Research: Published Papers 2002-18 - Professor James E. Anderson

This paper develops and characterizes an index of trade policy restrictiveness defined as the uniform tariff equivalent which maintains the same volume of trade as a given set of tariffs, quotas, and domestic taxes and subsidies. We relate this volume-equivalent index to the Trade Restrictiveness Index, a welfare-equivalent measure, and to the trade weighted average tariff Applications to international cross-section and time-series comparisons of trade policy show that the new index frequently gives a very different picture than do standard indexes.

JEL: F13 Keywords: International trade policy; tariffs; quotas; Trade Restrictiveness Index; trade liberalisation.
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Utarky and Anarchy: Endogneous Predation and Trade

James E. Anderson Douglas Marcouiller, S.J.
Boston College and NBER Boston College
International Economic Review (2005), 46,189-213.

Abstract

This paper offers a general equilibrium model in which a common and analytically “clean” transactions cost — that which arises from exposure to theft — is endogenously determined by forward-looking, utility-mazimizing individuals. Insecurity dramatically restricts specialization and trade, affects the welfare of the trading partners asymmetrically, and reflects the state of institutions for risk-sharing and coordination of defense. We show that anarchy presumptively implies autarky. The model provides an excellent framework for understanding the collapse of trade between Spain and its American colonies and may also apply to many contemporary forms of corruption.

This paper reflects helpful comments from participants in seminars at the University of Konstanz, Pompeu Fabra University, Ludwig Maximilian University (Munich), the London School of Economics, the University of Notre Dame, the Latin American and Caribbean Economic Association, the Midwest International Economics Group, and the NBER Summer Institute. Anderson acknowledges the hospitality of the NBER and the Institute for International Economic Studies, Stockholm, during work on this paper.

JEL: F10
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Latent Exports : Almost Ideal Gravity and Zeros

James E. Anderson Penglong Zhang

Boston College and NBER Tsinghua University

Abstract

The Almost Ideal gravity model generates zero trade flows from variable and fixed trade cost variations within a flexible demand structure. Latent predicted trade shares between non-partners are based on the Tobit estimator of the model applied to bilateral trade among 75 countries and 25 sectors in 2006. Latent Trade Bias (LTB) is the difference between the latent trade share and the as-if-frictionless trade share. The explained LTB variance is decomposed into 48% from variable trade cost combined with heterogeneous price elasticities, 26% from non-homothetic income effects, and 26% from fixed trade cost. Export promotion effects on zeros are quantified with counterfactual variable (fixed) cost cuts. Elimination reduces zeros by 88% (33%). Cuts of 10% suggest successful export promotion for targeted cases.

We thank Pol Antràs, Andrew Bernard, Arnaud Constinot, Thibault Fally, Marc Muendler, Dennis Novy, Theodore Papageorgiou, Steve Redding, Anthony Venables and seminar participants at LACEA 2019, the Australasian Trade Workshop, Boston College, the Empirical Investigations in Trade and Investment Workshop, and the Tsinghua Workshop on International Trade for their helpful comments.

JEL: F10, F14

Private Enforcement and Social Efficiency

James E. Anderson Oriana Bandiera
Boston College and NBER London School of Economics

Journal of Development Economics (2005), 77, 341-66.Abstract

This paper makes precise the distributional consequences and social efficiency of private enforcement of property rights. We develop a model where properties of different values are subject to predatory attacks and owners must choose between self-defense and purchasing private enforcement services. A distributional conflict of interest arises as private protection purchased by rich owners deflects predators on low value properties. We show that the market structure of private enforcement and the level of development affect the distribution of property income through relative changes in the security of high and low values property. We also show that privately provided enforcement can be higher than its socially optimal level because of the negative externality that enforcers and their rich customers impose on poorer owners. The availability of private enforcement may then constrain the enforcement policy of a welfare maximizing State.

Keywords: enforcement, predation, informal sector. JEL Classification: H11, H42, K42.

Political Pressure Deflection

James E. Anderson
Boston College and NBER

Maurizio Zanardi

Free University of Brussels

Abstract

Much economic policy is deliberately shifted away from direct political processes to administrative processes — political pressure (group) deflection. Pressure deflection poses a puzzle to standard political economy models which suggest that having policies to `sell’ is valuable to politicians. The puzzle is solved here by showing that incumbents will favor pressure deflection since it can deter viability of a challenger, essentially like entry deterrence. US trade policy since 1934 provides a prime example, especially antidumping law and its evolution.

