Quantifying the Landlocked Trade Penalty using Structural Gravity

I estimate the cost of being landlocked on exports using a structural gravity model. The empirical challenge of doing so is to estimate a country-specific variable, being landlocked, in the presence of exporter and importer fixed effects. To do so I follow two alternative approaches, each of which models the exporter fixed effect as a function of country-specific variables and average trade costs. Both approaches show a substantial “landlocked penalty”, with landlocked countries on average exporting 27–41% less than non-landlocked countries over 2005–2014, all else equal. I further demonstrate that such a penalty is driven primarily by developing countries. Indeed, whilst I find no landlocked penalty in high-income countries, the penalty was over 40% in developing countries. The difference between the two sets of countries is likely driven by the income level of transit countries, and the ease with which exporters can access the coast. Developing landlocked countries are generally constrained by limited infrastructure, inefficient logistics services and lengthy border delays. This constraint appears to be increasing over time; the landlocked penalty was higher in 2014 than in both 2005 and 2010.