Measuring trade costs and analyzing the determinants of trade growth between Cambodia and major trading partners: 1993–2019

Abstract

High trade costs pose substantial barriers to the process of trade liberalization. This study aims to measure trade costs and explore the driving forces behind the growth of bilateral trade between Cambodia and its top 30 trading partners from 1993 to 2019. Using a micro-founded measure of trade costs derived from the gravity model, we find that Cambodia’s average trade costs decreased by 35.43 percent between 1993 and 2019. Fluctuations in average trade costs persisted until 2014, despite Cambodia’s accession to the World Trade Organization (WTO) in 2004. Since then, these costs have declined more rapidly. Cambodia’s bilateral trade costs are lower with its major trading partners in Southeast Asia and East Asia than with those in South Asia, Oceania, Europe, and North America. Cambodia’s average trade costs with developing and emerging economies are lower than those with developed economies. Between 2014 and 2019, Cambodia experienced a notable decline in average trade costs with trading partners along the Belt and Road Initiative (BRI) corridors by 34.78 percent, twice as fast as with non-BRI trading partners. Regarding the decomposition of trade growth, we find that the expansion of Cambodian trade over the period from 1993 to 2019 was driven by three factors: the rise in income (59.65 percent), the decline in trade costs (56.69 percent), and the decline in multilateral resistance (–16.34 percent). The findings of this study have significant implications for a better understanding of Cambodia’s development process toward global trade integration over the past two decades. Our results suggest that Cambodia can optimize its trade expansion potential by focusing on its relations with trading partners exhibiting high economic growth potential and those showing substantial reductions in trade costs.