Trade Policies and the Shadow Economy: The Nexus of Tariffs, Non-Tariff Barriers and Trade Freedom in N-11 Countries

The shadow economy (SE), which is hard to define and even harder to tackle, is posing a serious challenge in emerging countries. The study examines the impact of tariff (TAR) and non-tariff (NTAR) barriers on SE in N-11 countries. Additionally, it investigates the role of market signaling factors, specifically trade freedom (TFR)'s impact on SE. Employing the method of moments quantile regression (MMQR) and mean group estimation techniques, the study analyzes panel data from 2000 to 2020. The empirical findings demonstrate that increases in TAR barriers significantly contribute to an increase in SE activities. Conversely, NTAR regulations and enhanced trade freedom substantially reduce the magnitude of informal economic activities. These results highlight the importance of non-tariff measures and trade liberalization in reducing informality and fostering a formal economy. The study offers practical insights for policymakers, economic planners, and international organizations in designing trade policies that encourage formal participation while limiting shadow economy activities.