Gravity Channels in Trade

Yulin Hou (yhou003@fiu.edu), Yun Wang (ywang111@fiu.edu) and Hakan Yilmazkuday
Additional contact information
Yulin Hou: Zhongnan University of Economics and Law, Wuhan, P.R. China
Yun Wang: Barry University, Miami Shores, FL

No 2209, Working Papers from Florida International University, Department of Economics

Abstract: Gravity variables such as distance, adjacency, colony, free trade agreements or language are used to capture the effects of trade costs in empirical studies. By using actual data on trade costs, this paper decomposes the overall effects of such variables on trade into those through three gravity channels: duties/tariffs (DC), transportation-costs (TC), and dyadic-preferences (PC). As opposed to the existing literature where gravity variables act like supply shifters (through DC and TC), this paper empirically shows that they act like demand shifters (through PC). Regarding policy, it is implied that welfare-improving globalization cannot be achieved only through reductions in direct costs such as duties/tariffs or transportation costs; it is rather the globalization itself that should be promoted in order to shift the preferences of destination countries toward international products and thus reduce indirect trade costs. The results are further connected to several existing discussions in the literature, such as welfare gains from trade and the distance puzzle.

Keywords: Gravity Variables; Dyadic Preferences; U.S. Imports (search for similar items in EconPapers)
JEL-codes: F12 F14 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2022-05
New Economics Papers: this item is included in nep-cna and nep-int
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https://economics.fiu.edu/research/pdfs/2022_working_papers/2209.pdf First version, 2022 (application/pdf)

Related works:
Journal Article: Gravity channels in trade (2023)
Working Paper: Gravity Channels in Trade (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fiu:wpaper:2209

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