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Gravity and Heterogeneous Trade Cost Elasticities

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  • Chen, Natalie

    (University of Warwick)

  • Novy, Dennis

    (University of Warwick, CEP/LSE, CESifo and CEPR)

Abstract

How do trade costs a¤ect international trade? This paper o¤ers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to popular trade cost variables such as currency unions, trade agreements, and WTO membership. While we estimate that these variables are associated with increased bilateral trade on average, we find substantial heterogeneity. Consistent with the predictions of our framework, trade cost e¤ects are strong for ‘thin’ bilateral relationships characterised by small import shares, and weak or even zero for ‘thick’ relationships.

Suggested Citation

  • Chen, Natalie & Novy, Dennis, 2021. "Gravity and Heterogeneous Trade Cost Elasticities," The Warwick Economics Research Paper Series (TWERPS) 1385, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1385
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    3. Benjamin Jung, 2023. "The Trade Effects of the EU-South Korea Free Trade Agreement: Heterogeneity Across Time, Country Pairs, and Directions of Trade within Country Pairs," Open Economies Review, Springer, vol. 34(3), pages 617-656, July.
    4. Jung, Benjamin, 2022. "The Trade Effects of the EU-South Korea Free Trade Agreement: Heterogeneity across Time, Country Pairs, and Directions of Trade within Country Pairs," VfS Annual Conference 2022 (Basel): Big Data in Economics 264125, Verein für Socialpolitik / German Economic Association.
    5. Peter Egger & Reto Foellmi & Ulrich Schetter & David Torun, 2023. "Gravity with History: On Incumbency Effects in International Trade," CID Working Papers 153a, Center for International Development at Harvard University.
    6. Heid, Benedikt & Stähler, Frank, 2024. "Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market," Economic Modelling, Elsevier, vol. 131(C).
    7. Mugnier, Martin & Wang, Ao, 2022. "Identification and (Fast) Estimation of Large Nonlinear Panel Models with Two-Way Fixed Effects," The Warwick Economics Research Paper Series (TWERPS) 1422, University of Warwick, Department of Economics.
    8. Alena DORAKH, 2022. "Trade and FDI connectivity in Europe: the European Union, Western Balkans and new EU candidate countries," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 13, pages 24-53, December.
    9. Erik Merkus, 2024. "Gravity Models in International Trade: A Specification Curve Analysis," Journal of Industry, Competition and Trade, Springer, vol. 24(1), pages 1-10, December.
    10. Carmen Díaz-Mora & Silviano Esteve-Pérez & Salvador Gil-Pareja & Fernando Ríos-Avila, 2024. "The EMU effect on trade: A re-assessment accounting for staggered treatment adoption," Working Papers 2407, Department of Applied Economics II, Universidad de Valencia.
    11. Alessandro Nicita & Enxhi Tresa, 2022. "Trade policy and trade resilience during the 2020 trade downturn," UNCTAD Working Papers #1, United Nations Conference on Trade and Development.
    12. Andreas M. Fischer & Dr. Pinar Yesin, 2023. "The kindness of strangers: Brexit and bilateral financial linkages," Working Papers 2023-02, Swiss National Bank.
    13. Nuno Carlos Leitão, 2023. "The Impact of Geopolitical Risk on Portuguese Exports," Economies, MDPI, vol. 11(12), pages 1-17, November.

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    More about this item

    Keywords

    Currency Unions ; Euro; Gravity ; Heterogeneity ; RTA ; Trade Costs ; Trade Elasticity ; Translog ; WTO JEL Classification: F14 ; F15 ; F33;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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