GRAVITY REDUX: MEASURING INTERNATIONAL TRADE COSTS WITH PANEL DATA

TLDR

Barriers to international trade are known to be large, yet data limitations make direct measurement difficult across many countries and years. The study derives a micro‑founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. The measure is constructed by analyzing observable trade data to infer trade frictions. The measure aligns with leading trade theories and shows that U.S. trade costs with major partners fell by about 40 % between 1970 and 2000, especially with Mexico and Canada.

Abstract

Barriers to international trade are known to be large but because of data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem, I derive a micro‐founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions . ( JEL F10, F15)