Subscribe to E-Bulletin Donate to CEGA

Who’s Getting Globalized? The Size and Implications of Intra-national Trade Costs

Development Challenge

Economic development policy has often focused on reducing international trade barriers. In recent decades, international trade costs have fallen substantially, successfully improving trade between nations, a process commonly referred to as globalization. However many developing countries also face substantial intra-national trade costs, resulting from features such as poor road infrastructure, which raise the cost of transportation within a country leading to higher prices at the final destination.  This limits the ability of more remote households to benefit from globalization.

There are few existing estimates of the size and nature of these intra-national trade costs; this paper creates a framework with which to more accurately estimate them.

Context

This study focuses on within-country trade costs in Sub-Saharan Africa. Ethiopia and Nigeria were chosen for the study due to their large geographic size and their willingness to make detailed price data available to researchers.

Evaluation Strategy

This study estimates the costs of intra-national trade in Ethiopia and Nigeria. The study uses for analysis the relationship between price gaps and distance, i.e. how price differences between two locations vary with the distance between them. Distance was measured as the shortest path along the earth’s surface between the origin and destination locations, with controls for quality and quantity of roads. Such an approach has been used extensively in the literature to provide information about the costs of moving goods between locations.

In order to correct for bias due to products differing across locations, the researchers used Consumer Price Index (CPI) retail price data from Ethiopia and Nigeria (2001- 2010) for identical products at many different outlet locations on a monthly basis. As a comparison, similar data for the United States were taken from the Nielsen Consumer Panel. Data were limited to precisely defined, brand name products, in order to control for unobserved product characteristics such as quality. In order to correct for bias due to the fact that price gaps are only informative about the level of trade costs when one of the locations is the origin location for that good, the precise origin location of each product was determined by directly contacting firms and distributors to identify the point of production or port of entry. The final research sample included 15 products in Ethiopia, 18 products in Nigeria and 46 products in the United States.

Finally, in order to correct for the fact that prices may differ across locations due to traders’ markups varying spatially, the researchers develop a novel theoretical framework where oligopolistic traders move goods between locations and charge markups that depend on demand and supply conditions in the destination location. The key insight is that product- and location-specific estimates of the pass through rate, the extent to which shocks to the price at the origin are passed through to the price at destination, provide the necessary information to correct standard price gaps for spatially varying markup differences.

Results and Policy Implications

The cost of intra-national trade in Ethiopia and Nigeria is approximately four to five times higher than in the US.

                                           Difference in trade costs between least and most remote locations Percentage price increase for most remote locations
Ethiopia $0.09 20%
Nigeria $0.13 12%
United States $0.02 2%

The results indicate that previous models that did not incorporate specific origin-destination spatial controls or account for variation in mark-ups by intermediaries underestimated the impact of distance by a factor of four. They find that despite remote locations being less competitive, mark-ups are actually lower because households in remote locations pay higher prices due to high trade costs and so are on a more elastic part of their demand curve.

Finally, the authors explore the implications of these high trade costs. First, high trade costs reduce the probability that remote locations can obtain particular products. Second, high trade costs make remote markets unprofitable for traders to serve, and so competition is limited. This means that consumers in remote locations capture a smaller share of any surplus created by trade compared to traders. 

Timeline

2014

Photo Credit: Roger Burks via Flickr