Economic development and export diversification: The role of trade costs

As exports grow, export diversification tends to increase in developing countries, but decrease in high-income countries. We examine how the effect of transportation costs on diversification varies with the level of economic development, and offer a novel explanation for the difference in export diversification patterns. Using a combination of trade and trade cost data, we find that transportation costs impact export diversification in developing countries, primarily. That is, higher transportation costs do not reduce high income countries’ ability to add new export products, or increase export value for existing trade linkages. On the other hand, when compared with high income countries, higher variable transportation costs negatively affect all of these for developing countries. Our findings are related to and have implications for the debate on whether economic growth requires diversification, or whether diversification should come before growth.