Cross border land trade is essentially trade across jurisdictions in two neighbouring countries. This may occur via road or rail route.  In this light, we can locate an understanding of the importance of cross border land trade in the elementary international economics model: Gravity Model.

The Gravity Model is a formulation of the empirical relationship observed between the sizes of the two countries under investigation, the distance between them and the volume of trade. The general gravity model for two countries is formulated as given below:

Tij = A × Yi × Yj / Dij

Therefore, this model predicts that the volume of trade is directly proportional to the product of the GDPs of the two countries, and inversely proportional to the distance between them (Krugman, Obstfeld, Melitz; 2005).

Numerous iterations of this model include more qualitative and policy factors. For example, in A Practical Guide to Trade Policy Analysis, jointly published  by WTO and UNCTAD, the gravity equation takes into account dummy variables denoting whether the two countries have a common border, common language and common colonizer, whether one was a colony of the other at some point in time, whether one of the two is a landlocked country (including when both countries are landlocked), or whether the two countries are members of a regional trade agreement.

Hence, the gravity model approach provides a theoretical basis for factors affecting trade flows as well as an empirical relationship to test the statistical significance of the factors. Considering the preponderance given to common borders, common customs and ethnicities in the extended Gravity Model Approach, why not also incorporate the political realm into this model as a determinant of cross border trade, specifically bilateral relations, conflicts and diplomacy?

To answer this question, one need only take a look at India and its border outposts of Nathu la: this is a mountain pass connecting Sikkim with China’s Tibet Autonomous Region. While this has historically been an important trading route, the volume of trade remains insignificant in the bigger Indo-China number game. The Doklam effect has only served to accentuate this. During the standoff, the trade via Nathu la was halted – while exports valued at Rs 63.38 crore were reported in 2016, only Rs 7.83 crore of exports took place in 2017. Imports fell from Rs 19.30 crore in 2016 to just Rs 1.02 crore. Approximately, total trade has gone down by 89.33 % because of this disruption. This takes us back to the proposition that political and military relations must also be incorporated into the Gravity Model approach – just a common border or common customs are not sufficient for sustaining border trade; political circumstances play a vital role. 

Secondly, Integrated Check Post (ICP) at Attari also supports this proposition - in terms of volume, this remains our single most important trade point with Pakistan. However, this was disrupted on 14th February, 2019, when a CRPF convoy was attacked by a Jaish-e-Mohammad terrorist. India, in retaliation, withdrew the Most Favoured Nation status from Pakistan and imposed a 200% customs duty on Pakistani goods coming into India.The Hindu Business Line reports that post the imposition of duties “truckloads of cement, dates and some other items from Pakistan are languishing at the Attari border”. There was a 33% fall in exports per month and a 69.4% fall in imports per month processed at Attari, comparing 2018-19 and 2019-20 data (Land Ports Authority of India). 

Cross border trade is thus especially sensitive to any disruption in the political realm. Thus, in modelling determinants of volume of trade, while distance, common border and common customs remain important, currents and tides in the political realm must also be analysed and accorded importance in elementary theories of trade.