Measuring and Decomposing Cost of Agricultural

Trade Between Turkey, the EU and MPC Countries

Selim AATAY* and Murat GEN**

Workshop on Agricultural Trade and Food Security

in the Euro-Med Area

25-26 September 2014

Antalya, Turkey

*Akdeniz University, Department of Economics, Turkey. selimcagatay@yahoo.com.

**Otago University, Department of Economics, New Zealand. murat.genc@otago.ac.nz.
 Motivation behind the work..

Two factors:

1st: Anderson & Wincoop (2004) ...trade costs..., Jour. of Econ. Literature
Novy (2012) ...measuring international trade costs..., Economic Inquiry
Arvis et al (2013) ...trade costs in the developing..., WB Discussion Papers

...ad valorem trade cost for the developed countries reach about 170%... of which
border barriers are about 44%... of which 8% is only tariffs...

... we have transportation costs, wholesale and retail distributional costs,

information, security, language etc. barriers... left...

2nd: Changing/unchanging shares of Turkey and MPC in the EUs agricultural trade
since late 1990s
 Motivation

Table 1: Share of various markets in EU's and Turkey's agricultural trade

EU Turkey
Turkey-% Main MPC Prt.-% Main MPC Prt.-%
Exports Imports Exports Imports Exports Imports
2000 1.15 3.55 4.79 0.11 7.90 2.36
2005 1.44 4.68 4.58 0.16 3.30 4.95
2006 1.36 4.44 4.28 0.15 4.00 4.33
2007 1.60 4.01 4.68 0.13 3.45 4.54
2008 1.72 3.87 6.47 0.12 4.56 1.81
2009 1.79 3.96 5.24 0.09 6.04 1.94
2010 2.29 4.09 4.97 0.07 6.02 2.26

. ...the shares change in a narrow range...

 Motivation
25.00 30.00
EU-MPC Agr. Trd.
20.00 EU-TR Agr. Trd. 25.00
EU-TR Trd. Cost EU-MPC Trd. Cost
15.00 20.00
10.00 15.00
5.00 10.00
0.00 5.00
2000-01

2005-06

2006-07

2007-08

2008-09

2009-10
-5.00 0.00

2000-01

2005-06

2006-07

2007-08

2008-09

2009-10
-10.00 -5.00
-15.00 -10.00
-20.00 -15.00
40.00
TR-MPC Agr. Trd.
30.00 TR-MPC Trd. Cost

20.00

10.00

0.00
2000-01

2005-06

2006-07

2007-08

2008-09

2009-10
-10.00

-20.00
 Motivation
The change in agricultural trade might be partly due to the factors that affect
agricultural demand and production but the literature also attributes significant
attention to cost of agricultural trade...

From theoretical point of view trade costs are:

the set of factors that drive a wedge between export and import prices
can be fixed in the sense that they are paid once in order to access a market
or variable in the sense that they must be paid once for each unit shipped
trade costs matter as a determinant of the pattern of bilateral trade and
investment, as well as of the geographical distribution of production

Therefore trade costs are of great importance from the policy perspective
- to understand the sources of those costs
- they are important determinants of a countrys ability to take part in regional
and global production networks
 Motivation
Empirical evidence provides that
tariffs in many countries are now at historical lows but trade costs still remain
high
trade costs in the developing world are likely to be even higher
trade costs are lower at least in some parts of developing world but the rate of
change is slower compared to developed countries
in addition to traditional sources of trade costs, such as tariffs and
transportation charges, a range of additional factors are now affecting the
pattern of trade and production in the developing world:

trade facilitation and logistics performance

behind the border measures

 Motivation

This classification is important because

it suggests that a significant part of the trade isolation of some developing
countries may be due to policy factors within their governments control
deep regulatory and institutional features of countries that affect all firms
operating there and do not necessarily discriminate in lawalthough they
usually do in factagainst foreign firms
 Aim of the Paper

Mainly:

To find the effect/contribution of various tariff and non-tariff factors on

bilateral agricultural trade costs between:
- EU-MPC
- EU-TR
- TR-MPC
 Methodology

