Measurement of Trade Costs, its Determinants and Trade Growth. Accounting for India with its Asian Trading Partners

Abstract

Gravity model of international trade established a fact that international trade of an economy is highly affected by the trade costs incurred locally and across borders. These costs are the difference between production cost of a traded commodity and its price paid by the ultimate buyers. The present study calculates the trade costs of Indian economy with its Asian trading partners. The study is developed in three stages: It measures the trade costs for India with its trading partners from the Asian region; it also estimates the determinants of trade costs by using the data on the available trade cost proxies; and thereafter, it decomposes the growth of Indian trade into the contribution of growth in income, the contribution of the decline in bilateral trade costs, and the contribution of the decline in multilateral resistance. It is found that the trade costs of India with all its Asian partners have declined throughout the whole study period (1995-2013). The decline in Indian trade costs was the highest in West Asia followed by Southeast Asia, East Asia, South Asia, and Central Asia. The variables, used as determinants of trade costs, namely: contiguity, distance, tariffs, non-tariff barriers, exchange rate, and port infrastructure, behaved according to the theoretical expectations. Furthermore, the decomposition of the growth of Indian trade with Asian partners revealed that the decline in the relative bilateral trade costs was the driving force of growth of Indian trade with all the Asian regions.