Vertical gravity

- We deploy a network trade indicator as dependent indicator in a gravity setting.
- Preferential trade agreements are associated with higher degree of processing trade.
- Network trade is premised on lower tariffs relative to less integrated countries.

Vertical gravity deploys as the dependent variable a newly developed indicator of production sharing and processing trade among country pairs. The intensity of this relationship among 73 countries between 1998 and 2005 is assessed in a standard fixed-effects panel setting, with particular focus on trade policy. We find that joint adherence to a preferential trade agreement is associated with a considerably higher degree of processing trade among country pairs, and that such trade is also premised on a lower tariff environment compared to countries that integrate less strongly.