Rev World Econ (2010) 146:709730

DOI 10.1007/s10290-010-0072-8
ORIGINAL PAPER

Why do trade costs vary?

Richard Pomfret Patricia Sourdin

Published online: 14 September 2010

 Kiel Institute 2010

Abstract As tariffs have fallen, it is apparent that trade costs are a significant
obstacle to international trade and that they vary from country to country. The gap
between the cif and fob value of a trade flow is a useful measure of aggregate trade
costs, but only if the measure is based on a consistent volume of trade; mirror
statistics are unsuitable. Using high quality Australian import data disaggregated at
the HS 6-digit level, we find large country-by-country variations in trade costs.
Distance, weight and size account for part of the variation in trade costs. Indicators
of institutional quality pick up some of the variation in trade costs, but the relationship is not uniform across mode of transport and commodities; exporting
countries institutional quality is more strongly related to trade costs for air freight
than sea freight, and the relationship is commodity-specific and strongest for
manufactured goods. Country-specific characteristics influencing trade costs provide a link between institutions and economic development.
Keywords

Trade costs  Trade facilitation

JEL Classification

F10  F13  O24

R. Pomfret (&)  P. Sourdin

School of Economics, University of Adelaide, Adelaide, SA 5005, Australia
e-mail: richard.pomfret@adelaide.edu.au
P. Sourdin
The Johns Hopkins University Bologna Center,
via Belmeloro 11, 40126 Bologna, Italy
e-mail: patricia.sourdin@gmail.com

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1 Introduction
Transport and related trade costs are often viewed as technologically determined,
but in practice they vary considerably across different bilateral trade flows. Some of
the variation is due to distance and other geographical constraints and some reflects
commodity composition of trade. However, port infrastructure, corrupt customs
officials and other trade costs are policy-related trade barriers, 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 non-implementation
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 paper aims to get inside the black box of measured trade costs, to
understand which are policy-related (and can be reduced by trade facilitation
measures) and which are exogenously determined. After discussing how to measure
trade costs, the paper addresses the question: why do trade costs vary?
The missing trade mystery and literature on the border effect suggest significant
trade costs, but we have little direct information on the size of trade costs and only
limited evidence on their determinants.1 Anderson and van Wincoop (2004)
highlighted the potential significance of trade costs, with estimates that in the highincome countries trade costs amount on average to a 170% ad valorem barrier to
trade. However, they use a very broad definition of trade costs, i.e. all costs of
getting a good to the final user apart from the marginal cost of producing the good
itself, and the estimates relied on indicative case studies or indirect evidence from
gravity models. Direct measures of trade costs, such as the World Customs
Organizations Time Release Studies are more informative, but too narrow and have
been done for too few countries.
The gap between free-on-board (fob) values when a good reaches the port of exit
in the exporting country and import values which include cost, insurance and freight
(cif) provides an economically meaningful and operational measure of international
trade costs.2 The cif-fob gap is an economically meaningful measure of the wedge
between the cost of producing and moving a good to the exporters port and the
price paid by the importer upon the goods arrival in the destination country. The
measure has, however, been difficult to implement because mirror techniques,
matching fob values reported by exporting countries to cif values reported by
importing countries, are unsatisfactory due to large measurement errors (Hummels
and Lugovskyy 2006). Nevertheless, some national statistical offices now collect
consistent data on fob and cif values at disaggregated levels, making the cif-fob
1

Despite large reductions in tariffs and other barriers to trade since 1947, levels of international trade are
less than would be expected from relative factor endowments (Trefler 1995). Even across frontiers as
open as that between the USA and Canada, trade between a state and a province is less than between two
US states or two Canadian provinces ceteris paribus.

Measurement is important for policy as well as for testing theories. Trade facilitation is included in the
Doha Development Round of multilateral trade negotiations, and has featured increasingly prominently in
regional trade agreements (Pomfret and Sourdin 2009). In 2001 AsiaPacific Economic Cooperation
(APEC) members adopted a goal of reducing trade costs by five percent over 5 years, and the
commitment was repeated in 2006, although without an agreed measure of trade costs it is difficult to
monitor progress towards such a goal.

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711

price gap operationally useful. In this paper we utilize such data for Australian
imports since 1990 at the 6-digit HS level to measure cross-country differences in
trade costs.
Of the few countries collecting consistent cif and fob data, Australia is
particularly well-suited to this exercise.3 Australia is an island; no imports arrive by
land and there is no need to allow for geographical contiguity.4 Because Australia is
a reasonably large trading nationthe worlds 14th largest importer in 2006 (WTO
2007, Table 1.9)there are relatively few empty cells at the 6-digit level of
aggregation. Apart from trade with New Zealand and other Pacific islands, no
significant preferential trading arrangements influence Australias trade. Hence,
Australia provides a good natural experiment of the trade costs associated with each
of the 228 trade partners identified in the Australian Bureau of Statistics data.
Several studies show that trade costs vary considerably among country pairs and
are not simply related to distance. Limao and 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 due to differences in infrastructure. Clark et al. (2004) came
up with similar results for the costs of shipping a container from Latin American
countries to the USA, and emphasised the quality of institutions (corruption,
logistical efficiency, and so forth) as the key determinant of port efficiency. A
similar conclusion informs research on bilateral trade flows; in the micro-founded
gravity model of Anderson and van Wincoop (2003), country-specific trade
resistance terms can be accounted for by exporting-country fixed effects, although
the source of the country fixed effects is indeterminate. Recent research has moved
beyond aggregated gravity models to analyse with data disaggregated by
commodity the interaction between variables such as weight/value and timeliness
requirements and the choice of mode of transport and their joint impact with
distance on bilateral trade patterns.5 The present paper complements this work by
using disaggregated data to analyse the variability of trade costs across countries.
The data allow us to decompose, at least partially, country and commodity
characteristics which impact on trade costs. A countrys geographical characteristics
such as distance from major market are immutable and distinct from institutional
and other characteristics which are amenable to policy change. In general, a country
selling bulky goods will have higher transport costs than a country selling high
value/bulk goods.6 Once geographical characteristics and weight have been
controlled for, we can analyse variations in trade costs using measures of
3

Similar data sets for the USA, New Zealand, and some South American countries are described in
Hummels (2007, 152153) and in Korinek and Sourdin (2009).

Hummels (2007), reviewing the literature on trade costs, emphasises the difficulty of measuring costs of
land transport (the mode used by over a fifth of international trade) and how they interact with costs of sea
and air transport, which may be substitutes to varying degrees. For Australia the only substitution option
is between sea and air transport.

Harrigan and Deng (2008), Berthelon and Freund (2008), Egger (2008), Moreira et al. (2008) and
Hummels and Schaur (2009) contribute to this literature and provide references to other work.

Although bulk accounts for some commodity characteristics, we are unable to take account of other
characteristics such as perishability or fashion which influence the choice of air or sea transport.

