A Two‐Step Procedure for Generating Domestic and Asymmetric Trade Costs When Data Are Scarce

ABSTRACT The practice of domestic trade cost measurement faces several challenges related to data quality, methodology and theory; but the major issue is that of data scarcity. Due to these facts, both domestic and asymmetric trade costs have been ignored despite being a feature of modern trade models. This paper offers a two‐step procedure to tackle these limitations and fill the gaps between theory and practice. The results of this work show that domestic trade costs proportionally grow with economic size, and that international trade costs are highly asymmetric especially when trading pair sizes differ. A key strength of the method is its applicability in data‐constrained contexts, as it enables the recovery of domestic and international trade costs using internal trade data from a single benchmark country. Rather than introducing a novel use of trade flows, the method's contribution lies in its structured two‐step calibration approach, which enables asymmetric and domestic trade cost recovery without relying on gravity estimation or requiring internal trade datasets from all countries.