A-Measuring agricultural trade costs

B-Econometric estimation of agricultural trade costs

 Methodology
A-Measuring agricultural trade costs

Alternative measures of trade costs

Gravity approach Top-down approach

(vast literature) (Novy, 2012)

Bottom-up
Bottom-up Unified measure of
Product-line measures trade cost
(Kee et al., 2009). (Anderson and Van
Wincoop, 2004)
 Methodology
A-Measuring agricultural trade costs
Gravity approach:

use particular factors, such as geographical distance, cultural similarity, etc. as

sources of trade costs

one drawback- it does not produce an overall estimate of the level of trade
costs between countries, of the type that is frequently included in theoretical
models of trade

another drawback- concerns about omitted variables bias due inclusion of some
variables but not others
 Methodology
A-Measuring agricultural trade costs
Bottom-up Product-line measures:

focus on aggregating product-line measures of trade policies -Trade

Restrictiveness Indices; tariff (TTRI) and non-tariff barriers (OTRI)

these suffer from the limitation that they are bottom up measures-

they take account of those sources of trade costs included in the datasets
used to build them, but not other potential sources

these indices leave out other major sources of trade costs, such as transport
costs, and differences in cultural or legal heritage between countries which
magnify the costs of doing business across borders
 Methodology
A-Measuring agricultural trade costs
Bottom-up Unified measure of trade cost:

they unify various determinants of trade costs such as tariffs and non-tariff
measures, transport costs, and domestic distribution costs

a bottom up approach in the sense that it builds up an estimate of the overall

level of trade costs based on assumptions as to what the likely components of
the total costs are
 Methodology
A-Measuring agricultural trade costs
Top-down approach Novy Index:

top down measure in the sense that it uses theory to infer trade costs from
the observed pattern of trade and production across countries

derives an all-inclusive measure of trade costs based on the observed pattern of

trade and production, without the need to work up from individual policy
measures as in other work

trade costs therefore include both observable and unobservable factors: tariffs
and traditional non-tariff measures; transport costs; behind-the-border barriers;
and costs linked to the performance of trade logistics and facilitation services

it includes all factors that contribute to the standard definition of iceberg trade
costs in trade models (anything that drives a wedge between the producer price
in the exporting country and the consumer price in the importing country)

provides a summary indicator of the level of trade costs between any two
country pairs
 Methodology
A-Measuring agricultural trade costs

Novy Index to Measure Trade Costs

ciJ: cost of trade between countries i and j

xii: domestic trade flow in country i
xjj: domestic trade flow in country j
xij: nominal exports from country i to country j
xji: nominal exports from country j to country i
: elasticity of substitution between all goods

final measure represents the geometric average of international trade costs

between countries i and j relative to domestic trade costs within each country

trade costs are higher when countries tend to trade more with themselves than
they do with each other

data for domestic trade flow are not directly available but can be calculated by
subtracting total exports of the country from its gross domestic product
 Methodology
A-Measuring agricultural trade costs

Novy Index to Measure Trade Costs

if the measure is expressed for a specific industry k (rather than total exports),
the trade flow variables will have a superscript k and will have a subscript k

all the variables except are observable (although it is possible to estimate,

Novy (2012) shows that the overall results are not sensitive to its value and
suggests setting it equal to 8 based on the surveyed estimates of it in Anderson
and van Wincoop (2004)

the calculated value ciJ measures international trade costs relative to domestic
trade costs, and captures bilateral trade barriers in both directions
 Methodology
B-Econometric estimation of agricultural trade costs

Data sources: UN/ESCAP (Econ. and Soc. Commission for Asia & the Pacific)
World Bank/WDI (World Development Indicators)
UN/UNCTAD (UN Conf. On Trade & Development)
CEPII

