On the Geography of Trade: Distance is Alive and Well

Abstract

It has been widely argued that, with the decline in trade costs (e.g., transport and communication costs), the importance of distance has declined over time. This paper examines the evolution of the geographic profile of countries' trade by studying the evolution of their distance of trade (DOT) in 1962-2000. The paper find that the DOT falls over time for the average country in the world, and that the number of countries with declining DOT is close to double those with increasing DOT. Thus, distance seems to have become more important over time for a majority of countries. The paper examines various hypotheses in order to explain the evolution of the DOT. One of the conclusions is that its evolution is unrelated to that of the overall level of trade costs but depends on the relative evolution of its components. We also examine the impact on the DOT of changes in production costs, customs costs, domestic transport costs, of air relative to land and ocean transport costs, of competition, exchange rate policy, regional integration, uneven growth, counter-season trade, and just-in-time inventory management. The paper also offers some insights into how these changes may affect the home bias in consumption and the border effect.