Trade Elasticity, Gravity and Trade Liberalisation: Evidence from the Food Industry

Abstract

We present an econometric investigation of the trade effect produced by the elimination of tariffs in 18 food sectors for a large sample of developing and developed countries. The standard CES monopolistic competition trade model and the gravity equation were used to estimate trade substitution elasticities, exploring their sensitivity to different estimation methods. Using these elasticities, we simulate the trade effect of the elimination of tariffs, dealing with the problem of uncertainty in the estimated values. Results point to a significant variation in the elasticities estimated by different econometric methods, suggesting that the Poisson pseudo-maximum-likelihood estimator significantly inflates their magnitude. Simulation results indicate that trade liberalisation will strongly increase food exports especially from high income and emerging countries, leading to a general loss of market share by developing countries. The simulated trade flows obtained from the econometric approach are quite close to current evidence based on computable general equilibrium models.