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Gravity and Heterogeneous Trade Cost Elasticities

Author

Listed:
  • Chen, Natalie

    (University of Warwick, CESifo and CEPR.)

  • Novy, Dennis

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

Abstract
How do trade costs affect international trade? This paper offers 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," CAGE Online Working Paper Series 595, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:595
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    References listed on IDEAS

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    6. 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.
    7. 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.
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    9. 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.
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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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