Trade costs and trade composition: a case study of Pakistan’s trading partners

Abstract

The article deals with the trade costs impact on conducting international business. Developing countries with high trade costs can find the results of the empirical findings rather helpful for their economies as developing countries generally incur higher costs of conducting international business compared to developed ones. The author emphasizes that these relatively high costs put the industries located in developing countries at a comparative disadvantage, which in turn affects not only their trade volumes but also their export mix. Using the World Bank’s Bilateral Trade Costs Dataset, this study finds that trade costs influence trade composition, and that this effect is heterogeneous across industries and countries. The developing countries in Asia, Africa and South America are much more prone to the effect of high trade costs. Within developing countries this effect, however, is far higher for the low trade cost intensive sectors, such as the food, minerals and textiles. These industries located in high trade cost countries gain a relatively smaller share in their exports of manufactured goods compared to their counterparts situated in low trade cost countries. The main attention is paid to Pakistan as a country with 136 trading partners. These empirical findings have implications for prioritising countries and industries with regard to the post-Bali trade facilitation agenda.