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R. Pomfret, P. Sourdin

institutional quality and other explanatory variables. The determinants of trade costs
are estimated separately for both sea and air freight. However, the choice of
transport mode may be endogenous, e.g. the preference for air is likely to be
increasing with distance and air freight may be a way of avoiding inefficient internal
transport and ports in the exporting country.7
Anderson and Marcouiller (2002) argued that corruption reduces the volume of
trade because insecurity increases trade costs. The higher price of trade affects the
relative attractiveness of producing traded and non-traded goods and services,
causes substitution away from traded goods, and by reducing the gains from trade
has an indirect negative impact on trade through the income effect. Thus, more
corrupt countries trade less, have distorted trade patterns and have lower incomes.
Despite their emphasis on the price of insecurity, the evidence presented by
Anderson and Marcouiller is based on estimating a gravity model, i.e. analysis of
quantities traded. Levchenko (2007) also shows that institutional differences,
measured by a composite indicator of protection of property rights and strength of
the rule of law, are a significant determinant of trade flows; countries with good
institutions trade more, and this is more apparent in institution-dependent sectors.8
Our data permit testing for a direct link between corruption and trade costs and we
can analyse the relationship between institutions and trade at a finer aggregation
level than Anderson and Marcouiller (2002) or Levchenko (2007).
A connection between institutions and trade costs will impact on levels of trade
and economic development. Markusen and Venables (2007) relate the degree of
specialization in an economy to the interaction of comparative advantage and trade
costs; high trade costs inhibit a country from taking advantage of potential gains
from specialization and trade in order to promote economic development. In a
global model of the pattern of bilateral trade, Waugh (2009) finds that the calibrated
trade costs are systematically asymmetric, with poor countries facing higher costs to
export their goods relative to rich countries; removing the asymmetry in trade costs,
cross-country income differences decline by up to 34 percent. Importers may be
concerned about time rather than financial costs; Evans and Harrigan (2005), using
proprietary data from a major US department store chain, find that the retailers
demand for timely deliveries influenced its choice of source countries, and
Hummels (2001) has estimated that the cost of a days delay in transport adds on
average 0.8% to the value of a manufactured good. This is related to a growing
literature on global supply chains, the importance of trade in intermediate goods,
and the costs of having to keep larger inventories if trade is slow or unreliable.
Countries with high trade costs are likely to be excluded from international supply
chains and hence miss out on one of the most dynamic areas of growth in trade and
incomes.
7

The time advantage of air is more pronounced over longer distances. To the extent that transport costs
are related to weight rather than value, they are closer to a specific than an ad valorem charge, and hence
trade costs are declining with respect to unit value; if the charge is by ton-kilometer, then for a given
value the preference for air is likely to be increasing with distance. Hummels and Schaur (2009) argue
that, when demand is volatile, air may be preferred because it permits a faster response to price changes.

A sectors institutional dependence is measured by complexity, proxied by the Herfindahl index of

intermediate input use.

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Why do trade costs vary?

Fig. 1 Average trade costs,
Australian Imports, 19902007.
Note: the means are importweighted (ad valorem trade
costs = Rcif/Rfob - 1) and
hence biased downwards
because goods or trading
partners with higher trade costs
will be underrepresented

713
0.090
0.080
0.070
0.060
0.050
0.040
0.030

sea
air
all imports

0.020
0.010
0.000
1990

1995

2000

2005

The next section describes the data and provides summary statistics of trade
costs. Section 3 reports baseline results showing that distance and bulk are
significant determinants of trade costs, but that their impact varies across mode of
transport and a substantial part of cross-country variation remains unexplained.
Section 4 analyses the relations between institutions and trade costs, identifying
transport-mode and commodity-specific patterns. The final section draws
conclusions.

2 Data
The Australian Bureau of Statistics data provide annual fob and cif values of
Australias imports for 19902007 at the HS 6-digit level of aggregation, as well as
reporting weight for about a quarter of the observations and separating out sea, air
and parcel post. After deleting parcel post, re-imports into Australia, country
categories such as Unidentified, ships supplies and Australian forces overseas,
and the miscellaneous category (HS 99), we had a dataset of 2,097,969
observations, or between 103 and 133 thousand observations per year.9
Overall, average trade costs associated with imports into Australia fell
continuously and substantially from 8.0% in 1990 to 4.9% in 2007, despite the
huge increase in the price of oil after 1998 (Fig. 1).10 Average trade costs are higher
9

With more than 5,000 HS 6-digit categories and over 200 trade partners, there are over a million
potential trade flows, but the data set has just over 100,000 observations per year. Potential biases from
the truncated sample could be addressed by a two-step sample selection model, but there is unlikely to be
a consistent explanation of empty cells, e.g. some reflect high trade costs precluding goods without a
pronounced comparative advantage whereas others are an artefact of size (one tiny Pacific island has four
observations and over 5,000 empty cells).

10
There is a slight increase between 1999 and 2000 and a more substantial increase between 2003 and
2004, both of which may be related to oil price increases, but in every other year the average trade cost is
constant or falling from the previous year. The decline in trade costs may be understated due to a
composition effect; if air costs fell faster than sea costs, the lightest or most time-sensitive goods formerly
shipped by sea may now be airfreighted, increasing average transport costs by both modes while
providing more cost-effective transport for all.

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R. Pomfret, P. Sourdin

than Australias applied tariff rates, which were 4.5% in 2002 and 3.8% in 2006.11
The pattern of falling costs applies to both sea and air transport. Trade costs relative
to value are lower for air freight than for sea transport, because higher value goods
are sent by air.
Globally, air shipping has increased rapidly over the last forty to fifty years.12
Hummels (2007) argues that this is due to a substantial decline in relative costs of
air shipping (air freight costs fell substantially in real terms while sea freight costs
had no clear trend) and also to a continuous decline in the bulk/value ratio of world
trade, associated with an increasing share of manufactures. Bulk commodities (e.g.
oil, iron ore, coal and grains), which are shipped almost totally by sea, constitute the
majority of world trade by weight, but are a smaller and shrinking share of
international trade by value (Hummels 2007, p. 132). Over the period covered by
our data this pattern is visible in the 1990s, when the share of imports arriving by air
increased from 26.9% in 1990 to 31.2% in 2000, but the share then declined and by
2007 was almost the same (27.0%) as in 1990. At the same time, the gap between ad
valorem trade costs by air and by sea increased, from sea being less than 30% higher
in 1990 to being almost 50% higher in 2007 (Fig. 1). This suggests that the shift to
air became more attractive for a greater range of higher value goods, while the
overall share of sea was maintained by the increasing value of bulk goods as oil and
other primary product prices surged in the decade after 1998.
Table 1 illustrates the distribution of trade costs by country in 2007. Although
there is a wide range, over half of the 211 trading partners exporting to Australia in
2007 had average trade costs between 3.5 and 7.9%. The outliers with trade costs
less than 2% or over 20% of fob value tend to be minor trading partners. The ten
largest sources of imports all have trade costs between 2.9 and 6.3%, but there is no
clear pattern of these countries average trade costs being determined by distance or
level of development. For the fifty-one African countries the average ad valorem
trade costs in 2007 were 7.3%, which suggests a negative relationship between trade
costs and economic development.13
The simple correlation between ad valorem trade costs and di,A (the distance
between the ith county and Australia) is -0.001.14 The negative sign disappears if a
simple regression is run in logarithms or with a squared distance term, but the
coefficient is always less than 0.1. Even with the most favourable non-linear
11
Average tariff rates as reported on the WTO website www.wto.org. The Australian tariff profile on the
same website reports a weighted average applied tariff in 2005 of 6.5 and 5.3% in 2008.
12
Between 1965 and 2004 the share of air in the total value of US imports increased from 8 to 32% and
in US exports from 12 to 53%. Worldwide average revenue per ton-kilometre air-freighted (in constant
2000 US dollars) fell from $3.87 in 1955 to under $0.30 in 2004; the biggest decline was in 19551972
before rising oil prices led to a flattening of the decline during the 1970s, but since the late 1980s air
transport costs by this measure more than halved (Hummels 2007).
13
The 51 exclude the island economies of Mauritius, Reunion and Seychelles. Four African countries
sent no exports to Australia in 2007. Excluding the two extreme observations of zero for Libya and 51%
for Morocco the African average was just over 6.5%, which is still about a third bigger than the average
for the rest of the world.
14
Distances are taken from the Centre dEtudes Prospectives et dInformations Internationales database,
available at www.cepii.fr/anglaisgraph/bdd/distances.htm. The correlations are similar irrespective of
which of the four distance measures are used.

