Latent Exports: Almost Ideal Gravity and Zeros

Abstract Export promotion at the extensive margin is a key concern of governments. We develop measures of how far firms in origin sectors are from break-even entry in destination markets. The measure is based on Almost Ideal gravity featuring heterogeneous price and income elasticities. Tobit estimation of 2006 trade flows for 75 countries and 25 sectors generates Latent Trade Bias (LTB) – the latent (projected) trade share of non-partners minus the as-if-frictionless trade share. Explained LTB variance decomposition shows that variable trade costs (distance and tariffs together) account for zero flows more than do fixed trade costs (entry cost) and income variation.