Evaluating the Impact of Transport Costs in Latin America

Applying a multi-region, recursive dynamic general equilibrium model, this study evaluates the impact of a reduction of trade transport costs in Latin America, which are now considered as a significant impediment to trade. The novelty of this study is three-fold. First, the model applies very rigorous and precise estimates of ad valorem transport costs and relevant elasticity of substitution on trade for Latin America (Moreira, Volpe and Blyde: 2008). Second, it accommodates the concept of the “effective price and quantity”, introduced by Hertel, Walmsley and Itakura (2001). The simulation results on trade are fairly consistent with the econometric estimates (Moreira, Volpe and Blyde: 2008). Third, the model, which is built on the updated 2008 new SAMs, traces growth trajectories and captures the time-path dynamic and cumulative effects. The simulation results show very promising and strong gains due to reducing transport costs. A 10-percent reduction of transport costs in Latin America would increase the region’s real GDP by more than 2 percent. The impact on trade is more dynamic. The intra-regional exports jump by 22 percent, equivalent to $33.8 billion at 2008 prices. But reflecting the initial heterogeneity in the structure of transport costs, the positive impact is fairly asymmetric over sectors and countries. The simulation results also show that an improvement of transport infrastructure is by far an effective policy option to foster growth and trade than tariffs do: in terms of real GDP, it generates 10 times greater gains, and 4.5 times larger effects on trade.