Modelling and quantifying the effects of trade facilitation on trade and international transport costs using the logistics performance index

Abstract

In order to investigate and analyse the factors behind the promotion of international trade, we propose the logistics performance index (LPI) as a way to measure the facilitation of international trade. We suggest modelling transportation costs and their impact on trade according to a gravity approach. The impact of the LPI appears to be robust to the preferred specification (basic or with fixed effects) and to the different implemented econometric techniques (OLS, Tobit and PMLT), to the extent that we always obtain a significantly positive impact of the LPI for both the importing and exporting countries. Our results reveal two major mechanisms: 1) an improvement of the logistics performance index leads first to a reduction in transportation costs; 2) it further results in the expansion of trade. Econometric tests also show that a 10% increase in the index positively affects the probability of trade occurring, with it increasing by 30% in the importing country and by 40% in the exporting one.