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

Tibor Besedes () and Matthew Cole ()

No 1506, Working Papers from California Polytechnic State University, Department of Economics

Abstract: It is quite common in the trade literature to use iceberg transport costs to represent variable trade barriers, both tariffs and shipping costs alike. However, in models with monopolistic competition these are, in fact, not identical trade restrictions. This difference is not driven by tariff revenue but by how the two trade costs affect firm profits and the extensive margin. We illustrate these differences in a gravity model `a la Chaney (2008). We show theoretically that trade flows are more elastic with respect to ad valorem tariffs than transport costs and find a linear relationship between the elasticities with respect to ad valorem tariffs, iceberg transport costs, and fixed market costs. We empirically validate these results using data on U.S. product-level imports.

Keywords: Gravity; firm heterogeneity; monopolistic competition (search for similar items in EconPapers)
JEL-codes: F12 F13 F17 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015
New Economics Papers: this item is included in nep-bec, nep-int and nep-tre
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Journal Article: Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model (2017) Downloads
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