December 2002. Prepared for the Econometric Society meetings, Jan. 2003. Public Choice, (2009), 141, 129-50.
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Trade and Contract Enforcement

James E. Anderson Boston College and NBER
Leslie Young Chinese University of Hong Kong

July, 2006 Abstract

We model imperfect contract enforcement when the victims of default resort to spot trading because the act of repudiation reveals a favorable outside option. We show that enforcement imperfection is essentially distinct from the contract incompleteness analyzed in the previous literature. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from unfavorable contracts. Multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement may often be optimal.
(100 words)
JEL Classification: F0, F1, H1, O170.
Keywords: Contract enforcement, trade, institutions.

Contributions to Economic Analysis & Policy (2006), Vol 5 (1), Article 30.
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Trade Costs

James E. Anderson* and Eric van Wincoop**

Journal of Economic Literature, (2004), 42, 691-751.Abstract

This paper surveys trade costs — what we know, and what we don’t know but may usefully attempt to find out. Partial and incomplete data on direct measures of costs go together with inference on implicit costs from the pattern of trade across countries. Representative margins for full trade costs in rich countries exceed 170% based on our pushing the data very hard. Poor countries face even higher trade costs. There is a lot of variation across countries and across goods within countries, much of which makes economic sense. Theory looms large in our survey, providing interpretation and perspective on the one hand and suggesting improvements for the future on the other hand. Some new results are presented to apply and interpret gravity theory properly and to handle aggregation appropriately.

* Economics Department, Boston College and NBER, Chestnut Hill, MA 02467, USA, Tel: 617-552-3691,e-mail: James.Anderson.1@bc.edu
** Department of Economics, University of Virginia, e-mail: vanwincoop@virginia.edu Prepared for the Journal of Economic Literature.

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Gravity with Gravitas: A Solution to the Border Puzzle*

James E. Anderson
Boston College and NBER Eric van Wincoop
Federal Reserve Bank of New York

Abstract

The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that was a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the “border puzzle” by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 40%, while reducing trade among other industrialized countries by about 30%. The spectacular McCallum headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy.
Revised version of NBER WP 8079; October, 2001. American Economic Review March 2003.
JEL: F10, F13

Keywords: Gravity model; border effects; trade liberalization.
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Borders, Trade and Welfare
James E. Anderson
Boston College and NBER

Eric van Wincoop
Federal Reserve Bank of New York
August, 2001
Published in the Brookings TradeForum 2001, Jan. 2002.

We find that international economic integration has large potential welfare effects, even in a static constant returns competitive world economy. Our method has elements of novelty. The effect of border barriers on trade flows is often inferred from gravity models. But their rather atheoretic structure precludes welfare analysis. Computable general equilibrium models are designed for tight welfare analysis, but lack econometric foundation and are often black boxes. Our method combines these approaches. We show that gravity models based on Anderson’s (1979) interpretation are full general equilibrium models of a special simple sort. In Anderson and van Wincoop (NBER WP 8079, 2001) we develop this structure to estimate and calculate the comparative static effects on trade flows of border barriers. In this paper we further deploy the model to explore the comparative statics of welfare with respect to borders, to currency unions and to NAFTA. Our NAFTA exercise does a much better job of replicating the actual trade flow changes than do the main computable general equilibrium models. An interesting implication of gravity models is that terms of trade changes are very important, even for ‘small’ countries such as Mexico. JEL classification: F0

Trade and Informal Institutions
James E. Anderson
November, 2001

This chapter surveys recent work on informal institutions and trade. Trade barriers other than tariffs, quotas and transport costs are apparently very large even between developed countries such as the US and Canada. Nations exhibit wide variation in their use of informal institutions in trade, suggesting complex relations between formal and informal institutions and the volume of trade. New institutional economic research on informal institutions and trade attempts to explain these phenomena. The institutions presumptively lower trade costs but impose costs of their own. Informal institutions presumptively substitute for but may complement formal institutions. Better institutions are not always in every trader’s interest. Handbook of International Trade: Economic and Legal Analysis of Laws and Institutions, E. Kwan Choi and James Hartigan, eds., Oxford: Basil Blackwell, 2005.

