Trade Flows, Multilateral Resistance, and Firm Heterogeneity

Abstract

We present a gravity model that accounts for multilateral resistance, firm heterogeneity and countryselection into trade, while accommodating asymmetries in trade flows. A new equation for the proportion of exporting firms takes a gravity form, such that the extensive margin is also affected by multilateral resistance. We develop Taylor approximated multilateral resistance terms with which to capture the comparative static effects of changes in trade costs. For isolated bilateral changes in trade frictions, multilateral resistance effects are small for most countries. However, if all countries reduce their trade frictions, the impact of multilateral resistance is so strong that bilateral trade falls in most cases, despite the larger trade elasticities implied by firm heterogeneity. As a consequence, the worldwide trade response, though positive, is much lower.

Distance and Border Effects in International Trade: A Comparison of Estimation Methods

“…These fixed effects or dummies capture unobserved heterogeneity, including multilateral resistance terms as pointed out by e.g. Anderson and van Wincoop (2003) and Behar and Nelson (2014). If the variable of interest is in the country level dimension, identification of the variable is impossible with exporter and importer fixed effects.…”

Exports and International Logistics*

“…These effects are shown to be quantitatively important by AvW (2003) in explaining the so‐called US‐Canada ‘border puzzle’ of McCallum (1995), and Behar and Nelson (2012) show that the effects of MR are large for multilateral changes in trade costs. Changes in a given country's logistics quality share some of this multilateral characteristic: if Kenya were to achieve an improvement in its logistics, its relative trade barrier across all export destinations would be affected, and our comparative statics on exports to a particular destination must reflect this.…”

“…A further implication of imposing trade balance is that for the extensive margin also takes a gravity‐like form. Drawing on Behar and Nelson (2012), which is a gravity equation for the cost cut‐off defining the extent of the extensive margin. Just as for bilateral exports, it responds positively to the product of the trading countries’ GDPs, negatively to bilateral trade costs, and positively to MR, captured by the term.…”

“…If this firm does not find it profitable to export to i , then no firm in j will. For firm a L , the ratio of variable profits to fixed export costs can be written as and it follows that Z ij is HMR's latent variable, which under the trade balance assumption can be written as (Behar and Nelson, 2012) where That is, the latent variable can be decomposed into two components: MR, and a component independent of prices. Next, using allows us to relate the extensive margin cut off and the latent variable according to which gives according to where and where .…”

Determinants of Malawis cotton exports from 2001 to 2013

“…estimation with a correlation coefficient of 0.06 which satisfies the exclusion restriction (Behar and Nelson, 2012;Ergul, 2010). In the second level, a generalised least square random effects model was used to estimate the factors that determine the volume of exports cotton from Malawi to a particular country between the year 2001 to 2013 (Mitze, 2010).…”