Asia's Melting Trade Costs

Abstract

This study calculates the decline in costs involving merchandise trade between the People’s Republic of China (PRC) and India during the period 1980–2008. Drawing from the recent literature, a comprehensive measure of trade costs is derived from a theory-founded gravity model of international trade, which can be computed based on the observed bilateral trade flows and GDP data. The analysis reveals that trade costs have declined sharply since the 1980s, accounting for a large and increasing portion of growth in total trade between the two countries. Whereas the reduction in trade costs accounted for less than one-third of the increase in trade between PRC and India during the 1980s, lower costs seem to explain about three-quarters of trade expansion during the 1990s and up to nearly 85 per cent in 2001–08.