Traders, Cops and Robbers
James E. Anderson Oriana Bandiera
Journal of International Economics (2006), 70, 197-215.

We propose a simple model of trade outside the law preyed on by robbers and possibly protected by private cops. We establish the conditions for trade collapse, secure trade and insecure trade. Endogenous predation and enforcement can explain both puzzling failures of commonly observed state policies against illegal trade and puzzlingly large trade responses to liberalization in licit goods.

JEL Classification: F1, K42

An earlier version was presented to the Peace Science Society meetings, Atlanta, GA, Jan. 2002, at Brown University and at the LSE. We are indebted to Hong-bin Cai, Herschel Grossman, Evi Pappa and Steve Redding for helpful comments.

Does Trade Foster Contract Enforcement ?

James E. Anderson
August 2009

Economic Theory, 41(1), 105-131

Contract enforcement is probabilistic, but the probability depends on rules and processes. A stimulus to trade may induce traders to alter rules or processes to improve enforcement. In the model of this paper, such a positive knock-on effect occurs when the elasticity of supply of traders is sufficiently high. Negative knock-on is possible when the elasticity is low. Enforcement strategies in competing markets are complements (substitutes) if the supply of traders is sufficiently elastic (inelastic). The model provides a useful structure of endogenous enforcement that gives promise of explaining patterns of institutional development.

JEL Classification: F10, O17, K42.

Consistent Policy Aggregation

August 2009

International Economic Review, 50(3), 903-927

Much empirical work requires the aggregation of policies. This paper provides methods of policy aggregation that are consistent with two common objectives of empirical work. One is to preserve real income. The other is to preserve the real volume of activity in one or more parts of the economy. Trade policy aggregation is an acute example of the aggregation problem with thousands of highly dispersed trade barriers to be aggregated. An application to India shows that the standard atheoretic method of aggregation is seriously misleading compared to the consistent method.

Efficient Policy in a Predatory Economy:

To him who hath shall be given?

International Economic Review, 53, 157-74 (2012, February)

Trade subject to predation generates externalities within and between markets. Efficient tax, infrastructure and enforcement policies internalize the net externality — more trade implies fewer predators but drawn to trade at rising cost. The balance is positive (negative) as enforcement is weak (strong). Dual economies pair weak Periphery and strong Core enforcement markets. Efficient taxation and infrastructure promote the Core at the expense of the Periphery. Efficient enforcement promotes both. Tolerance (intolerance) of smuggling is efficient when Core enforcement is weak (strong). Tolerance of informal market Mafias that provide enforcement and infrastructure is efficient when Core enforcement is strong.

JEL Classification: F13, O17, K42.Keywords: dual economy, Core-Periphery, predation.

Revenue Tariff Reform

James E. Anderson J. Peter Neary Boston College and NBER Oxford University and CEPR

August 2006

What kind of tariff reform is likely to raise welfare in situations where tariff revenue is important? Uncertainty about specication and risk from imprecise parameter estimates of any particular specication reduce the credibility of simulation estimates. A promising alternative is to develop rules which are robust with respect to such uncertainty. We present sufficient conditions for a class of linear rules that guarantee welfare-improving tariffreform. The rules span cones of welfare-improving tariff reforms consisting of convex combinations of (i) trade-weighted-average-tariff-preserving dispersion cuts; and (ii) uniform tariff cuts that preserve domestic relative prices among tariff-ridden goods.

Welfare vs. Market Access

James E. Anderson J. Peter Neary Boston College and NBER Oxford University and CEPR

Journal of International Economics (2007), 71, 187-205.

We show that the effects of tariff changes on welfare and import volume are fully characterised by their effects on the generalised mean and variance of the tariff distribution, implying two “cones of liberalisation” in commodity price space. Because welfare is negatively but import volume positively related to the generalised variance, the cones do not intersect, which poses a policy dilemma. We present a new radial tariff reform rule, which implies new results for welfare- and market-access-improving tariff changes. Finally, we show that generalised and trade-weighted moments are mutually proportional when the trade expenditure function is CES.

JEL classification: F13, F15.