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Table 1 Average trade costs by country 2007

Ad valorem trade
costs

Number of
observations

Less than 2 percent

13

23.9

31

45.9

57

67.9

43

89.9

23

1011.9

17

1213.9

1415.9

1617.9

1819.9

20.0 percent or more

Total

211

Ten largest import sources

Ten lowest trade costs

Ten highest trade costs

USA

0.050

Puerto Rico

0.010

El Salvador

China

0.063

Swaziland

0.011

Bhutan

0.205

Japan

0.048

Chad

0.012

Pitcairn Island

0.269

0.198

Germany

0.040

Papua New Guinea

0.013

Tonga

0.285

Singapore

0.042

Grenada

0.014

Norfolk Island

0.456

UK

0.029

Anguilla

0.015

Guyana

0.492

Malaysia

0.040

Ireland

0.016

Morocco

0.513

New Zealand

0.049

Laos

0.016

Christmas Island

0.547

Korea

0.045

Gibraltar

0.017

Nauru

0.640

France

0.035

St. Helena

0.017

Yemen

0.648

specification, a doubling of distance increases ad valorem trade costs by less than a

tenth.15 For the half million observations identified by consistent measures of
weight, the correlation between weight and costs is 0.0013.16 In sum, ad valorem
trade costs are positively related to distance and to weight, but in the Australian data
both of these are weak correlations implying that the variation in ad valorem trade
costs is principally determined by other variables.
Figure 2 illustrates the pattern of ad valorem trade costs over time, using
exporter-commodity fixed effects to control for distance and commodity characteristics. The pattern for goods arriving by sea is similar to that with the raw data in
Fig. 1. The adjusted costs, however, reveal the higher costs of air transport once
weight/value is taken into account. The adjusted values indicate a larger percentage
15

Berthelon and Freund (2008) conclude from their disaggregated gravity model analysis that the
importance of distance over time is related to the substitutability of goods, i.e. distance is more relevant to
the cost of trading differentiated manufactured goods than to trade in homogeneous primary products.
16
The quantity data include measures by number, square meters and many commodity-specific units. For
556,468 observations they were in metric tons, kilograms, grams or metric carats.

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R. Pomfret, P. Sourdin

Fig. 2 Ad valorem trade costs,

adjusted for exportercommodity effects, 19902007.
Note: vertical axis indicates ad
valorem trade costs, using
exporter-commodity fixed
effects to control for distance
and commodity characteristics

decline in maritime trade costs between 1990 and 2007 than shown by the
unadjusted data. The picture for air transport is of a dramatic decline in adjusted
trade costs during the 1990s, but no clear trend since 1999.
A number of other variables have been identified in the literature as influencing
transport costs. Transport costs are subject to scale economies and may depend upon
the potential size of the bilateral trade. Unbalanced trade can influence trade costs, if
the ship or plane has to travel empty in one direction.17 Both scale economies and
unbalanced trade are likely to be more significant for sea than for air freight. Trade
costs may also be influenced by how many shipping lines or airlines serve the
bilateral route and by how much monopoly power they have.18
Trade costs are also influenced by institutional and policy factors. In this paper
the institutions in the importing country, Australia, are constant for all bilateral trade
flows, and differences will be observed dependent upon the exporting countrys
institutions. Limao and Venables (2001) identified onshore infrastructure as an
important variable.19 Clark et al. (2004) focused on port efficiency.20 Port costs may
be high for geographical reasons (e.g. lack of deep water harbours) or low for scale
17
Wilmsmeier et al. (2006) find that unbalanced trade (measured by the ratio of imports to exports in a
countrys bilateral trade) is a significant determinant of freight costs in Latin America and they argue that
their estimated coefficients are too low because the imbalances need to be applied to broader trade
routes such as South Americas Pacific coast and North America. This is less relevant to Australia,
where the only major non-Australian port for an empty ship to pick up cargo in the Southwest Pacific is
Auckland. However, a potential complication from using Australia as the yardstick for measuring
countries trade costs is the importance of bulk commodities in Australian exports. Although the trade
costs of Australian exports are not the subject of this paper, there may be an indirect non-random impact
on Australian import costs from the empty space in returning bulk carriers.
18
Hummels et al. (2009) show that one-sixth of importer/exporter pairs are served by a single liner
service, and over half are served by three or less. They also present evidence of shipping companies
charging higher rates on goods with inelastic demand, which is consistent with the exercise of market
power. In contrast, the measures of market power in Clark et al. (2004) are not statistically significant.
Geloso-Grosso (2008) and Piermartini and Rousova (2008) using a gravity model both find a robust
positive relationship between liberalization and the volume of air traffic.
19
Their infrastructure index is based on kilometers of road, paved road and railway per square kilometer
and telephone main lines per capita.
20

Their principal measure of port efficiency is survey data drawn from the Global Competitiveness
Report published by the World Economic Forum. Wilson et al. (2003) and Wilmsmeier et al. (2006) use
the same source, and Sanchez et al. (2003) use Latin American survey data. Bloningen and Wilson (2008)
show that survey data overstate the importance of port efficiency because respondents include other
country fixed effects. A problem with using the Global Competitiveness Report data or the Bloningen and
Wilson econometric estimates of port costs is that the former only cover about fifty countries and the
latter cover 100 ports in 42 countries.

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Why do trade costs vary?

