On the economic and political determinants of trade in natural gas

Abstract

AbstractThis paper analyses the determinants of trade in natural gas through a political economy lens. In addition to the economic determinants of trading in natural gas, the latter could be affected by political determinants such as sanctions and the institutional gap between trading partners. Moreover, while the literature considers the effect of tariffs, less attention has been attributed to non‐tariff measures (NTMs) that might also be imposed for political reasons. To quantify the impact of these different determinants on natural gas trade, we use a gravity model that explains bilateral trade for pipeline natural gas (PNG) and liquefied natural gas (LNG) over the period 2000–2017. We also consider the zero trade flows of natural gas by using the Poisson pseudo‐maximum‐likelihood estimator. Our results show that economic sanctions have reduced bilateral LNG trade by 24% on average. We also find that the institutional gap between trading partners exerts a significant negative effect on bilateral PNG and LNG trade, pointing out that institutions could be considered as fixed export cost in the natural gas market. Moreover, in addition to tariffs, NTMs have a significant negative effect on trade in natural gas.