This paper analyses the role of infrastructure on the Andean Community trade patterns. Three distinct but related gravity models of bilateral trade are used. The first model aims at identifying the importance of the Preferential Trade Agreement and adjacency within the Andean Community trade, while also checking the traditional roles of economic size and distance. The second and third models assess the evolution of the Trade Agreement and the importance of sharing a common border, but their main goal is to analyse the relevance of including infrastructure in the augmented gravity equation, testing the theoretical assumption that infrastructure endowments reduce trade and transport costs and therefore reduce “distance” between bilateral partners. Indeed, if one accepts distance as a proxy for transportation costs, infrastructure development and improvement drastically modify it. As evidenced by the results, trade liberalisation eliminates most of the distortions that a protectionist tariff system imposes on international business; hence transportation costs represent nowadays a considerably larger barrier to trade than in past decades. As new trade pacts are being negotiated in the Americas, agreements and borders will lose significance as most countries will be able to trade among themselves without exchange restrictions, and bilateral trade will be defined in terms of costs and competitiveness. Competitiveness, however, will only be achieved by an improvement in infrastructure services at all points in the production-distribution chain and the reduction in costs triggered by a more modern type of regional integration.

O-2005-5.pdf