On Transport Costs and Sectoral Trade: Further Evidence for Latin-American Imports from the European Union

Abstract

In this paper we evaluate the relative importance of different sources of trade costs, namely, freight rates, poor infrastructure, and location with respect to Latin-American imports from the European Union (EU). Firstly, a transport-costs equation is estimated using disaggregated data on transportation costs from the International Transport Database (BTI). Secondly, the effect of transports costs on disaggregated imports is investigated using a direct and an indirect method. The direct method consists of the addition of freight costs and infrastructure variables in the traditional gravity model of trade. The indirect method consists of the separate estimation of an augmented transport-costs equation and a traditional gravity model of trade and combination of the coefficients obtained to calculate the elasticity of trade with respect to transport costs. The results of the indirect method show greater elasticities of trade with respect to transport costs than the direct method (3.4 on average versus 0.85). The primary results highlight the importance of improving transport conditions in order to foster international trade.

I would like to thank the participants of the International Economic Workshop, EU and Emerging Markets, held in Vienna, for their helpful comments and suggestions. Financial support from Fundación Caja Castellón-Bancaja and the Spanish Ministry of Education is gratefully acknowledge (PI-1B2005-33 and SEJ 2007-67548).