Estimating foreign and national trade elasticities in the EU internal market using Generalised Transport Costs

José Zofío, Jorge Diaz-Lanchas, Damiaan Persyn and Javier Barbero

No 2020-05, JRC Working Papers on Territorial Modelling and Analysis from Joint Research Centre

Abstract: This paper undertakes the simultaneous estimation of import elasticities of substitution (trade elasticities) within European Union (EU) regions, differentiating between imports from regions belonging to the same country (national or interregional trade) and regions belonging to other EU countries (international trade within the EU). We use a nested CES utility structure to derive the corresponding trade gravity equations and estimate them by way of Poisson pseudo-maximum likelihood regression. As the EU is a single market, the usual approach followed in the international trade literature that relies on changes in bilateral tariffs cannot be used to identify the trade elasticities. To address this issue, a very detailed definition and calculation of the ad valorem specification of transport costs is performed. The methodology takes into account the transport engineering and logistic characteristics of road freight transportation, which allows us to obtain a reliable measure of the generalized transport costs between regions. Trade elasticities are calculated at several levels of industrial aggregation, including individual sectors at 2-digit CPA classification, and their higher-level categories corresponding to agriculture, mining, and manufacturing. Results show that the trade elasticity increases the closer are the trading partners; i.e., national vs. foreign elasticities, thereby providing the first evidence of this widely presumed hypothesis. National trade elasticities are broadly double the value of their foreign counterparts. We also find that trade elasticities substantially decrease as commodities are considered at a higher level of aggregation. Our calculated trade elasticities can be adopted in a wide array of models of international trade, or spatial economic models such as Regional Computable General Equilibrium models (e.g. the RHOMOLO model), improving the results obtained from simulations aimed at policy analysis.

Keywords: Gravity equation; trade elasticities; interregional trade; international trade; generalized transportation costs (search for similar items in EconPapers)
JEL-codes: C21 C68 F12 F17 R41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-11
New Economics Papers: this item is included in nep-geo, nep-int and nep-tre
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://publications.jrc.ec.europa.eu/repository/handle/JRC122414 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ipt:termod:202005

Access Statistics for this paper

More papers in JRC Working Papers on Territorial Modelling and Analysis from Joint Research Centre Contact information at EDIRC.
Bibliographic data for series maintained by Publication Officer ().