Distorted Trade Barriers: A Dissection of Trade Costs in a "Distorted Gravity" Model
|Title:||Distorted Trade Barriers: A Dissection of Trade Costs in a "Distorted Gravity" Model|
|Publication Date:||February 2017|
|Published In:||Review of International Economics|
It is common in the trade literature to use iceberg transport costs to represent both tariffs and shipping costs alike. However, in models with monopolistic competition these are not identical trade restrictions. This difference is driven by how the two costs affect the extensive margin. We illustrate these differences in a gravity model. We show theoretically that trade flows are more elastic with respect to tariffs than transport costs and find a linear relationship between the elasticities with respect to tariffs, iceberg transport costs, and fixed market costs. We empirically validate these results using data on US product‐level imports.
|Ivan Allen College Contributors:|
|External Contributors:||Matthew T. Cole|
“Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model,” Review of International Economics (2017), 25(1): 148-164, joint with Matthew T. Cole.