Direct and Relative Effects of the Import Tariff: Method and Application Using the Industrial Level Data

The importing country usually imposes heterogeneous import tariff rates based on the national origins of the products. Reducing the tariff rates on the products from one origin country not only increases the import flows from this country, but also decreases the import flows from the other trade partners of the importing country. (Direct and relative effects of the import tariff) This paper constructs a variation of the conventional gravity model to analyze the direct and relative effects of the import tariff on international trade flows at the industrial level. Based on our theoretical framework, we compute a new indicator to measure the relative effect and estimate both effects using the Chinese industrial level data. Our empirical findings are consistent with our theoretical predictions: (i) if the tariff rates are reduced towards one origin country, the importing country will import more from this country but reduce the imports from the other origins; (ii) the relative effect is more effective at the industry or country where the importing penetration ratio is relatively high; and (iii) omission of the import penetration ratio will lead to the underestimation of the effects of the multilateral resistance terms on trade performances. Our research contributes to the existing literature by introducing a manipulable method to compute the direct and relative effects of the trade cost at the industrial level, which takes the heterogeneity among industries and countries into account.