North, South and distance in the gravity model

Abstract

It is generally assumed that distance in the gravity model strictly reflects frictions impeding bilateral trade. However, distances North–South could also reflect differences in factor endowment that provide opportunities for profitable trade. This paper investigates the hypothesis that if we control for distance in the ordinary sense, differences North–South promote international trade. The hypothesis receives ample support. Moreover, the significance of differences North–South survives a battery of robustness tests, concerning period, distinctions between differences in latitude North–North, North–South and South–South, and controls for other measures of differences in factor endowment, such as differences in per capita output and differences in average temperature, rainfall, and seasonal range in temperature. The impact of differences North–South on bilateral trade has also been falling. This decline, in turn, might be partly responsible for the weakening of the influence of distance that has been occurring since World War II. This last hypothesis receives confirmation as well. Finally, the paper examines the impact of internal distance and remoteness on trade. Since both variables are country-specific, this is done by studying their impact on the country fixed effects themselves in the earlier estimates. Internal distance turns out to have a far greater impact than remoteness—by an order of 10.