Infrastructure, Geographical Disadvantage and Transport Costs Non-technical Summary: Infrastructure, Geographical Disadvantage and Transport Costs

The real costs of trade – the transport and other costs of doing business internationally – are important determinants of a country's ability to participate fully in the world economy. Remoteness and poor transport and communications infrastructure isolate countries, inhibiting their participation in global production networks. Recent liberalizations have reduced artificial trade barriers, and mean that the effective rate of protection provided by transport costs is, for many countries, considerably higher than that provided by tariffs. To bring countries further into the trading system it is important to understand both the determinants of transport costs, and the magnitude of the barriers to trade that they create. This paper studies the determinants of transport costs, and shows how they depend both on countries' geography, and on their levels of infrastructure (measured by an index combining road, rail and telecommunications density). Our research uses three data sets. The first is shipping company quotes for the cost of transporting a standard container from Baltimore to selected destinations. The advantages of this measure are that it is the true cost of transporting a homogenous good, and that it gives the city of origin, the city of landfall, and the final destination city. The disadvantages are that it is not clear how the experience of Baltimore generalizes, since charges are affected by the particular routes, frequencies, and opportunities for back-hauling and for exploiting monopoly power that are present. Our second data set uses the cif/ fob ratios reported for each country by the IMF. These are representative, in so far as they cover the entire imports of each reporting country. However, there are some questions regarding the quality of the data, and the measure suffers from the fact that it is an aggregate over all commodity types imported. Our third piece of analysis uses bilateral trade data in a gravity modeling exercise, adding to the standard independent variables our measures of geography and infrastructure. Our main results are, first, that infrastructure – both own infrastructure and that landlocked countries' transit routes-is a significant and quantitatively important determinant of transport costs and of bilateral trade flows. For example, improving destination infrastructure by one standard deviation reduces transport costs by an amount equivalent to a reduction of 6,500 sea km or 1,000km of overland travel. Second, being landlocked raises transport costs by around 50% (for the median landlocked country compared to the median coastal economy). However, improving …