Trade costs and the composition of developing countries' exports

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This study investigates whether trade costs have a systematic influence on the composition of developing countries' exports, one which is distinct from their effect on the volume of trade. It uses the World Bank's bilateral trade cost dataset and incorporates trade flows for a large set of developing countries. The identification strategy exploits the variation in trade costs across countries and the differences in trade cost sensitivity across industries and employs a cost shifter as an instrument to overcome the potential endogeneity of trade costs. The paper finds that the export composition of developing economies is fashioned by trade costs, with higher trade costs lowering (other things constant) the share of an industry's exports in the country's total exports more for more trade-cost-sensitive industries. The policy implication is clear: reducing trade costs encourages a shift in the composition of developing country exports in favor of relatively more trade-cost-intensive exports, which tend also to be more technologically advanced.