717

reasons (e.g. a Rotterdam or Hong Kong effect, which encompasses more than pure
exporting country variables). They may be high because corruption leads to extra
demurrage costs or because political obstacles restrict investment in port facilities.
Devlin and Yee (2005) document the wide variation in logistics costs among the
Middle Eastern and North African countries and how they can influence shipping
costs, e.g. inefficient trucking services lead to longer stand time on the dockside and
costly inventory accumulation as well as reducing export volumes so that there are
infrequent shipping services.21 There is a large literature on the Digital Divide
between developed and developing countries and on the positive effect of Internet
adoption on economic growth.22 We address this complex of determinants by using
the Transparency International Corruption Perceptions Index as a proxy for
institutional quality in the exporting country.

3 Determinants of trade costs

In our estimating equation, ad valorem trade costs ((cif-fob)/fob)ik for commodity
k from country i at time t depend on the distance between the country and Australia
(di,A), the value/weight ratio (VWik = cif value divided by weight in kilograms),
exporting-country GDP (Yi) or total bilateral trade to capture scale effects, and the
Transparency International Corruption Perceptions Index for the exporting country
(TIi):


cif  fob=fobkit f diA ; VWik ; Yit ; TIit
1
Table 2 reports OLS regression results using 2007 data and including product fixed
effects.23c
In the full sample of 23,803 observations, distance and the value/weight ratio
have the expected signs and are statistically significant at the one percent level.24
Exporting country GDP and the corruption index both have the expected negative
relation to ad valorem costs. An interaction term between the corruption index and a
dummy variable to indicate if the exporting country is an OECD member is also
21
The World Bank logistics perceptions index provides proxy measures for cross-country variations in
logistic quality (http://info.worldbank.org/etools/tradesurvey/mode1a.asp).
22

Freund and Weinhold (2004) found that internet use had no impact on world trade in 1995 but after
1997 it had an increasing impact. Andres et al. (2007), using data from the International Telecommunications Union database on the number of internet users, document for 199 countries the wide variations
in internet diffusion and how this is influenced by policy decisions such as the degree of competition
among providers. Unfortunately data on the quality of internet access, intensiveness of use or geographic
concentration are not available for a large enough number of countries to use in cross-country analyses.
23

The Transparency International Corruption Perceptions Index is on a scale from 0 to 10, with a higher
number indicating less corruption; 163 countries were covered in 2006 and 180 in 2007. The GDP data
are the current dollars series from the Penn World Tables. Distance (the great circle distance between the
largest city in each country and Sydney) and the landlocked dummy are from the CEPII database referred
to in the previous section.
24
A dummy for landlocked countries had a negative sign and was statistically significant, which is
difficult to explain as the literature strongly indicates that landlockedness is associated with higher trade
costs (Arvis et al. 2007).

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R. Pomfret, P. Sourdin

Table 2 Baseline regressions, 2007 data: dependent variable ladvalki : log ((cif - fob)/(fob))ki
Full sample

Sea

Air

(a) ladvalik = b0 ? b1ldistiA ? b2lVWik ? b3 lg dpi ? b4OECDi * TIi ? b5TIi ? ui

Log distance

Log value/weight

Log gdp

Sea

0.292***

0.352***

0.167***

0.138

0.197

0.076

(0.013)

(0.013)

(0.027)

-0.319***

-0.382***

-0.262***

-0.575

-0.595

-0.465

(0.005)

(0.006)

(0.008)

-0.017***

-0.023***

-0.002

-0.029

-0.047

-0.003

(0.004)

(0.004)

(0.008)

0.005***

0.020***

-0.017***

0.018

0.077

-0.059

(0.002)

(0.002)

(0.003)

-1.542***
-0.725
(0.017)

OECD 9 TI

TI corruption index

Constant

-0.033***

-0.029***

-0.033***

-0.075

-0.082

-0.066

(0.003)

(0.003)

(0.006)

-3.088***

-5.053***

-2.281***
(0.206)

(0.103)

(0.111)

R-squared

0.409

0.367

0.228

23,803

15,704

8,099

(b) ladvalik = b0 ? b1ldistiA ? b2lVWik ? b3limportsi ? b4OECDi * TIi ? b5TIi ? ui

Log distance

Log value/weight

Sea

0.249***

0.289***

0.162***

0.117

0.161

0.076

(0.012)

(0.013)

(0.014)

-0.317***

-0.381***

-0.108***

-0.573

-0.593

-0.196

(0.005)

(0.006)

(0.004)

0.004**

0.017***

0.012***

0.013

0.066

0.041

(0.002)

(0.002)

(0.002)

-1.521***
-0.715
(0.017)

OECD 9 TI

TI corruption index

123

-0.028***

-0.025***

-0.010***

-0.065

-0.070

-0.023

(0.003)

(0.003)

(0.003)

Why do trade costs vary?

719

Table 2 continued
Full sample
Log imports

Constant

Sea

Air

-0.020***

-0.023***

-0.069***

-0.039

-0.054

-0.139

(0.003)

(0.003)

(0.003)

-2.544***

-4.319***

-2.330***

(0.130)

(0.148)

(0.159)

R-squared

0.408

0.366

0.058

24,010

15,866

24,010

(c) ladvalik = b0 ? b1ldistiA ? b2lVWik ? b3ltradei ? b4OECDi * TIi ? b5TIi ? ui

Log distance

Log value/weight

Sea

0.263***

0.315***

0.167***

0.124

0.175

0.076

(0.011)

(0.012)

(0.022)

-0.329***

-0.401***

-0.264***

-0.594

-0.625

-0.468

(0.005)

(0.006)

(0.007)

-1.458***
-0.685
(0.017)

OECD 9 TI

TI corruption index

Log trade

Constant

0.005***

0.019***

-0.015***

0.018

0.074

-0.050

(0.002)

(0.002)

(0.003)

-0.029***

-0.026***

-0.028***

-0.067

-0.073

-0.055

(0.002)

(0.003)

(0.005)

-0.066***

-0.059***

-0.105***

-0.149

-0.164

-0.185

(0.002)

(0.002)

(0.006)

-2.394***

-4.337***

-1.317***

(0.105)

(0.114)

(0.208)

R-squared

0.427

0.390

0.260

24,010

15,866

8,144

***, **, * denote significance at the level of 1, 5 and 10% respectively. All regressions include product
effects. Standard errors in parentheses. Standardized coefficients are reported below main estimates

included to allow the influence of corruption to vary by developing versus

developed economy status, in order to control for the fact that the corruption index
may merely be capturing a development country effect; a positive coefficient on this
interaction term suggests that the effect of corruption is less important as a
determinant of ad valorem transport costs in OECD countries. The mode of
transport, captured by a dummy variable of 1 for sea and 0 for air in the first column
of Table 2, indicates that sea transport is less expensive than air transport once
commodity and country characteristics are controlled for.

