DP8883 On the Measurement of Trade Costs: Direct vs. Indirect Approaches to Quantifying Standards and Technical Regulations

Author(s): Natalie Chen, Dennis Novy
Publication Date: March 2012
Keyword(s): Gravity, Measurement, Nontariff Measures, Product Standards, Technical Barriers to Trade, Technical Regulations, Trade Costs
JEL(s): F10, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8883

In this article, we review the literature on the measurement of trade costs in international trade with a special emphasis on nontariff measures and in particular on standards and technical regulations. We distinguish 'direct' from 'indirect' approaches. The direct approach collects observable data or proxy variables on trade cost components which are then typically used as regressors in a gravity equation of trade. Instead, the indirect approach infers the extent of trade impediments from trade flows. It compares actual trade flows to the trade flows predicted by a hypothetical frictionless benchmark scenario based on a micro-founded trade model, attributing the deviation of actual from predicted trade flows to trade frictions. We argue that economists and policymakers can gain useful insights from both approaches.