On the Geography of Trade: Distance is Alive and Well

It has been widely argued that, with the
decline in trade costs (for example, transport and
communication costs), the importance of distance has
declined over time. If so, this would be a boon for
countries located far from the main centers of economic
activity. The authors examine the evolution of
countries' distance of trade (DOT) from 1962-2000. They
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 has become more important over time for a majority
of countries. The authors examine various hypotheses to
explain this phenomenon. One conclusion is that the
evolution of the DOT is unrelated to that of the overall
trade costs but depends on the relative evolution of its
components. The authors also examine the impact on the DOT
of changes in production, customs, and domestic transport
costs; air relative to land and ocean transport costs;
competition, exchange rate policy, regional integration,
uneven growth, and counter-season trade; and just-in-time
inventory management. An interesting finding is that, though
regional integration has a negative impact on the DOT, the
countries forming trade blocs had a DOT that was growing
faster or falling more slowly than that of excluded
countries. The authors also offer some insights into how
these changes may affect the home bias in consumption and
the border effect.