High cost of cross-border trade restricting Africa’s potential gains from international trade
The costs of moving goods within countries are generally higher in developing countries than in the rest of the world, and this is especially true in much of Africa. Transport in Africa is often unpredictable and unreliable, and the cost of transport is therefore often higher than the value of the goods being transported (World Bank, 2007).
In some areas of Africa, transport costs may constitute a higher trade barrier than import tariffs or other trade restrictions (Amjadi and Yeats, 1995). A one-day reduction in inland travel times could lead to a 7% increase in exports – equivalent to a cut of 1.5 percentage points on all importing-country tariffs (Freund and Rocha, 2010). It has also been estimated that a 10% drop in transport costs could increase trade by 25% (Limao and Venables, 2001).
It is difficult to give an exact estimate of the size and implications of existing transport costs in sub-Saharan Africa, especially in environments where data is scarce. Various techniques have been used (see box on pg. 3), with one study estimating that the unit costs of road transport are 40–100% higher in Africa than in Southeast Asia (Rizet and Gwet, 1998). In landlocked countries, estimates suggest the costs are three to four times higher than in other developed countries (MacKellar et al., 2002).
However, more recent research suggests these could be substantial underestimates. Atkin and Donaldson (2015) reckon that the cost of transporting goods could be up to five times higher (per unit distance) in some sub-Saharan African countries than in the US. In the case of Ethiopia, the “cost of distance” is estimated to be about 3.5 times higher relative to the US, while in Nigeria, it is 5.3 times higher.
Atkin and Donaldson (2015) reckon that the cost of transporting goods could be up to five times higher (per unit distance) in some sub-Saharan African countries than in the US.
There is little doubt that such relatively high costs would put upward pressure on the prices of a country’s imports, and simultaneously make its exports less competitive in international markets – and that both of these factors would act to reduce the country’s level of international trade.
Having an accurate estimate of transportation costs is important in order to understand the role these costs play in determining the overall level and benefits of international trade. These new estimates suggest that the beneficial effect of reducing transport costs could be even larger than previously thought.
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Calculating the cost of distance
Estimating the size of intra-national trade costs and how these costs depend on distance proves challenging. Many studies have tried to do this by using the quoted price of transport from trucking surveys (see for example, Rizet and Gwet, 1998).
Although such quotes can give an approximate measure of trade costs, they only capture the components that transport firms charge, omitting other costs of distance (delay, uncertainty, risk of damage or theft, difficulties of buyers and sellers matching and monitoring one another, etc.)
The most straightforward way to estimate the cost of distance without using surveys would be to calculate the difference in price of an imported good when sold at the port of origin versus the price at the destination. This requires detailed data on goods, with specific information about their origin and price at different locations.
This is necessary to ensure that the goods sold at different locations are identical, and that price differences do not simply reflect differences in quality. Atkin and Donaldson (2015) generate a unique dataset to tackle this challenge, where the prices of goods are recorded at the barcode-equivalent level and also include information on its origin and destination.
Once such data has been found, the calculation still presents a serious challenge, as the difference in price between origin and destination may reflect not only the desired intra-national trade costs but also an added mark-up by traders, which may vary across locations.
To address this problem, Atkin and Donaldson (2015) remove the variation in mark-ups from the data on prices. They do this by observing how a change in price (perhaps due to a reduced tariff or a change in production costs) at the port or source location is reflected in the price of that good at the destination – the so-called pass-through rate.
Using this information, the authors can deduce how strongly mark-ups are affected by transport costs and are thus able to arrive at a clean estimate of the intra-national trade costs.
