International economics has overwhelmingly relied on Samuelson’s (1954) assumption that trade costs are proportional to value. We build a general equilibrium heterogeneous firms model of trade that allows for both ad valorem and per-unit costs. Using a novel minimum distance estimator we are able to identify per unit trade costs from the distribution of foreign sales across markets. Estimated average per-unit costs are substantial being, on average, between 35 and 45 percent of the average consumer price. This leads us to reject the pure ad valorem cost assumption. An important theoretical finding is that non-ad valorem trade costs create an additional channel of gains from trade through within-industry reallocation. Thus, we show that standard welfare assessments of trade liberalization may be understated.

exporters react to a change in trade costs?

This paper estimates the impact of China’s exchange rate changes on exports of competitor countries in third markets, which we call the “spillover effect. ” We use recent theory to develop an identification strategy in which competition between China and its developing country competitors in specific products and destinations plays a key role. We exploit the variation—afforded by disaggregated trade data—across exporters, importers, product, and time to estimate this spillover effect. We find robust evidence of a statistically and quantitatively significant spillover effect. Our estimates suggest that, on average, a 10 percent appreciation of China’s real exchange rate boosts a developing country’s exports of a typical 4-digit Harmonized System (HS) product category to third markets by about 1.5 to 2 percent. The magnitude of the spillover effect varies systematically with product characteristics as implied by theory.

Exchange rate volatility, financial constraints and trade:

We consider the determinants of exports of services, distinguishing between modern and traditional services. We consider both the growth of export volumes and so-called export surges – periods of rapid sustained export growth. We ask whether the determinants of export growth rates and surges differ between merchandise, traditional services and modern services and whether developing countries are different. Our findings confirm the importance of the real exchange rate for export growth. We find that the effect of the real exchange rate is even stronger for exports of services than exports of goods; it is especially strong for exports of modern services. While the evidence of differential effects between advanced and developing countries is weaker, our results nonetheless suggest that as developing countries shift from exporting primarily commodities and merchandise to exporting traditional and modern services in the course of their development, appropriate policies toward the real exchange rate become even more important.

In this paper we develop a new methodology for estimating intranational trade costs, apply our methodology to newly collected CPI micro-data from Ethiopia and Nigeria, and explore how our estimates affect the geographic incidence of globalization within these countries. Our approach confronts three well-known but unresolved challenges that arise when using price gaps to estimate trade costs. First, we work exclusively with a sample of goods that are identified at the barcode-level, to mitigate concerns about unobserved quality differences over space. Second, because price gaps only identify trade costs between pairs of locations that are actually trading the product in question, we collect novel data on the location of production/importation of each product in our sample in order to focus exclusively on trading pairs. Conditioning on this new information raises our estimate of trade costs by a factor of two. Third, we demonstrate how estimates of cost pass-through can be used to correct for potentially varying mark-ups over space. Applying this correction raises our trade cost estimate by a factor of two (again). All said, we estimate that intranational trade

U.S. imports and exports respond little to exchange rate changes in the short run. Pricing behavior has long been thought central to explaining this response: if local prices do not respond to exchange rates, neither will trade flows. Sticky prices and strategic complementarities in price setting generate sluggish responses, and they are necessary to match newly available international micro price data. I test models capable of replicating price data against trade flows. Even with significant short-run frictions, the models still imply a trade response to exchange rates stronger than found in the data. Moreover, using significant cross-sector heterogeneity, comparative statics implied by the model find little to no support in the data. These results suggest that while complementarity in price setting and sticky prices can explain pricing patterns, some other short-run friction is needed to match actual trade flows. Furthermore, the muted response found for sectors with high long-run substitutability implies that simply assuming low elasticities may be inappropriate. Finally, there is evidence of an asymmetric response to exchange rate changes.

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