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Distorted Trade Barriers


  • Matthew T. Cole


Since firm heterogeneity has been introduced into international trade models, the importance of firm entry and exit (the extensive margin) has been highlighted. In fact, Chaney (2008) illustrates how accounting for this extensive margin and heterogenous firms alters the standard gravity equation; thereby reversing the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Furthermore, Cole (forthcoming) points out that ad valorem tariffs affect the extensive margin quite differently than the commonly used iceberg transport cost. In this paper, I show that the elasticity of trade flows with respect to tariffs is more elastic than that of iceberg transport costs. Thus, elasticity estimates derived from variables such as distance may underestimate the effect caused by a change in tariffs.

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  • Matthew T. Cole, 2011. "Distorted Trade Barriers," Working Papers 201105, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:201105

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    Cited by:

    1. Prehn, Sören & Brümmer, Bernhard, 2011. "'Distorted gravity: The intensive and extensive margins of international trade' revisited ; an application to an intermediate Melitz model," DARE Discussion Papers 1109, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    2. Matthew T. Cole & Ben Zissimos, 2014. "Too Small To Protect? The Role of Firm Size in Trade Agreements," Working Papers 1410, Florida International University, Department of Economics.
    3. Gabriel Felbermayr & Benjamin Jung & Mario Larch, 2013. "Icebergs versus Tariffs: A Quantitative Perspective on the Gains from Trade," CESifo Working Paper Series 4175, CESifo Group Munich.

    More about this item


    Intra-industry trade; Gravity; Firm heterogeneity; Monopolistic competition;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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