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

17 Pages Posted: 4 Jan 2017

See all articles by Tibor Besedes

Tibor Besedes

Georgia Institute of Technology

Matthew T. Cole

Florida International University (FIU)

Date Written: February 2017

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.

Suggested Citation

Besedes, Tibor and Cole, Matthew T., Distorted Trade Barriers: A Dissection of Trade Costs in a 'Distorted Gravity' Model (February 2017). Review of International Economics, Vol. 25, Issue 1, pp. 148-164, 2017, Available at SSRN: https://ssrn.com/abstract=2893391 or http://dx.doi.org/10.1111/roie.12260

Tibor Besedes (Contact Author)

Georgia Institute of Technology ( email )

221 Bobby Dodd Way
Atlanta, GA 30332-0615
United States

Matthew T. Cole

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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