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Tariff rates in gravity

Kazunobu Hayakawa () and Taiyo Yoshimi ()

No 796, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: In investigations on the role of tariff rates in the gravity equation, applied tariff rates (i.e., the lowest available rates) are often introduced. However, not all exporters use the lowest available rates, especially when some cost is incurred in using those rates. This implies that it is not prudent to introduce only the applied tariffs into the gravity equation. Accordingly, this study discusses how to deal with tariff variables in the gravity estimation. Specifically, it empirically demonstrates that when multiple tariff schemes are available, omitting tariffs in either scheme creates a remarkable bias in the estimates. When we control for other tariffs by explicit variables or fixed effects defined at an appropriate level (e.g., importer-product-year fixed effects), the use of applied tariffs can be justified.

Keywords: Gravity; Tariffs; Regional trade agreements; Tariff (search for similar items in EconPapers)
JEL-codes: F15 F53 (search for similar items in EconPapers)
Date: 2020-08
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 796. 2020-08

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