The nature of international trade has long been analyzed through the lens of traditional trade costs—tariffs, transportation expenses, and cultural barriers. But what if a significant share of these so-called trade costs are not trade-specific at all? A new research project, led by Nicholas Kozeniauskas, researcher at CATÓLICA-LISBON Research Unit in Business and Economics (CUBE), and funded by the Fundação para a Ciência e Tecnologia (FCT) under its exploratory projects program, aims to challenge the conventional wisdom surrounding trade impediments.
“This project started with trying to better understand the experiences of businesses in export markets. Why do businesses take time to grow in these markets and why do they often exit after only a few years? Understanding this led to new insights about trade costs and the benefits of trade.” — Nicholas Kozeniauskas
Kozeniauskas' project, Trade Costs and the Gains from Trade, started on February 15 and will run for 18 months. It seeks to uncover a new understanding of the real barriers to trade and how they impact economic gains from international commerce. Traditionally, research in international trade has treated these costs as exogenous factors—fixed obstacles that foreign firms must overcome. However, this project proposes a paradigm shift: what if many of these barriers are not specific to international trade but instead reflect general business challenges that all firms, both foreign and domestic, must navigate?
A Fresh Take on Trade Barriers
Most models in trade economics assume that costs such as tariffs, language differences, and border-related frictions are uniquely burdensome for foreign firms. But Kozeniauskas’ project suggests that a major portion of these costs stems from a different source—uncertainty about consumer preferences and the marketing investments necessary to build a customer base.
Foreign firms, by virtue of being new to a market, struggle more with these challenges than domestic firms, which already have brand recognition and established consumer trust. This leads to lower overseas sales and has often been mistaken for evidence of trade-specific costs. Kozeniauskas argues that rather than focusing exclusively on cross-border frictions, policymakers and economists should pay closer attention to the general costs of doing business—especially those related to consumer acquisition and learning about markets.
“The support of FCT is incredibly valuable for this project and my career. The resources provided are crucial for the success of the project, and the activities that I can now participate in will be extremely beneficial for my professional development.” — Nicholas Kozeniauskas
Implications for Policy and Business Strategy
This shift in perspective has profound implications. If trade costs are not just about tariffs or border regulations but also about broader market entry challenges, then trade policy alone may not be enough to boost international commerce. Instead, measures that reduce uncertainty for all firms—such as better access to consumer data, improved marketing infrastructure, and policies that help firms learn about demand more efficiently—could play a crucial role in fostering international trade. This change in how we think about the impediments to international trade has important implications. For several decades, there has been a broad international push towards lower trade costs. There have been efforts to reduce tariffs, reduce other barriers to trade like quotas, and broader projects of economic integration like the European Union. When we think about the impediments to trade as being a result of costs faced by all firms, rather than being specific to international trade, it affects how we think about the effects of these policies.
On one hand, these policies may not be as powerful as previously thought, since there are other impediments to trade that have been ignored. On the other hand, this new project will show that as trade-specific costs fall, it endogenously affects how much uncertainty about demand and customer costs impede trade. In some cases, this will result in larger benefits from a reduction in trade-specific costs, and in other cases, a smaller benefit. Understanding this is useful for designing better trade policies in the future and allowing everyone to benefit more from international trade.
For business leaders, this research suggests that success in foreign markets is less about overcoming traditional trade barriers and more about investing strategically in understanding and engaging with new customer bases. Companies looking to expand internationally may benefit more from refining their marketing strategies and leveraging local partnerships than from lobbying for tariff reductions alone.
Contribution to Sustainable Development Goals (SDGs)
The project contributes directly to UN Sustainable Development Goals (SDGs) 8 and 10. In Portugal, goods and services exports represent approximately 50 percent of GDP, a figure that has doubled over the past 20 years. Imports are of a similar magnitude, making international trade a crucial component of the country's economy. Trade supports many jobs and plays a vital role in determining national economic growth. By improving our understanding of the nature of trade impediments, this research can help enhance labor market outcomes and long-term economic expansion, contributing to SDG 8: Decent Work and Economic Growth. Additionally, the project provides insights into why some countries are wealthier than others, addressing SDG 10: Reduced Inequalities. Trade policies significantly influence income and wealth distribution across nations. By analyzing how general business costs—not just traditional trade frictions—shape international commerce, the research will offer a more nuanced perspective on how policy changes affect economic disparities. This improved understanding can inform better policy design, fostering more equitable economic benefits across countries.
By shifting the focus from traditional trade frictions to general business challenges, CUBE’s project, Trade Costs and the Gains from Trade, offers a novel framework for understanding what really drives (or hinders) global commerce. As the research unfolds, its findings could reshape both economic theory and the strategies that businesses and policymakers employ to navigate the complexities of international trade.
