Better Together: How Digital Connectivity and Regulation Reduce Trade Costs

Abstract

ABSTRACT Digital connectivity enhances international trade by reducing trade costs, including search frictions, language barriers, and other transaction costs. It is particularly transformative for services trade, where digital delivery enables cross‐border trade in numerous sectors. Using comprehensive estimates of trade costs across 58 economies and 23 sectors, our analysis reveals that a 10 percentage point increase in connectivity reduces trade costs by an average of 2% in both goods and services sectors. Notably, the positive effects are significantly larger in economies with digital regulations that ensure open access to communications infrastructure and facilitate freer cross‐border data flows, especially for digitally deliverable services. Hence, for the trade benefits to materialize, the adoption of digital technologies needs to be supported by an open regulatory regime.