An approach to plan infrastructural investments to facilitate domestic trade

Abstract

The volume of trade between two regions is shaped by the cost of trade, which is a function of infrastructural and political barriers. Governments can invest in the upgrade of their country’s logistics infrastructure to mitigate these barriers, decrease trade costs, and increase domestic trade volumes; but they need to decide which infrastructural project(s) to invest under limited budget. A bilevel, bicriteria optimization model is proposed to overcome this challenge. The inner model anticipates total trade flows among all regions of the country with a profit maximization lens of the transporters. The outer model selects the projects based on minimizing total investment costs and maximizing total trade flows. The novelty in this approach is in incorporating the implicit ‘trade barriers’ through a ‘trade cost model’ borrowed from the economics literature. The proposed framework is implemented in a case study originating from the Canadian Northern Corridor concept which aims to boost domestic trade between the provinces and the territories of Canada. The numerical study indicates that investments to upgrade and increase connectivity in the logistics infrastructure of western Canada should be prioritized over others.