Trade Logistics – the Gravity Model Approach

Over the past decade, a number of papers attempt to capture the decisive impact of trade facilitation on international trade. Since the emergence of trade liberalization and tarrif reduction, trade facilitation analysis has been put in the spotlight. Trade facilitation is defined as all measures that reduce trade costs other than lowering tariffs. Therefore, the aim of this paper is to empirically examine the impact of trade facilitation from the logistics perspective on international trade distinguishing between low, middle and high income importing countries. We used the augmented gravity model to estimate this relationship across 150 countries within the period 2007-2016. The Logistic Performance Index (LPI) created by the World Bank is used as a proxy variable for trade facilitation. The results of our analysis show that all used variables are significant and show the expected signs correspondingly to our hypotheses, suggesting that trade will increase with trade facilitation. The results also lead to the conclusion that exporter logistics performance seems to be more important than importer logistics performance. This paper supports the World Bank trade facilitation initiatives to assure lower trade costs as they serve as a barrier to enjoying the benefits of increased trade.