Why do trade costs vary?

Abstract

As tariffs have fallen, it is apparent that trade costs are a significant obstacle to international trade and that they vary from country to country. We analyse country-by-country variations in trade costs, controlling for distance and commodity composition, and using measures of corruption/institutions. Using disaggregated Australian import data, we find that exporting countries‟ institutional quality is more strongly related to trade costs for air freight than sea freight; the relationship is commodity-specific and strongest for manufactured goods. Country-specific characteristics influencing trade costs provide a link between institutions and economic development.