- TeX source:
- \bar{t}_{i j t}^{k}\is
generally much larger in magnitude than the rates of protection trade
economists are used to dealing with in measures such as the Overall Trade
Restrictiveness Index (OTRI) or average applied tariffs.
Once the Novy (2010) trade cost measure has been calculated for a range of
countries, it is possible to use an econometric decomposition to assess the
impact of different factors on the overall level of trade costs. Shepherd (2011)
adopts this approach to examine the impact of logistics performance on total
trade costs in the Maghreb region (Table 5). Logistics costs are captured by a
rescaled version of the LPI, 39
in which a higher score indicates poorer performance. Results show that
logistics performance is clearly an important determinant of trade costs in this
sample of countries: increasing logistics performance by 10% would tend to
decrease trade costs by 6.5% in manufacturing and 8% in agriculture.
Table 5: Regression Results Using Log(Trade Costs) as the Dependent Variable, 2007 Only. Source: Shepherd (2011).
(1)Manufacturing
(2)Agriculture
(3) Energy
Log(Logistics Costs)
0.653***(0.000)
0.808***(0.000)
-0.061(0.668)
Log(Tariff)
1.943(0.415)
-2.786*(0.100)
-115.840***(0.002)
Log(Distance)
0.397***(0.000)
0.467***(0.000)
0.372***(0.000)
No Common Border
0.207**(0.037)
0.282**(0.011)
0.225*(0.057)
No Common Language
0.190**(0.011)
0.126(0.228)
-0.038(0.704)
No Colonial Relationship
0.426**(0.001)
0.050(0.652)
0.192(0.278)
No Common Colonizer
0.055(0.564)
-0.186(0.312)
-0.344(0.191)
Constant
-3.961***(0.000)
-3.476***(0.000)
-1.582***(0.002)
R2Observations
0.620336
0.579448
0.357322
Note: P-values based on robust standard errors corrected for clustering by country
pair are included in parentheses below the parameter estimates. Statistical significance is indicated by *
(10%), ** (5%), and *** (1%).
To illustrate the relative importance of the various factors as determinants of
overall trade costs, Chen and Novy (2010) suggest a variance decomposition
approach. The percentage of the observed variance in trade costs accounted
for by logistics, for example, is given by the following expression:
\( \text { Variance } \%=\beta_{1} \frac{\operatorname{cov}\left[\log \left(\bar{t}_{i j}^{k}\right), \log \left(\overline{\operatorname{Logistlcs}_{i j}}\right)\right]}{\operatorname{var}\left[\log \left(\bar{t}_{i j}^{k}\right)\right]}