assumptions. The preferential reduction of tariffs within the BRI area brings only marginal results in terms of poverty reduction. An additional 0.34 million and 1.7 million people would be lifted from extreme and moderate poverty by 2030 compared to the scenario with infrastructure improvements and reduction of border cost delay, mostly in the BRI area. The net effect of tariff reductions on displacement is relatively small, therefore the countries that experience the lowest poverty reductions under the border cost reduction scenario remain the least affected when the preferential tariff reduction is implemented as well.

# **7. Sensitivity analysis**

One of the key assumptions in our analysis is that the reduction of trade costs will impact domestic trade as much as cross-border trade. The estimates of de Soyres et. al. (2018) focus on maritime and rail transport routes, however in domestic transportation a larger proportion of trade takes place through road transportation. As a result, our assumptions of the internal trade cost reductions could be overestimated. We look at the impacts of the cross-border trade costs reductions alone to estimate the benefits of the BRI related infrastructure investments. Table 14 presents the results of this analysis. The key findings remain unchanged as the world and the BRI region experience welfare gains in the upper bound infrastructure scenario, but the gains are much smaller in line with a much more modest trade cost reduction. However, certain countries would see much smaller gains with no internal trade cost reductions. The most striking examples are Pakistan with gains declining from 10.5 to 0.8 percent, Bangladesh with gains declining from 6.9 to 0.7 percent as well as Malaysia and Thailand with gains declining from 7.7 to 4.6 percent and 8.2 to 5.4 percent respectively.

Further, we test the sensitivity of our findings to the elasticity of substitution between imported goods. The Armington assumption allows for product differentiation between countries of origin. We employ the elasticities typical for the structural model as in de Soyres, Mulabdic and Ruta<sup>14</sup> (2018) allowing for greater substitutability across products and making them more homogenous. Somewhat surprisingly, raising the Armington elasticity lowers the overall gains. In order to understand this better, we developed a model similar in spirit to the 1-2-3 model—a standard single country model with two produced goods (for domestic and export markets) and three prices.<sup>15</sup> We extended the model to include an import supply and an export demand schedules to better represent the endogenous terms of trade in the global model. The impacts of an improvement in the iceberg trade costs depend on five key parameters: the initial trade balance, the share of imports in domestic absorption, the export demand elasticity, the import supply elasticity and the Armington elasticity. Using this simple model, we look at the impacts of varying these key parameters individually and it is the case that raising the Armington elasticity reduces the impact on welfare from improving the iceberg parameter. We also undertook Monte Carlo simulations to assess a

> 14 In this model, the elasticity of trade with respect to trade costs is the dispersion of productivity and is not the elasticity of substitution as in Armington models. If producers of the intermediate good aggregate are restricted to purchase goods from the same source, regardless of the change in trade costs, then the trade elasticity will be given by the elasticity of substitution as in Armington models.

> 15  See Deverajan et al. 1990.

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