Defining, Measuring, Explaining and Reducing the Cost of International Trade
3. Explanations Trade costs vary considerably across different bilateral trade flows. Some of the variation is due to distance and other geographical constraints (landlockedness, ice-free natural harbours etc.), and some reflects commodity composition of trade. However, port infrastructure, corrupt customs officials and excessive bureaucracy are policy-related, while other determinants of trade costs may be indirectly policy-related (e.g. lack of competition among shippers may be due to low volumes or to nonimplementation of anti-monopoly policy). Country variations related to institutions such as poor law enforcement increase trade risks and hence affect insurance rates and inventory costs. This chapter aims to get inside the black box of measured trade costs, to understand the determinants of the level of trade costs and which of these determinants are policyrelated (and can be reduced by trade facilitation measures) and which are exogenously determined. Several studies have shown that trade costs vary considerably among country pairs and are not simply related to distance. Nuno Limao and Anthony Venables (2001) found a large variation in the cost of shipping a container from Baltimore to different countries, some of which is physically determined (landlocked countries have higher transport costs) but much of it is not. Ximena Clark, David Dollar and Alejandro Micco (2004) came up with similar results for the costs of shipping a container from Latin American countries to the USA, and emphasized the quality of institutions (corruption, logistical efficiency and so forth) as the key determinant of port efficiency. A similar conclusion informs research on bilateral...
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