1. Introduction There is a close relationship between trade costs and a country’s ability to increase its exports and integrate into the world economy. The relevance of transport costs as a component of trade costs has been increasing as liberalization continues to reduce artificial barriers to trade. In many cases, the effective rate of protection provided by transport costs is higher than the one provided by tariffs (Clark, Dollar and Micco, 2004; Hummels, 1999). One of the most important and evident components of transport costs is distance. In its simplest formulation, the gravity model for trade, introduced by Linnemmann (1966), states that bilateral trade flows depend positively on the product of the GDPs of both economies and negatively on the distance between them, which stands for bilateral transport costs. The impact of distance on countries’ volume of trade is significant: recent estimates of the elasticity of trade volumes with respect to distance indicate that when distance increases by 10 percent, the volume of trade is reduced between 9 and 15 percent (Overman, Redding and Venables, 2003).2 In addition to distance, however, many other elements influence transport costs. As explained by Limão and Venables (2001), transport costs and trade volumes depend on many complex details of geography, infrastructure, administrative barriers and the state of competition in the transport industry. Provided that distance and infrastructure-related costs are major determinants of the success of a country’s export sector, immediate questions arise: what can governments do to “get closer” to markets with high import demand? Can improvements in infrastructure and regulation reduce transport costs? Is it worthwhile to implement policies designed to increase competition in transport markets? Do these policies have a quantifiable impact on transport costs? Not many papers have tried to estimate the impact on transport costs of policies that improve the quality of regulation and infrastructure or implement new competition regimes. Focusing on infrastructure and using data from maritime shipping companies, Limão and Venables (2001) show that poor infrastructure accounts for more than 40 percent of predicted transport costs. In a study specific to the port sector, Clark, Dollar and Micco (2004) show that an improvement in port efficiency from the 25th to the 75th percentile reduces shipping costs by
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Deardorff (1984) surveys the early work on this subject.
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