Trade Facilitation and the Extensive and Intensive Margins of Trade

The objective of this paper is to see where inefficient cross-border trade procedures, i.e. the trade procedures that trade facilitation is meant to lower, matter the most. Do the effects on the extensive margin (the range of goods being traded) or the intensive margin (how much that is traded of a certain good) dominate, or are the two margins affected in the same way? Very detailed, 8-digit, data on imports to EU countries from developing countries in 2005 is used to decompose trade into its extensive and intensive margins at the industry level. Thereafter, a fractional logit approach is employed to estimate how inefficient export and import procedures affect the extensive margin in relation to the intensive margin. Inefficient trade procedures are proxied by the number of days needed to export or import a good, using data from the World Bank’s Doing Business Database. To summarize the results, inefficient import and export procedures have a significantly negative effect on the extensive margin share, i.e. the extensive margin divided with the sum of the extensive and intensive margins, which is interpreted as saying that the extensive margin effects dominate. Further, evidence is found that these negative effects are declining with the level of inefficiencies. Lastly, there are significant differences between industries in how the extensive margin share is affected by inefficient procedures. These results are consistent with recent developments in the heterogeneous firm trade theory literature.