Estimating the impact of EU trade policy with Structural Gravity

The main goal of this paper is to assess the impact of the EU trade preferences on EU imports. The case of the EU is relevant for several reasons. The EU is the biggest player on the global trading scene: tariffs are still significant in specific sectors though over time a large number of preferential trade agreements has been concluded between EU and developing countries in order to integrate them in international trade and to promote economic growth. The first contribution of this paper is the estimation of the impact of preferences in a theoretically grounded gravity model that includes domestic trade flows. To this purpose, we measure the preference margin taking into account the advantage/disadvantage that preferential policies provide with respect to other foreign or domestic producers. The second contribution of this paper is to develop an empirical strategy that consider both international and intra-national trade data, and this implies that the preference margin computation takes into account the fact that intra-EU trade flows are duty free. Taking into account the intra-EU trade leads to lower reference tariffs and this implies much lower preference margins (if any). Our identification strategy relies on there being enough variation in tariffs applied by the EU to different origin markets. Accordingly, we use cross-section data (more than 5,000 tariff lines and 188 exporters, including the EU25 Member States, in the year 2017), to obtain structural gravity estimates of trade substitution elasticities. The estimated elasticities are used to calculate the counterfactual change in total EU imports that would follow either from the removal of trade preferences or from the removal of trade policies.