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Gravity with multiple tariff schemes

Kazunobu Hayakawa () and Taiyo Yoshimi ()

No 614, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This study contributes to the literature on gravity analysis by explicitly incorporating both most favored nation (MFN) rates and regional trade agreement (RTA) rates. Our gravity equation considers the fact that all exporters do not necessarily utilize RTA schemes, even when exporting to their RTA partners. We apply the tariff line–level data on worldwide trade to this gravity equation. As a result, we find a significantly negative coefficient for the (log) ratio of RTA rates to MFN rates. From the quantitative point of view, we show that in the first year of the Japan–Australia Economic Partnership (i.e., 2015), exports from Australia to Japan are expected to increase by 6% compared with the exports in 2014. Furthermore, it is shown that, based on the subsequent reduction in RTA rates, the magnitude of the trade-creation effect through tariff reductions gradually rises over time.

Keywords: Tariff; International trade; Gravity; RTA; Preference margin (search for similar items in EconPapers)
JEL-codes: F15 F53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2016-08-01
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 614. 2016-08-01

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