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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

    (Dartmouth College)

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 Society for Economic Dynamics in its series 2011 Meeting Papers with number 1438.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1438

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  1. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
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  4. Souleymane Coulibaly & Lionel Fontagné, 2004. "South – South Trade: Geography Matters," Working Papers 2004-08, CEPII research center.
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  8. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
  9. Douglas A. Irwin & Marko Tervio, 2000. "Does Trade Raise Income? Evidence from the Twentieth Century," NBER Working Papers 7745, National Bureau of Economic Research, Inc.
  10. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, February.
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  14. 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. 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.
  2. 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.
  3. Ariel Burstein & Javier Cravino, 2012. "Measured Aggregate Gains from International Trade," NBER Working Papers 17767, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Campbell, Douglas L., 2010. "History, culture, and trade: a dynamic gravity approach," MPRA Paper 24014, University Library of Munich, Germany.

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