National and foreign trade elasticities: a spatial econometrics approach

The literature estimating trade elasticities at the regional level has overlooked spatial dependence in trade flows, raising concerns about the reliability of results. We address this problem by defining a spatial autoregressive gravity equation that captures spatial spillovers from trade between neighbouring regions. We estimate trade elasticities differentiating between goods imported from regions within the same country (national elasticities) and regions located in third countries (foreign elasticities). The elasticities are identified using a precise measure of iceberg trade costs including economic, engineering and logistic factors. National elasticities are consistently larger than foreign elasticities. We find sizable complementary and competition spatial effects.