Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model

Abstract

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.

Heterogeneous effects of economic integration agreements

“…10 There is just now emerging a literature on the formulation of transport costs versus tariff rates in Melitz-Chaney type models, cf. Costinot and Rodriguez-Clare [2014], Besedes and Cole [2017] and Caliendo, Feenstra, Romalis and Taylor (2015, especially Appendix A). Also, we address endogeneity of f rij to ϕ (via p(ϕ)) in Online Appendix 2 and its theoretical supplement.…”

Corruption and assortative matching of partners in international trade

“…It is important to note in this context that not all types of trade-related costs can be reduced by the use of bribery, even though they might negatively impact trade volumes between two countries. Consider, for instance, tariffs versus transportation costs: trade flows are more elastic with respect to the former than the latter(Besedeš and Cole 2017); therefore, it may be easier to evade tariffs than transport costs in the presence of corruption.…”

The welfare consequences of import tariffs: A quantitative perspective

“…And in models in which the set of imported varieties is not fixed by assumption, they additionally affect the extensive margin through an entry channel. 8 ACR have noticed the role of multiple sectors for their result. In their presence, some sectors have higher gains under monopolistic competition than under perfect competition and other sectors have lower gains.…”

“…c x ij ∝ Y j ). Then, the Y α i terms drop from λ ij , wiping out selection effects in the presence of monopolistic competition; see equation (8).…”

“…6 7 The fact that iceberg trade costs and tariffs may have quite different effects on outcomes has been discussed in various papers but, to the best of our knowledge, only CR offer a comparative quantitative perspectiveà la ACR. Besedes and Cole (2013) use the framework of Chaney (2008) 5 The mark-up appears when conditioning tariff revenue on trade flows. 6 Other extensions have larger welfare implications.…”