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Trade and location: A moving example motivated by Japan

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  • Alan V. Deardorff

Abstract

If trade costs matter for trade, and if distance matters for at least some trade costs, then location matters for trade. This may be especially important for Japan, given its distance from other developed countries and proximity to a number of developing countries. This paper explores the relationship between location and trade in a simple partial equilibrium model of a single homogeneous good that may be produced and traded by three countries located on a plane. Six equilibrium regimes arise in this model, depending on trade costs compared to differences in autarky prices. The results are the following: For a country whose autarky price lies between those of the other countries, it will export the good if it is close to the high-cost country, import it if it is close to the low-cost country, and not trade it at all if it is too far from both. The location of such a country is also important for the trade of the other countries. Finally, although a fall in trade costs increases, up to a point, the geographic scope for a country to trade, beyond that point it cannot make trade possible for an intermediate-cost country that is too remote to trade. The results suggest that Japan, with factor endowments similar to other developed countries but located closer to many developing countries, should dominate trade with its developing-country neighbors.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d04-56.

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Date of creation: Dec 2004
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Handle: RePEc:hst:hstdps:d04-56

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Keywords: Trade costs; Location;

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  1. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  3. Davis, D.R. & Weinstein, D.E., 1999. "An Account of Global Factor Trade," Working Papers 435, Research Seminar in International Economics, University of Michigan.
  4. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  5. Peter A. Petri, 1993. "The East Asian Trading Bloc: An Analytical History," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 21-52 National Bureau of Economic Research, Inc.
  6. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-46, December.
  7. Alan V Deardorff, 2004. "Local Comparative Advantage: Trade Costs and the Pattern of Trade," Working Papers 500, Research Seminar in International Economics, University of Michigan.
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