In this paper, Alexander Plekhanov, Senior Economist at the EBRD, and Zsoka Koczan, University of Cambridge, examine the widely held view that the value of modern trade agreements derives primarily from investment, service liberalisation and the removal of non-tariff barriers rather than changes in rules governing movement of goods such as tariffs and quotas. They look at the effects of infrastructure and quality of institutions on bilateral trade flows, paying particular attention to the joint effects of the quality of infrastructure and the control of corruption in importing and exporting countries.
Overall, the analysis suggests that potential trade gains from improvements in infrastructure are large and far exceed the effects of lowering tariff barriers. Moreover, the effect of improving hard infrastructure on trade flows in a particular country increases with the quality of infrastructure of trading partners. A similar relationship is observed for control of corruption, where institutions in the destination market seem to be considerably more important. This suggests that simultaneous and complementary improvements in infrastructure can be most effective in facilitating trade.
Read the working paper in full here.