Trade Costs and Intra-OIC Trade: What Are the Linkages?

(ProQuest: . denotes formulae omitted.)1. IntroductionSince the initiation of the General Agreement on Trade and Tariffs in 1947, a dramatic fall in tariffs, quotas and other non-tariff barriers has been observed in the world trading system. Particularly in manufacturing goods, significant reductions were observed in tariff rates. Substantial improvements in transport and logistics over the years have also contributed to the fall in trade costs around the world. However, international trade remained more costly than domestic trade. This is not only due to costs of transporting goods to far distances, but also at-the-border and behind-the-border costs that can be reduced by appropriate policies. This fact accordingly shifted the attention from reducing policy barriers to promoting trade facilitation.Member countries of the Organization of Islamic Cooperation (OIC) have equally benefited from this transformation, albeit at varying levels depending on their transport infrastructure, composition of export goods and their distance to export markets. The current 57 OIC countries are dispersed over a large geographical region and at different levels of economic development. The mixed nature of the group of the OIC countries reflects high levels of heterogeneity and divergence in the economic structure and performance of these countries. This also reflects the great potential for trade between the member countries. This potential being partly utilized by the member countries, intra-OIC exports increased significantly from $132 billion in 2005 to $362 billion in 2012, whereby the share of intra-OIC exports in total OIC exports increased only 2.8 percentage points to reach 16% in 2012. However, during the same period the share of developed countries increased even further compared to intra-OIC trade while the share of non-OIC developing countries naturally decreased.Enhancing the intra-OIC trade is one of the key targets of the OIC Ten Year Program of Action as well as several other strategic documents of the OIC. Despite the great importance given to the issue, there is no serious technical document evaluating the progress achieved and prospects for further development. In this respect, this paper provides a brief account of trade costs in OIC countries and analyzes the decomposition of trade costs in OIC countries as well as its impacts on direction of exports from OIC countries. Thereby, it aims to contribute to the efforts in understanding the significance of major barriers for the expansion of trade within the OIC region.This paper utilizes a new global data set of bilateral trade costs prepared jointly by the World Bank and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) based on trade and production data, covering 202 countries for the time period 1995-2011. According to the World Bank and UNESCAP research, trade costs are influenced to varying degrees by distance and transport costs, tariff and non-tariff measures, and logistics. The data also stress the importance of supply chains and connectivity constraints in explaining the higher costs and lower levels of trade integration observed in developing countries.International trade literature widely utilizes standard gravity model to estimate the impacts of trade costs (and its components) on trade. The pioneering work of Jan Tinbergen (1962) initiated a vast theoretical and empirical literature on the gravity equation for trade. In its simplest form, the gravity equation for trade states that the trade flow between two countries is proportional to the product of the GDPs of these countries and inversely proportional to their distance, which broadly interpreted to include all factors that might create trade resistance. Gravity equation can be used to attribute changes in trade flows to changes in domestic economic activity and changes in bilateral trade costs. Jacks et al. (2008) show the role of trade costs in explaining trade booms and trade busts. …