Academic journal article Economic Inquiry

Trade Costs and Trade Composition

Academic journal article Economic Inquiry

Trade Costs and Trade Composition

Article excerpt

I. INTRODUCTION

Trade costs, especially if defined to include less easily identified and measurable information-related costs of transacting internationally as well as costs of transportation, have been shown by a number of recent studies to be large (Anderson and van Wincoop 2004; Hummels 2007). The gravity model literature has identified many factors, ranging from economic 1o cultural and institutional elements that account for the high cost of international trade. Although trade costs are currently of great interest (Anderson and van Wincoop 2004; Hummels 2007; Jacks, Meissner, and Novy 2011; Obstfeld and Rogoff 2000), studies have by and large been confined to explorations either of their magnitude and/or subsequent impact on trade volumes. For example, using a comprehensive dataset on international trade volumes across the years 1870-2000, Jacks, Meissner, and Novy (2011) show changes in countries' trade costs underlay both the booms and busts in international trade volumes throughout recent history. (l)

Despite such insights, little is known about the consequences of trade costs beyond their impact upon the volume of trade. Indeed there are reasons to believe that trade costs may also affect the composition of trade since recent evidence shows institutional quality, a component of national trade costs, to shape comparative advantage. Institutions represent a sub-set of the influences on trade costs which affect transaction and production costs, raising information and procurement costs in institutionally inferior environments. For example, Levchenko (2007) shows institutional quality to be a significant determinant of the import shares of 116 countries into the United States in 1997, with countries endowed with better institutions capturing a larger share of imports in more institutionally intense industries. Similarly, Nunn (2007) finds empirical evidence that the ability to enforce contracts (a component of legal institutions contained within the broader definition of country-specific institutions) affects a country's comparative advantage in the production of goods requiring relationship-specific investments.

In this paper, we consider how trade costs affect the composition of international trade and therefore act as a source of comparative advantage or disadvantage. We therefore extend the analysis of specific types of trade costs by incorporating the entire universe of institutions, infrastructure characteristics, and endowments of countries which induce differences in overall national trade costs. To answer this question, we apply and adapt a recently proposed micro-founded method for measuring international trade costs (Novy 2008) to a large sample of developed and transition countries for the period 1990-2004. This provides comprehensive information which is interesting in its own right, relating to the evolution of trade costs over time and the differences across country types and regions. The primary aim of the study is, however, to empirically test whether differences in aggregate, or national trade costs, systematically affect the commodity composition of countries' trade, and whether by implication overall trade costs may be viewed as an endowment and source of comparative advantage differences. (2) We explore econometrically whether industry export shares (for 15 two-digit manufacturing industries) in 37 countries over the period 1990-2004 tend to be larger (smaller) in trade cost sensitive industries in countries "endowed" with relatively low (high) trade costs, having controlled for other influences on the composition of trade. The core hypothesis in this paper is that countries with low trade costs (or good trade cost endowments) specialize in exporting goods that have high trade cost intensity. (3) For example, a good that requires a high share of imported intermediate inputs for production will be relatively more expensive to produce in a country with high trade costs since these affect the cost of the imported intermediates to a greater extent compared to a country with low trade costs. …

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