Infrastructure And Trade: An Empirical Study Based On China And Selected Asian Economies

Past works of literature and authors have shown and emphasized on the importance and impact of infrastructure in shaping and increasing the trade flows leading to the development patterns of the countries.Based on this notion,this paper explains the role of infrastructure on country's trade and uses an augmented gravity model that incorporates infrastructure in the estimation of trade of goods and services and trade flows.The model estimated follows the models presented by Durnaton,Limao and Venables model of trade.The paper looks at the impact of infrastructure on the trade flows between China and its trading partners.This paper has provided further evidence on the impact of infrastructure on trade flows using different variables including main variables,control variables,and dummy variables.The importance of infrastructure in determining the trade flows between nations has been assessed in previous works of literature and papers.On grounds of the past writings,gravity model with some alterations in augmented form was used for the estimation.The dependent and independent variables with addition of dummy variables were introduced in the gravity equation for unbiased and balanced estimations.Contributing to the past literature this paper included all the variables included in the transport and information and communication technology infrastructure.The main contributions of the paper include the regression of the effect of all the infrastructure sections under the transport infrastructure(roads,rail,airways,and ports)and information and communication infrastructure(landline telephones,internet broadband connections,electricity connections and cellular phone usage.This paper not only included all the variables but checked the stalked effect of the all the variables under each category of the infrastructure.With China providing an impressive model of development and growth for other nations in terms of exports and trade,the paper focuses on the regression of variables taking China as the main country for representing the dependent variable.For the purpose of estimation of the model,data of 20 years starting from 1996 to 2015 for 20 selected Asian economies and their trade with China was estimated using the ARMA OLS method.The model consisted of 12 variables variables including dependent variable,3 dummy variables,2 control variables and 7 main variables for the estimation purpose.Export of goods and services between China and the Asian partners was assumed to be the dependent variable and a proxy to show the trade flows between the nations.A total of 400 observations were taken as sample for the estimation of the model.Secondary data was used as a sample which was mostly collected from the World Bank's database as well as the statistical bureaus and economic commissions of the respected countries.The variables were first tested for unit root and the results showed the absence of unit root in the main variables of the model.The model then checked and regressed through the OLS model.The results showed expected signs with significant effects.The results can be summarized firstly as transport Infrastructure(infi & infj)including roads,railways,ports and air passages has a substantial and positive impact on trade flows between China and its Asian partners;Secondly,Information and communication technology(icti & ictj)including number of internet connections,Cell phone and mobile subscriptions,electricity linkages and telephone lines,also showed positive and significant impact on trade flows;(iii)The dummy variable in the model i.e.quality of infrastructure(quali & qualj)is an important determinant of trade performance and presented expected positive and significant result;(iv)The GDPs of the exporting and importing countries also had positive and significant outcomes which showed the higher the GDP of the trading countries the more will be trade among them;(v)All the variables in the model have positive impact on trade except distance and landlocked nations,which have negative impact on trade between the trading nations.The estimations and the elasticities for the main independent variables were also high.The elasticities of ‘infi' and ‘infj' were 1.072 and 0.038 respectively,which showed that the the impact of transport infrastructure on trade is high.Similarly the elasticities for ‘icti' and ‘ictj' have high values.These results provide the evidence that the impact of infrastructure both transport and communication is high.The more the coverage and implementation of the infrastructure projects the more will be the trade of the country.In order to increase the trade the countries should also focus on initiating more infrastructure projects that will lead to increased mobility and accessibility regarding to the enhancement in trade.The results of the GDP for the trading countries were in line with the suppositions of the gravity model.GDPi and GDPj,both were estimated to be positive,significant and high elasticities,thus showing that increase in GDP will lead to increase in trade flows of the country.Keeping in view the importance of quality of infrastructure,in addition to the quantity of infrastructure,the impact of the quality of the infrastructure on the trade flows was also checked using the dummy variables ‘quali' and ‘qualj'.The results showed expected positive signs with significant estimates.The high elasticities of 0.425 and 0.278 showed that improved and high standards of infrastructure lead to increase in trade flows of the exporting and importing country respectively.Exchange rates were added to the model as control variables and check the impacts of the exchange rates on trade flows as the exchange rates also determine the trade and exports and imports of the countries.The results showed positive and significant results for both the exporting and importing nations.The estimates conclude that the value of exchange rate if high will lead to increase in the exports and trade flows of the nations as its currency value is lower and for the trading partners it is easier to import goods and services from the country with a high exchange rate as the prices will be cheaper for the importing nations.Similarly,the effect is vice versa for the exporting nation,if the exchange rate of the foreign nation is high then the exporting nation will try to import more as goods in the foreign country will be cheaper to import.In contrary to other variables,the independent variables of Land lockedness and Distance presented negative and significant estimates.The estimates indicated that the more the distances between the countries the lesser will be the trade flows between them and vice versa.Similarly,for the dummy variable of Land lockedness,the result explains that countries that are landlocked and with no access to sea routes and seaports are more likely to have less trade as compared to countries with access to sea routes and seaports.Moreover,the robustness of the results was tested by estimating an ordinary least square model using additional independent variables in the model.For the purpose of robustness test investment in the infrastructure sector was added to the model.The values,standard errors and significance of the main variables were not affected due to the addition of the new independent variables showing that the variables are able to explain the dependent variable to large extend and our model is thus robust.In order to the check the presence of heteroskedasticity and autocorrelation in the model the estimations were run through tests to analyze if heteroskedasticity and autocorrelation were present in the model or not.The estimates were then resolved for the heteroskedasticity and autocorrelation test by using white test and AR1 and AR2 test in the model.Based on the results,the paper provided further evidence on the importance and effect of transport and information and communication infrastructure on the trade flows between nations.The quality of infrastructure is also an important factor in determining the trade flows and growth of a country.Asian nations should focus on developing and enhancing the infrastructure for increased mobility,reduction in cost,the decrease in time consumption and intensified economic activities related to trade and industries not only at local levels but also at global level.Governments should encourage investments and projects related to infrastructure and provide further support to the sector.Improved and efficient infrastructure networks provide support and act as a backbone of the economy in terms of the countries developments in trade and development.