Economic Integration and the Civilizing Commerce Hypothesis

James E. Anderson

World Economy, (2008), 31, 141-57

Economic integration lowers one form of trade costs, tariffs, and stimulates changes in other trade costs. This paper offers a model in which integration may raise or lower the important trade cost associated with insecurity. The model can help to explain the varied experience with integration and it points to the usefulness of combining enforcement policy integration with trade policy integration.

Gravity, Productivity and the Pattern of Production and Trade

James E. Anderson
December, 2008

In a global economy the incidence of productivity in distribution and production is what matters for welfare and the pattern of production and trade. Incidence is derived from the gravity model. Sectoral and national differences in the incidence of TFP have sharp implications for the equilibrium pattern of production and trade in a specific factors model of production. Productivity shocks induce incidence shocks. Below (above) average incidence sectors produce less and have below (above) average skill premia. In contrast to the generalized Ricardian gravity model of Eaton and Kortum (2002), relative factor endowments play a role and import-competing production and wage premia in exporting are featured.

JEL Classification: F10, D24

The Specific Factors Continuum Model, with Implications for Globalization and Income Risk

James E. Anderson
Revised, July 2011

Journal of International Economics, 85, 174-85.

This paper embeds the specific factors model in the goods continuum approach of Dornbusch, Fischer and Samuelson (1977, 1980) and applies it to analyze the effect of globalization on income risk. Globalization amplifies sector specific income risk induced by idiosyncratic sectoral technology shocks, but tends to reduce income risk to both mobile and immobile factors induced by aggregate technology shocks that differ by country. Aggregate risk bears most heavily on the poorest specific factors.

JEL Classification: F10.
Keywords: goods continuum, extensive margin, factoral terms of trade.

The Changing Incidence of Geography

James E. Anderson: Boston College and NBER

Yoto V. Yotov: Drexel University

NBER Working Paper No. 14123, October, 2008

American Economic Review, (2010) 100, 2157-2186

Neglected properties of the structural gravity model offer a theoretically consistent method to calculate the incidence of estimated trade costs, 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. Aggregation biases gravity coefficients downward.

JEL Classification: F10, D24

Gravity, Scale and Exchange Rates

James E. Anderson:Boston College and NBER
Mykyta Vesselovsky: DFAIT, Canada
Yoto V. Yotov: Drexel University

Feb., 2013

We develop a structural gravity model that introduces scale effects in bilateral trade. Scale effects and incomplete passthrough give two channels through which exchange rates have real effects on trade patterns. Estimates from Canadian provincial trade data identify these effects through their interaction with the US border. We find statistically and quantitatively significant economies of scale in cross-border trade in almost 2/3 of sectors. Real effects of exchange rate changes on trade are found for 12 of 19 goods sectors and none of 9 services sectors.

JEL Classification: F13, F14, F16

Measurement of Protection

James E. Anderson
Palgrave Handbook of International Trade,
eds. Daniel Bernhofen, Udo Krieckemeier and David Greenaway (2011)

Protection is defined broadly as government action or inaction that discriminates in favor of home producers against foreign producers. Measurement of protection has two aspects: observing or inferring protection at the product level and appropriately aggregating the highly differentiated product level protection to manageable indexes of protection. Better practice in each aspect makes a very significant difference to the measured level of protection across product groups, countries and time.

JEL Classification: F13

Terrorism, Trade and Public Policy

James E. Anderson
Research in Economics (2015), 69(2), 180-190.

Are bigger markets safer? How should government policy respond to terrorist threats? Trade draws potential terrorists and economic predators into productive activity, but trade also draws terrorist attacks. Larger trade reduces the risk of terrorist attack when the wage elasticity is high, associated with low ratios of predators to prey and high wages; but it may increase the risk of terrorist attack when the wage elasticity is low, associated with high ratios of predators to prey. Anti-terrorist trade policy should always promote trade in simultaneous play. Government first mover advantage and inelastic wage may imply trade restriction. Tolerance of smuggling may improve security. Better enforcement should ordinarily be provided for bigger, inherently safer and higher wage markets.

