Distorted Trade Barriers: A Dissection of Trade Costs in a "Distorted Gravity" Model. Issue 1 (20th September 2016)

• Record Type: Journal Article
• Authors: Besedeš, Tibor; Cole, Matthew T.
• Is Part Of: Review of international economics. Volume 25:Issue 1(2017:Feb.)
• Page Start: 148
• Page End: 164
• Publication Date: 2016-09-20
• Subjects: International economic relations -- Periodicals; International finance -- Periodicals; Economic policy -- Periodicals; 330
• DOI: 10.1111/roie.12260
• Languages: English
• ISSNs: 0965-7576

Abstract

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.