policymakers demonstrate

254 Cecília Hornok and Miklós Koren
Table 6.1 Percentage equivalents
of trade costs. Source: Anderson
and Van Wincoop (2004), p. 692
Cost component
Transportation 21
Policy barrier 8
Language barrier 7
Currency barrier 14
Information barrier 6
Security barrier 3
Total border costs 44
Distribution 55
Percentage
cent. 2 Estimates of the dispersion of log prices across locations vary between
20 and 40 per cent (Anderson and Van Wincoop, 2004).
The third method infers trade costs from the volume of trade relative to a frictionless
benchmark. This method has been immensely popular, relying mostly
on the gravity equation as the benchmark trade model. 3
Theories of the past decades have incorporated these frictions mostly as taxes
or wedges on import prices. These are often modelled as an ad-valorem cost,
following Samuelson (1954). Recently, other forms of trade costs have also
been modelled and estimated: fixed entry costs of operating in a market, time
costs associated with shipping, fixed costs accruing per shipment, and additive
rather than proportional shipping charges. We will briefly discuss estimates of
each.
Fixed Entry Costs
Entry costs are useful in explaining why many firms do not export. If a firm is
too small, it would not find it profitable to bear the fixed costs associated with
distribution in a given market. Das et al. (2007) estimate a structural model of
exporters with sunk market entry costs, and find that these costs are substantial,
of the order of $400,000. The primary fact identifying such large sunk costs
is that many large firms seem to forego large profit opportunities in foreign
markets and do not enter.
Helpman et al. (2008a) estimate a model of heterogeneous firms with fixed
costs of market entry from macro data: the volume of trade between pairs of
countries. Their estimation is based on the idea that only fixed costs can generate
zero trade flows in the data, variable costs cannot. They show how fixed
costs vary across countries, and that FTAs, a common language, and a common
religion predominantly reduce the fixed costs of trade, not the variable cost.