Abstract
We 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 on the importer side (e.g. most favored nation tariffs) and on the exporter side (e.g. export subsidies), even in the presence of exporter and importer fixed effects. An important byproduct of our approach is that it can be used to recover estimates of the export-supply elasticity and of the import-demand elasticity. We demonstrate the effectiveness of our techniques in the case of MFN tariffs and Time to Export as representative 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
Relation to literatureOur paper is related to several strands of the literature. From a methodological perspective, our approach improves on three existing methods to identify the impact of unilateral policies and country-specific characteristics within the gravity literature. (i) Numerous papers have used country-specific variables directly in a-theoretic empirical gravity models, i.e., those that do not properly account for the structural multilateral resistances (MRs) and, deliver estimates that are potentially biased and subject to the critique of Anderson and van Wincoop (2003)
We propose a simple method to identify the effects of unilateral and nondiscriminatory trade policies on bilateral trade within a theoretically consistent empirical gravity model
As demonstrated in the seminal paper of Arkolakis et al (2012), and as summarized in the survey articles of Head and Mayer (2014) and Costinot and Rodríguez-Clare (2014), a large class of trade models lead to the following structural gravity equation for bilateral trade flows Xij from country i to j: Xij where Tij is a function of bilateral trade costs between i and j, including both tariffs and non-tariff trade costs
Summary
Our paper is related to several strands of the literature. From a methodological perspective, our approach improves on three existing methods to identify the impact of unilateral policies and country-specific characteristics within the gravity literature. (i) Numerous papers have used country-specific variables directly in a-theoretic empirical gravity models, i.e., those that do not properly account for the structural multilateral resistances (MRs) and, deliver estimates that are potentially biased and subject to the critique of Anderson and van Wincoop (2003). (i) Numerous papers have used country-specific variables directly in a-theoretic empirical gravity models, i.e., those that do not properly account for the structural 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 identification of the effects of country-specific variables even in the presence of exporter and importer fixed effects that control for the MRs. Sellner (2019) compares our method citing the working paper version of this paper, Heid et al (2017), to methods that do not rely on intranational trade flows He concludes, “First and foremost, assuming that [nondiscriminatory trade policies] impact only border-crossing trade flows, we recommend to use the approach outlined [by] Heid et al (2017) for econometric estimation of a theory-consistent [structural gravity model]. The BV and FE-2S methods that have been frequently employed in past empirical research, often because domestic trade flows were unavailable, yield biased and inconsistent point estimates.”
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