Gravity in Networks: Lessons from the U.S. - China Trade War, with Burcu Eke Rubini
Abstract
We propose an alternative way to estimate Gravity equations that drops the assumption that only importer and exporter characteristics determine bilateral trade flows. Studies of the U.S-China trade war are uncovering large effects on other countries, challenging the irrelevance of third countries. We model trade within a network, where any bilateral flow is dependent on all others. We find that while the point estimates are close to those relying on Panel Data techniques, the error term is very different. Using the error term to assess the impact of the trade war produces very different results under both methods.
[paper]
We propose an alternative way to estimate Gravity equations that drops the assumption that only importer and exporter characteristics determine bilateral trade flows. Studies of the U.S-China trade war are uncovering large effects on other countries, challenging the irrelevance of third countries. We model trade within a network, where any bilateral flow is dependent on all others. We find that while the point estimates are close to those relying on Panel Data techniques, the error term is very different. Using the error term to assess the impact of the trade war produces very different results under both methods.
[paper]