GEP 15/13: Trade Costs and the Composition of Developing Countries' Exports

Summary

This study investigates how trade costs fashion the export composition of the developing countries. We exploit the variation in trade costs across countries and the differences in trade cost sensitivity across industries in the identification strategy. The paper finds that high trade cost countries gain a relatively lower export share overall compared to lower trade cost countries, and importantly that the share of exports declines more for more trade cost sensitive exports.

Abstract

This study investigates how trade costs fashion the export composition of the developing countries. It uses the World Bank’s bilateral trade cost dataset and incorporates trade flows of a large set of developing countries. We exploit the variation in trade costs across countries and the differences in trade cost sensitivity across industries in the identification strategy. Moreover, we employ a set of cost shifters as instruments to overcome the endogeneity of trade costs. The paper finds that high trade cost countries gain a relatively lower export share overall compared to lower trade cost countries, and importantly that the share of exports declines more for more trade cost sensitive exports. The policy implications are clear: reducing trade costs would both increase the manufactured exports of developing economies and alter the composition of these exports.

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Authors

Salamat Ali and Chris Milner

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