How serious is the omission of bilateral tariff rates in gravity?

This paper presents a constructed dataset of worldwide bilateral tariff rates to explore the seriousness of omitting bilateral tariff rates from gravity equations. Results indicate, first, that omitting bilateral tariff rates presents no serious issue related to the omitted variable bias because coefficients for the usual gravity variables remain unchanged before and after their inclusion. Second, the widely used dummy variable for regional trade agreements is not a statistical substitute for tariff rates because the coefficient for bilateral tariff rates remains significant even if it is included. Similarly, time-invariant pair fixed effects alongside time-variant importer and exporter fixed effects do not substitute statistically for omitted tariff rates.

► We construct a worldwide dataset of bilateral tariff rates. ► The seriousness of their omission in gravity equations is examined. ► The omission seems to present no serious issues regarding omitted-variable bias. ► An FTA dummy does not substitute for tariff rates in the estimation.