123

720

R. Pomfret, P. Sourdin

To examine whether the determinants of trade costs differ according to the mode of
transport, the last two columns of Table 2 split the sample into goods arriving by sea
and goods arriving by air. Distance and weight have the expected signs with both
modes and, unsurprisingly, the coefficients are larger for imports arriving by sea than
for air freight.25 Exporting country GDP has the expected negative sign for only
seaborne trade and is significant at the 1% level for sea but not statistically significant
for air, suggesting that scale may be important for seaborne trade. We are aware that
GDP may be picking up other relationships including good institutions, and ran the
same regression replacing GDP by the sum of imports from the trading partner
(Table 2b) and by total imports of commodity k from country i (Table 2c); the results
reported in the three panels of Table 2 indicate that scale, captured by the volume of
trade, is significant for both modes of transport. The institutional quality variable has
the expected negative sign for both air and sea transport, but for imports arriving by air
the coefficient is more economically significant and good institutions in OECD
countries matter more for goods arriving by air than by sea.
In order to compare the relative importance of each independent variable to the
determination of ad valorem transport costs, Table 2 also reports standardized
coefficients. In all specifications, the value to weight ratio is the most importanta
one standard deviation increase in the ratio leads to a fall in ad valorem transport
costs of between 0.6 to 0.5 standard deviations. As expected, value to weight and
distance matter less for ad valorem air transport costs.
Table 3 reports similar regressions with a panel, 19982007.26 We experimented
with a number of scale variables; total imports from the trading partner as in
Table 2b and total imports of commodity k from country i in year t (log trade) as in
Table 2c. Compared to Table 2, the standard errors are much smaller due to the
larger number of observations. The only qualitative change in the results is the
positive sign on the scale variable when it is measured by total imports by air. In
sum, the results are fairly robust but there is a slight concern about the appropriate
scale variable.
The Transparency International Corruption Perception Index is a proxy for
evaluating the importance of institutions for trade costs. The regressions reported in
Tables 2 and 3 were run with alternative measures such as the Heritage Foundation
Index of Economic Freedom and the World Banks Ease of Doing Business index;
the results were identical in sign and statistical significance, with just small
variations in coefficients size. To test for variations between high- and low-income
countries (or that a statistically significant coefficient on TI is picking up difference
in technology or sets of traded goods between nations at different levels of
development rather than the effect of institutions), we included a dummy for OECD
members and an interaction term between OECD and TI; the results were
inconclusive, with differing signs on the coefficient of the interaction term for air
25
The coefficients are significant at the one percent level for both sea and air, with larger coefficients and
bigger t-statistics for sea.
26

The range was determined by availability of all variables, notably the Transparency International
Corruption Perceptions Index. Results with the borders (landlocked) dummy variable are not reported
because the coefficient was not positive and significantly different from zero. The regressions underlying
these and the results reported in the following paragraph are available from the authors on request.

123

Why do trade costs vary?

721

Table 3 Baseline regressions, 19982007 data: dependent variable ladvalki : log ((cif - fob)/(fob))ki
Full sample
Log distance
Log value/weight
Log imports

Air

0.271***

0.283***

0.190***

0.204***

0.318***

0.339***

(0.006)

(0.006)

(0.011)

(0.011)

(0.007)

(0.007)

-0.227***

-0.240***

-0.166***

-0.173***

-0.269***

-0.296***

(0.005)

(0.005)

(0.007)

(0.007)

(0.005)

(0.005)

-0.009***

0.013***

(0.002)
Log trade
Sea
OECD 9 TI
TI
Constant

Sea

-0.015***

(0.004)

(0.002)

-0.045***

-0.058***

-0.045***

(0.003)

(0.006)

(0.002)

-1.409***

-1.345***

(0.015)

(0.013)

0.007***

0.010***

-0.010***

-0.005***

0.020***

(0.001)

(0.001)

(0.001)

(0.001)

(0.001)

0.023***
(0.001)

-0.034***

-0.033***

-0.042***

-0.034***

-0.031***

-0.030***

(0.001)

(0.001)

(0.003)

(0.003)

(0.001)

(0.001)

-3.240***

-3.084***

-3.123***

-2.511***

-4.762***

-4.750***

(0.074)

(0.061)

(0.124)

(0.106)

(0.080)

(0.064)

R-squared

0.359

0.369

0.089

0.102

0.179

0.198

245,238

245,238

91,483

91,483

153,755

153,755

***, **, * denote significance at the level of 1, 5 and 10% respectively. Standard errors are in parentheses. All models are estimated with product level effects and year dummies but output suppressed. Log
imports for air and sea are total imports by mode of transport

and sea.27 These results suggest that a more disaggregated analysis may be
appropriate.

4 Trade costs and institutions

This section reports results similar to those reported in Table 3, but disaggregated to
the HS 2-digit level. Disaggregation is likely to be especially important for the
relationship between institutions and trade costs. The aggregate results are
consistent with the hypothesis that in the presence of corruption, exporters prefer
air transport. This could be in order to minimize costs and delays within the
exporting country; goods for which poor institutions may be unimportant, e.g. bulk
commodities, are shipped by sea whereas more time-sensitive, easily pilfered or

27

The OECD dummy should capture differences in average ad valorem trade costs between OECD and
non-OECD countries, but perhaps due to collinearity including both the OECD dummy and the
interaction term renders both coefficients not statistically significant at any standard level of significance.
The interaction term included in Tables 2 and 3 captures the differential impact of the TI index between
developed and less-developed economies, and we therefore felt it better to report only the results with the
interaction term. The coefficient on TI and other variables of interest are not materially different whether
the OECD dummy variable is included or omitted.