JEL Classification: F13, O17, K42

Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods

James E. Anderson

Will Martin

Boston College and NBER

World Bank

Journal of Public Economic Theory (2011) 13, 289-309

The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive consistent measures of the marginal benefit of public goods and their marginal social cost inclusive of tax distortions using both compensated and uncompensated measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the desirability of tax financed public projects is independent of whether compensated or uncompensated methods are used. The main innovation shows that the costs or benefits of providing particular public goods should be adjusted by a simple, benefit multiplier not previously seen in the literature if an uncompensated MCF is used. JEL Code: D61, F11, H21, H43. Keywords: fiscal policy; second best; public goods; distortions; costs of taxation, marginal cost of funds; marginal excess burden, thought experiment.

The Incidence of Gravity

James E. Anderson
in The Gravity Model in International Trade: Advances and Applications, Steven Brakman and Peter Bergeijk, eds., Cambridge University Press, 2010

The high trade costs inferred from gravity are rarely used in the wide class of trade models. Two related problems explain this omission of a key explanatory variable. First, national seller and buyer responses to trade costs depend on their incidence rather than on the full cost. Second, the high dimensionality of bilateral trade costs requires aggregation for most practical uses in interpretation or standard trade modeling. This paper provides an intuitive description of a resolution to the aggregation and incidence problems. For each product, it is as if each province or country sells to a world market containing all buyers and buys from from that market containing all sellers, the incidence of aggregated bilateral trade costs being divided between sellers and buyers according to their location. Measures of incidence described here give intuitive insight into the consequences of geography, illustrated with results from Anderson and Yotov (2008). The integration of the incidence measures with standard general equilibrium structure opens the way to richer applied general equilibrium models and better empirical work on the origins of comparative advantage.

The Gravity Model

James E. Anderson

Annual Review of Economics, vol. 3 (2011), 133-160.

The gravity model in economics was until relatively recently an intellectual orphan, unconnected to the rich heritage of economic theory. This review is a tale of the orphan’s reunion with its family and the benefits that flowed from it. Gravity has long been one of the most successful empirical models in economics. Incorporating the theoretical foundations of gravity into recent practice has led to a richer and more accurate estimation and interpretation of the spatial relations described by gravity. Recent developments are reviewed here and suggestions are made for promising future research.

The Trade Corruption Trap: N-S Trade with Weak Institutions

James E. Anderson

Trade corruption traps are likely for countries with weak institutions (South). South labor earns equal returns in production and trade predation (extortion) in a Ricardian trade model. Taxing trade to build state capability reduces South welfare, one jaw of the trap. The other trap jaw is opposition by North. South weak enforcement normally harms North’s terms of trade. Strong South enforcement can eliminate predation if fixed cost/trade is sufficiently low. North tribute pays for corrupt South institutions — Mafias — that cost less than South welfarist states. Globalization can release the corruption trap, but productivity growth cannot.

Specialization: Pro- and Anti-Globalizing: 1990-2002

James E. Anderson

Yoto V. Yotov

Boston College and NBER

Drexel University

Specialization alters the incidence of trade costs to buyers and sellers, with pro-and anti-globalizing effects on 76 countries from 1990-2002. The structural gravity model yields measures of Constructed Home Bias and the Total Factor Productivity effect of changing incidence. A bit more than half the world’s countries experience declining constructed home bias and rising real output while the remainder of countries experience rising home bias and falling real output. The effects are big for the outliers. A novel test of the structural gravity model restrictions shows it comes very close in an economic sense.

Terms of Trade and Global Efficiency Effects of Free Trade Agreements, 1990-2002

Journal of International Economics, vol. 99 (2016), 279-98.

James E. Anderson: Boston College and NBER

Yoto V. Yotov: Drexel University

This paper infers the terms of trade effects of Free Trade Agreements (FTAs) with the structural gravity model. Using panel data methods to resolve two way causality between trade and FTAs, we estimate direct FTA effects on bilateral trade volume in 2 digit manufacturing goods from 1990-2002. We deduce the terms of trade changes implied by these volume effects for 40 countries plus a rest-of-the-world aggregate. Some gain over 10%, some lose less than 0.2%. Overall, using a novel measure of the change in iceberg melting, global efficiency rises 0.62%.

