A recent article in the International Economic Journal revisits a classic question in international economics: do trade restrictions actually improve a country’s welfare? Rather than relying on the traditional terms of trade (TOT) — the ratio of export prices to import prices — the study focuses on a more comprehensive indicator, the income terms of trade (ITT). Using panel data for 139 countries over the period 2008–2021, it examines whether import and export restrictions, as well as governance quality, shape a country’s real purchasing power in global markets.
The distinction between TOT and ITT is crucial. Traditional TOT measures how export prices move relative to import prices. In theory, large countries may use tariffs to influence world prices in their favour. However, higher export prices alone do not guarantee greater national welfare if export volumes decline. ITT, first formalised by Graeme Dorrance, adjusts for this by incorporating export volumes. It captures how many imports a country can actually purchase with its export earnings. A country may experience favourable price movements yet see its real import capacity stagnate or fall if export performance weakens. ITT therefore provides a more accurate picture of trade-related purchasing power.
The study employs the Measure of Aggregate Trade Restrictions (MATR) and detailed indicators of specific policies, including import licences, non-tariff measures (NTMs), tariffs, export licences, and export taxes. To address endogeneity and dynamic effects, the analysis uses the two-step system GMM estimator developed by Manuel Arellano and Stephen Bond. This econometric approach allows the study to isolate the causal relationship between trade policy and income terms of trade across countries with diverse economic structures.
The findings are consistent. Import restrictions are strongly associated with deterioration in income terms of trade. Measures such as import licences, non-tariff barriers, and tariffs show particularly large and statistically significant negative effects. While theory suggests that tariffs may improve price-based terms of trade, the empirical evidence indicates that once export volumes are taken into account, restrictive policies reduce overall export purchasing power. The volume losses appear to outweigh any potential price gains.
Export restrictions also have adverse implications, though their magnitude is generally smaller than that of import barriers. Policies such as export licences, repatriation requirements, and export taxes are linked to lower income terms of trade. In practice, restricting exports can reduce foreign demand, weaken competitiveness, and limit export revenues, thereby diminishing the ability to finance imports. One important insight is that import barriers tend to have more elastic and sensitive effects than export restrictions. Import controls raise input costs for domestic producers, reduce competitiveness, and may trigger retaliatory measures from trading partners. Administrative barriers, including documentation requirements and licensing systems, further increase transaction costs. Rather than strengthening national welfare, these policies appear to compress export revenues and weaken real trade capacity.
Institutional quality plays a central role in shaping outcomes. Using World Governance Indicators, the study finds that stronger governance significantly improves income terms of trade. Control of corruption, regulatory quality, government effectiveness, and rule of law all show positive and statistically significant relationships with ITT. Improvements in corruption control and regulatory quality have particularly large effects. These findings resonate with institutional trade theory associated with scholars such as Daron Acemoglu and James Robinson, which emphasises that sound institutions reduce uncertainty, lower transaction costs, and enhance economic performance.
Structural factors also matter. Higher labour productivity and greater industrial employment shares are positively associated with income terms of trade, suggesting that industrialisation and upgrading strengthen export performance. Conversely, larger relative output — measured as a country’s share of global GDP — can deteriorate ITT, consistent with the idea that increased global supply exerts downward pressure on export prices. These patterns echo earlier structuralist arguments advanced by Prebisch and Singer on the importance of diversification and industrial transformation (Toye & Toye, 2003; Bibi, 2024).
While traditional terms-of-trade theory implies that tariffs can improve national welfare under certain conditions, the income-based perspective tells a different story. Manipulating relative prices does not necessarily increase real purchasing power if export volumes decline or trade efficiency suffers. Once quantity effects are incorporated, protectionist gains appear fragile and often counterproductive.
In conclusion, the evidence suggests that trade restrictions — particularly on the import side — tend to reduce a country’s export purchasing power and import capacity. At the same time, stronger governance, higher productivity, and structural transformation enhance income terms of trade. For policymakers, the implication is that sustainable trade gains are more likely to arise from institutional strengthening, regulatory quality, and competitiveness-enhancing reforms than from raising trade barriers. In a global economy marked by recurring protectionist pressures, the purchasing power of exports ultimately depends less on restricting trade and more on enabling it.
References
Bibi, S. (2024). Prebisch and the terms of trade. Resources Policy, 90, Article 104813. https://doi.org/10.1016/j.resourpol.2024.104813.
Natanael, Y. (2026). Trade Restrictions, Governance, and Income Terms of Trade: Evidence from a Global Panel Data Analysis. International Economic Journal, 1-45. https://doi.org/10.1080/10168737.2026.2613855
Toye, J. F., & Toye, R. (2003). The origins and interpretation of the Prebisch-Singer thesis. History of Political Economy, 35(3), 437–467. https://doi.org/10.1215/00182702-35-3-437
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