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Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model
Author(s) -
Besedeš Tibor,
Cole Matthew T.
Publication year - 2017
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12260
Subject(s) - monopolistic competition , economics , gravity model of trade , margin (machine learning) , fixed cost , bilateral trade , trade barrier , competition (biology) , marginal cost , international economics , microeconomics , computer science , monopoly , ecology , machine learning , law , political science , china , biology
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.