123

722

R. Pomfret, P. Sourdin

otherwise institution-sensitive goods are sent by air and among the latter set the
lower the perceived corruption in the exporting country the lower the trade costs.
The impact of corruption on trade costs is likely to vary by commodity. The
relative impact on trade costs may be stronger on trade in intermediates, if
corruption creates uncertainty about timeliness of delivery as well as higher direct
costs. Especially if a country seeks to trade intermediates as part of an international
value chain, insecurity of supply with respect to time and cost will reduce
competitiveness. Such commodity variation is important, because a strand of the
trade literature suggests that gains from trade liberalization on intermediate goods
are greater than gains from trade liberalization on final goods.28
To capture industry-specific influences on trade costs, we included dummies for
HS 2-digit categories in regressions similar to those reported in Tables 2b and 3. For
goods arriving by sea, these dummies were almost all not significantly different
from zero.29 For goods coming by air, however, the coefficients on the dummies
were mostly statistically significant, suggesting that industry-specific features
(perhaps capturing timeliness, fragility and so forth) influence air transport costs.30
Table 4 reports results for the basic regression run at the industry level (i.e. by
2-digit HS categories) using 19982007 data. The estimating equation includes log
distance, log value/weight, log of total bilateral imports at the product (6-digit HS)
level, and the Transparency International Corruption Perceptions Index, as in
Table 2b.31 For goods shipped by sea, distance and bulk are the key determinants of
ad valorem trade costs in almost all categories, with frequent statistically significant
coefficients on the scale variable. The corruption variable has a statistically
significant negative sign at the 1% level for only 16 of the 55 categories, and half of
these are primary products or simple processed goods (HS 125). In sum, the sea
28
Amiti and Konings (2007) find that in Indonesia the gains from trade liberalization on intermediate
goods are greater than gains from trade liberalization on final goods. See also Kasahara and Rodrigue
(2008) and references therein.
29
The results are available from the authors on request. Only HS 44 (wood and wood products), 63
(miscellaneous textiles) and 71 (pearls and precious stones) had coefficients significantly different from
zero at the 1% level; the first two are heterogeneous and the third is not a major sea-freighted category.
Case studies suggest that at some sea ports corruption is a major problem, e.g. in Durban and Maputo
corrupt payments account for up to 600% of customs agents official income and queue jumping and
avoidance of storage costs are important motives for illicit payments (Sequiera and Djankov, 2008). This
suggests that corruption is most burdensome for traders to whom time matters. Such behaviour may lead
to a tragedy of the anti-commons where over-competition for rents leads to less trade, and Australian
imports from ports in which corruption is rife may be too small to influence our econometric results.
30
Leinbach and Bowen (2004), reporting on a survey of 126 electronics producers in Malaysia, the
Philippines and Singapore, find that Much of the variation in air cargo services usage is related to
product characteristics that go beyond simply the value-to-weight ratio (p. 316) and one of their most
significant findings is the extent to which air cargo usage is associated with the degree to which a firm
has internationalized, not only its production sites and final markets, but also its material procurement
sites (p. 317). They did not address national variations in institutions, but their case studies highlight the
importance not only of flight times but also of associated services (electronic tracking, specialized planeto-market logistical support, and so forth), which are unlikely to be compatible with inefficient
institutions or widespread corruption.
31
Categories with few observations (n \ 50) were omitted. There may be a selection bias due to the
weight variable (i.e. goods whose quantity is measured by number, area, volume and so forth are
excluded).

123

R-squared

0.253*

0.225***

0.075*

23

25

0.384***

0.369***

20

21

24

0.429***

0.459***

18

19

0.084**

0.403***

16

0.290***

15

17

0.216**

0.169

13

0.375***

12

14

0.297***

0.481***

10

11

0.353***

0.380***

0.429**

0.227***

0.264***

0.316***

-0.303***

-0.355***

-0.196**

-0.420***

-0.266***

-0.274***

-0.227***

-0.210***

-0.300***

-0.218***

-0.346***

-0.299***

-0.229***

-0.312***

-0.262***

-0.189***

-0.169***

-0.312***

-0.304***

-0.266

-0.326***

0.057***

-0.138***

-0.033

-0.055***

-0.027***

0.024**

-0.045**

-0.004

-0.067***

-0.058***

-0.035

-0.106***

-0.037***

0.035**

-0.002

-0.061***

-0.037***

0.013

-0.035

0.013

-0.062***

-0.013

-0.075***

-0.003

-0.025**

-0.024***

-0.024***

-0.040***

-0.013**

-0.007

0.017

-0.101***

-0.036**

-0.016

-0.013

-0.009

-0.040***

-0.017**

-0.002

0.074

0.036***

-0.025***

-0.012*

0.291

0.271

0.294

0.231

0.211

0.212

0.228

0.216

0.130

0.243

0.286

0.204

0.227

0.240

0.092

0.192

0.207

0.201

0.400

0.282

0.258

0.189

3,585

583

863

2,916

6,054

3,906

1,798

2,076

3,126

740

467

1,197

2,207

2,357

694

5,099

2,914

2,938

51

511

1,469

3,852

0.167**

0.369***

0.388*

0.382***

0.136

0.342***

0.282***

0.289***

0.445***

0.389*

0.503***

0.314***

0.407***

0.164

0.596**

0.374***

-0.070

-0.017

0.315

0.462***

0.254*

0.725***

-0.051***

0.366***

-0.335***

0.157***

TI

Log distance

Log imports

Log distance

Log val/wgt

Air only

Sea only

HS2

Table 4 Regression by HS 2-digit industry, 19982007 data

-0.012

-0.191***

-0.047

-0.126***

0.118**

0.175***

0.186***

-0.044

-0.208**

-0.159**

-0.224**

-0.353***

-0.326***

-0.084

0.036

-0.005

0.220***

-0.021

-0.276

-0.170

0.079

-0.157*

-0.315***

Log value/wgt

0.087**

-0.091*

-0.016

-0.059**

0.055**

0.086**

0.072***

0.067***

0.030

0.058

-0.058

-0.081**

-0.144***

0.135**

-0.102

0.064

0.086***

0.047***

-0.113

-0.161***

0.064

-0.026

-0.035

Log imports

-0.022

-0.057***

-0.032

0.014

-0.041*

-0.008

-0.022

0.003

0.023

-0.034

-0.101**

-0.046***

-0.066**

-0.048

0.024

-0.011

-0.105***

-0.008

-0.030

-0.071**

0.053

-0.006

0.076

TI

0.104

0.183

0.062

0.085

0.081

0.098

0.117

0.041

0.131

0.081

0.190

0.215

0.388

0.129

0.135

0.051

0.166

0.072

0.303

0.208

0.064

0.075

0.209

R-squared

153

1,180

484

340

1,356

901

999

721

726

636

291

99

922

1,576

354

109

1,540

674

775

131

347

633

1,405

Why do trade costs vary?

