Specifically, the World Bank’s Logistics Performance Index (LPI) is based on surveys of global freight operators and express carriers on customs, logistics and transport infrastructure, international shipments, logistics competence, tracking and tracing, and delays. UNCTAD’s Liner Shipping Connectivity Index (LSCI) is derived from the number of ships, their container-carrying capacity, maximum vessel size, number of services, and number of companies that deploy container ships in a country’s ports. The choice of variables in the panel is informed by Arvis et al. (2013), but also by findings from the stylized facts presented in the main text. Full details of data and sources are presented in table 2.<sup>9</sup> Since trade costs data are obtained as bilateral geometric averages, trade facilitation indicators available at individual country level are transformed into bilateral measures by taking the geometric average of each country pair direction. Therefore, the unit of analysis is each individual country pair. Time fixed effects η t are included in the estimation to control for global trends. As the measures of trade costs already net out multilateral resistance components, in line with Novy (2013), the estimation does not include additional fixed effects.<sup>10</sup> Instead, to control for possible correlation of error terms, clustered standard errors by country pairs are used.

Two models are estimated: a general model for the determinants of trade costs in all sectors of the economy, and a sectoral model for the determinants of trade costs in the manufacturing sector. The two models follow the specification presented in equation 1, but trade costs and tariff rates are sector specific. Table 3 shows results from the estimations.

# Results

All estimated coefficients have signs and magnitudes in line with prior expectations based on the literature. Geographical distance and high bilateral tariff rates are positively associated with trade costs. In contrast, adjacency, common language, and membership in a common regional trade agreement tend to reduce trade costs. Policies aimed at facilitating trade, including maritime connectivity and stronger logistics performance, are also associated with lower bilateral trade costs, both overall and in the manufacturing sector. Trade uncertainty is also positively associated with trade costs, including in the manufacturing sector. With an R-squared above 50 percent, the regression explains most of the variation in trade costs in the sample.

> 9 Nontariff barriers or exchange rate volatility would ideally have been included in the regression estimation. However, these are difficult to measure and the available cross-country, over-time panel measures were too crude to yield statistically significant results. Ideally, the regression would also be applied to services; however, the database does not include trade costs for services.

> 10 Multilateral resistance captures global trends. Specifically, outward multilateral resistance measures the degree to which trade flows between i and j depend on trade costs across all potential markets for i’s exports, while inward multilateral resistance measures the degree to which bilateral trade depends on trade costs across all potential import markets. Therefore, the two indexes summarize third-country effects that might affect bilateral trade flows between i and j. Novy (2013) shows that simple algebra makes it possible to eliminate the multilateral resistance terms from the gravity equations, and in so doing he derives an expression for trade costs.