The Role of Trade Facilitation in Central Asia: A Gravity Model

With a decrease in formal trade barriers, trade facilitation has come into prominence as a policy tool for promoting trade. In this paper, we use a gravity model to examine the relationship between bilateral trade flows and trade facilitation. We also estimate the gains in trade derived from improvements in trade facilitation for the Central Asian countries. Trade facilitation is measured through the World Bank’s Logistic Performance Index (LPI). Our results show that there are significant gains in trade as a result of improving trade facilitation in these countries. These gains in trade vary from 28 percent in the case of Azerbaijan to as much as 63 percent in the case of Tajikistan. Furthermore, intraregional trade increases by 100 percent. Among the different components of LPI, we find that the greatest increase in total trade comes from improvement in infrastructure, followed by logistics and efficiency of customs and other border agencies. Also, our results show that the increase in bilateral trade, due to an improvement in the exporting country’s LPI, in highly sophisticated, more differentiated, and high-technology products is greater than the increase in trade in less sophisticated, less differentiated, and low-technology products. This is particularly important for the Central Asian countries as they try to reduce their dependence on exports of natural resources and diversify their manufacturing base by shifting to more sophisticated goods. As they look for markets beyond their borders, trade facilitation will have an important role to play.