borders as well as within the countries.<sup>46</sup> The World Bank has argued that an FTA would bring large welfare gains for consumers in Bangladesh, provided infrastructure and administrative capacity at customs borders is adequately expanded.<sup>47</sup> The conditions of land ports in Bangladesh are not satisfactory. It has also been found that ports in Bangladesh are plagued by labor problems, poor management, and lack of equipment; costs rise further with inadequate customs services, including delays in clearances and rent-seeking.

Poor trade logistics in Bangladesh affects the cost of export and import very significantly and is reflected in the Logistic Performance Index (LPI). The World Bank (2012) finds that the domestic logistics chain – including collection of products from producers, road haulage to the warehouse, containerization, haulage to the port, and customs at port- is still very underdeveloped. Bangladesh ranks 87 in the LPI, while its South Asian comparators like India and Pakistan rank 39 and 68 respectively.

The quality and performance of logistics services differ markedly between India and Bangladesh and also across their trade partners. These variations in time and cost stem from differences in the quality and cost of infrastructure services as well as differences in policies, procedures, and institutions. The quality of such services, policies, and procedures has a significant effect on trade competitiveness and market access. While there is strong anecdotal evidence that the lack of adequate trade infrastructure might have altered the bilateral trade potential due to trade costs, this study tries to assess the effect of trade facilitation/trade cost elements (e.g., transit and time) and logistics services on bilateral trade. It does so with the help of an augmented gravity model (AvW type), and then determines important trade remedies. The regressions are based on a cross-section pooled dataset for the years 2007 and 2008. A three-stage regression process is used here to understand the impact of trade facilitation, comprising several of the logistics and trade facilitation indicators and shows that this captures essentially all the explanatory power of the indicators used separately.<sup>48</sup> Definition of variables and corresponding data sources appear in Appendix 6, and the list of Bangladesh‘s trade partners in Appendix 7. The initial augmented gravity results are worth noting (Table 11):

- Specification 1 contains the initial set of models fitted before any of the trade facilitation or logistics indicators or additional variables are included. It contains regressions of bilateral trade on GDP in the exporting and importing countries. The results are qualitatively consistent with those of earlier studies, particularly de Groot _et al._ (2004). What is most interesting is that the tariff and the dummy variables for regional transit in specification 1 are statistically significant at a 1 percent level. Furthermore, trade liberalization and regional transit would lead to increased exports of Bangladesh, other things remaining equal.

> 46 De and Ghosh (2008); De and Bhattacharyay (2007a, 2007b).

> 47 Countries that have removed common barriers to trade have raised per-capita income by increasing trade. The removal of common borders between Germany and the Czech Republic and between the United States and Mexico are seen as key factors in the incomes per capita rising in the smaller countries-–-by 26 percent in the Czech Republic and 27 percent in Mexico (Redding and Venables, 2004).

> 48 The following diagnostics are carried out: (i) linearity assumption between response variable and predictors is checked; (ii) statutory hypothesis tests are carried out on the parameter estimates; (iii) Ramsey test is done to check model specification; (iv) normality of residuals is tracked through Kernel density plot; (v) all estimates are checked for heteroscedasticity through Cameron and Trivedi‘s decomposition of IM-test; (vi) multicollinearity problems are checked by looking at the variance inflation factor (VIF); (vii) models do not suffer from endogeneity as highly correlated exogenous variables are not used in the gravity equations; and (viii) it being cross-section data, the presence of serial correlation does not appear.

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