Effects of Tariffs and Sanctions on Bilateral Trade Flows: Gravity Model Applications
Economists apply the gravity model widely to study trade. This model predicts bilateral trade flows based on economic sizes and distance. Researchers add policy variables like tariffs and sanctions to measure their impact.
How the Gravity Model Works The basic gravity equation links trade positively to GDP of both countries. However, it links trade negatively to distance and trade barriers. Moreover, researchers include dummy variables for tariffs and sanctions. As a result, they estimate precise effects on trade volumes.
Impact of Tariffs Tariffs raise trade costs directly. Studies show that higher tariffs reduce bilateral imports significantly. For instance, a 1% increase in tariffs often lowers trade by 1.5% to 2.5%. In addition, the US-China tariff hikes demonstrated strong diversion effects. Trade shifted from China to other suppliers.
Furthermore, pass-through to import prices remains high. Importers bear most of the cost in the short run. Therefore, consumers face higher prices while trade volumes drop.
Impact of Sanctions Sanctions create even stronger barriers. They often reduce bilateral trade by 25% to 90%, depending on severity. Extensive sanctions cause the largest declines. Moreover, effects appear quickly and persist over time.
Researchers also observe network effects. Sanctions disrupt trade not only with the target country but also with third countries. In some cases, senders experience “back-to-sender” losses in exports.
Key Empirical Findings Many studies use structural gravity models with fixed effects. These models control for multilateral resistance. Consequently, estimates become more reliable. Recent analyses of mineral commodities and high-tech goods confirm large negative impacts. However, some evasion occurs in the short term through third countries.
Broader Implications Tariffs and sanctions fragment global value chains. They raise overall trade costs and reduce efficiency. As a result, countries seek new partners and diversify supply sources. Policymakers must weigh these costs against political goals.
In summary, gravity model applications reveal consistent negative effects of tariffs and sanctions on bilateral trade. These tools offer valuable insights for future policy design. Ongoing research continues to refine estimates with newer data.