Tariff Rates in Gravity
by Kazunobu Hayakawa, Taiyo Yoshimi
In investigations on the role of tariff rates in the gravity equation, applied tariff rates (i.e., the lowest available rates) are often introduced. However, not all exporters use the lowest available rates, especially when some cost is incurred in using those rates. This implies that it is not prudent to introduce only the applied tariffs into the gravity equation. Accordingly, this study discusses how to deal with tariff variables in the gravity estimation. Specifically, it empirically demonstrates that when multiple tariff schemes are available, omitting tariffs in either scheme creates a remarkable bias in the estimates. When we control for other tariffs by explicit variables or fixed effects defined at an appropriate level (e.g., importer-product-year fixed effects), the use of applied tariffs can be justified.
Keywords: Gravity, Tariffs, Regional trade agreements
JEL classification: F15, F53
Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.