Distance as a Determinant of Trade Costs: A Different Type of Distance Puzzle?

Employing a gravity model approach and using recently released estimations of trade costs between nations, we present confounding results that demonstrate a new “trade-cost-distance puzzle.” Using data from 1995-2012, we... [ view full abstract ]

Employing a gravity model approach and using recently released estimations of trade costs between nations, we present confounding results that demonstrate a new “trade-cost-distance puzzle.” Using data from 1995-2012, we examine the influence of various determinants of trade costs, including the distance between trade partners. While the estimated coefficient on the distance variable is positive as expected, we show that the distance between countries has an increasing influence on trade costs over time, which runs counter to intuition regarding the effects of globalization. These results hold whether the estimation is performed using annual cross sections or using an iterated distance variable. Proposed solutions to the more traditional “distance puzzle” in international trade literature, including balancing the data, mitigate the severity of increasing effects of distance on trade costs, but do not solve this new puzzle.