The Tip of the Iceberg: A Quantitative Framework for Estimating Trade Costs

Abstract

Casual empiricism suggests that additive trade costs, such as quotas, per-unit tariffs, and, in part, transportation costs, are prevalent. In spite of this, we have no broad and systematic evidence of the magnitude of these costs. We develop a new empirical framework for estimating additive trade costs from standard firmlevel trade data. Our results suggest that additive barriers are on average 14 percent, expressed relative to the median price. The point estimates are strongly correlated with common proxies for trade costs. Using our micro estimates, we show that a reduction in additive trade costs produces much higher welfare gains and growth in trade flows than a similar reduction in multiplicative trade costs.

Trade liberalization and credit constraints: Why opening up may fail to promote convergence

“…The advantage of this specification of trade costs is that all firms incur the same transportation costs whereas models assuming iceberg transportion costs instead imply that more productive firms have access to a transport technology of lower cost (Sorensen ; Irarrazabal et al. ). Thus, with iceberg transportation costs the competitive advantage of the country with a more developed credit market—and hence, on average, more productive firms—would be reinforced and the gap after trade liberalization even larger.…”

Winners and Losers of Globalization: Sixteen Challenges for Measurement and Theory

“…The magnitude of these costs is likely substantial. Irarrazabal et al (2015) estimate it to be 14 per cent of the median product price, which is a lower bound estimate. The presence of additive costs can have important welfare implications.…”

“…Recent research emphasizes that part of international trade costs are additive costs, that is, fixed cost per unit traded Skiba, 2004 andIrarrazabal et al, 2015). These may include per-unit tariffs, quotas, or transport costs proportional to the physical quantity of the cargo.…”

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“…Empirical evidence indicates substantial differences in transportation costs at the sector level as well as at the firm level (see e.g. Anderson and van Wincoop, ; Irrazabal et al, ), and sector‐level differences in trade costs have a substantial effect on firm‐level exports as shown by, for example, Bernard et al (). Therefore, we allow for a sector‐specific relationship between freight rates and shipment volumes in our model.…”