723

123

123
TI

R-squared

0.450***

0.332

0.503***

0.377***

0.249***

54

55

56

0.291***

51

52

0.957**

50

53

0.841**

0.241***

45

48

-0.196*

0.256***

0.058***

40

41

44

0.242***

0.298***

38

0.280***

35

39

0.289***

0.280***

33

34

0.289***

0.358***

31

32

0.292***

0.370***

28

29

0.243*

0.073

26

-0.180***

-0.408***

-0.389***

-0.277***

-0.303***

-0.392***

-0.272**

-0.182***

-0.224**

-0.311***

-0.098***

-0.235***

-0.297***

-0.422***

-0.253***

-0.201***

-0.238***

-0.333***

-0.440***

-0.339***

-0.314***

-0.261***

-0.295***

-0.030**

-0.089***

-0.062***

-0.033

-0.083***

-0.080***

-0.064

0.004

0.024

-0.040

-0.114***

-0.036***

-0.040***

-0.043***

-0.045***

-0.009

-0.063***

-0.059***

-0.032**

-0.068***

-0.043***

0.008

-0.041*

-0.036***

-0.017**

-0.016**

-0.052**

-0.029**

0.012

0.063

-0.050***

-0.002

-0.051**

-0.054***

-0.012*

-0.008*

-0.015***

-0.032***

-0.045***

-0.048***

-0.005

-0.011

-0.008**

-0.012**

-0.013

-0.017

0.108

0.305

0.275

0.158

0.208

0.306

0.299

0.129

0.184

0.288

0.272

0.148

0.183

0.349

0.209

0.168

0.220

0.262

0.389

0.258

0.196

0.188

0.240

572

1,805

2,645

2,849

369

1,869

909

131

4,126

53

269

52

2,987

14,089

5,479

1,685

4,298

4,772

4,989

1,930

18,784

10,623

1,207

0.226***

0.093

0.218***

-0.367

-0.021

0.311***

-0.039

0.154***

1.013**

0.039

0.083

0.187***

0.243***

0.210**

0.236***

0.316***

0.284***

0.555***

0.194***

0.061

0.114

0.083

Log distance

Log imports

Log distance

Log val/wgt

Air only

Sea only

27

HS2

Table 4 continued

-0.174***

-0.159***

-0.175***

-0.022

-0.056

-0.216***

-0.142**

-0.067***

-0.042

-0.126

-0.108***

-0.110***

-0.145***

-0.225***

-0.153***

-0.245***

-0.288***

-0.005

-0.237***

-0.117***

-0.062*

-0.069

Log value/wgt

-0.043***

-0.005

-0.007

-0.061

-0.020

-0.082***

-0.093***

0.040*

0.132***

-0.234***

0.008

0.022**

-0.069***

-0.020

0.026*

-0.046***

-0.079***

0.003

-0.208***

-0.058***

0.081**

0.019

Log imports

-0.071***

-0.076***

-0.083***

-0.094**

-0.084***

-0.095***

-0.032

-0.052***

-0.203**

-0.106

-0.089***

-0.052***

-0.035***

-0.025

-0.050***

-0.055***

-0.022**

-0.067

-0.027***

-0.002

-0.030

-0.034

TI

0.122

0.114

0.117

0.079

0.064

0.255

0.148

0.050

0.511

0.352

0.114

0.073

0.115

0.125

0.100

0.163

0.224

0.092

0.309

0.059

0.046

0.173

R-squared

330
577

1,391

1,596

2,343

157

1,350

847

221

3,750

74

66

1,655

9,822

3,224

1,352

2,702

4,070

4,082

373

13,777

5,090

724
R. Pomfret, P. Sourdin

TI

R-squared

0.190***

0.153***

0.194***

83

84

85

-0.137

-0.217***

-0.163**

-0.179***

-0.235***

-0.232***

-0.205

-0.194**

-0.167***

-0.227**

-0.138***

-0.178***

-0.039

-0.244***

-0.483**

-0.231***

-0.033*

-0.243***

-0.040*

-0.044***

-0.107**

-0.046***

-0.155***

-0.149***

-0.045

-0.122***

-0.049***

-0.129***

-0.077***

-0.039***

-0.002

-0.037

-0.070***

-0.041***

-0.027

-0.045***

-0.026

-0.039***

-0.004

-0.043*

0.004

0.015

0.011

0.079

-0.004

-0.080*

-0.021

-0.029**

0.233*

-0.034

-0.012

-0.057***

-0.051

-0.010

0.080

0.149

0.088

0.185

0.236

0.391

0.044

0.081

0.078

0.172

0.110

0.123

0.292

0.140

0.392

0.195

0.043

0.135

429

1,635

162

908

1,188

237

267

145

3,371

562

975

2,263

46

1,035

579

1,464

310

1,964

0.309**

0.074

0.490**

-0.068

0.253***

-0.625*

0.452***

0.197

0.299***

0.072

0.243***

0.163***

0.438**

0.343***

0.027

0.286***

0.350*

0.349***

-0.230***

-0.384

-0.163**

-0.249***

-0.134

-0.207**

-0.246**

-0.146***

-0.260***

-0.168***

-0.196***

-0.382***

-0.204***

-0.112

-0.143***

-0.198*

-0.320***

-0.236***

Log value/wgt

-0.057***

-0.098*

-0.037*

-0.129***

-0.018

-0.042

-0.194**

0.051*

-0.129***

-0.047

-0.037***

-0.279**

-0.046*

-0.050

-0.063**

0.037

-0.095***

-0.007

Log imports

Categories with less than 50 observations are omitted; ***, **, * denote significance at the level of 1, 5 and 10% respectively

0.321*

0.233**

80

81

0.681***

0.010

78

79

0.545***

0.174***

75

0.299***

74

76

0.363

0.219***

71

73

0.377**

0.290**

69

0.156*

70

-0.058

67

68

0.360***

0.309***

59

Log distance

Log imports

Log distance

Log val/wgt

Air only

Sea only

60

HS2

Table 4 continued

-0.060***

-0.075

-0.044

-0.048***

-0.093

-0.019

0.162

-0.031

-0.030

-0.068***

-0.047***

0.016

-0.088***

-0.061*

-0.065***

-0.088**

-0.047***

-0.095***

TI

0.198

0.249

0.087

0.231

0.094

0.204

0.209

0.067

0.254

0.125

0.131

0.416

0.166

0.163

0.119

0.170

0.232

0.166

R-squared

416

2,018

214

770

1,693

107

162

105

2,279

585

893

1,945

159

879

258

940

233

2,445

Why do trade costs vary?

725

123

726

R. Pomfret, P. Sourdin

results in Table 5 provide a traditional picture of the determination of transport

costs.
For air freight, distance and value/weight are also the most frequently statistically
significant exogenous variables, although there are more industries where both these
and the scale variable are not statistically significant. The striking difference to the
sea results is that the corruption index is negative and statistically significant for 23
out of the 55 categories in Table 4. Moreover, the absolute values of the negative
coefficients on the TI variable are consistently larger for air than for sea freight.
In order to focus on the commodities for which institutions are an important
determinant of trade costs, Table 5 lists the 2-digit categories for which the
coefficient on the TI variable was negative and significantly different from zero, at
the 1% level, for at least one mode. In raw and processed farm products, HS 125,
the statistical significance is more pronounced for sea transport, although the
coefficients on the TI variable are fairly small, apart from for the miscellaneous
category (HS 14) and for tobacco. In general fewer shipments of these goods go by
air and institutions are not so important. An interesting exception is HS 8 edible
fruits and nuts where there are over four times as many country/commodity flows by
sea but for those by air, presumably including more perishable items, institutions are
an important determinant of trade costs. In chemical and allied industries, HS
2838, institutions are significant for about half of the HS 2-digit categories. The
coefficients on TI are larger for air freight, but there is not a great difference.
The biggest difference between sea and air freight is in manufacturing. In textiles
and clothing, HS 5160, the TI coefficient is significant for almost all 2-digit
categories and the coefficient values are consistently high, in the 0.050.1 range. A
similar pattern is visible in the other manufacturing industries in Table 5. In only a
few cases is the TI variable significant at the 1% level for the cost of sea freight, and
even in these cases (HS 41, 48, 68 and 85) the coefficient is larger on air freight. The
impact of institutions on trade costs is stronger for good shipped by air than for
goods sent by sea and this pattern mainly applies to manufactured goods. This
appears to be especially true for sectors in which global value chains are welldeveloped, such as electrical equipment, clothing, rubber and plastic.

