Differing trade elasticities for intra‐ and international distances: A gravity approach

• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/roie.12475
• Date: 01 August 2020

Rev Int Econ. 2020;28:913–929. wileyonlinelibrary.com/journal/roie

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© 2020 John Wiley & Sons Ltd

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INTRODUCTION

International trade economists have long been interested in trade costs. In recent years, as artificial

trade barriers, such as tariffs and quotas, fall to low levels, trade economists have become more in-

terested in nonpolicy trade barriers. Many trade models proxy for these trade costs, which are often

difficult to measure, with distances between countries. While the distance between countries, which I

call external distance, functions well as a proxy for trade costs (and has since Tinbergen, 1962), it does

not give an explicit explanation of trade costs. In addition, it fails to capture anything not correlated

with external distance.

Because of these limitations, there is a significant literature that attempts to explicitly define trade

costs (see, e.g., Anderson & Van Wincoop, 2004). Trade costs can be anything from actual shipping

costs to time delays associated with shipping (Hummels & Schaur, 2013). The trade cost literature in-

cludes examinations of free-trade agreements (Baier & Bergstrand, 2007), culture (Rauch & Trindade,

2002), historical and political costs (Head, Mayer, & Ries, 2010), and the border effect (Anderson &

Van Wincoop, 2003; McCallum 1995) among many other possible impediments to trade.

Received: 22 April 2019

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Revised: 21 February 2020

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Accepted: 29 February 2020

DOI: 10.1111/roie.12475

ORIGINAL ARTICLE

Differing trade elasticities for intra- and

international distances: A gravity approach

JasonQuery

Department of Economics, College

of Business and Economics, Western

Washington University, Bellingham, WA,

USA

Correspondence

Jason Query, Department of Economics,

College of Business and Economics,

Western Washington University,

Bellingham, WA, 98225, USA.

Email: Jason.Query@wwu.edu

Abstract

Using the gravity model of trade, I estimate the impact that

within-country transportation distance has on international

trade levels. Combining multiple data sets, I create a meas-

ure for the distance U.S. agricultural goods travel before

leaving the country. In order to account for endogeneity

in production location choice, I use potential agricultural

production as an instrument for actual agricultural produc-

tion. I find that internal distance is statistically significant

and large in magnitude. A 10% reduction in the distance a

good travels within the exporting country increases trade by

roughly 3%.

JEL CLASSIFICATION

F14; L90

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QUERY

One potentially important trade cost that has received little attention until recently is the costs in-

curred in trading before a good leaves the country of origin, which I call internal costs. One probable

avenue in which internal costs are important is that a firm located in a country with high internal costs

is at a competitive disadvantage compared to those firms that can move a good through its location

cheaper. While we have many estimates for the effect of external distance on trade, we know little

about the magnitude of internal distance at the importer-commodity level.

Little research has been done in this area because internal trade costs and internal distance can be

extremely difficult to measure and the trade impact can be extremely difficult to estimate. Several

papers, such as Yilmazkuday (2014) and Coughlin and Novy (2018), take advantage of state-to-

country data to better examine how distance and aggregation biases gravity estimates. In this paper,

I combined two data sets, a data set including by-commodity exports at the U.S. port level and a data

set with by-state agricultural production, to create a unique weighted average measure of what I call

internal distance, the distance a good travels within the United States before leaving the country at a

port of exit.

The impact of internal distance on trade is difficult to estimate because it is plausible that internal

distance is endogenous to trade levels. Firms that export heavily will tend to locate production closer

to the port of export as a means of reducing internal trade costs, biasing the estimate of the impact of

internal distance. To alleviate this concern, I limit my sample to agricultural goods, which are con-

strained in production location by climate and soil factors. To further alleviate endogeneity concerns, I

develop an instrumental variable strategy, instrumenting actual agricultural production with the Food

and Agricultural Organization’s (FAO) Global Agro-Ecological Zone (GAEZ) project’s suitability

index. This index essentially ranks the ability of each state to grow a given agricultural good. The

measure is created by the FAO using historical measures of climate and soil, measures which are

independent of import demand. To my knowledge, this is the first paper to properly deal with this

endogeneity concern.

I find that the internal distance elasticity of trade is statistically significant and large in magnitude.

I find that, using conservative estimates, a 10% decrease in the distance a good must travel before

leaving the United States would increase the exports of that good by 2.5–3%. These findings have

potentially significant policy implications, particularly with policy makers’ decisions to fund internal

infrastructure.

This paper proceeds as follows. Section 2 of this paper gives a brief review of the relevant litera-

ture. Section 3 details the data used in this paper, and Section 4 outlines the empirical specifications

employed. Section 5 gives the empirical results. Section 6 concludes.

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LITERATURE REVIEW

This paper contributes to a key literature in international trade which focuses on gravity models of

trade and trade costs. Trade economists have long attempted to explain what exactly the trade cost

component in the gravity model should properly consist of. Many papers have examined the potential

trade-encouraging effects of currency and trade unions. Glick and Rose (2002) finds that joining a

currency union nearly doubles trade between the sharing countries. Head etal. (2010) finds that strong

colonial ties can boost trade. Blonigen and Wilson (2008) and Clark, Dollar, and Micco (2004) show

that the efficiency of a country’s ports significantly impact trade. Most gravity-based papers examine

between-country trade costs. In this paper, I further attempt to understand how trade costs drive trade

flows, but I am examining the costs a trading firm incurs before a good leaves the country.