Quality Competition, Pricing-to-Market and Non-Tariff Measures: A Unified Framework for the Analysis of Bilateral Unit Values

Abstract

This paper seeks to present a unified framework for several factors that have been independently studied as determinants of unit values in international trade: product differentiation by quality (which suggests that unit values should be positively correlated with exporters' per capita income), pricing-to-market (which suggests they should be positively correlated with importers' per capita income), and non-tariff measures (which suggests that remaining residuals may contain evidence of trade barriers). On a large sample of bilateral unit values for 2005, we find that about half of all HS-6 products demonstrate both significant quality-ladder effects and pricing-to-market effects, with quality-ladder effects predominating in importance. Distance-related effects associated with prices appear significantly larger than one would expect based on shipping margins alone. We also rank importers by the remaining unexplained variation in import prices, and examine whether these variations are plausibly related to non-tariff measures.