The Tip of the Iceberg: Modeling Trade Costs and Implications for Intra-Industry Reallocation

Andreas Moxnes, Alfonso Irarrazabal () and Luca David Opromolla

No 7685, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: When trade costs are of the iceberg type (Samuelson 1952) and markups are independent of trade costs, relative prices across markets are distorted, but relative prices within markets are not. When trade costs depart from the analytically convenient iceberg type, distortion will also occur within markets. In this paper we build a heterogeneous firm model of trade that allows for both iceberg and per-unit costs. An important theoretical finding is that these within-market distortions create an additional channel of gains from trade through within-industry reallocation. We fit the model to firm-level export data, by product and destination, using a novel minimum distance estimator and find that average per-unit costs, expressed relative to the consumer price, are 35-45%, depending on the elasticity of substitution. The pure iceberg model is therefore rejected. Finally, we calibrate the model and quantify the costs of protectionism. Simulations indicate that the welfare costs are roughly 50% higher when tariffs are per-unit compared to when they are iceberg.

Keywords: Trade costs; Intra-industry reallocation; Exports; Trade liberalization (search for similar items in EconPapers)
JEL-codes: F10 (search for similar items in EconPapers)
Date: 2010-02
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Citations: View citations in EconPapers (24)

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Related works:
Journal Article: The Tip of the Iceberg: A Quantitative Framework for Estimating Trade Costs (2015)
Working Paper: The Tip of the Iceberg: A Quantitative Framework for Estimating Trade Costs (2013)
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