We derive a micro-founded measure of bilateral trade integration that is consistent with a broad range of leading gravity models. This measure accounts for cross-industry heterogeneity by incorporating substitution elasticities estimated at the industry level. We then use it to provide a theory-based ranking of trade integration across manufacturing industries in European Union countries. In addition, we explore the determinants of trade integration, finding that substantial Technical Barriers to Trade in certain industries as well as high transportation costs associated with heavy-weight goods are the most notable trade barriers.

Micro-level data have had a profound in‡uence on research in international trade over the last ten years. In many regards, this research agenda has been very successful. New stylized facts have been uncovered and new trade models have been developed to explain these facts. In this paper we investigate to which extent answers to new micro-level questions have a¤ected answers to an old and central question in the …eld: How large are the gains from trade? A crude summary of our results is: “So far, not much.”

What has driven trade booms and trade busts in the past and present? We derive a micro-founded measure of trade frictions from leading trade theories and use it to gauge the importance of bilateral trade costs in determining international trade flows. We construct a new balanced sample of bilateral trade flows for 130 country pairs across the Americas, Asia, Europe, and Oceania for the period from 1870 to 2000 and demonstrate an overriding role for declining trade costs in the pre-World War I trade boom. In contrast, for the post-World War II trade boom we identify changes in output as the dominant force. Finally,

The incidence of bilateral trade costs is calculated here using neglected properties of the structural gravity model, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada’s provinces, 1992-2003, incidence is on average some five times higher for sellers than for buyers. Sellers’ incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in ‘constructed home bias’, the disproportionate share of local trade; and large but varying gains in real GDP.

This paper proposes to reexamine the GATT/WTO membership effect on bilateral trade flows, using nonparametric methods including pair-matching, permutation tests, and a Rosenbaum (2002) sensitivity analysis. Taken together in a coherent manner, these methods provide an estimation framework that is robust to misspecification biases, allows general forms of heterogeneous treatment effects, and addresses potential hidden selection biases. This is in contrast to most conventional parametric studies of this issue based on gravity models. The results here suggest large GATT/WTO trade-promoting effects, robust to various restricted matching criteria, alternative indicators for GATT/WTO involvement, and different matching methodologies.

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and rich substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country‟s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor. In an application to the currency union effect, I find that a currency union is only associated with substantially higher bilateral trade if the exporting country provides a small share of the destination country‟s imports. For other pairs, the currency union effect is modest or indistinguishable from zero.

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.

In this paper we build into a Ricardian model the role of trade in intermediate inputs, sectoral linkages and differing productivity levels across sectors. The model can be used for both ex-ante and ex-post trade policy evaluation. We also propose a new method to estimate sectoral trade elasticities. Estimation requires only trade and tariff data and does not require the assumption of bilaterally symmetric trade costs. With the model and estimates of sectoral trade elasticities for the year 1993, we evaluate the trade and welfare e¤ects of the North American Free Trade Agreement (NAFTA). We do so by incorporating into the model the change in tariffs from 1993 to 2005 to calculate the implied changes in exports and imports. We compare these calculated changes to their observed counterparts and find that the model matches the observed outcomes well. We find that as a consequence of the tariff reductions, real wages increased in all NAFTA countries. Mexico had the largest gains, while Canada and the United States gained relatively more from trade liberalization against the rest of the world than from trade liberalization within NAFTA over the sample period.

Any opinions expressed here are those of the author(s) and not those of the IIIS. All works posted here are owned and copyrighted by the author(s).

Gravity equations explaining foreign affiliates ’ sales are ad hoc and hence estimated coefficients are hard to interpret. We therefore provide the theoretical underpinnings of the gravity equation applied to the analysis of sales of foreign affiliates of multinational firms. We argue that the success of the gravity equation results from the fact that it can be derived from various theoretical models. We illustrate this point by deriving a gravity equation from three different models of multinational firms. Using data on real affiliate sales, we show how the gravity equation can nevertheless be used to discriminate between the different theoretical models. 1.