geographic context, and infrastructure on trade. Using a panel of bilateral trade and tariff data from 1988 to 2002, and controlling for bilateral tariff preferences and the correlation between GDP and infrastructure and institutional development, they conclude that infrastructure is a significant determinant not only of export levels, but also of the likelihood exports will take place at all. The sample variation in basic infrastructure (communications and transportation) explains substantially more of the overall sample variation in exports than do the trade barriers faced by developing countries. Similarly, Djankov, Freund and Cong (2006) find that internal transport and related transactions costs are a major factor determining the competitiveness of (potential) exporters.

Such cost factors reflect the specific role played by “transport” services—they are intermediates that help determine the costs of trade in goods and thus the producer prices received by firms.<sup>27</sup> Deardorff (2001) illustrates the importance of transport-related costs as a barrier to trade in goods (and services), and the potential welfare gains from actions that lower such costs. These gains may be much larger proportionately than those that can be obtained from merchandise trade policy reforms insofar as the transport costs generate real resource costs as opposed to rents. With tariff liberalization there is redistribution from producers and the government (tariff revenue) to consumers, so that gains are limited to removal of the deadweight losses associated with taxing trade. Lowering trade service (transport) costs also results in the recovery of deadweight losses, but not the redistribution of tariff revenue. Whether the net welfare gains from lower costs exceed those from an equivalent tariff reduction depends on the size of the reduction in costs. Insofar as policy generates redundant procedures and duplication of fixed costs, the potential gains from liberalization of “trade services” are likely to be large.<sup>28</sup> Francois and Wooton (2001a), examine the interaction between different modes of market access liberalization in services – cross-border and establishment – and the prevailing market structure in a domestic services industry. They develop a model of a domestic service sector that is imperfectly competitive (acts as a cartel) and assume there are barriers to crossborder competition (“trade costs”). They then investigate the implications of lowering these barriers and giving the foreign firm access to domestic consumers through establishment (FDI or mode 3). They illustrate that in such a setting domestic firms have an incentive to accommodate the entry of a foreign firm by inviting it to establish (FDI) and join the domestic

> 27 Anderson and van Wincoop (2004) conclude that the ad valorem tax equivalent of total trade costs in rich countries is about 170 percent and even higher for poor countries.

> 28 Langhammer (2006) analyzes the impact of liberalization of intermediate services in developed and developing countries on effective rates of protection of manufacturing and finds that indirect effects of greater competition in services – in terms of more variety and lower prices – is larger than the direct effect, as reflected in the associated change in the implicit effective rate of protection for manufacturing sectors.

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