Impacts of trade facilitation on modal choice and international trade flows

Abstract

Over the last decade, the use of air transport to facilitate global merchandise trade has grown significantly, driven by the increasing demand for ‘just in time’ delivery of intermediate goods as well as due to the growing importance of trade between more distant countries. In this paper we analyze the effect of improved global logistics and trade facilitation on transport mode choice in international trade using the Global Trade Analysis Project (GTAP) model of global trade which we modify to incorporate modal choice. To parameterize this model, we develop a continuous modal choice model and estimate the associated elasticities of substitution between transport modes. We find that modal substitution elasticities have values ranging from 0.57 to 2.14, indicating significant response to changes in the relative cost of different modes of goods transport. The quality of logistics infrastructure is also found to influence modal choice in international trade with improved logistics performance generally leading to increased reliance on air transportation.We validate the modified and parameterized GTAP model by simulating the impact of improvements in logistics, measured as a change in the Logistics Performance Index (LPI). We find that improvement in LPI in the poorest countries of the world reduces the overall cost of transport and amount of services required to transport a given product along a given route by a given mode. Importantly, the reduction in modal cost of transport results in modal substitution. We use the framework to explore the consequences of an improvement in low income country logistics performance for GDP and economic welfare.