Key Findings
- Transport and travel costs emerge as the largest determinant of trade costs, with their influence consistent across all income groups.
- The role of governance quality and ICT connectedness varies between sectors: governance quality accounts for a larger share of trade costs in goods compared to services, while ICT connectedness plays a more significant role in services. Information and transaction costs remain relatively stable across both sectors.
Trade Cost Determinant Categories
Information and Transaction Costs
This category captures factors that influence how easily information and communication flow between trading partners. It includes shared ethnic languages, religions, or legal systems, historical ties such as colonial relationships or having once been the same country, and longstanding migration patterns. These elements serve as proxies for common cultural and institutional backgrounds that reduce communication barriers and simplify transactions across borders.
ICT Connectedness
ICT Connectedness measures the digital infrastructure linking trading countries. It is based on the lower broadband and mobile phone penetration rates between the exporter and importer, reflecting the quality of communication technologies available to both. This dimension highlights actionable policy areas that can strengthen information flows and reduce trade costs through improved digital connectivity.
Governance Quality
Governance Quality gauges differences in institutional effectiveness, focusing on control of corruption between the importer and exporter. It incorporates how governance interacts with geographic distance to affect trade, acknowledging that stronger, more transparent institutions can lower risks and costs associated with trading, especially over long distances.
Transport and Travel Costs
This measure examines geographical and infrastructural factors that influence the cost and ease of physically moving goods. It includes the population-weighted distance between partners, whether they share a border, and if one is landlocked. It also considers how the quality of transport and trade-related infrastructure in each country interacts with distance to affect overall trade costs.
Trade Policy and Regulatory Differences
This component reflects formal trade barriers and regulatory discrepancies that impact bilateral trade. It covers participation in free trade agreements, membership in the European Union or Eurozone, applied tariffs, and disputes raised through the WTO related to sanitary, phytosanitary, and technical measures. Additionally, it accounts for services trade restrictiveness and the degree of regulatory divergence between partners, all of which shape the ease and cost of trade.