What Drive Trade Costs? South Asia and Beyond

Abstract

Higher trade costs in developing countries have received enormous attention during the recent past. In this context, it is imperative to revisit the factors contributing to such higher trade costs. This article attempts to explore the major determinants of trade costs conceptually and empirically. Further, the study endeavours to solve the puzzle of higher trade costs in the South Asian perspective. Using panel data of 93 countries from 2007 to 2015, the study tends to uncover major determinants of trade costs between South Asian countries and their two proximate regional blocks, namely Asia-Pacific Economic Cooperation (APEC) and Association of Southeast Asian Nations (ASEAN). In estimating the model, the study prefers to use fixed-effect estimation technique, owing to the results of statistical tests carried out to choose the most appropriate model for the estimation. The findings of the study reveal that trade facilitation, political corruption and financial development affect intra-regional trade costs of South Asia significantly. Trade facilitation influences trade costs between South Asia and ASEAN. Moreover, trade facilitation and financial development affect trade costs between South Asia and APEC. The diagnoses of South Asian intra and inter-regional trade costs can push forward ongoing efforts at unlocking the potential of regional integration as well as global integration of the region.