Agricultural Trade Costs: 1965-2010

International trade costs are known to be large but difficult to measure. Using a microfounded gravity equation based on the framework in Novy (2011), this study estimates an indirect measure of multilateral trade costs for tradable goods in agriculture. Using production and bilateral trade data along with plausible values of the elasticity of substitution, we find that median global agricultural trade costs were 285 percent in 1965, on an ad-valorem equivalent basis, before declining dramatically to a 118 percent ad-valorem equivalent in 2010. There is considerable variation in agricultural trade costs, bilaterally, and within various policy arrangements such as regional integration and the GATT/WTO. Statistical analysis of the determinants of agricultural trade costs largely confirms this variation: bilateral and regional free trade initiatives lower international trade costs by 36 percent on average, whereas GATT/WTO membership lowers trade costs by nearly 20 percent.