Did you know that trade policy barriers such as tariffs and other regulations account for at least 14% of total trade costs? Would you be interested in gaining a sense of the degree of restrictiveness of these measures, of how trade-policy barriers compare with other trade costs, and of who ultimately bears these costs?

On April 30, the World Trade Organisation (WTO) launched its Trade Cost Index (TCI), which details the impact of regulatory barriers and other factors on the costs to trade. The TCI considers the costs of trading internationally relative to trading domestically.

Produced by the WTO’s Economic Research and Statistics Division, the TCI complements other statistics on trade costs that the WTO provides, such as average tariffs or the number of nontariff barriers (NTBs), and gives a sense of the weight of these measures relative to other factors, such as transport and travel costs, information and transaction costs, information and communication technology connectedness, and governance quality.

The TCI uses estimates of bilateral trade costs for 43 economies and 31 sectors from 2000 to 2018 to illustrate the evolution of trade costs over time, the incidence of trade costs across economies and sectors for different household income groups by gender, firms size and skill groups, as well as to identify the main factors determining trade costs.

The TCI provides a detailed breakdown of trade costs for both goods and services and also identifies the groups of producers and consumers that bear the brunt of these costs. Compared with previous studies, this methodology introduces several improvements. Firstly, it allows for sector-specific elasticities of trade flows to trade costs for both goods and services. Secondly, it allows the estimation of directional trade costs, thus offering more realistic estimates of trade costs. Directional trade costs also allow us to estimate the incidence of trade costs on different groups of consumers and producers.

The TCI finds that trade policy barriers and regulatory differences – which include tariffs and NTBs – comprise the largest component of trade costs when low-income economies trade with one another. The statistics draw attention to the high potential for policy reforms to boost trade among developing countries. Transport and travel costs comprise the largest share of trade costs when high- income economies transact with one another or with lower-income economies.

The TCI’s main finding can be summarised as: (1) Global trade costs declined by 15% between 2000 and 2018. (2) Trade costs for services are higher than trade costs for agricultural goods (trade costs for manufactured goods are the lowest). (3) Overall trade costs are higher for women, small and medium-sized enterprises, and unskilled workers. (4) High-income groups face higher trade costs, given their larger share of services consumption. (5) Trade policy barriers and regulatory differences account for at least 14% of trade costs in all sectors. (They include tariffs and NTBs, as well as regulatory differences and other policies covered by trade agreements, such as a lack of investment facilitation or of intellectual property protection.) (6) Trade policy barriers are the most important component of trade costs for trade among low-income economies. (7) Transport and travel costs, coupled with information and transaction costs, explain why the largest share of trade costs is for trade between high-income economies.

Where the TCI found overall trade costs to be higher for women, small and medium- sized enterprises and unskilled workers, this was partly because of these groups' concentration in certain sectors, such as services. The TCI also found that trade costs for services are higher than trade costs for agricultural goods, while trade costs for manufactured goods are the lowest.