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

Background: Like in many other least-developed countries (LDCs), high trade costs have long been a major barrier to Cambodia's trade integration. Despite their practical significance and increasing policy attention in the country, little is known about these costs.

Purpose: This study aims to measure Cambodia's trade costs and explore the driving forces behind the growth of its bilateral trade.

Methodology: A micro-founded measure of trade costs introduced by Novy (2013) is employed to quantify the bilateral trade costs between Cambodia and its top 30 trading partners from 1993 to 2019.

Originality/value: This study contributes to the literature on Cambodia’s trade costs, which has received limited attention. This research work is the first to provide a comprehensive measure of trade costs, including a wide range of trade barriers, such as tariffs, transportation costs, border-related costs, infrastructure inefficiencies, and other factors impeding Cambodia's bilateral trade flows.

Major findings: We find that Cambodia's average trade costs decreased by 35.43% 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%, twice as fast as with non-BRI trading partners. Regarding the decomposition of trade growth, we find that the expansion of Cambodian trade from 1993 to 2019 was driven by three factors: the rise in income (59.65%), the decline in trade costs (56.69%), and the decline in multilateral resistance (-16.34%).

Research implications and recommendations: The findings of this study have significant implications for a better understanding of Cambodia's development 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 achieving substantial reductions in trade costs.