>7</sup> The latter database is also used to extract data on effectively applied tariffs for country pairs belonging to a PTA. Data on WTO bound rates are from the WTO Consolidated Tariff Schedules (CTS) database.

Trade data have been retrieved from the UN COMTRADE database. Bilateral exports at the 6-digits level of the Harmonized System 1996 are used for the analysis. Since the number of observations in the full sample is sizable and creates computational challenges, a set of restrictions is established to reduce the sample size of the database. First, the analysis focuses on a cross section analysis for the year 2011. Second, agricultural sectors are excluded from the estimations. These sectors are characterized by a relevant portion of non-ad valorem tariffs and other country-specific distortions such as agricultural subsidies and, consequently, the calculation of the equivalent bound rates could be misleading or biased. Third, importers and exporters that were not WTO members in 2011 are also excluded from the analysis.<sup>8</sup> Fourth, the sample of countries whose share of world trade is less than 0.1% is omitted from the regressions. Finally, zero trade observations in products for which certain countries, mainly small countries, do not export to any destination is disregarded under the assumption that such countries do no produce these products. After applying these restrictions, information on trade, tariffs, bound rates and additional control variables is available for 65 developed and developing countries exporting up to 4,381 different HS6 products to 49 destinations.

Table 1 presents some summary statistics for the main variables of interest.<sup>9</sup> The average value of exports is almost 1.2 million of dollars. The average applied tariff rate is 4.94% while the bound rate is

> 6 The number of cases in which preferential rates are above MFN rates is very small. 7 The authors use TRAINS as the primary source for tariff data and IDB to fill the missing values. 8 Considering only WTO members and manufacturing products, we have information about 151 countries exporting to 123 countries in 4,399 products. This translates into a sample of more than 81 million observations. 9 Summary statistics are calculated for the sub-sample of observations that are used in our econometric analysis.

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