5 Conclusions
Trade costs are important and amenable to reduction by technical progress and by
policy measures. The rich Australian data set presents a striking picture of falling
trade costs since 1990. However, trade costs still remain a significant component of
the wedge between the prices of domestic and imported goods; ad valorem trade
costs are larger than ad valorem tariffs on imports into Australia.
Trade costs depend on more than distance or bulk or scale, and the determinants
vary by mode of transport. Trade costs are related to distance and to weight, but
simple correlations are weak. There is no simple relationship between the size of the
trading partner and trade costs. There is also no clear relationship to per capita
income levels, although costs are higher on trade with African countries. Sea freight
is cheaper than air per kilogram, but imports arriving by air have lower ad valorem

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727

Table 5 HS 2-digit industries in which institutions are significant determinants of trade costs
Industry description

Sea
Coefficient

Air
Number

Coefficient

Number

IIV Farm products

4. Dairy produce, eggs, honey

-0.025***

1,469

8. Edible fruit and nuts

-0.017**

2,914

0.053

633

-0.105***

9. Coffee, tea and spices

-0.040***

5,099

-0.011

13. Gums, resins, etc.

-0.036**

1,197

-0.046***

14. Other vegetable materials

-0.101***

467

18. Cocoa and cocoa products

-0.040***

1,798

674
1,540

-0.101**

922
99

-0.022

721

19. Preparations of cereals, starch or milk

-0.024***

3,906

-0.008

999

20. Preparations of vegetables, fruit or nuts

-0.024***

6,054

-0.041*

901

24. Tobacco and tobacco substitutes

-0.075***

583

-0.057***

484
13,777

VI Chemical and allied industries

29. Organic chemicals

-0.008**

18,784

-0.027***

33. Perfumes and cosmetics

-0.048***

4,772

-0.055***

4,070

34. Soap, waxes, candles, etc.

-0.045***

4,298

-0.050***

2,702

35. Modified starches, glues and enzymes

-0.032***

1,685

-0.025

1,352

38. Misc, chemical products

-0.015***

5,479

-0.035***

3,224

X Textiles and clothing

51. Wool or animal hair yarn and woven fabric
52. Cotton

0.012
-0.029**

909

-0.095***

847

1,869

-0.084***

1,350

54. Man-made filaments

-0.016**

2,849

-0.083***

2,343

55. Man-made staple fibres

-0.017**

2,645

-0.076***

1,596
1,391

56. Wadding, felt, twine and ropes

-0.036***

1,805

-0.071***

59. Coated or laminated textile fabrics

-0.026

429

-0.095***

416

60. Knitted or crocheted fabrics

-0.010

1,964

-0.047***

2,445

39. Plastics and articles thereof

-0.008*

14,089

-0.052***

9,822

40. Rubber and articles thereof

-0.012*

2,987

-0.089***

1,655

Other manufacturing

41. Hides, skins and leather

-0.054***

52

48. Paper, paperboard, and articles thereof

-0.050***

4,126

-0.106

66

-0.052***

3,750

68. Articles of stone, plaster, cement, etc.

-0.057***

1,464

-0.065***

940

70. Glass and glassware

-0.034

1,035

-0.088***

879

73. Articles of iron and steel

-0.029**

2,263

-0.047***

1,945

74. Copper and articles thereof

-0.021

975

-0.068***

893

0.004

1,188

-0.048***

1,693

1,635

-0.060***

2,018

81. Other base metals and articles thereof

85. Electrical machinery and equipment

-0.039***

Source: Table 4
***, **, * denote significance at the level of 1, 5 and 10% respectively

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R. Pomfret, P. Sourdin

trade costs because air freight is used for higher value goods. The choice of
transport mode is, however, more complex than simply having more valuable lighter
goods shipped by air. Air transport will be favoured when timeliness is important,
and for such goods poor exporting-country institutions may be a particularly
significant obstacle.
The econometric results reported in Tables 2, 3, and 4 indicate that distance and
bulk have the expected relationship to trade costs, and that trade costs fall with the
volume of trade (whether proxied by GDP or measured by bilateral imports).
The distance and weight variables are statistically significant for both modes, but the
coefficients are larger and confidence intervals tighter for sea than for air. Good
institutions, as measured by the Transparency International Corruption Perceptions
Index, are associated with lower trade costs, but the impact is larger for air freight
and especially for air cargo from OECD countries.
The disaggregated analysis in Tables 4 and 5 highlights connections between
commodity characteristics and the importance of institutions. The institutional
variable is especially important for manufactured goods and less so for agricultural
goods (and probably primary products in general). Corruption increases the costs of
trade in manufactures, and the relationship is more important when the characteristics of the commodity favour air over sea transport (e.g. high value/weight or
where reliable timely delivery is important). Poor institutions may limit the
extensive margin of trade by excluding some potential exports.32
There are caveats to our conclusions. An attractive feature of the Australian data
is the absence of land transport, but even with just two modes there is an important
feedback mechanism because the choice of mode is not simple and it is related to
the impact of exporting-country institutions. There is also an endogeneity concern
related to the vicious circle of high trade costs reducing trade flows and low trade
volumes being a cause of high trade costs. The data constrained us to define trade
costs as cif-fob; as argued in the introduction this is a useful measure, but it may be
too narrow for some purposes because it is more akin to transport costs than to all
of the costs of trading across international borders. Moreover, by focussing only on
dollar values of trade costs, we do not directly address the role of time, which some
authors (Hummels 2001; Evans and Harrigan 2005) identify as more important than
financial costs, at least for some goods.
A consensus has emerged among economists that institutions are the fundamental
determinant of differences in growth performance. Given that poor institutions raise
trade costs on manufactured goods that appear to be part of global value chains and
given the connection between trade in such commodities and economic growth, our
findings provide a transmission mechanism from poor institutions to slow growth and
stunted economic development. Countries with poor institutions are constrained to
increase their trade by exporting more of the same commodities, which for poor
countries may condemn them to exporting goods without positive growth-stimulating
32
Hillberry and Hummels (2008), using US domestic trade data, find that distance and other frictions
reduce trade primarily by reducing the number of commodities shipped and the number of establishments
shipping. Our results point to high trade costs also discouraging shipment of some products, but the
relationship is limited to a subset of commodities which a country is less likely to export if it has poor
institutions (or more precisely if perceived corruption is high).

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729

externalities. Countries with good institutions will, ceteris paribus, have lower trade
costs in the most dynamic segment of international trade, time-sensitive manufactures, and be better able to participate in global value chains and benefit from
globalization.
Acknowledgments We have benefited from helpful comments on earlier versions of this paper by
participants in seminars at Monash University, the University of South Australia and Flinders University,
at the Empirical Investigations in Trade and Geography conference in Melbourne on 35 July 2009, and
from Russell Hillberry and Ben Shepherd and a referee for this journal. We are grateful to the Australian
Bureau of Statistics for assembling the trade data, and to the School of Economics at the University of
Adelaide for paying for the data. A longer early version is available as Richard Pomfret and Patricia
Sourdin: Why Do Trade Costs Vary? University of Adelaide School of Economics Working Paper 200808, at http://www.economics.adelaide.edu.au/research/papers/.

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