How well does observable trade data measure trade friction costs? Evidence from member countries within the Economic Community of West African States (ECOWAS)

Abstract

This paper is an empirical application of the micro-founded measure of trade costs by Head and Mayer (2004) and Novy (2013). The derived micro-founded measure, consistent with the Ricardian and heterogeneous firm's models of trade, captures all trade costs components that hitherto have been impossible to include in the gravity framework because of severe data limitations and the impracticability of measuring some of the trade cost components.

Based on bilateral trade and production data from the Trade, Production, and Protection database by Nicita and Olarreaga (2007) over the period 1980–2003, the micro-founded estimate of relative bilateral trade cost measure computed for ECOWAS clearly indicates lower trade costs among member ECOWAS countries compared with that for trade with other countries from SSA. With regard to accounting for variations in the computed measure of trade costs, the estimates obtained support the literature on the contribution of trade cost proxies to trade costs. Common non-tariff trade costs proxies explain over two-thirds of the variation in the trade costs estimates obtained for trade within the ECOWAS sub-region.

This paper argues for the need for policy makers within the sub-region to identify and reduce the trade barriers associated with trading within the ECOWAS sub-region. In addition, results from this paper, that bilateral transactions in a common currency reduces trade costs, suggest that current efforts at establishing a common currency, if successful, may improve intra-ECOWAS trade.