Short Run Gravity

James E. Anderson: Boston College and NBER

Yoto V. Yotov: Drexel University

Short run gravity is a geometric weighted average of long run gravity and bilateral capacity. The model features (i) joint trade costs endogenous to bilateral volumes, (ii) long run gravity as a limiting case of efficient investment in bilateral capacities, (iii) a structural ratio of short run to long run trade elasticities equal to a micro-founded buyers’ incidence elasticity, and (iv) tractable short and long run models of the extensive margin. Application to manufacturing trade of 52 countries during the globalization period 1988-2006 strongly supports the model. Results solve several time invariance and trade elasticity puzzles in the literature.

Intra-national Trade Costs: Measurement and Aggregation

Delina E. Agnosteva: Drexel University

James E. Anderson: Boston College and NBER

Yoto V. Yotov: Drexel University

The effects of intra-regional, inter-regional and international frictions on the trade flows of Canada’s provinces are disentangled by gravity model techniques. Unexplained Trade Barriers (UTBs) are the difference between inter-provincial trade barriers inferred from pair fixed effects and from bilateral distance and contiguity. The estimates reveal large intra-national trade costs and UTBs that vary significantly across Canada’s provinces. Decomposition of UTBs into relative border effects and a systematic residual UTB is based on a novel Cobb-Douglas aggregator of intra-provincial and pure inter-regional trade costs. Variation of both components across provinces is big.

Growth and Trade with Frictions: A Structural Estimation Framework

James E. Anderson: Boston College and NBER

Mario Larch: University of Bayreuth

Yoto V. Yotov: Drexel University

We build and estimate a structural dynamic general equilibrium model of growth and trade. Trade affects growth through changes in consumer and producer prices that in turn stimulate or impede physical capital accumulation. At the same time, growth affects trade, directly through changes in country size and indirectly through altering the incidence of trade costs. The model combines structural gravity with a capital accumulation specification of the transition between steady states. Theory translates into an intuitive econometric system that identifies the causal impact of trade on income and growth, and also delivers estimates of the key structural parameters in our model. Counterfactual experiments based on the estimated model give evidence for strong dynamic relationships between growth and trade, resulting in doubling of the static gains from trade liberalization.

Services Trade Estimates and Projections

James E. Anderson Boston College and NBER

Ingo Borcherdt: University of Sussex

Abhinay Mattoo: World Bank

Yoto V. Yotov: Drexel University

European Economic Review, , forthcoming.

A structural gravity model is used to estimate barriers to services trade across many sectors, countries and time. Since the disaggregated output data needed to flexibly infer border barriers are often missing for services, we derive a novel methodology for projecting output data. The empirical implementation sheds light on the role of institutions, geography, size and digital infrastructure as determinants of border barriers. We find that border barriers have generally fallen over time but there are differences across sectors and countries. Notably, border effects for the smallest economies have remained stable, giving rise to a divergent pattern across countries.

Estimating GE Trade Policy Effects Abstract

James E. Anderson: Boston College and NBER

Mario Larch: University of Bayreuth

Yoto V. Yotov: Drexel University

The World Economy, forthcoming.

We develop a simple estimation procedure for general equilibrium (GE) comparative static analysis of gravity models. Non-linear solvers of estimated models are replaced by (constrained) regressions. Applied economists can more readily generate results, with more intuition about the working of the model. We illustrate with a worldwide border removal application using the Poisson Pseudo-Maximum-Likelihood (PPML) estimator in STATA, iterated to deliver conditional and full general equilibrium responses. The method works by fully exploiting the combined properties of structural gravity and PPML. Our procedures readily extend to a wide class of general equilibrium production models.

How Much Does Geography Deflect Services Trade? Canadian Answers

James E. Anderson: Boston College and NBER

Catherine A. Milot: DFAIT

Yoto V. Yotov: Drexel University

International Economic Review, 2014, 55 (3), 791-818

We estimate geographic barriers to trade in nine service categories for Canada’s provinces from 1997 to 2007 with novel high quality bilateral provincial trade data. The border directly reduces average provincial trade with the US relative to interprovincial trade to 2.4% of its borderless level. Incorporating multilateral resistance reduces foreign trade relative to interprovincial to 0.1% of its frictionless potential. Geography reduces services trade some 7 times more than goods trade overall. Surprisingly, intra-provincial (local) trade in services and goods is equally deflected upward, implying that the border increases interprovincial trade much more in services than goods.

Professor James E. Anderson

William B. Neenan S.J. Millennium Professor of Economics

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