A New Interpretation of the Distance Puzzle Based on Geographic Neutrality

Abstract

One of the most remarkable features of globalization is that advances in technology have contributed to reducing the costs of trade (e.g., transportation and communication costs) and thus have boosted international trade. Under these circumstances, the importance of distance should have diminished over time, which would constitute a boon for countries that are far from the main centers of economic activity. However, one of the best-established empirical results in international economics is that bilateral trade decreases with distance. This apparent contradiction has been labeled the “missing globalization puzzle.” We propose yet another explanation for this apparent contradiction that is based on the concept of geographic neutrality, which we use to construct indicators of international trade integration for two different scenarios: when distance matters and when it does not. Our results indicate that the importance of distance varies greatly across countries, as revealed by disparate gaps between distance-corrected and distance-uncorrected trade-integration indicators for different countries. Some factors that are rooted in the literature explain away the discrepancies, but their importance varies according to the trade-integration indicator that is considered—trade openness or trade connection.