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Apples and Oranges: Iceberg Trade Costs

Lashkaripour, Ahmad [Pennsylvania State University, College of the Liberal Arts - Department of Economics] Apples and Oranges: Iceberg Trade Costs (May 23, 2014). Available for download at SSRN: http://ssrn.com/abstract=2470765

“The iceberg trade cost assumption is embodied in all major models of International trade. However, empirical evidence to support this rather conventional assumption is lacking. This paper provides such evidence by developing a simple model of international transportation. The model links shipping cost to the f.o.b. price of the shipment, and demonstrates that shipping cost per count is more iceberg-like than shipping cost per kilogram. To address this finding, I calculate price and shipping cost on a per-count basis for goods that report count as the primary unit of measurement in the US import data (e.g. TVs, cars), whereas existing studies have generally looked at shipping cost per kilogram. I then estimate the dependence of shipping costs on f.o.b. price. Estimation results strongly support the iceberg specification. Specifically, for every 1% increase in f.o.b. price (per count), the shipping cost (per count) increases by 0.91%. The paper also estimates the “Washington apples” effect: the dependance of export f.o.b prices on shipping costs. The effect is estimated to be stronger in industries where shipping costs are more iceberg-like. This suggests that, contrary to common belief, per-unit trade costs cannot be the only driving force behind the “Washington apples” effect. The paper then proceeds to find strong empirical support for an alternative explanation.”

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