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How Trade Costs, Infrastructure, and Institutions Affect Growth within Countries
the evidence suggests that a decline in international trade costs increases the returns from spatial characteristics that facilitate trade, such as being on a coast or a navigable river. Globalization has the potential to spatially concentrate economic activity within countries.
How Trade Costs, Infrastructure, and Institutions Affect Growth within Countries
While the previous section discusses evidence on spatial reallocation of economic activity following globalization and integration in GVCs, this section discusses the extent to which domestic trade and transport frictions fragment domestic markets and disconnect farther-off regions from ports and metropolitan hubs. In fact, internal trade costs vary widely within countries. In India, internal trade barriers (such as corruption and local taxes) are estimated to make up to 40 percent of all barriers (Van Leemput 2016).3 In China, bilateral trade costs between cities that are not primates—the city that is disproportionately larger than any other in its jurisdiction—can be five times higher than that between Beijing and Shanghai (Yang 2018). Higher trade costs reduce domestic accessibility and value added and inhibit the ability of economically distant regions to specialize and trade.
Based on recent empirical work on trade costs, this chapter proposes the following four stylized facts:
1. Infrastructure is not the only element of trade costs, or even the most important one. 2. The interaction of scale economies in transport and production spatially concentrates trade. 3. Improvements in infrastructure “hardware” may be necessary, but are not sufficient to reduce domestic trade costs for distant regions. 4. Complementary investments in “software” are needed so that a decline in trade costs does not widen spatial inequality.
Time in transit, information barriers, and market structure have important bearings on domestic trade costs. The cost of distance is 2.5 times higher in Ethiopia and 4.0 times higher in Nigeria than in the United States, even when controlling for the fact that the United States has more and better-quality roads (Atkin and Donaldson 2015). It is not only the poor quality of roads but also of logistics and trucks, as well as long queues at border crossings, that contribute to higher transport costs in developing countries (Redding and Turner 2015; Donaldson 2018).4 The higher costs of trade in Africa are partly explained by the use of old truck fleets that are fuel inefficient, the
terrible road conditions that require frequent truck repairs, and poor logistics (Teravaninthorn and Raballand 2009).
Time in transit poses a large trade barrier (Harrigan 2010; Hummels and Schaur 2013). It has been estimated that each day in transit is equivalent to an ad valorem tariff of 0.6 percent to 2.3 percent (Hummels and Schaur 2013). Enforcement of laws regarding issues such as piracy, corruption, and tax administration (Besley, Fetzer, and Mueller 2015; Van Leemput 2016) can be equally important in determining the regional differences in trading outcomes.
Information frictions can also be an impediment to trade (see, for example, Jensen 2007; Steinwender 2018; Allen 2014). Reducing search costs through e-commerce platforms can play a crucial role in reducing transaction costs. In Japan, for instance, the entry of Rakuten increased interregional price convergence for goods traded online (Jo, Matsumara, and Weinstein 2019).
The market structure of the transport services industry is an important contributor to transport costs, which is largely assumed away in the New Economic Geography approach. For example, transport costs in France fell by more than 38 percent between 1978 and 1998, largely because of the deregulation of the trucking industry (Combes and Lafourcade 2001).
Distance matters! In the United States, a 10 percent increase in distance leads to a 14 percent decrease in trade. Nearly three-quarters of all shipments of physical goods begin and end in the same zip code (Hillberry and Hummels 2008), while in Japan, the median distance to a supplier is 30 kilometers (Bernard, Moxnes, and Saito 2019). Although banking deregulation and technological change have reduced the transaction costs in financial services, distance still counts even in the United States, where most banking relationships between firms and banks remain local, with a median distance of 5 miles (Brevoort and Wolken 2008). For Colombia, Duranton (2015) estimates that a 10 percent increase in travel distance leads to a 6 percent decrease in trade flows. The estimated decline for Colombia is lower than in the United States, possibly driven by the fact that internal trade is dominated by agricultural goods and natural resources, which are typically traded over long distances. Short-haul trade also influences the geography of production. In Rwanda, 75 percent of the transactions are among firms that are within 10 kilometers of one another (Stoelinga, Rajashekar, and Richard 2019).
To take a recent example, consider the government-imposed nationwide lockdown in India to limit the spread of COVID-19. This nonpharmaceutical measure significantly affected transportation prices, domestic trade, and the fortunes of the
