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Distance, Trade, and Income – The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment

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  • James Feyrer

Abstract

The negative effect of distance on bilateral trade is one of the most robust findings in international trade. However, the underlying causes of this negative relationship are less well understood. This paper exploits a temporary shock to distance, the closing of the Suez canal in 1967 and its reopening in 1975, to examine the effect of distance on trade and the effect of trade on income. Time series variation in sea distance allows for the inclusion of pair effects which account for static differences in tastes and culture between countries. The distance effects estimated in this paper are therefore more clearly about transportation costs in the trade of goods than typical gravity model estimates. Distance is found to have a significant impact on trade with an elasticity that is about half as large as estimates from typical cross sectional estimates. Since the shock to trade is exogenous for most countries, predicted trade volume from the shock can be used to identify the effect of trade on income. Trade is found to have a significant impact on income. The time series dimension allows for country fixed effects which control for all long run income differences. Because identification is through changes in sea distance, the effect is coming entirely through trade in goods and not through alternative channels such as technology transfer, tourism, or foreign direct investment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15557.

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Date of creation: Dec 2009
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Handle: RePEc:nbr:nberwo:15557

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  9. James Feyrer, 2009. "Trade and Income -- Exploiting Time Series in Geography," NBER Working Papers 14910, National Bureau of Economic Research, Inc.
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Cited by:
  1. William W. Olney, 2013. "Impact of Corruption on Firm Level Export Decisions," Department of Economics Working Papers 2013-04, Department of Economics, Williams College.
  2. Hosny Zoabi & Philip Saure, 2010. "Effects of Trade on Female Labor Force Participation," DEGIT Conference Papers c015_015, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Tim Besley & Thiemo Fetzer & Hannes Mueller, 2012. "One Kind of Lawlessness: Estimating the Welfare Cost of Somali Piracy," Working Papers 626, Barcelona Graduate School of Economics.
  4. Campbell, Douglas L., 2010. "History, culture, and trade: a dynamic gravity approach," MPRA Paper 24014, University Library of Munich, Germany.
  5. Pascali, Luigi, 2014. "The Wind of Change: Maritime Technology, Trade and Economic Development," The Warwick Economics Research Paper Series (TWERPS) 1049, University of Warwick, Department of Economics.
  6. Alfonso Irarrazabal & Andreas Moxnes & Luca David Opromolla, 2013. "The Tip of the Iceberg: A Quantitative Framework for Estimating Trade Costs," NBER Working Papers 19236, National Bureau of Economic Research, Inc.
  7. Raphael A. Auer, 2012. "Geography, Institutions, and the Making of Comparative Development," CESifo Working Paper Series 3874, CESifo Group Munich.
  8. Parinduri, Rasyad, 2012. "Growth volatility and trade: evidence from the 1967-1975 closure of the Suez Canal," MPRA Paper 39040, University Library of Munich, Germany.
  9. Nicholas Bloom & Paul M. Romer & Stephen J. Terry & John Van Reenen, 2014. "Trapped Factors and China's Impact on Global Growth," NBER Working Papers 19951, National Bureau of Economic Research, Inc.
  10. Ortega, Francesc & Peri, Giovanni, 2014. "Openness and income: The roles of trade and migration," Journal of International Economics, Elsevier, vol. 92(2), pages 231-251.
  11. Krautheim, Sebastian, 2012. "Heterogeneous firms, exporter networks and the effect of distance on international trade," Journal of International Economics, Elsevier, vol. 87(1), pages 27-35.
  12. Ariel Burstein & Javier Cravino, 2012. "Measured Aggregate Gains from International Trade," NBER Working Papers 17767, National Bureau of Economic Research, Inc.
  13. Assaf Zimring, 2013. "Gains from Trade: Lessons from the Gaza Blockade 2007-2010," Discussion Papers 12-024, Stanford Institute for Economic Policy Research.
  14. Lendle, Andreas & Olarreaga, Marcelo & Schropp, Simon & Vézina, Pierre-Louis, 2012. "There goes gravity: how eBay reduces trade costs," CEPR Discussion Papers 9094, C.E.P.R. Discussion Papers.
  15. Konon, Alexander, 2012. "Direct and Indirect Crisis Effects on International Trade or: Is There a Chance to Employ an Income Stimulus to Stimulate Exports?," MPRA Paper 36363, University Library of Munich, Germany.
  16. Luigi Pascali, 2014. "The Wind of Change: Maritime Technology, Trade and Economic Development," Working Papers 764, Barcelona Graduate School of Economics.

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