Abstract
AbstractWe propose a simple method to identify the effects of unilateral and non‐discriminatory trade policies on bilateral trade within a theoretically consistent empirical gravity model. Specifically, we argue that structural gravity estimations should be performed with data that include not only international trade flows but also intra‐national trade flows. The use of intra‐national sales allows identification of the effects of non‐discriminatory trade policies such as most favoured nation tariffs, even in the presence of exporter and importer fixed effects. A byproduct of our approach is that it can be used to recover estimates of the trade elasticity, a key parameter for quantitative trade models. We demonstrate the effectiveness of our techniques in the case of most favoured nation tariffs and “time to export” as representative non‐discriminatory determinants of trade on the importer and on the exporter side, respectively. Our methods can be extended to quantify the impact on trade of any country‐specific characteristics as well as any non‐trade policies.
Highlights
Owing to its theoretical microeconomic foundations and remarkable predictive power, the structural gravity model has become the workhorse in the empirical trade literature that studies the eects of various determinants of bilateral trade ows and the impact of trade policies in particular.1as is evident from the opening quote of our study, despite its popularity and empirical success, the structural gravity equation cannot be used to identify the impact of any unilateral and non-discriminatory trade policies both on the importer side (e.g. most favored nation (MFN) taris) and on the exporter side.2This deciency of the gravity model poses important challenges to comprehensive quantitative trade policy analysis because much of today's trade policy landscape is shaped by various unilateral and non-discriminatory measures
The contribution of this paper is to propose a simple method to identify the impact of unilateral and non-discriminatory trade policies on bilateral trade ows within the structural gravity model
From a methodological perspective, our approach improves on three existing methods to identify the impact of unilateral policies and country-specic characteristics within the gravity literature: (i) Numerous papers have used country-specic variables directly in a-theoretic empirical gravity models that do not control for the multilateral resistances (MRs) and, deliver estimates that are potentially biased and subject to the critique of Anderson and van Wincoop (2003)
Summary
Owing to its theoretical microeconomic foundations and remarkable predictive power, the structural gravity model has become the workhorse in the empirical trade literature that studies the eects of various determinants of bilateral trade ows and the impact of trade policies in particular.. From a methodological perspective, our approach improves on three existing methods to identify the impact of unilateral policies and country-specic characteristics within the gravity literature: (i) Numerous papers have used country-specic variables directly in a-theoretic empirical gravity models that do not control for the multilateral resistances (MRs) and, deliver estimates that are potentially biased and subject to the critique of Anderson and van Wincoop (2003) In relation to these papers, our methods allow identication of the eects of country-specic variables even in the presence of exporter and importer xed eects, which control for the MRs; (ii) Some authors have constructed new dyadic variables as combinations of the country-specic variables of interest..
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