Estimation period: 1995-2010

Estimation methods: Unbalanced, static panel econometrics

Sample: Major trade partners of Turkey in the EU

Major trade partners of the EU in MPC
Major trade partners of Turkey in MPC
 Methodology
B-Econometric estimation of agricultural trade costs
0 1 X Tjt Tjt
cTjt distTj e ,
ln cTjt 0 ln distTj 1 X Tjt dt Tj Tjt ,

cTJt: cost of trade between Turkey and country j at time t

distTj: great-circle distance between capital of Turkey and capital of country j

XTjt: set of covariates that represent observable determinants of trade costs

Tjt: composite error term (allowed to consist of a country-pair specific

component Tj (that is, a fixed or random effect) and a country-pair white noise
error term Tjt

dt: vector of year indicators representing the time fixed effects

 Methodology
B-Econometric estimation of agricultural trade costs

XTjt: covariates that represent observable determinants of trade costs

Continous variables

distance between the two principal cities of countries

real exchange rate of country
trade-weighted average effectively applied tariff

Discrete variables: Non-tariff measures

Transportation Trade facilitation Business env.

. air freight . cost to export . cost of st. bussiness
. rail freight . cost to import . proc. of. st. business
. road freight . time to export . credit depth
. liner shipping connectivity . time to import . cost of enfor. contr.
. road density . customs procedures . str. of legal rigths
. port quality . customs clearence time . transp. in publ. sec.
. port traffic
 Methodology
B-Econometric estimation of agricultural trade costs
XTjt: covariates that represent observable determinants of trade costs

Discrete variables : Non-tariff measures Intercept dummy var.: Gravity var.

Infrastructure
. cell phone . colonial relationship
. phonelines . common land border
. internet users . colonized by the same power
. ever part of the same country
. share a common official language
. share a common language
(ethnographic basis)
. both landlocked
. members of the same RTA
Findings: measures of elasticity on the horizontal axis
road freight
ALG-EU

rail freight MOR-EU

transportation
EGY-EU
liner shipping connectivity TR-EU
TR-MPC
legal rights

credit depth business env.

cost of business st.

customs proc.

cost to import trade facilitation

cost to export

avg tariffs border

distance gravity
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3
 Findings
- No endogeneity problems expected due to how trade costs are calculated

- Adjusted R2 ranges between min 0.55 and max 0.88

- Variables included in the figure are statistically significant ones (at least 0.05)

The messages we got:

-Physical distance still remains as a major cost factor for all country pairs

-Tariffs are important especially between Morocco-EU & Egypt-EU

-Factors that improves trade facilitation especially in the EU are important both
for MPC and TR

-Improvements in business environment in the EU developes more intra trade

rather than international trade but this becomes more important in trade with
Algeria

-Improvement in shipping connectivity and increase in rail freigt decreases the

trade cost between Morocco-EU and Turkey-EU
Decomposition...

Although the estimated coefficients represent the impact of different components

of costs, their share in trade costs still needs to be determined.

m cov( xm , cTj )
sm ,
var(cTj )

sm: denotes the contribution (in percentage) of covariate xm to total trade costs
m: partial regression coefficient
Novy Index to Measure Trade Costs: should be interpreted cautiously

first, it is the geometric average of trade costs in both directions: from a policy
perspective, it is therefore impossible to say without further analysis
(decomposition analysis) whether a change in trade costs between two
countries is due to actions taken by one government or the other, or both
together (recognize that only part of the total will be amenable to direct policy
action by governments)

second, it measures international relative to domestic trade costs: a change in

cost might be due to a change in either component, or both simultaneously, it is
therefore impossible to disentangle the effects of particular policy actions
without further analysis (decomposition analysis)

third, the interpretation depends to some extent on the theoretical model from
which it is derived; in the Anderson and Van Wincoop (2003) model, trade costs
are variable only; in other models of trade with fixed costs as well, such as
Chaney (2008), a similar expression for trade costs can be derived
Novy Index to Measure Trade Costs: should be interpreted cautiously

the numerical value of trade cost is sensitive to the choice of parameter value
for , the elasticity of substitution (but the choice of parameter value largely
remains an issue of assumption rather than measurement)

the possibility that different countries and sectors might exhibit different
elasticities gives some cause for concern at the level of interpreting across
countries and through time

nonetheless, on the assumption that the elasticity is indeed constant, the choice
of parameter value only affects the level of ad valorem trade costs, not their
relative values across countries and through time

indexing trade costs on a base country-year combination reduces the problem

of sensitivity to negligible proportions, although it does not totally eliminate it
as trade costs are a non-linear function of the elasticity of substitution