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Ad Valorem Variable Trade Cost of China

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Document pages: 29 pages

Abstract: By combining datasets from various resources, this paper establishes an ad valorem freight cost measure for China’s exports from 2000 to 2006. We find that on average, the freight cost is about 10 of the FOB value per shipment. Comparing the freight cost with the tariff cost, the average freight cost is larger than the average tariff cost for most products. The variation of freight cost is smaller than the variation of tariff cost. Moreover, the correlation between these two trade costs is small. By combining the freight cost with the tariff cost, we establish the ad valorem variable trade cost measure for China’s exports. Establishing this measure is useful for understanding the fixed or variable nature of the trade cost. We provide two applications of the constructed variable trade cost. On the one hand, we decompose the impact variable trade cost into extensive and intensive margins. On the other hand, the direct measure of variable trade cost can help us evaluate the trade models including distinct implications for fixed and variable costs such as Chaney (2008).

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